Long Term Financial Plan
Aim
The Financial Plan seeks to demonstrate prudent financial governance to the community and external stakeholders by establishing the framework for sound and sustainable decision making. It will also assist in the development of Council’s annual operational plan and yearly budget.
Objectives
- To satisfy the needs of community for relevant information on the financial affairs of the council.
- To achieve financial sustainability over the next ten years.
- To provide good financial management, giving fiscal security assurance to the council and the community
- To reflect a responsible blend of services and facilities by the prudent use of available revenue sources
- To consider the whole of life costing on the implementation of new and future assets and its impact on the region’s future community.
Executive Summary, Vision and Directions
Financial management within Bundaberg Regional Council supports the delivery ofthe objectives identified within Council’s Community Plan and ensures that financialresources are allocated according to the annual priorities set by Council in achievingthat vision, within the parameters determined through the long-term financial planning.
The long term financial plan is an integral part of the local government planningframework depicted below:
The plan is informed by not only the Bundaberg Regional Community Plan 2031 and theBundaberg Regional Council Corporate Plan 2009-2014, but also the latest informationavailable at the time of its preparation with respect to:
• Master Planning Documents, inclusive of the Bundaberg Region Social InfrastructureStrategic Plan and Sport and Recreation;
• Infrastructure Schedules included within the current town planning schemes withinthe region;
• Latest population growth estimates from relevant sources;
• Most recent estimates of development activity;
• Asset Management Plans for the various classes of assets.
All financial decisions are made in the context of long term financial sustainability withfunding decisions having due regard to intergenerational equity, so that those who enjoy the benefits of assets and services provided by Council contribute to the fundingof those assets and services.
Conversely, assets and services that are consumed in the short term do not place afinancial burden on future generations. Financial decisions are guided by corporate policies, strategies and principles ofeffective financial management.
Rates and Charges
Council applies the principles of equity, effectiveness and efficiency, simplicity and sustainability.
Council aims to raise sufficient revenue to:
- Ensure a balanced budget and provide a strong financial basis for effectivemanagement of expenditure programmes and debt;
- Provide sustainable services to the community based on principles ofintergenerational equity and deemed capacity to pay for Council services;
•Sustain operating capability on a long-term basis;
- Encourage a strong, growing and sustainable local economy with appropriatelevels of infrastructure assets and facilities; and
- Provide certainty of funding for the provision of infrastructure and services identifiedby Council in its long-term strategic financial plans.
Sustainability Indicators
Council uses the financial sustainability indicators mandated in the Local GovernmentAct 2009 plus other measures to assist in monitoring financial sustainability.
As is the case with all forecasts, circumstances change and these sometimes impacton the financial forecast and can negatively affect the sustainability ratios. Whenthis occurs, Council will develop strategies to bring the forecast back to a sustainableoutlook in the long term.
Operating Position
The net operating position (operating revenue less operating expenses) indicatesthe extent to which Council is raising sufficient operating revenue to cover operatingexpenses. Council aims to achieve a positive operating position in each financial yearof the long-term financial forecast as an indication that expenditure is being managedwithin the available revenue projections.
Council must make all endeavours to ensure a balanced budget is adopted eachfinancial year, and seeks to achieve reliable and ongoing revenue sources to fundrecurrent operating expenditure. One-off revenue sources should not be used tocommit to new recurrent expenditure, thereby ensuring that new, ongoing (recurrent) expenditure commitments have a reliablerevenue source, not only in the current budget year, but for future years – thus, promoting financial sustainability.
Asset Management
Council continues to place particular importance on ensuring the standard of assets inthe region remains high. To this end asset management plans have been developedfor the eight classes of assets under Council’s control; namely:
•Land & Improvement;
• Buildings and Structures;
• Plant & Equipment;
• Cultural Assets;
• Roads,Footpaths and Bridges;
• Stormwater Drainage;
• Sewerage Infrastructure;
• Water Infrastructure.
The Local Government Act 2009 requires local governments to place an even greaterfocus on asset management with the development of more comprehensive assetmanagement plans and the integration of these plans with the long term planningprocess.
The intention of this increased focus is to ensure an appropriate amount of the annualbudget is dedicated to operating, maintaining and renewing assets, thus supportingservice standards in the region.
An improved asset management framework will deliver better financial data forfinancial planning and thus further promote financial sustainability.
It is recognised that this is an evolutionary process and that as Council’s assetmanagement systems and data analysis mature, so will the outputs from these plansthat feed into the Long Term Financial Plan.
Capital Investment
Council invests a significant amount of the annual budget into community andinfrastructure assets to enable the delivery of services to the region’s residents andvisitors.
Financial management necessarily requires balancing the level of rates burden onproperty owners with the demand for assets and services within the region. This requiresplanning for ‘whole of life’ costs for new assets including operating, maintenance,renewal and financing costs. The long term financial forecast seeks to capture thesecosts to avoid underestimating the true cost of constructing or acquiring a new asset.
Cash Investments
A significant proportion of Council’s revenue is received twice a year in conjunctionwith the annual rates levy. This causes a spike in Council’s cash held after each ratingperiod, with the cash to be used for budgeted purposes through to the next ratingperiod.
This cash flow profile requires prudent cash management processes to ensure fundsare invested to maximise returns within the bounds of Council’s conservative risk profileand also to ensure sufficient cash is on hand when required to meet obligations toemployees and suppliers. A number of internal policies, controls and procedures aremaintained to ensure the integrity of Council’s funds. Council’s policies are guided bythe Statutory Bodies Financial Arrangements Act, which sets the bounds for acceptableinvestments.
The portfolio is managed with consideration given to the interest rate offered, the credit rating of the institution, with the term of the investment being dependent on future cash flow requirements and the prevailing outlook regarding interest rates. Once investments are made, Council holdsthose investments to maturity.
Council’s Investment Policy is reviewed annually to ensure that it is structuredappropriately to strike the balance between maximising returns and protectingCouncil’s investment portfolio. Refer to appendix ???
Debt
Debt is only used for capital purposes. The term of the debt is matched, as best aspossible, to the life of the asset up to the maximum term imposed by QueenslandTreasury Corporation (QTC). Borrowings usually have terms of 3, 6, 9, 12 or 15 years.For major capital projects, with a reliable income stream, debt will be borrowed over the maximumterm of 20 years.
The level of borrowings drawn each financial year is carefully monitored through long-termfinancial modelling to ensure affordability. A number of financial measures areutilised to assess sustainability, including those mandated by legislation. In addition tointernal assessments, Council is required to submit an annual application to the StateGovernment, which includes the long-term financial forecast, to gain approval for allplanned borrowings.
QTC periodically undertakes a detailed credit assessment of Bundaberg RegionalCouncil, with Council 2011 review providing a moderate rating with a developing outlook, this was based on Council’s adopted budget and forward planning at that time.
The external debt assessments focus on the macro view of Council’s ability to repaydebt.However, Council manages debt at a more detailed funding level internally, furtherensuring the financial sustainability of borrowing decisions. Council seeks to minimisegeneral rates as a funding source to repay debt, preferring to rely on specific revenuesources (water charges, sewerage charges, airport fees etc) that are matched to theinfrastructure being constructed.
Each year there is an amount of general borrowings that relies on the general rate as afunding source, but this is kept to a minimum, and under the current long term financialplan this is planned to reduce over the 10 year period.
This ensures that Council is in a position to fund critical assets in areas that do not havea separate revenue source.
Our Long-term Financial Outlook
Council regularly models financial performance, financial position and cash flowforecasts to monitor the long term sustainability of financial decisions. Projectedfinancial statements for the ten year period through to 30 June 2022 are included in the 10 year long term financial forecast.
The long term financial forecast is set amidst the competing backdrops of increaseddemands for the provision of Council services and infrastructure to keep pace withthe current aging population growth within the region, but also significant capital revenueconstraints as a result of a series of State Government decisions over several years thathas seen the removal of the 40% capital grants and subsidies, as well as the cappingof infrastructure charges from new development.
The yearly budget and this long term financial forecast continue to apply theprinciples endorsed by Council, particularly with respect to:
•The continued implementation of the planned price paths for utility charges.To this endthe long term financial plan is based on pricing decisions in the respective utilityschemes that aim to achieve a postage stamp price for those services across theregion. This is expected to be achieved within Waste Charges by 2015/16,Water Charges by 2018/2019 and within SewerageCharges by 2019/2020. The price paths for Water Access Charges, Water Consumption Charges and WasteDisposal fees are developed and implemented over the period of this plan.
•Continual review of operations to ensure that the operating position is optimised byone or more of the following means:
- Reducing costs through operational savings or reduced service delivery;
- Ensuring that overheads are appropriately recovered;
- Increasing charges; and/or
- The restructuring of operations which may include the involvement of the private sector or investigating the divestment of all or parts of some activities.
Some of the key challenges to be managed by Council include:
• Asset Management
Council’s infrastructure is relatively old and is in a variety of conditions. As a result,preparation of future budgets will need to take a planned approach to fundingthe ongoing maintenance and renewal of infrastructure assets to ensure long termsustainability of Council services. To support this, Council is in the process of furtheradvancing the Asset Management Plans for infrastructure assets in order to providea better picture of the costs and risks associated with current levels of asset-based services.
The long term financial plan is based on current service levels for the respective assetclasses. These service levels continue to be reviewed (either to an increasedlevel or to a reduced level) andthe impact of any proposed changes in service levels on Council’s Long Term Financial Plan will be assessed.
• Community Facilities and Infrastructure Program
Council has a significant plan to improve the standard of community infrastructure inthe region through the Bundaberg Region Social Infrastructure Strategic Plan, as well asthe Council’s Park & Recreation Facilities Hierarchy and service level document and plans.
These plans identify the strategic needs for the Bundaberg Region in these areas andincluding swimming pools, youthfacilities, communityfacilities precincts and libraries.
A modest amount of funds has been set aside for this purpose and works arecontinuing, but more funding is required to complete the full 10 year capital plan andthe associated operating and maintenance costs that result from any new infrastructure.Funding sources to complete the full program will need to be considered as part offuture financial planning.
• Infrastructure Charges
Infrastructure charges are raised from developers to help meet the cost of newinfrastructure that Council must provide due to the growth of the region. The StateGovernment’s cap on infrastructure charges and a change to the timing of whenCouncil can collect the charges from developers came into effect from July 2011.The full impact of these changes is another issue that Councilmust carefully manage over the next few years, as Priority Infrastructure Plans as partof the development of the new Bundaberg Regional Council Planning Scheme arefinalised.
Major Infrastructure and Service Delivery Area Capital Expenditure
As part of the long term financial planning,it is proposed that the 10 year financial plans areto be developed and maintained for major service areas, which will enable planning at a more detailed levelfor the delivery of major infrastructure and services to the community.These plans, which represent the majority of the total capital spend in the financialforecast period, are at varying levels of development for the various asset classes. They are to bereviewed at least annually and incorporated into the corporate financial forecast.As planning and asset management systems become more informed, these figuresare expected to change at each revision due to trigger points for various projectsbeing met, which may lend itself to more certainty with respect to both expectedexpenditure and its associated timing.Capital expenditure forecasts for the major service areas are shown in the current 10 year financial forecast.
It should be noted that many proposed projects and associated indicative capital expenditureincluded in Council’s 10 Year Financial Forecasts are contingent on finding appropriate funding sources. Funding solutions for all proposed asset investments are continually reviewed as part of the planning process. As this is Council’s initial long term financial plan it is expected that the identifiedcapital funding in this plan is a “worst case” scenario, with projects not likely to proceedunless there is an appropriate funding source.
It is proposed to follow the following matrix whenimplementing Council’s financial strategy:
The 10 year estimates will be performed at a high level, serving as a guide only given the extended time frame involved. It is anticipated that the 3 year timeframe will be more robust allowing significant lead time for systematically scoping, drawing and approving projects; thereby enabling Council to budget with a greater degree of certainty in each budget year.
Financial Forecast
Section 104 of the Local Government (Finance, Plans & Reporting) Regulation 2010 sets out the
legal responsibilities for financial forecasting as follows:
Section 104
(1) A local government must, at least annually, prepare a long-term financial forecast.
(2) A long-term financial forecast must –
a. Contain a forecast of the following for each year during the period of the forecast:
i. Income;
ii. Expenditure;
iii. The value of assets, liabilities and equity; and
b. Including the following documents covering each year of the period of the forecast:
i. A statement of financial position;
ii. A statement of cash flow;
iii. A statement of income and expenditure;
iv. A statement of changes in equity.
(3) The long-term financial forecast must also state the relevant measures of financial
sustainability for the period of the forecast.
Council will prepare a 10 year forecast with the prescribed statements and, additionally, a Capital Funding Statement.
The capital expenditure program per asset class as a percentage of total asset expenditure averaged over the 10 year period will be according to the following:
Asset class% target % in forecast
Roads & Drainage 40-60% 50%
Water Infrastructure10-20%10%
Sewerage infrastructure 10-20% 20%
Includingcommencing upgrade & relocation to the East treatment plant
Buildings 5-10% 7%
Land 2.5-7.5%4%
Plant & Equipment 5-10%9%
Operating Forecast Range
The range of operational revenues and expenditures council has set as parameters
Operational ItemKey DriverRange
General Rates Property Growth0.5% to 2%
General Rates Price Path3.5% to 7%
Utility ChargesPopulation Growth1% to 3%
Utility Charges Waste Price PathFull cost recovery
Utility Charges Sewerage Price PathTransitioning to FCR
Utility Charges Water Access Price PathTransitioning to FCR
Utility Charges Water Consumption Price Path2 part Tariff principles
Waste Refuse Disposal Fees Price PathTransitioning to FCR
General Fees & ChargesPrice PathCPI to LG Cost Index
Salaries & WagesEBA rate2.5 to 5%
Salaries & WagesPopulation Growth1% to 3%
Material & ServicesConstruction Index2% to 12%
Material & ServicesLocal Gov Cost Index2% to 8%
Material & ServicesPopulation growth1% to 3%
Material & ServicesCPI1% to 4%
Material & ServicesProductivity improvements-7% to -1%
Interest EarnedInvestment Rate4% to 8%
Interest PaidQTC Loan Rates4.5% to 6.5%
Financial Indicators
Council uses a series of financial indicators to assist in monitoring its financial sustainability, which also serve to identify future year ramifications of decisions that are made in the present period. Notwithstanding these indicators, events outside the Council’s control or community expectations or a perceived benefit to the community may force Council to temporarily move outside the optimum range.A strategy would then be put in place to ensure Council reverts to its planned parameters.
RatioCouncilState
Operating Surplus –-4% to 8%-4% to 8%
Working Capital Cash -- > 3 months > 3 months
Current Assets/ Current Liabilities 3:13:1
Capital Expenditure: Depreciation 1.1:11.1:1
Total Liabilities: Operating Revenue 1.5:11.66:1
Annual Debt Payment: Operating Revenue20%No target
Addendums
Forming part of this plan is the