ANTHONY VULETA CHIEF EXECUTIVE OFFICER. 18 April 2016

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1 FINANCE AND AUDIT COMMITTEE Please be advised that a Finance and Audit Committee Meeting was held at 5.00 on 11 April 2016 in Meeting Room 1 at the Administration Building, 99 Shepperton Road, Victoria Park. ANTHONY VULETA CHIEF EXECUTIVE OFFICER 18 April 2016

2 TABLE OF CONTENTS ITEM TITLE PAGE NO WOR 1 OPENING 3 2 ATTENDANCE Apologies Approved Leave of Absence 3 3 DECLARATIONS OF INTEREST 3 4 CONFIRMATION OF MINUTES 4 5 TERMS OF REFERENCE 4 6 PRESENTATIONS Petitions Presentations (Awards to be given to the Town) Deputations 5 7 METHOD OF DEALING WITH AGENDA BUSINESS 6 8 REPORTS Refinancing loans held by Council Use of surplus funds investment analysis 12 9 MOTION FOR WHICH PREVIOUS NOTICE HAS BEEN GIVEN NEW BUSINESS OF AN URGENT NATURE REQUEST FOR REPORTS FOR FUTURE CONSIDERATION CLOSURE 18 2

3 1 OPENING Councillor Vince Maxwell opened the meeting at 5.02pm. 2 ATTENDANCE Members: Banksia Ward: Jarrah Ward: Cr K (Keith) Hayes Cr M (Mark) Windram Cr V (Vince) Maxwell (Presiding Member) Cr J (Jennifer) Ammons Noble Mayor Trevor Vaughan A/Director Business Life Director Future Life/Built Life Secretary: Guests: Mr G (Graham) Pattrick Mr W (Warren) Bow Ms G (Gaye) Last 2.1 Apologies Director Business Life Mr N (Nathan) Cain 2.2 Approved Leave of Absence 3 DECLARATIONS OF INTEREST Declarations of interest are to be made in writing prior to the commencement of the Meeting, (a form to assist Elected Members and Staff is attached at the end of this Agenda). Declaration of Financial Interests Declaration of Proximity Interest Declaration of Interest affecting impartiality 3

4 4 CONFIRMATION OF MINUTES Moved: Cr Windram Seconded: Cr Ammons Noble That the minutes of the Finance and Audit Committee meeting held on 14 March 2016 be confirmed. The Motion was Put and CARRIED (4-0) In favour of the Motion: Cr Maxwell; Cr Hayes; Cr Windram; Cr Ammons Noble 5 TERMS OF REFERENCE (once endorsed - to be inserted on each agenda permanently) To be presented to the Ordinary Council Meeting 12 April NAME The name of the Committee shall be the Finance and Audit Committee (the Committee). 2. AIMS AND OBJECTIVES The strategic focus for the Committee is aligned to the Community Strategic Plan. The purpose of the Committee is to contribute to the vibrant lifestyle of the Town. 2.1 Goals To provide sound financial management and good governance by: Providing guidance and assistance to Council as to the carrying out of its functions in relation to audits in compliance with the Local Government Act 1995; Developing and reviewing Council policies as per the Committee s Key Focus Areas; Developing appropriate strategies that will deliver the most favourable long term outcomes for the Council in the Committee s Key Focus Areas; Ensuring Council maintains its financial capacity to deliver programs and services; and Providing advice to Council in relation to matters that are within the Committee s area of responsibility. 2.2 Deliverables The key deliverables of the Committee will include: Annual compliance audit; Annual risk management audit; and Annual review / update of policies, strategies and plans related to the Key Focus Areas. 2.3 Scope and Jurisdiction The Key Focus Areas of the Committee include: Audit; Financial planning; 4

5 Revenue diversification; Investments; Rates; Grants; Asset management; Land asset optimisation; Risk Management; and Governance. 2.4 Engagement The Committee may invite individuals and subject matter experts to attend a meeting of the Committee to provide expert advice where required. 3. MEMBERSHIP The Committee will comprise a maximum of four Elected Members being two Elected Member representatives from each of the Town s two wards (with corresponding deputy members). 4. MEETINGS The Committee shall convene in accordance with its annual adopted meeting schedule. 5. QUORUM A quorum shall be comprised of two members of the Committee. 6. DELEGATED POWER The Committee has no delegated power and all recommendations made are to be referred to Council for a decision. 7. GOVERNANCE The Committee is governed by the provisions of the Town of Victoria Park Standing Orders Local Law 2011 and the Local Government Act 1995 and its Regulations. 6 PRESENTATIONS 6.1 Petitions Remove from future Agendas. 6.2 Presentations (Awards to be given to the Town) Remove from future Agendas. 6.3 Deputations 5

6 7 METHOD OF DEALING WITH AGENDA BUSINESS Remove from future Agendas. 8 REPORTS 8.1 Refinancing loans held by Council File Reference: Appendices: COR/10/41 No Date: 09 March 2016 Reporting Officer: N Cain Responsible Officer: N Cain Voting Requirement: Simple Majority Executive Summary: Recommendation That Council takes no action to refinance currently held loans. Elected members requested the Administration reviews the possibility of refinancing loans held by Council. The Administration, in conjunction with the Western Australian Treasury Corporation, have undertaken the review. The findings of the review do not support refinancing the loans held by Council. TABLED ITEMS: BACKGROUND: Elected Members have recently requested a review be undertaken with regards to the possibility of refinancing loans held by Council. This request is primarily as a result of the current economic climate where interest rates applicable to loan borrowings are at record lows. The Town currently has approximately $11.7 million dollars owing in loans. DETAILS: Following the recent request from Elected Members to review the possibility of refinancing loans to take advantage of low interest rates for borrowings, the Administration undertook a review of the current loans situation in conjunction with the Western Australian Treasury Corporation (WATC). The WATC are the supplier of the loans to Council as well as the State Government s corporate treasury services provider. The method of approach involved: Reconciling all current loans; Discussion with WATC as to available refinancing options; Calculation of best loan outcome refinancing options; and Comparative analysis of current versus best loan outcome refinancing options. 6

7 The Town currently has approximately $11.7 million owing in loans. The premium, or payout cost, to refinance these existing loans is approximately $0.9 million. The following table sets this out: Loan Capital Payout Cost Refinance ,007 39, , ,657 50, , ,565, ,299 1,681, ,908, ,287 2,095, , , , , ,980 1,070, ,723 45, , ,469 38, , ,344,384 45,783 1,390, ,366, ,158 3,476,177 Total 11,657, ,272 12,540,731 The total for refinancing then becomes approximately $12.5 million. The WATC supplied a number of refinancing options, each with associated clauses. These included various combinations of the following characteristics: Consolidate all loans versus keeping loans separate; Variations to timeframes of loans versus keeping existing timeframes; Refinancing the Payout Cost versus having a separate transaction for this payment; and Varying repayment frequencies versus the current situation of two payments per annum. Following considered analysis by both the WATC and the Town s Administration, the most advantageous combination is to: Keep loans separate; Maintain existing timeframes; Refinance the Payout Cost; and Maintain two payments per annum. 7

8 The resulting outcomes are shown below: Loan Applicable Interest Rate Whole of Life Payments Difference Current Future Current Future % 2.45% $560,664 $548, % 2.56% $750,798 $744, % 2.46% $1,795,392 $1,777, % 2.54% $2,281,026 $2,240, % 2.76% $753,795 $745, % 2.92% $1,244,671 $1,222, % 3.07% $604,210 $596, % 3.07% $511,658 $504, % 2.39% $1,464,421 $1,447, % 2.47% $3,697,344 $31681,468 Total $13,663,979 $13,509,556 $154,423 Accrued interest to date $151,869 Gain $2,554 Expected advertising costs $3,200 Total gain/(loss) ($646) As can be seen from the above table, the process to refinance the current loans held by Council will likely result in a minor loss to Council. The primary reason for this occurring is a policy requirement from the WATC that the State Government should not be worse off by way of any refinancing options. The premium, or payout cost, is designed to cover this and protect the State Government from any loss (future loss of interest earnings). A number of banks were also approached to quote on refinancing the loans. The outcome associated with this demonstrated that banks could not compete with the WATC and the loss was considerably greater than that shown above. 8

9 Legal Compliance: The Local Government Act 1995 provides Council with the power to borrow, as below: Power to borrow (1) Subject to this Act, a local government may (a) borrow or re-borrow money; or (b) obtain credit; or (c) arrange for financial accommodation to be extended to the local government in ways additional to or other than borrowing money or obtaining credit, to enable the local government to perform the functions and exercise the powers conferred on it under this Act or any other written law. (2) Where, in any financial year, a local government proposes to exercise a power under subsection (1) ( power to borrow ) and details of that proposal have not been included in the annual budget for that financial year (a) unless the proposal is of a prescribed kind, the local government must give one month s local public notice of the proposal; and (b) the resolution to exercise that power is to be by absolute majority. (3) Where a local government has exercised a power to borrow and (a) it does not wish to proceed with the performance of the function or the exercise of the power for which the power to borrow was exercised; or (b) after having completed the performance of the function or the exercise of the power for which the power to borrow was exercised, any part of the money borrowed, credit obtained or financial accommodation arranged has not been expended or utilized, the local government may resolve* to expend the money or utilize the credit or financial accommodation for another purpose if one month s local public notice is given of the proposed change of purpose. * Absolute majority required. (4) A local government is not required to give local public notice under subsection (3) (a) where the change of purpose has been disclosed in the annual budget of the local government for the relevant financial year; or (b) in such other circumstances as are prescribed. (5) A change of purpose referred to in subsection (3) is to be disclosed in the annual financial report for the year in which the change occurs. The Local Government (Financial Management) Regulations 1996 provides Council with the power to refinance borrowings, as below: 20. When local public notice not required for exercise of power to borrow (Act s. 6.20(2)(a)) (1) A local government is not required to give local public notice of a proposal to exercise a power to borrow when the power is to be exercised to re-finance a loan or to continue other financial accommodation (whether with the same or another bank or financial 9

10 institution) except where the re-financing or continuation is a major variation. (2) In this regulation major variation means a variation in the terms of a loan or other financial accommodation which is (a) a capitalisation of interest accruals; or (b) an increase in the term of the loan or other financial accommodation; re-finance in relation to a loan or other financial accommodation (the existing loan ), means to borrow an amount (the new loan ) which is, at the date of the new loan (a) (b) equal to the principal amount owing on the existing loan; or not more than $5 000 more or less than the principal amount owing on the existing loan, for the principal purpose of paying out the existing loan or preserving the credit originally provided by the existing loan. Policy Implications: Strategic Plan Implications: The Strategic Community Plan requires the Administration to ensure that financial systems are sound and well managed. Financial Implications: Internal Budget: Sufficient funds exist to cover the loan repayments for the loans that are currently in place. If Council were to deviate from this position (i.e. pursue the refinance of loans) then the full financial consequence would need to be reviewed for the annual impact. As it currently stands, the total outlay of funds over the life of the loans would not vary significantly to that which is already allowed for in the Long-Term Financial Plan. Total Asset Management: Sustainability Assessment: External Economic Implications: Social Issues: Cultural Issues: Environmental Issues: 10

11 COMMENT: Based on the aforementioned calculations, the Administration considers that it would not be sound financial management to pay out the loans currently held by Council. There is no gain to be had and therefore do not feel it is not in the best interests of the Town to pursue refinancing the loans. CONCLUSION: Council should not pursue refinancing the current loans held. RESOLVED Moved: Cr Hayes Seconded: Cr Windram That Council takes no action to refinance currently held loans as there is no financial benefit to be gained. The Motion was Put and CARRIED (4-0) In favour of the Motion: Cr Maxwell; Cr Hayes; Cr Windram; Cr Ammons Noble 11

12 Moved: Cr Windram Seconded: Cr Ammons Noble In accordance with Clause 6.18 of the Standing Orders Local Law Clause 6.10 be suspended to enable Members to speak more than once on any motion or amendment. The Motion was Put and CARRIED (4-0) In favour of the Motion: Cr Maxwell; Cr Hayes; Cr Windram; Cr Ammons Noble 8.2 Use of surplus funds investment analysis File Reference: Appendices: COR/10/41 No Date: 10 March 2016 Reporting Officer: N Cain Responsible Officer: N Cain Voting Requirement: Simple Majority Executive Summary: Recommendation That the current Investment Policy be reviewed to enable a greater variation of investment opportunities to occur. Council requested a review of best usage of surplus funds be undertaken. Deloitte Touche Tohmatsu (Deloittes) undertook the analysis. Opportunities to generate a greater rate of return exist. Revenue diversification represents an opportunity for Council to reduce rate rise pressure. TABLED ITEMS: BACKGROUND: At the February 2016 Ordinary Council Meeting, and as part of the recommendation of the Annual Budget Review, Council parked funds (approximately $2.2 million) until such time as an independent assessment of best usage of these funds is undertaken. DETAILS: The Administration, following the resolution of Council in February 2016, undertook to seek quotes from suitably qualified organisations to provide an assessment of investment options available to Council. As part of the assessment, the investment options were to be weighed up against the paying out of three particular loans to ascertain the most advantageous outcome. 12

13 Those loans are: Loan 02 Depot land Current interest rate 6.27% - Approximate amount owing $434,900; Loan Kent Street Current interest rate 7.55% - Approximate amount owing $538,900; and Loan 10 1 Harper Street Current interest rate 6.35% - Approximate amount owing $887,800. The total of the outstanding amounts of these loans equates to $1.9 million. When premiums, or pay out costs are included, the total owing is approximately $2.3 million. Following the quotation period, Deloitte Touche Tohmatsu (Deloittes) was awarded the works. Deloittes provides audit, economics, financial advisory, human capital, tax and technology services on a global scale. The methodology undertaken by Deloittes in analysing different investment options for the Town included: Using a weighted average interest rate of the three loans for pay out (being 2.93%) as the hurdle rate against which investments should be benchmarked; Using current returns (yields) for State and Commonwealth Government bonds and deposits as sourced directly from those government agencies; Using, for 1 and 5 year returns, Chant West Asset Class Report, AMP Capital Asset Class Returns and Vanguard Asset Class Tool; Using, for 10+ year returns, Chant West Asset Class Report, AMP Capital Asset Class Returns, Vanguard Asset Class Tool and ASX / Russell Long-Term Investing Report; Using the Property Council of Australia Index for commercial property rental and capital yields; and Using Corelogic RPData Index for residential rental and capital yields. In relation to the advice provided, Deloittes notes that the information is provided as an analysis of past performance of investment classes and may not be a reliable indicator of future performance. Any actual returns may vary from the historical performance due to many reasons. 13

14 In general, a summary of the major investment class analyses is as below: Investment Type Rate of Return Low High Bonds 1.76% 3.00% Term Deposits 1.90% 3.00% Australian Shares 5.00% 5.70% International Shares 15.00% 25.20% Rental Capital Commercial Property (Australia) 7.00% 4.10% Commercial Property (WA Metropolitan) 7.33% Not available Residential Property (Australia) 3.50% Not available Residential Property (WA Metropolitan) 3.90% -2.90% Benchmarked Rate of Return 2.93% The above table is not a definitive list of all options explored by Deloittes, merely a summary. What Deloittes has shown is that, whilst paying off the three loans in question is a good use of funds (when compared to basic investment options such as Bonds and Term Deposits), other options for investment of surplus funds may provide a better rate of return. Deloittes also commented on the restrictive nature of the current investment policy of Council noting that only certain Bonds, Term Deposits and certain land investment are permitted. Other investment options allowed under the Local Government (Financial Management) Regulations 1996 that may provide a better rate of return are not permitted under the current Council policy. Deloittes advise that, before making any investment decision, a suitably qualified investment professional should be consulted, as well as legal advice sought, to ensure any investment made is allowed under any applicable statute. Legal Compliance: The Local Government Act 1995 provides Council with the power to invest, as shown below: Power to invest (1) Money held in the municipal fund or the trust fund of a local government that is not, for the time being, required by the local government for any other purpose may be invested as trust funds may be invested under the Trustees Act 1962 Part III. 14

15 2A) A local government is to comply with the regulations when investing money referred to in subsection (1). (2) Regulations in relation to investments by local governments may (a) make provision in respect of the investment of money referred to in subsection (1); and (b) deleted (c) prescribe circumstances in which a local government is required to invest money held by it; and (d) provide for the application of investment earnings; and (e) generally provide for the management of those investments. The Local Government (Financial Management ) Regulations 1996 provide the restrictions on investment types, as shown below: 19C. Investment of money, restrictions on (Act s. 6.14(2)(a)) (1) In this regulation authorised institution means (a) an authorised deposit-taking institution as defined in the Banking Act 1959 (Commonwealth) section 5; or (b) the Western Australian Treasury Corporation established by the Western Australian Treasury Corporation Act 1986 ; foreign currency means a currency except the currency of Australia. (2) When investing money under section 6.14(1), a local government may not do any of the following (a) deposit with an institution except an authorised institution; (b) deposit for a fixed term of more than 12 months; (c) invest in bonds that are not guaranteed by the Commonwealth Government, or a State or Territory government; (d) invest in bonds with a term to maturity of more than 3 years; (e) invest in a foreign currency. Policy Implications: Council policy FIN1 (Investments) applies. The objective of this policy is to provide a framework for the investment of the Town s surplus funds. Current limitations of the policy restrict investments to: Interest bearing deposits with Authorised Deposit Taking Institutions for a term not exceeding 12 months; Interest bearing deposits with the Western Australian Treasury Corporation for a term not exceeding 12 months; Bonds guaranteed by the Commonwealth Government, State Government or Territory Government for a term no exceeding 3 years; and Land and its development (subject to legislative requirements and express approval from Council). 15

16 Strategic Plan Implications: The Strategic Community Plan requires Officers to ensure that financial systems are sound and well managed. Financial Implications: Internal Budget: The surplus funds currently held will generate interest at approximately 2.5% interest. This is likely to generate approximately $60,000 in the next 12 months if left in term deposits. Total Asset Management: Sustainability Assessment: External Economic Implications: Opportunities exist to invest in land developments locally, which may add to the economic activity of the region. Social Issues: Cultural Issues: Environmental Issues: COMMENT: The report from Deloittes highlights the fact that opportunities exist in the current market for a greater rate of return from surplus funds than that which is currently occurring through the use of term deposits and bonds. The Town s Administration currently do not possess the necessary qualifications to facilitate high level investment of public monies. Any investment outside of low-risk, lowrate of return type investments (term deposits and bonds, for example) will require investment advice from suitably qualified professionals. The current policy restricts the ongoing investment of surplus funds into term deposits and bonds. Land, and developments on that land, is permitted through approval from Council. If Council is of the view that investment in other opportunities is preferred then to facilitate this will require an amendment to the Policy. With greater rate of returns comes greater risk. The current risk profile, as defined by Council s Investment Policy, demonstrates that Council is largely risk-adverse when it comes to seeking greater rates of return. For Council to realise the rates of return highlighted by Deloittes, a change in risk profile would be required. 16

17 CONCLUSION: Council is currently missing out on additional revenue by maintaining a low-risk, low-return investment profile. A review of the Investment Policy, with the objective to pursue other investment opportunities to occur, may provide for greater revenue diversification. RECOMMENDATION/S: The Chief Executive Officer be requested to review Council Policy FIN1 (Investments) enabling a greater variation in investment opportunities to occur. RESOLVED: Moved: Cr Hayes Seconded: Cr Ammons Noble A draft report of the Policy Statement and Management Practice to be brought back to the Finance and Audit Committee by August The Motion was Put and CARRIED (4-0) In favour of the Motion: Cr Maxwell; Cr Hayes; Cr Windram; Cr Ammons Noble Moved: Cr Windram Seconded: Cr Ammons Noble That Clause 6.10 of the Standing Orders Local Law be reinstated. The Motion was Put and CARRIED (4-0) In favour of the Motion: Cr Maxwell; Cr Hayes; Cr Windram; Cr Ammons Noble 9 MOTION FOR WHICH PREVIOUS NOTICE HAS BEEN GIVEN 10 NEW BUSINESS OF AN URGENT NATURE 10.1 Councillor Maxwell asked if the Budget report format be more user friendly and include a summary of the formal information in the budget in order for the information to be more readily available for ratepayers/residents. 17

18 11 REQUEST FOR REPORTS FOR FUTURE CONSIDERATION 11.1 The Finance and Audit Committee requested an update on the Land Optimisation Strategy (LAOS) and how it has been progressed The Finance and Audit Committee requested an oversight of Fees and Charges before going to an Elected Members Workshop. 12 CLOSURE The meeting was closed at 5.52pm. 18