Financial Reporting Statutory Obligations LGA - Part 7, Division 1, Sections 136 to 150 –Principles of sound financial management –Budgeting and reporting framework –Borrowings and investment LGA - Part 6, Sections 125 to135 –Council Plan, Strategic Resource Plan, budget, annual report, Performance statement LG (Finance & Reporting) Regulations 2004 Budget Audited Annual Report Quarterly Financial Statements
Financial Management Council Plan –Identifies the needs and issues to be dealt within the municipality –Must be prepared by 30 June Strategic Resource Plan –Is included as part of a Council Plan –Sets out the financial and human resources required to achieve objectives in Council Plan Council Budget –Estimates revenue to be collected from government funding and loans to determine amount needed in rates –Draft budget open for comment for 14 days –Must be submitted to the Government by 31 August Annual Report –Reviews a council’s performance against Council Plan –Must be submitted to the Government by end of September
Identifying Important Financial Indicators Is there an underlying surplus? - Long term survival Is Working Capital positive? Is there enough cash? - Short term survival Is debt in control? Is depreciation increasing due to lack of maintenance? Are Capital Works on time and at their budgeted cost? What are the contingencies and commitments?
Income Statement Is there an underlying surplus? – Long term survival
Income Statement Is there an underlying surplus? – Long term survival
Balance Sheet Is Working Capital positive? Solvency = current assets – current liabilities
Notes to Financial Report – “Provisions” Is there enough cash? Short term survival Must hold Long Service Leave provision in cash
Balance Sheet Is debt in control?
Standard Income Statement Is depreciation increasing due to lack of maintenance?
Standard Statement of Capital Works Are Capital Works on time and at their budgeted cost?
Notes to Financial Report – “Contingencies” What are the contingencies and commitments?
Council Budgets: Points to Remember Recurrent Deficits Operating and Capital Asset maintenance and renewal –Understand good and bad debt (intergenerational equity) Physical Services - capital works, costing, plant acquisitions & disposals and maintenance. Human Services – grant funding and relationships to other tiers of government
Session 2: Local Government Funding 1.Local government – facts and stats 2.Where funding comes from 3.Cost Pressures –Intergovernmental funding –State Levies collected by councils –Local Government Cost Index –Asset Management – funding the renewal gap
Introduction: Local Government Facts 79 councils Governed by 620 democratically elected councillors Employs people Annual recurrent revenue of $6.4 billion Responsible for $60 billion in community assets Provide more than 100 services to Victorian communities
What Councils Do Each Year Service 129,735 kms of roads (85% of the state’s road network) Maintain more than 1000 grassed sports surfaces Collect 1.9 million tonnes of kerbside garbage Collect tonnes of recyclable materials Collect tonnes of green organic waste Spend $50 million on public street lighting Loan 52.8 million items from 316 libraries to 2.6 million users Provide free internet access for 3.4 million bookings Decide over planning permit applications Provide maternal and child health consultations Provide 306,600 immunisations to preschool & secondary children Deliver 3.8 million meals to home care recipients Register more than food businesses
LG Funding Sources Victorian local government recurrent venue was $6.4 billion: 56.3% or $3.45 billion in rates (at the extremes 25% and 70%) 17.1% or $1.05 billion in fees, fines and charges 9.2% or $560 million in specific purpose revenue grants 7.4% or $450 million in general purpose revenue payments 10.0% or $610 million from other (Eg interest, asset sales) Local government collects 3.5 cents of every $1 raised in Australian taxes. The Commonwealth collects 80.2% (including GST 14%) and the States 16.4% of total taxation revenue.
LG Cost Pressures 1.Intergovernmental funding – declining 2.State Levies collected by councils 3.Councils’ growth in costs – LG Cost Index 4.Asset management – funding the infrastructure renewal gap
Intergovernmental Funding GST was implemented in Australian Parliament rejected that states should fund local government through GST –responsibility remains at the federal level Financial Assistance Grants to local government have declined from 1.2 per cent in to 0.62 per cent of Commonwealth revenue in –Funding indexed by CPI & population (not real costs growth) Gap in state and federal funding for home and community care, kindergartens, school crossings, public library services –Shortfall is either paid for by ratepayers, service cuts and/or reduced asset maintenance/renewal spending
State Levies Collected by Councils The State Government requires councils to collect state levies, usually included in rates notices, to fund State agencies and programs –Landfill levies are being progressively increased from 2010 –This imposes an additional $71.6 million on ratepayers over four years, with Victorian councils to collect and pass on an estimated $160 million to the State Government –Councils collected $63 million in State fire services and landfill levies in 2011 (1.8% of total rates) –State introduction of a property-based fire levy (from 2013) could add an average 19 per cent increase to council rates.
LG Cost Index Consumer Price Index (CPI) measures household goods & services LG Cost Index measures costs to deliver council goods & services –Staff costs are the main driver as most services are delivered by people to the community –Second largest expense is asset maintenance and construction inc. staff/contractors and materials LG Cost Index is determined using: –Average Weekly Earnings (AWE) Index –Engineering Construction Index LG Cost Index has averaged 4% over the 5 years to and was estimated at 3.6% for CPI for both was approx 3.1%
Asset Renewal Gap Local government is capital intensive: $60 billion in assets –level of government that spends the highest proportion of its revenue on infrastructure Councils explicitly recognise deterioration of their assets for the first time in mid 1990s, but rate capping and rate cuts led to councils spending less on ageing infrastructure 2002: Auditor General says renewal backlog is $1.5 - $2.7 billion 2007: MAV Step Asset Program identified an annual underspend of $280 million - equivalent to av. 12% rate rise for next five yrs Further investment is still needed by councils –Deferred spending = higher costs for future ratepayers
Session 3: Council Rates 1.What are council rates 2.Rate Process 4. Comparing council rates
What are Council Rates? A property tax that uses property values as the basis for calculating how much each property owner pays Can comprise up to three components: –Municipal charge (not more than 20% of total rate revenue) –Waste management (garbage) charge –General rate based on the ‘rate in the dollar’ Exemptions apply to crown land, charitable land, land used for religious purposes, land used exclusively for mining or forestry Primary reason for rates is to raise revenue to fund local government services and infrastructure for public benefit All property owners pay a share of rates regardless of their choice to use/not use council services, programs, infrastructure
Rating Process Draft Budget: –Sets priorities to meet Council Plan objectives –Identify asset maintenance and service funding needs –Estimate revenue to be collected from other sources –Identify amount of rates needed to meet financial responsibilities for coming year –Advertise and open for public comment for at least 14 days Setting Rates: –Determine any municipal and waste charges –Determine rate in the dollar (balance of required revenue by the total value of all properties in the municipality) –Individual property rates: multiply rate in the dollar by the value of a property, add any municipal and waste charges
Rates Example Total income identified in Council Budget: $70 million –Other revenue (funding, grants, fees, fines): $30 million –Rate revenue needed: $40 million $40 million $12 billion (value of all rateable properties in the municipality) = $ (rate in the dollar) $ Value of property x $ rate in the dollar = $ rates payable –Eg. $550,000 x = $1,815 Note: there is NO connection between the amount of rates paid on a property and the services received
Comparing Local Government Rates 79 councils –31 metropolitan (including 8 Interface councils) –48 rural and regional (including 10 regional cities) Difficult to generalise about local government –Each council varies in size, rate base, needs, infrastructure Municipal populations range from to more than Manage significantly different budgets –Rural council budgets average $48 million (smallest $8 m) –Metro council budgets average $152 million (largest $360 m) Rating comparisons are problematic – especially a reliance on averages or levels paid by properties of the same value in different municipalities
Outer metroInner metroRural shire Total council revenue:$155m$120m$21m Population: 170, ,000 8,000 Median property value:$350,000$1,000,000$250,000 $500,000 property: 4 bedroom, large block2 bedroom apartment 5 bedroom on acreage Rating Comparison Example
Session 4: Property Valuations 1.Valuation Process 3.Facts and Myths 4.Case Study: Valuation, Revaluation and Rates Increase
Valuation Process 2.5 million properties in Victoria valued at more than $1 trillion Council valuers review property values every two years –Last valued on 1 January 2012 Total value of all properties in a municipality is used to strike the ‘rate in the dollar’ Up-to-date revaluations are critical to ensure property owners pay a fair and equitable share of rates Ratepayers have a right under the Valuation of Land Act 1960 to object to a valuation
Valuation Process cont… Only qualified valuers can perform municipal valuations Amount a property would sell for on a set date (1 Jan 2012) –Assess market movements and recent sales/rental trends –Highest and best use of the property –Build profile of value levels for different areas/property types –Physical inspection of a sample of properties –Complex statistical models apply information to individual properties Valuer General certifies council valuations met required standards Minister declares the valuations suitable to be adopted and used The same valuations are used for State land tax
Facts and Myths MYTH Increased (or decreased) property values increase (or decrease) how much a council collects – NO (but YES for State land taxes) Valuations change the total rates collected – NO FACT Valuations are “revenue neutral” Council budget is set first and determines total amount of rates to be collected Valuations are used to apportion how the burden (the total revenue to be raised) will be shared by each ratepayer Rate in the dollar x property value = rates payable
Property Revaluations Size of the pie = Council revenue to be collected (determined by budget) Slice of pie = amount each ratepayer will pay (based on value of their property) A change in property values can change the slice (amount you pay), but not the size of the pie (overall amount council collects)
Revaluation Example Property Value - $2,950,000 House 1-$650,000 House 2 -$460,000 Unit-$370,000 Farm-$800,000 Business-$670,000 Rates required - $5,500 Rate in the Dollar Property Value - $3,030,000 House 1-$620,000 House 2 -$460,000 Unit-$360,000 Farm-$820,000 Business-$770,000 Rates required - $5,500 Rate in the Dollar
Revaluation Example (Cont) Rates: –House 1: $1212 –House 2: $858 –Unit: $690 –Farm: $1492 –Business: $1249 –Total: $5, Rates: –House 1:$1,125(-7.1%) –House 2: $835(-2.6%) –Unit:$653(-5.3%) –Farm:$1,488(-0.2%) –Business:$1,398(11.9%) –Total$5,500 (0%) But, what happens when councils also increase the amount of rates they collect? Suppose the council increased the amount of rates from $5,500 to $5,800 (increase of 5.5%)
Revaluation Example Property Value - $2,950,000 House 1-$650,000 House 2 -$460,000 Unit-$370,000 Farm-$800,000 Business-$670,000 Rates required - $5,500 Rate in the Dollar Property Value - $3,030,000 House 1-$620,000 House 2 -$460,000 Unit-$360,000 Farm-$820,000 Business-$770,000 Rates required - $5,800 Rate in the Dollar
Revaluation Example (Cont) Rates Rates (before rate increase) Rates (with rate increase) Change Due to Revaluation Total Change House 1$1212$1125$ %-2.1% House 2$858$835$ %2.7% Unit$690$653$ %-0.1% Farm$1492$1488$ %5.2% Business$1249$1398$ %18.0% Total$5,500 $5,8000%5.5%