SEPTEMBER 2009 BUDGET REVIEW - Amazon S3



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TOWN OF GAWLER

QUARTERLY BUDGET REVIEW

(AS AT 31 JANUARY 2012)

FOR THE YEAR ENDING 30 JUNE 2012

CONTENTS

| | |Page |

| | | |

|Executive Summary |2-10 |

| | | |

|Statutory Financial Reports: | |

| |Budgeted Income Statement |11 |

| |Budgeted Balance Sheet |12 |

| |Budgeted Statement of Changes in Equity |13 |

| |Budgeted Cashflow Statement |14 |

| |Budgeted Uniform Presentation of Finances |15 |

| |Financial Indicators |16 |

| | | |

|Supporting Information: | |

| |Budgeted Cash Surplus/(Deficit) Reconciliation |17 |

| |Budgeted Funding Statement |18 |

| |Income Statement by Directorate / Function |19-24 |

| |Capital Expenditure by Directorate |25-28 |

| |Projected Reserve Funds movement |29 |

| |Appendix 1 – List of Proposed Budget variations |30-32 |

| | | |

EXECUTIVE SUMMARY

In accordance with Section 123 of the Local Government Act 1999, and the Local Government (Financial Management) Regulations 2011, this report comprises the second of three quarterly budget reviews for the 2011/2012 financial year.

An analysis of the statutory financial reports included in this review is disclosed below.

1. Budgeted Income Statement

Based on financial performance to date, and forward projections for the financial year as determined in conjunction with relevant Budget managers, this review provides for a reduction of $337,000 in Council’s estimated operating deficit for the year to $2.950M which, when combined with the October 2011 review, represents a reduction of $375,000 (11.3%) from the original adopted budget of $3.325M.

The operating deficit illustrates the shortfall of recurrent revenue to fund Council’s recurrent expenditure (including depreciation).

Section C of Appendix 1 discloses the recommended budget variations which require approval by Council in accordance with the Budget Management Policy.

The key contributing factors behind the projected net reduction of $337,000 in Council’s operating deficit include:

a) Investment income – additional income of $51,000

Through improved budget and treasury management in recent years, Council has experienced improvement in its overall cash position.

This has subsequently translated into a reduced reliance on the short-term cash advance facility through the Local Government Finance Authority (culminating in reduced interest expense) and a substantial increase in the amount of interest received on Council’s growing investments. The amount of interest received on investments for 2011/2012 is projected to be $135,000 – which is almost a 300% increase on the $46,000 received in 2010/2011.

Unlike previous years, Council has not had to draw upon the cash advance facility (limit of $3.168M) this financial year, which has prompted Finance staff to undertake an extensive financial analysis to determine whether Council can utilise the short-term cash advance facility to part-finance its capital works program this year (as distinct from a fixed term (15 year) Debenture loan borrowing of $3M previously provided for such purpose in the budget). The outcome of this analysis is separately disclosed in Section 2 – Budgeted Balance Sheet below.

b) Employee Costs – reduced expenditure of $400,000

The projected budget saving of $400,000 is derived from a combination of positions temporarily vacant during the year and a staffing restructure within the Planning & Infrastructure Services Directorate.

It is important to note that expenditure savings derived from positions vacant are ‘one-off’ savings (assuming the positions are refilled), as distinct from longer-term savings that may be achieved via restructures.

c) Depreciation – reduced expenditure of $48,000

In accordance with Australian Accounting Standard AASB116 (Property, Plant & Equipment), Council must undertake an annual review of useful lives applied for depreciation purposes against its stock of fixed assets.

Reviews undertaken to date have revealed that the useful lives applied for buildings, spray-seal road surfaces and sheeted (unsealed) roads are understated. On this basis, the useful lives applied for such assets has been extended which has culminated in a depreciation reduction of $110,000.

Based on road asset revaluations undertaken as at 30 June 2011, annual depreciation for other assets has increased by $62,000, resulting in a net depreciation expenditure reduction of $48,000.

d) Finance Costs – reduced expenditure of $75,000

The projected saving of $75,000 is based on reduced cash advance interest expense ($10,000) and reduced accrued loan interest ($65,000) as at 30 June 2012 – the latter due to the proposed transfer of $3M capital works funding from a fixed-term Debenture Loan over 15 years to utilisation of the existing Cash Advance facility with the Local Government Finance Authority (see Section 2 – Budgeted Balance Sheet for further details).

These favourable budget variances have been partly offset by a number of unfavourable budget variances including:

i. $140,000 for the engagement of consultants to temporarily fill a number of positions vacant within the Town Planning section;

ii. $44,000 for a supplementary Council election, due to recent Councillor resignations (this has been partly offset by reduced allowances paid as a result of the temporary positions vacant);

iii. $33,000 to engage AMA Leisure to undertake a comprehensive operational review for the Gawler Swimming Centre and the Sports & Community Centre (in accordance with Council resolution);

iv. $40,000 projected reduction in Development Application fees due to volume of applications received to date less than anticipated (particularly in relation to new growth areas);

v. $20,000 for legal costs incurred as a result of an Ombudsman investigation;

vi. $17,000 increase in net debt collection costs, towards ensuring payments due to Council are received in a timely manner, thereby facilitating proper cashflow.

The recommended budget variances incorporated within this review are disclosed within Appendix 1.

2. Budgeted Balance Sheet

The projected movement in the Balance Sheet (from $174.085M to $175.488M) reconciles to the projected total of Comprehensive Income ($1.393M) disclosed in the Statement of Comprehensive Income.

As reported at the Audit Committee meeting on 14 December 2011 (Agenda item 7.3 – Treasury Management review), Finance staff have since undertaken a financial analysis to determine whether there is the capacity to not undertake any fixed long-term Debenture loan borrowings this financial year ($3M currently provided for in the 2011/2012 budget) and, instead, source this capital funding from accessing the cash advance facility. This analysis was undertaken on the basis of Council’s current cash position which has translated to Council not having had to access the cash advance facility thus far this year.

The financial analysis undertaken has revealed that, based on revised budget projections, there is currently the capacity to cover loan funding required for capital works purposes from within the $3.168M cash advance facility limit.

Whilst this will have a favourable impact on the current budget (in relation to accrued loan interest expense as at 30 June 2012), the potential longer term financial benefits are dramatic.

Historically, the Council has undertaken fixed-term (15 year) Debenture Loan borrowings to part-fund the delivery of its capital works program. On this basis, on each occasion the Council has ‘locked in’ a fixed schedule of half-yearly principal and interest repayments over the life of the loan. The amount of interest payable on a 15 year loan of $3M at an interest rate of 6% is approximately $1.6M (with $178,000 interest payable within the first twelve months alone).

However, the benefit of accessing the same funds via the cash advance facility is that repayments to reduce the cash advance balance can be made at any time as cashflow permits. Conversely, Council can draw upon the cash advance (up to the limit of $3.168M) at any time as required.

Given that Finance staff only instigate the investment of surplus funds once any cash advance balance has been repaid (i.e. thereby avoiding instances where there is a cash advance and cash investments balance), this means interest expense on the cash advance balance would be kept to an absolute minimum.

Further, as Council’s financial position improves, it will also mean that Council will be able to ‘fast-track’ the repayment of the cash advance balance over a considerably shorter number of years as Council would not be locked into a fixed term loan repayment schedule. It is anticipated that the interest expense saving to the Council in the longer term, by changing capital works borrowings for the 2011/2012 financial year from a fixed-term loan to the cash advance facility, could amount to approximately $1M (assuming no major increase in interest rates given the cash advance rate varies with movements in official cash rates).

In relation to the above, it is worthy to note that Council’s Funding & Debt Management Policy (Policy No. 6.5) stipulates that the loan portfolio should be split between fixed interest (i.e. fixed term Debenture Loans) and variable interest rate (i.e. Cash Advance facility) borrowings.

Based on the above factors, staff have recommended within this review that Council transfer the $3M identified capital works loan funding from a fixed term Debenture Loan to the Cash Advance facility available through the Local Government Finance Authority. On this basis, Council would only draw down on the Cash Advance facility as needed.

In accordance with the Model Financial Statements, with which Council’s financial statements must be prepared, the cash advance facility is effectively treated as a ‘bank overdraft’ within the balance sheet, due to the fact that Council can draw down on and make repayments of the Cash Advance facility at any time. This is the reason why the Balance Sheet provides for a revised budget of a $0.963M bank overdraft and a reduction in the projected non-current loan liability for the year (from $15.960M per the October 2011 review to $12.960M).

The marked estimated reduction in ‘Trade & Other Payables’ from $4.742M to $3.260M is due to abnormally high Grants received in advance as at 30 June 2011 (relating to the Urban Rivers Project and Julian Terrace upgrade works).

The estimated movement in the value of ‘Infrastructure, Property, Plant & Equipment’ (non-current assets) is based on the value of Council’s capital works program less annual depreciation and proceeds from assets sold.

3. Budgeted Statement of Changes in Equity

The estimated movement in ‘Other Reserves’ is based on transfers to/from internal Equity Reserves as disclosed on page 31.

The recommended budget variations within this review include:

i. $39,970 reduction in Transfer from the Waste Management Service Charge Reserve, based on projected revenue/expenditure levels for the service. The estimated Reserve fund balance of $40,000 as at 30 June 2012 will be rebated back to related ratepayers during the 2012/2013 financial year via a rebate against the service charge applied for that year;

ii. $36,000 allocation to the Property Reserve, being interest received on developer contributions received in November 2011 relating to the Southern Urban Areas Community Infrastructure Deed. The agreed conditions of the deed funding was that Council would effectively treat the funds received as ‘trust’ funds for future capital projects;

iii. $8,100 allocation to the Stormwater Drainage Reserve, being for developer contributions received.

Whilst an annual ‘desktop’ revaluation will be undertaken for road infrastructure assets as at 30 June 2012, no provision has been made for this in the Asset Revaluation Reserve at this stage.

4. Budgeted Cashflow Statement

The key proposed change within the Cashflow Statement is the transfer of $3M of external loan funds from a fixed-term Debenture Loan to the utilisation of the cash advance facility available through the Local Government Finance Authority.

As the cash advance is treated as a ‘bank overdraft’ it has the effect of reducing the amount of cash (i.e. ‘Cash at end of reporting period’) disclosed within the Cashflow Statement. This approach will deliver major savings in future loan interest for the Council (refer Section 2 – Budgeted Balance Sheet above for further details regarding this).

The deferral of sale of land at Barkley Crescent (per Council resolution – Motion No:2011:12:369) has resulted in a marked reduction in projected revenue from the ‘Sale of surplus assets’. This has been partly offset by reduced ‘Disposal costs of assets sold’ from $400,000 to $30,000 (the net effect of this is a reduction of $569,572 in cash inflows for the financial year).

5. Budgeted Uniform Presentation of Finances

The projected increase in net borrowing for the year from the previous review (i.e. $937,000 to $1,572,000) is due to the deferral of property sales.

The deferred property sales revenue has been partly offset by a reduction of $346,000 in the operating deficit (from the October 2011 review).

6. Financial Indicators

The 11.3% reduction in the projected operating deficit for the year (from $3.325M to $2.950M) has automatically translated to a corresponding reduction in the Operating Surplus Ratio (from -22% to -20%).

The net increase of $265,000 in projected net financial liabilities is due to the deferral of property sales. There has only been a very minor increase in the Net Financial Liabilities Ratio (from 87% to 88%) as a result.

Increased investment income and reduced interest expense has culminated in a estimated reduction in the Interest Cover Ratio from 5.2% (October 2011 review) to 4.5%.

7. Budgeted Cash Surplus / (Deficit) Reconciliation

The cash deficit illustrates the overall shortfall of cash to fund Council’s day-to-day expenditure requirements (i.e. payments to suppliers and employees), employee leave provisions (i.e. annual and long service leave entitlements) and specific funded reserve funds (e.g. developer contributions towards future capital works, unspent capital works projects from the previous financial year).

In recent years, Council has made major inroads in reducing its cash deficit – from $6.650M as at 30 June 2008 to $1.547M previously projected as at 30 June 2012 within the October 2011 review.

This reduction is being achieved by effective budget funding management and prudent treasury management.

It is important to note, however, that the transfer in loan funding (as detailed in Section 2 – Budgeted Balance Sheet above) will impact on Council’s cash deficit calculation result (as disclosed on page 14) only because the cash advance balance is included within the cash deficit calculation equation (as it effectively acts as a bank overdraft facility), whereas fixed long-term loan liability (secured by future rate revenue) is not included in the cash deficit calculation.

The impact of this on the cash deficit calculation is effectively outlined in the Budgeted Funding Statement on page 17.

8. Response to recent media articles relating to Council’s financial position

In recent times, there has been some criticism levelled in the media about the management of Council’s finances (refer appendix 2).

Management and staff,take exception to this misleading reporting which is not supported by facts. The recent reference in the media to the GFC (Global Financial Crisis) as the ‘Gawler Financial Crisis’ is particularly inaccurate, unhelpful and unwarranted.

Whilst it is acknowledged that Council is not reducing its operating deficit as quickly as it would otherwise like, there have been external and mitigating circumstances which have prevented a swifter reduction in the deficit, not the least being a dramatic increase in depreciation (non-cash) expenditure as a result of major asset revaluations / corrections undertaken as at 30 June 2010 and costs incurred as a consequence of managing impending major growth within the Town of Gawler.

By contrast, there has been a substantial reduction in the cash deficit position of the Council in recent years – to the extent that it is projected that Council can now fund its external loan borrowings for 2011/2012 from within its existing cash advance facility limit (thereby delivering substantial future year interest savings of potentially up to $1M over a 15 year period to the Council).

Part of the financial management criticism levelled at Council has also been that there has been no apparent review of Council’s recurrent expenditure levels – and that, put simply, the reliance in addressing the operating deficit has been solely placed at future general rate revenue increases.

Whilst it is acknowledged that additional rate revenue will naturally play its part, there is just as much importance and reliance in Council reviewing its expenditure levels. This approach was reiterated as recently as within the Rating Review Discussion Paper (January 2012), which is currently subject to public consultation, and may have been the cause that sparked the recent media criticism.

As previously indicated to Council, a proper review of recurrent expenditure can only occur by Council (i.e. the Elected Member body) having been provided on an informed basis of the existing recurrent service levels provided to the community. As ratified via the Audit Committee at its most recent meeting on 14 December 2011, this informed approach will be facilitated by comprehensive information (both financial and non-financial) being provided within the 2012/2013 budget papers for consideration and assessment by Council.

Only when the Council has an improved understanding of its service levels can an informed decision be made about future expenditure and service levels.

Nonetheless, Council staff are reviewingcurrent practices and procedures, towards identifying operational efficiencies. Some of the recent achievements to this end include:

• Banking services review, resulting in a negotiated reduction in bank charges (estimated saving of approximately $8,000 per annum);

• The elimination of a $300 annual performance bonus to staff ($30,000 per annum)

• The ‘freezing’ of Service Recognition payments to employees with over 10 years’ service to the Council;

• The transition of the periodic cleaning of Murray Street from a manual labour-intensive service to a more effective machine operated service;

• Reduced postage costs as a result of no longer posting the Community Information Directory to all households;

• Reduced telephone/mobile phone costs as a result of associated service tender undertaken;

• The implementation of issuing dog registration discs with annual dog registration notices and providing the B-Pay payment option for dog registrations (approximately 40% take-up), culminating in reduced demand for casual Customer Service staff;

• Reduced net interest costs (i.e. reduced cash advance interest and increased investment income) through improved budget/cash management practices

• A review of the operations of the Waste Transfer Station, culminating in reduced costs as a result of reduced opening hours;

• Improved irrigation practices for Council’s irrigated surfaces (i.e. ovals, parks and gardens) resulting in lower water consumption;

The above information is provided in response to the recent media criticism, in the expectation that Council can proactively illustrate that considerable in-roads and improvements are being made in addressing the operating and cash deficit positions of the Council.

Whilst staff can continue to review how existing services are delivered, towards identifying any operational efficiencies, it is important to note (as previously indicated to Council) that the ambitious target of achieving a break-even operating position by the 2014/2015 financial year (which would essentially require a reduction in the existing operating deficit of $1M each year over the next three financial years) can only be achieved by a dramatic reduction in various service levels provided.

This will be particularly challenging for Council, given that there is often the demand for new and/or expanded services.

9. Legal Expenses

At the time of adopting the 2011/2012 budget, Council capped legal expenses for the year at $100,000 (a reduction of $44,000 from that originally sought by Management).

As at 31 January 2012, $123,091 of legal expenses has been incurred as disclosed in Table 1 below.

Table 1 – 2011/2012 Legal Expenses as at 31 January 2012

|Function |Notes |Actual |Adopted Budget |Variance |

|General Administration |Ombudsman investigations |13,057 |- |(13,057) |

|General Administration |Other routine legal advice |5,015 |6,255 |1,240 |

|Human Resources |Unfair dismissal claim |8,314 |- |(8,314) |

|Human Resources |CEO contract / Key Performance Targets negotiations |14,908 |- |(14,908) |

|Human Resources |Routine industrial relations advice |4,780 |7,297 |2,517 |

|Rates Administration |Debt collection expenses – costs recovered from relevant|33,220 |34,745 |1,525 |

| |debtors | | | |

|Town Planning |Routine advice and provision for development appeals |17,423 |41,696 |24,273 |

| |costs | | | |

|Community Lease / Licence |Finalisation of agreements with sporting / community |20,580 |4,864 |(15,716) |

|agreements |groups | | | |

|Other sundry activities | |5,794 |5,143 |(651) |

|TOTALS | |123,091 |100,000 |(23,091) |

As evidenced in Table 1 above, the total legal fees budget of $100,000 has been exceeded due to:

i. Costs incurred as a result of recent investigations by the Ombudsman;

ii. Defending an unfair dismissal claim lodged against the Council;

iii. Extensive negotiations regarding the Chief Executive Officer’s contract and Key Performance Targets undertaken by the Performance Management Panel;

iv. Finalisation of community lease / licence agreements with community groups and sporting clubs.

Whilst the budget of $34,745 for debt collection costs has not yet been exceeded, on-going costs incurred in ensuring the collection of outstanding debtors will mean that the existing budget will unfortunately be exceeded. However, it is important to note that such costs incurred are recovered as a charge against the relevant ratepayer, so that the net budget remains unaffected.

The collection of debts payable to Council is an important undertaking, as Council’s cashflow (and thereby investment income and overdraft interest) is heavily reliant on it.

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