Financial Management Strategy & Long Term Financial Plan 2014/2015 2023/2024 February 2014
Table of Contents Page 1.0 EXCUTIVE SUMMARY 1.1 Introduction 1.2 Financial Management Strategy 1.3 Long Term Financial Plan 2.0 KEY STATISTICS 3.0 FINANCIAL MANAGEMENT STRATEGY 3.1 Introduction 3.2 Financial Principles 3.3 Cash Reserves 3.4 Rating 3.5 Fees & Charges 3.6 Other Revenue Sources 3.7 Debt Levels 3.8 Funding of Infrastructure 3.9 Operational Budget (Recurrent Funding) 4.0 Financial Targets 5.0 LONG TERM FINANCIAL PLAN 2014/2015-2023/2024 5.1 Introduction 5.2 Assumptions 5.4 Risk 5.5 Conclusion APPENDIX 1 - EXPLANATION OF TERMS APPENDIX 2 STATEMENT OF COMPREHENSIVE INCOME APPENDIX 3 STATEMENT OF CASH FLOWS APPENDIX 4 STATEMENT OF FINANCIAL POSITION APPENDIX 5 VARIABLE ASSUMPTIONS APPENDIX 6 KEY FINANCIAL INDICATORS APPEDNIX 7 SENSITIVITY ANALYSIS 1 1 1 2 4 4 4 5 6 7 8 9 11 12 14 15 17 17 17 19 20 21 22 23 24 25 26 27
1.0 EXECUTIVE SUMMARY 1.1 Introduction A key component of sound financial management is the preparation of longer term financial strategies, plans and budgets. The development and adherence to longer term plans is critical to ensure the Council remains financially sustainable. The key reasons for the development of a long term financial framework are: To establish a financial framework over the next ten years to ensure the Council s strategic objectives are achieved; To provide an assessment of the financial resources required to accomplish the objectives and strategies included in the Council s Strategic Plan To establish a basis to measure the Council s adherence to its policies and strategies; and To assist Council to comply with sound financial management principles, in accordance with the Local Government Act 1993 and to plan for the long term financial sustainability of the municipal area The Financial Management Strategy and Long Term Financial Plan are not intended to be static, but will be reviewed annually as part of the annual planning process so as to incorporate any future changes in council policy, priorities, new initiatives or strategic direction. 1.2 Financial Management Strategy The Financial Management Strategy is an important part of the overall financial management activities of Council. The table following demonstrates the context within how this document fits into the overall financial management framework of Council. Financial Management Strategy and Long Term Financial Plan Page 1
Impacts Financial Management Activities Roles Internal Long-term Financial Planning Elected Body Strategic Planning Budgeting Set Policy Communication Strategies Management Reporting Set & Adopt Annual Budget Other Policy Decisions Financial Reporting Corporate Performance Management Revenue Collection Delegate Authority External Maintenance of Accounting Records Community Consultation Local Government Act Internal Control Framework Receive/Review Information Regulations Asset Management Plan Accounting Standards Cash Management Management Community Investment Implement Council Decisions Government Grants Manage Debt Portfolio Advise/Inform Elected Body Other External Factors Cash Flow Budgeting Set Administrative Policy Prepare Annual Budget Set Standards & Measure The strategy has been prepared to guide Council in its financial decision-making ensuring that the following principles are followed:- The community s finances will be managed to provide sustainable and responsible financial management of the community s resources. Council will endeavour to maintain community wealth to ensure that the wealth enjoyed by today s generation may also be enjoyed by tomorrow s generation. Council s financial position will have a margin of comfort aimed to absorb the impact of unexpected developments, without the necessity for substantial increases in rates. Resources will be allocated to those activities that generate community benefit. Managing the legacy impact of water reform to ensure the organisation is not financially burdened Applying user pays principles where it is appropriate to do so and there is a clearly identifiable cohort benefit from using those facilities and services. The Strategy assists in the development and revision of long term financial planning and determines financial boundaries for delivery of operational and capital plans. The key focus of the Financial Management Strategy is to demonstrate and maintain financial sustainability in the medium and long term whilst achieving the strategic objectives of council. 1.3 Long Term Financial Plan The Long Term Financial Plan has been developed to assist council in adopting a budget within a longer term prudent financial framework. The key objective of council s financial plan is financial sustainability in the medium to long term, while linking to council s objectives as specified in its Strategic Management Plan. The Plan is a guideline for future Financial Management Strategy and Long Term Financial Plan Page 2
action and encourages council to take into consideration the future impact that decisions made today may have on council s long-term sustainability. One of the program objectives of The Strategic Plan 2009-2014 is to provide sustainable and responsible financial management of the community s resources. The Financial Plan forms part of the strategy to achieve these outcomes, with the Strategic Plan providing for the development of a rolling financial plan. The Long Term Financial Plan establishes the strategic financial direction for the Council to meet the funding and investment challenges that lie ahead in the next ten years. It is an essential tool in delivery of the Strategic Plan and demonstrates council s commitment to undertake sound financial planning to ensure the future prosperity of its community. The following table demonstrates the context of how the Long Term Financial Plan fits into Council s overall financial management framework Strategic Plan Long Term Financial Plan Annual Plan and Estimates Financial Statements The Long Term Financial Plan is intended to achieve the following objectives in the ten year time frame: Maintain the existing range and level of service provision and develop the capacity to grow and add new services where appropriate; Maintain a strong cash position, ensuring the Council remains financially sustainable in the long term; Achieve underlying operating statement surpluses (excludes nonoperational items such as granted assets and capital income); Maintain a low debt profile below prudential guidelines; and Financial Management Strategy and Long Term Financial Plan Page 3
Continue to pursue recurrent grant funding for strategic capital funds from the state and federal government. 2.0 SNAPSHOT OF WEST TAMAR COUNCIL The following table provides a snapshot of West Tamar Council Area (sq km) 709 Population (est) 22,000 Number of Electors 16,389 Number of Ratepayers 11,278 Number of Residential Properties 9,200 Total Rates Levied (2012/13) Total Income (2012/13) $14.2m $23.9m Number of FTEs 94 Total Assets $267m Roads Maintained 460km Steady growth is being achieved through subdivision developments in Riverside and Legana. Residential properties have increased by approximately 930 in the municipal area in the last six years (an annual increase of approximately 2% in residential properties) 3.0 FINANCIAL MANAGEMENT STRATEGY 3.1 Introduction In preparing the Financial Management Strategy, the following principles of sound financial management have been complied with: Prudent management of financial risks relevant to debt, assets and liabilities Provision of reasonable stability in the level of rate burden Consideration of the financial effects of Council decision on future generations Full, accurate and timely disclosure of financial information It is important to note that the Financial Management Strategy is not about deciding on what Council will spend on individual projects. The Financial Management Strategy is about Financial Management Strategy and Long Term Financial Plan Page 4
the various strategies that will effectively determine the amounts of funds that Council will have at its discretion in future years. The Financial Management Strategy and Long Term Financial Plan is a guiding document to consider when developing budget estimates, rather than a document that is dictating future decision of Council. The long-term financial estimates will be revisited and updated regularly to reflect any strategies that arise from the Council planning process. The Strategy establishes the financial framework under which sound and sustainable financial decisions can be made. 3.2 Financial Principles The following principles serve to guide Council in setting its financial management strategies. They are given practical effect through strategies. The Community s finances will be managed to provide sustainable and responsible financial management of the community s resources. Council will ensure it only raises the revenue it needs, and does so in an efficient, sustainable and equitable manner. Council will manage community funds effectively and ensure information regarding its financial management decisions is accessible to the community. Council will maintain community wealth to ensure that the wealth enjoyed by today s generation may also be enjoyed by tomorrow s generation. Council will seek to achieve equity across generations by recognising that each generation must pay its way with respect to recurrent expenses being met from recurrent revenue (the full cost of the service it consumes). Council will invest sustainably in community assets to maintain (and potentially enhance) service levels. Council will manage the legacy impact of water reform to ensure the organisation is not financially burdened Council will aim through the owner s representatives that forecast profits of the Water Corporation are maintained. Council will apply user pays principles where it is appropriate to do so and there is a clearly identifiable cohort benefit from using those facilities and services. Council will ensure that the user pays approach continue as council s preferred revenue collection method. Financial Management Strategy and Long Term Financial Plan Page 5
Council s financial position will have a margin of comfort aimed to absorb the impact of unexpected developments, without the necessity for substantial increases in rates. Council will ensure it accumulates and maintains sufficient financial resource and has the borrowing capacity to deal with volatility and unexpected events. Council s operational budget will be flexible enough to ensure that changes volatility in revenues and expenses as a result of the changing economic environment can be absorbed. Resources will be allocated to those activities that generate community benefit. Council will ensure that robust and transparent processes are in place for the allocation and prioritisation of resources through budgetary decision-making, as well as for choosing the efficient methods for delivering specific services and projects. Council will recognise its service obligations to the West Tamar community in its decision-making. 3.3 Cash Reserves Cash reserves require careful management to both achieve optimum investment incomes and to ensure that cash is available when needed for the planned expenditures. Funds will be invested in a manner that allows them to earn interest for as long as possible while retaining flexibility in accessing those funds for Council purposes. Council will ensure that enough funds are on hand at 30 June each year to ensure that all current liabilities can be met. Future works are anticipated to be funded from a mixture of cash, debt and rates. Council will ensure that its investment portfolio maximises its return on investments while maintaining an acceptable level of risk. OUTCOME Council has enough cash to fund daily cash requirements and to enable flexibility to respond to opportunities as they arise. STRATEGY Council targets to achieve a consistent underlying surplus result in the income statement in order to ensure the ongoing delivery of services and capital works programs. The budgeted cash position is sufficient to fund daily cash requirements as well as provide opportunities for funding of new acquisitions and short term contingencies. Council invests in high security, low risk financial products (mainly term deposits and bank bills) to safeguard the Council s financial position. Financial Management Strategy and Long Term Financial Plan Page 6
KEY PRINCIPLES Council applies the outcomes of the adopted Long Term Financial Plan to the 2014/15 Budget and future budgets. Council monitors compliance with its Investment policy. 3.4 Rating Rates are an important source of revenue, accounting for 65% (2012/13) of the total income received by council annually. Planning for future rate increases has therefore been an important component of the financial planning process. Council s principle objective with rating levels is to aim for rating to adequately fund council s operations in conjunction with other funding sources to ensure ratepayers are paying for those services and infrastructure maintenance obligations they are consuming. RATING STRATEGY Council s rating strategy establishes a framework by which rates and charges will be shared by the community. Higher percentages of rates and charges as a proportion of total revenue represent greater financial independence and financial sustainability. Council ensures it only raises the revenue it needs, and does so in the most efficient and equitable manner possible. Council must balance its service levels with the needs and expectations of the community and set appropriate levels of tax to adequately fulfil its roles and responsibilities. The following factors influence the level of rates and charges:- Distribution and level of Commonwealth and state funding Socio-economic profile of the area (capacity to pay) User-pays policies Level and range of services including the level of regional responsibility Current economic environment In determining its rates each year Council gives consideration to the current economic climate and the capacity of the community to pay for services. The aim of rates and charges decision-making is to spread the burden fairly across the community with those that have the greatest capacity to pay paying more than those with a lesser capacity to pay. Council must balance capacity to pay with the benefit principle acknowledging that some groups of the community have more access to and benefit from specific services. RATING STRUCTURE The rating structure determines how the Council will raise money from properties within the municipal area. It does not influence the total amount of money to be raised, only the share of revenue contributed by each property. Financial Management Strategy and Long Term Financial Plan Page 7
Council has established a rating structure comprising of two key elements general and service rates. The general rates are levied based on the Annual Assessed Value (AAV) of properties as determined by the Valuer General. Property values generally reflect the capacity of the ratepayer to pay. The service rates currently cover stormwater and waste management services. This user pays component is designed to reflect payment based on usage of services provided by Council. Council will endeavour to strike a balance between the two elements to provide equity in the distribution of the rate burden across the municipality. OUTCOME To provide Council with a reasonable degree of consistency and stability in the level of the rates burden To maintain rating levels at a rate that will phase out any overall financial shortfall over the medium to long term. To maintain rating levels that will build community wealth through the achievement of underlying surpluses STRATEGY Council considers the most appropriate rating strategy to provide adequate funds to:- a) Achieve underlying surpluses in the income statement; b) Achieve a sustainable cash flow; and c) Fund capital projects KEY PRINCIPLES Council retains its valuation base. A consistent rate increase is applied to the Long Term Financial Plan. Council monitors compliance with its rates and charges policy. 3.5 Fees & Charges For some years council has continued to implement the principles of user pays. From a merit viewpoint this approach is correct in that it recognises the situation where certain services are consumed by a discrete part of the community, who may or may not be ratepayers or residents. The approach of user pay does not necessarily mean that every service or function are subject to this principle nor does it constrain council from exempting some sectors of the community from paying for the service under a social justice policy or from recognising some general public service function. Financial Management Strategy and Long Term Financial Plan Page 8
OUTCOME To continue the user pays approach as council s preferred revenue collection method where a direct recognizable service is provided To increase the overall level of fees and charges by the Local Government Cost Index averaged over a three-year period. STRATEGY Review all fees and charges on an annual basis prior to the setting of rates and charges by council. KEY PRINCIPLES A consistent fees & charges increase is applied to the Long Term Financial Plan. 3.6 Other Revenue Sources The major source of funds outside of rates and user charges is grants and investment returns from the Water and Sewerage Corporation. Interest 2% Investments Water Corporation 6% Revenue Cash Flows 13/14 Fees & Charges 11% Other 1% Operational Grants 11% Capital Grants 2% Rates 67% The strategic approach council has taken for government grants are to ensure that an equitable share of funding is provided to local government. It is not advocated council should become reliant on government grants rather that they are necessary to continue developing the municipal area. Financial Management Strategy and Long Term Financial Plan Page 9
From part way through the 2013-14 year council has had the impact of the removal of priority dividends from the Water and Sewerage Corporation causing a significant decrease in projected returns from council s investment in the Water and Sewerage Corporation over much of the planning period. OUTCOME To continue to seek an equitable share of funding for Local Government from the Commonwealth and State Governments. Continue to explore possible funding opportunities Receive an equitable share of returns from the Water and sewerage Corporation in recognition of council s investment. STRATEGY Apply for grants as they become available. Research and identify revenue streams that could complement/substitute for existing sources Seek new and innovative funding sources Investigate the rationalisation of council assets to allow for some funding from the sale of assets surplus to council s core needs. Through the owners representatives ensure forecast profits of the Water and Sewerage Corporation are maintained. KEY PRINCIPLES Council actively pursues funding aligned with the Council s Strategic Plan objectives, Manage the legacy impact of water reform to ensure the organisation is not financially burdened Financial Management Strategy and Long Term Financial Plan Page 10
3.7 Debt Levels West Tamar has for many years maintained a low debt profile. Debt will be regarded primarily as a tool to be used in a strategic perspective to provide community assets. Debt will be considered: In the context of the strategic objectives of council In the context of long term financial forecasts and objectives As funding for long term infrastructure asset creation As a means of spreading the cost of infrastructure over the ratepayers who use it As a mechanism to fund temporary cash shortfalls The Council s debt level is planned to reduce to nil by 2017. The Long Term Financial Plan for the period 2014/15 to 2023/24 does not contain any new borrowings. However, if future reviews of the plan include borrowings then the strategies following will apply. OUTCOME To continue to maintain a low debt profile STRATEGY Council consider borrowing for new capital projects only when surplus operating results are being achieved in the operating statement. Balance of any surplus funds used to retire debt or minimise the use of new debt. Any new loan borrowings are to be used to fund intergenerational capital investments where the community benefits are long term and other sources of funding are not available. Council will remain a low debt user by maintaining a debt service ratio (principal and interest repayments compared to operational revenue) below 4 %. Financial Management Strategy and Long Term Financial Plan Page 11
KEY PRINCIPLES Council borrows funds for capital projects that provide intergenerational equity. Council retains its debt servicing ratio below 4% over the life of this Long Term Financial Plan. Council will only use debt to fund capital expenditure. The term of any debt shall not exceed the life of the asset it is used to fund. 3.8 Funding of Infrastructure A decision not to fund the renewal of assets would lead to reduced service levels and higher costs in the future without other funding sources. Increases in rates are often seen as the solution to the problem of ageing assets. However it is only one of a number of options available to council to fund the maintenance and management of its major infrastructure. Options which could be applied individually or in combination are: Maintain underlying surpluses Raise additional revenue Changing the composition of capital spending to ensure adequate renewals Re-evaluation of service levels and standards Choosing low cost strategies over high cost asset strategies Demand management More efficient use and operation of assets Making forward provision for renewal by reducing debt to create future borrowing capacity Carrying out cost/benefit analyses on the services being provided Asset rationalisation and review of asset growth strategies Emphasis is placed on understanding and planning for long-term infrastructure funding needs to effectively allow for the ongoing funding of: Existing services-operations, maintenance, asset renewal, asset upgrade and proposed variations New services and assets required The key objective of Council s Asset Management is to maintain Councils existing assets at desired condition levels. If funding is not sufficiently allocated to asset renewal then Council s investment in those assets will reduce along with the capacity to deliver services to the community. Financial Management Strategy and Long Term Financial Plan Page 12
The Council has adopted its Asset Management Policy. The policy is supported by an Asset Management Strategy, which details specific actions to be undertaken by Council to improve asset management capability and achieve specific strategic objectives. Asset Management Plans are subsequent components where long term plans (ten years and beyond) outline service and funding levels for each asset category. OUTCOME To have a long term equitable funding plan for adequate renewal of council assets as well as capacity for new infrastructure to cater for council s desired levels of service to the community. Council s assets will be fit for purpose to provide the desired level of service to the community. To increase funds available for the development and maintenance of facilities and infrastructure consistent with responsible asset management. To accommodate the organisations cash flow needs to enable it to carry out asset maintenance activities and renewal and replacement of assets, as set out in the asset management plans providing the asset management plans are based on financially sustainable service levels. STRATEGY Continue to improve the rate base and review the need to renew assets. Continue to improve asset management practices with a high priority to have adequate asset assessments (condition and fit for purpose assessments) to enable reasonable long term capital renewal forecasts which can be directly linked to long term financial planning and annual budgets Implement funding plans that meet the renewal and new funding requirements over the life of asset management plans. Council updates asset management plans for all classes of the Council s assets with a focus on ensuring the assets are fit for purpose and provide the desired level of service to the community. Financial Management Strategy and Long Term Financial Plan Page 13
KEY PRINCIPLES Council, having established its critical renewal investment levels, continues to regularly update Asset Management Plans for all classes of Council assets incorporating service level assessments. Council, as part of the review of its Asset Management Plans, determines how service levels will be reached including a combination of improved revenue raising, review of existing service levels, asset disposal and composition of the asset portfolio. Council allocates sufficient funds to the renewal of existing assets and plans the funds required for constructing new assets. Council regularly updates the 10 Year Asset Renewal Program to ensure that Council adequately maintains its existing asset base. 3.9 Operational Budget (Recurrent Funding) The Council provides a diverse range of services as detailed in the Annual Plan. All such services are funded through the operational budget derived from rates, charges and other income each year. Ultimately, the Council determines the range and level of services it is able to offer the community via its strategic planning process. This is finalised through the annual budget process with the Long Term Financial Plan providing preliminary guidance based on the service delivery model from the previous year. One of the key objectives of the Council s Long Term Financial Plan is to maintain existing service levels and maintain a satisfactory operating position over the life of the Long Term Financial Plan. Managing growth and the range and level of services provided will remain an ongoing challenge. OUTCOME Council generates sufficient funds from operations to continue to provide the existing level of services to our community STRATEGY Council determine how desired service levels will be reached including a combination of improved revenue raising, rationalisation and review of existing service levels. Allow for increases in operating costs for current services at the rate of the Local Government Cost Index. KEY PRINCIPLES Council utilises its Strategic Plan to determine the range of service to be provided to the community through the annual budget process based on an analysis of organisational and financial capability. Financial Management Strategy and Long Term Financial Plan Page 14
4.0 Financial Targets Ratio Method of Calculation Comments Current Ratio Benchmark 1.00 Target >1.10 Underlying Surplus Ratio Benchmark >0% Target >1% Net Financial Liabilities Ratio Benchmark between 0% to negative 50% of operating income Target >0% Debt Servicing Ratio Target <4% Current Assets Current Liabilities Underlying Surplus or Deficit Total Operating Revenue Total Liabilities less liquid assets Operating Income Principal & Interest Repayments Operational Revenue This measures the extent to which council has liquid assets available to meet short term liabilities. A ratio of 1.00 or more indicates that there is enough cash and liquid assets to cover short-term liabilities. Underlying surplus ratio means an amount that is the underlying surplus or deficit of a council for a financial year divided by the recurrent income (not including income received specifically for new or upgraded assets, physical resources received free of charge or other income of a capital nature) of a council for the financial year. The ratio is an indicator of the extent to which revenues raised cover operation expenses only or are available for capital funding purposes. A result greater than 0% indicates a surplus, the larger the surplus the stronger the result and therefore stronger assessment of sustainability. A negative result indicates a deficit which cannot be sustained in the long term. The net financial liabilities ratio is defined as the significance of net amount owed compared with the period s income. Indicates the extent to which net financial liabilities could be met by operating income. Positive ratio indicates liquid assets in excess of total liabilities. A measure of debt load Financial Management Strategy and Long Term Financial Plan Page 15
Ratio Method of Calculation Comments Cash Balance Target > Current Liabilities Asset Sustainability Ratio Benchmark =>100% Target => 75% Asset Consumption Ratio Benchmark between 40% and 60% Target between 40% and 80% Asset Renewal Funding Ratio Benchmark =>90% Target 100% Cash held at period end (excluding unspent grant funds) Asset Replacement Expenditure Depreciation WDV of Plant, Equipment and Infrastructure Assets Current Replacement Cost of Depreciable Assets Current Value of Projected Capital Renewals in LTFP Current Value of the Required Capital Expenditures on Renewals over the Same Period Cash represents money on hand and in short-term deposits (less than 6 months) at the end of each year. Some of this cash is restricted and must be used to meet employee leave obligations and to meet general working capital requirements (for example to pay accounts payable as at 30 June). A measure whether assets are being replaced at the rate they are wearing out. The ratio is viewed as only a rough measure by council as the consumption of assets (measured by depreciation) may not agree with asset renewal expenditure required. As the bulk of council s assets are in the earlier parts of their life, replacement expenditure expected is less than depreciation. The average proportion of as new value remaining in the infrastructure assets. This ratio seeks to highlight the aged condition of Council s stock of depreciable assets. This represents the extent to which the required capital expenditures on renewals per the Asset Management Plans have been incorporated into the ten year financial model. LTFP (Long Term Financial Plan) It is important to note that ratios are only indicators of financial performance and should not be considered in isolation when determining sustainability. It is important to consider the ratios over time to consider trends. The results taken over time indicate good or poor performance. Financial Management Strategy and Long Term Financial Plan Page 16
5.0 LONG TERM FINANCIAL PLAN 2014/2015 2023/2024 _ 5.1 Introduction There are a number of dynamic variables that may influence the outcomes expressed in this Long Term Financial Plan. They include: Rating levels and supplementary rate income; Government grant revenue (both recurrent and capital); Asset revaluations (major impact on fixed asset value and depreciation); Asset sales; Mix of funding between capital works/special projects (new initiatives); and Level of growth factor applied to expenditure items/rate of expenditure/activity level. The Long Term Financial Plan provides a financial framework for the Council, enabling an assessment of the Council resources and assisting the Council to plan and fund operational expenditure while maintaining its asset base and new asset investments. Apart from recreational developments in Legana, the Plan does not include any new initiatives, projects or expansion of services. As these matters arise and are considered by council, the Plan will be updated to incorporate any future council decisions on policy, priorities, new initiatives or strategic direction. 5.2 Assumptions The following key assumptions have been applied in developing the Plan: Except for recreational developments in Legana, no changes in roles, functions and services from the existing are assumed, or where there are, the effect is cost neutral. The Plan caters for future recreational developments in Legana. $2m is planned for strategic Legana land acquisitions in 2014-15 funded by $1.2m in surplus land sales in 2014-15 and a further $0.65m land sale in 2017-18. A further $5m has been written into the plan as a preliminary figure for Legana recreational developments, the amount spread evenly over 2014-15 and 2015-16 funded from cash balances. Timing, monies and extent of Legana recreational developments will alter upon more conceptual planning and in part hinge on the actions of private developers. The municipal area remains the same except for estimated growth of 1.6% (based on historic trends) annually in the ratepayer base from additional dwellings. Water Corporation Return estimates to 2021 are from publicly released estimates with CPI increases factored in the remaining years of the plan. Financial Management Strategy and Long Term Financial Plan Page 17
Federal Assistance Grants are received in full each year, no payment timing affects. New and upgraded assets assumed to have an average 65 year life. Sale of fixed assets is averaged based on previous history. Roads to Recovery capital grant receipts are spread evenly. Cash includes term deposits up to 6 months in duration Employee costs increase by the local government cost index in later years in plan, earlier years are calculated from known enterprise bargaining agreement and superannuation guarantee increases. Council growth forecasts are also factored into employee costs. Cash Flows are presented in the Statement of Cash Flows on a gross basis, except for the GST component of investing activities, which are disclosed as operating cash flows. $500,000 capital carryover assumed from 2013/2014 to 2014/2015. Split between expenditure on new assets and asset upgrades assumed to be the same over long term. The model as indicated treats everything in future dollars, that is CPI rises are included for revenue and expenditure areas. 5.3 The Financial Model Attached to the report are the worksheets for the financial model. From part way through 2013-14 onwards the council has the impact of the removal of priority dividends from council s investment in the Water and Sewerage Corporation causing a material decrease in projected returns from this investment over much of the planning period. Consequently rating levels predicted for 2014/2015 and 2015/2016 are higher than local government predicted cost increases in response to impacts from the completion of Ben Lomond Water priority dividends. Rate increases are minimised in later years in the plan with the ongoing growth rate assisting continued underlying surpluses. Financial Management Strategy and Long Term Financial Plan Page 18
2,500 Underlying Surplus (Deficit) Historic Results and Future Estimates 2,000 $thousand 1,500 1,000 500-2008 2009 2010 2011 2012 2013 For 2014 Est 2015 Est 2016 Est 2017 Est 2018 Est 2019 Est 2020 Est 2021 Est 2022 Est 2023 Est 2024 5.4 Risk The Plan primarily forecasts results based on existing activities. There is an inherent risk that circumstances may change in the future which may materially affect the projected financial estimates. Recent water and sewerage reforms demonstrate how quickly projected estimates can change. Typically for council, changes in community expectations and legislative changes can affect costs associated with services, service levels and governance activities. If there is legislative change e.g. legislation on stormwater matters or rate capping, this could significantly impact on the Plan. There is a risk that capital expenditure forecasts don t estimate the appropriate level of capital renewals. Asset management plans being rolled out are based on existing asset attributes such as condition rating and construction date data held by council. There is a risk that the data may contain some deficiencies or infrastructure may deteriorate at a faster rate than anticipated due to such factors as changes in traffic patterns, new development, etc. Future data improvement will minimise this type of risk. The biggest considered risk is that the estimated returns from the Water Corporation do not meet current estimates which would cause upward rating pressure. Financial Management Strategy and Long Term Financial Plan Page 19
5.5 Conclusion The preparation of the Plan must be seen in the context of factors affecting council s financial position. The projected forward budget provides a framework against which council can make decisions for the future. A regular review of the underlying assumptions and resultant budget implications will be undertaken on an ongoing basis. Council s long term financial sustainability is dependent upon ensuring that on average, over time, its expenses are less than associated revenues. The key directions arising from within these financial plan estimates are: A strong alignment with council s strategic directions An ongoing commitment to asset rehabilitation and replacement, ie the proper management of the community s infrastructure assets, requires ongoing increases in revenue over the forward estimate period. A commitment to ensure long term sustainability A number of strategic challenges remain ahead including renewing existing assets, continuing to provide an appropriate range and level of services to a growing and changing community, maintaining a sound financial position and addressing the need for capital expansion. OUTCOME Council ensures financial sustainability in the medium to longer term whilst meeting the strategic objectives of council. STRATEGY Council ensures compliance with the Long Term Financial Plan when developing future budgets. KEY PRINCIPLES Council reviews and updates the Long Term Financial Plan on an annual (ongoing) basis. Financial Management Strategy and Long Term Financial Plan Page 20
APPENDIX 1 EXPLANATION OF TERMS Asset Management the term used to describe the process by which council manages physical assets in the most cost-effective manner to meet current and future levels of service. Capital Expenditure relatively large (material) expenditure, which has benefits, expected to last for more than 12 months. Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. The depreciable amount of an asset is the acquisition, or other mount substituted for cost, less residual value. Expenditure definitions Renewal: Restores, rehabilitates, replaces existing asset to its original capacity (ie road seal replacement, roof replacement, bridge deck refurbishment). Capital Expenditure Upgrade: Enhances existing asset to provide higher level of service (i.e. pavement widening, bridge upgrade). Capital Expenditure New: Creation of a new asset to meet service level requirements e.g. new building (i.e. new Windsor Park Precinct). Maintenance: regular ongoing day to day work necessary to keep asset operating (ie road patching, parks maintenance, building maintenance, bridge repairs). Financial Sustainability is where planned long-term service and infrastructure levels and standards are met without unplanned and disruptive increases in rates or cuts to services. Operating Expenses this is what it costs to operate the council services including financing costs and depreciation. Financing costs represent the interest on loans taken out to fund capital expenditure. Assets purchased to aid with the provision of a service only have a limited life before they need to be replaced. Depreciation expense represents the cost of using the asset over its life. Operating Income this represents any revenue generated by the provision of the service including any service rates and charges raised. Net Surplus/(Deficit) the difference between day to day income and expenses for the period. An operating surplus indicates the extent to which operating revenues are sufficient to meet all operating expense. An operating deficit occurs when total operating expenses exceed total operating revenues, a potential burden for future ratepayers. Underlying Surplus/(Deficit) income less expenditure before capital amounts. Financial Management Strategy and Long Term Financial Plan Page 21
APPENDIX 2 STATEMENT OF COMPREHENSIVE INCOME West Tamar Council - 10 Year Financial Plan Statement of Comprehensive Income Forecast Estimate Estimate Estimate Estimate Estimate Estimate Estimate Estimate Estimate Estimate 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24 $,000 $,000 $,000 $,000 $,000 $,000 $,000 $,000 $,000 $,000 $,000 Operations Income Rates * 14,862 15,546 16,261 17,009 17,749 18,476 19,234 20,022 20,843 21,698 22,588 Grants * 2,340 2,399 2,458 2,520 2,583 2,647 2,714 2,782 2,851 2,922 2,995 Fees and charges * 2,328 2,423 2,523 2,626 2,734 2,846 2,963 3,084 3,211 3,342 3,479 Interest 461 410 300 260 275 310 345 375 405 440 485 Investment revenue from water corporation 1,375 984 1,245 1,399 1,600 1,800 2,000 2,300 2,358 2,416 2,477 Other income * 163 170 177 184 191 199 207 216 225 234 244 Total Revenues 21,529 21,931 22,964 23,998 25,132 26,279 27,463 28,779 29,892 31,053 32,268 Expenses Employee Costs Including Oncosts * -7,550-7,955-8,395-8,782-9,142-9,516-9,907-10,313-10,736-11,176-11,634 Statutory Contributions * -1,040-1,066-1,093-1,120-1,148-1,177-1,206-1,236-1,267-1,299-1,331 Other Operating Expenses * -6,942-7,244-7,559-7,869-8,192-8,527-8,877-9,241-9,620-10,014-10,425 Depreciation -5,241-5,446-5,698-5,924-6,119-6,318-6,524-6,737-6,957-7,184-7,418 Loan Interest -23-13 -7-2 0 0 0 0 0 0 0 Total Expenses -20,796-21,724-22,752-23,697-24,600-25,539-26,513-27,527-28,580-29,673-30,808 Underlying Surplus (Deficit) 733 207 212 301 532 740 949 1,252 1,312 1,380 1,460 Contributions - non monetary assets * 1,800 1,829 1,858 1,888 1,918 1,949 1,980 2,012 2,044 2,076 2,110 Capital Grants for new or upgrade assets 350 350 350 400 400 400 400 400 400 400 400 Net Surplus (Deficit) 2,883 2,386 2,420 2,589 2,850 3,089 3,329 3,663 3,756 3,856 3,970 Other Comprehensive Income Net asset revaluation increments (decrements) 5,000 4,038 8,058 4,531 5,631 5,243 5,325 5,264 5,196 5,133 5,088 Comprehensive Result 7,883 6,425 10,478 7,120 8,481 8,332 8,655 8,928 8,952 8,989 9,058 * Increases generally based on estimated inflation and ratepayer growth. Financial Management Strategy and Long Term Financial Plan Page 22
APPENDIX 3 STATEMENT OF CASHFLOWS West Tamar Council - 10 Year Financial Plan Statement of Cash Flows Forecast Estimate Estimate Estimate Estimate Estimate Estimate Estimate Estimate Estimate Estimate 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24 $,000 $,000 $,000 $,000 $,000 $,000 $,000 $,000 $,000 $,000 $,000 Cash flows from operating activities Receipts Rates 14,862 15,546 16,261 17,009 17,749 18,476 19,234 20,022 20,843 21,698 22,588 Interest received 461 410 300 260 200 310 345 375 405 440 485 Fees and user charges (GST inclusive) 2,525 2,629 2,736 2,848 2,965 3,087 3,213 3,345 3,482 3,625 3,774 Grants (GST Inclusive) 2,341 2,400 2,459 2,521 2,584 2,648 2,715 2,783 2,852 2,923 2,996 Returns from Water Corporation 1,375 984 1,245 1,399 1,600 1,800 2,000 2,300 2,358 2,416 2,477 Other receipts (inclusive of GST) 177 296 153 159 166 237 180 187 195 203 211 Net GST refund/(payment) 1,138 1,049 1,250 1,115 1,161 1,144 1,258 1,310 1,363 1,419 1,478 Payments Payment to employees -7,550-7,955-8,395-8,782-9,142-9,516-9,907-10,313-10,736-11,176-11,634 Payments to suppliers & other payments (GST Inclusive) -8,292-8,625-9,000-9,183-9,559-9,951-10,359-10,784-11,226-11,686-12,165 Interest Paid -23-13 -7-2 0 0 0 0 0 0 0 Statutory Contributions -1,040-1,066-1,093-1,120-1,148-1,177-1,206-1,236-1,267-1,299-1,331 Net cash provided by (used in) operating activities 5,974 5,653 5,910 6,225 6,576 7,059 7,473 7,989 8,270 8,564 8,877 Cash flows from investing activites Receipts Proceeds from sale of property, infrastructure, plant & equipment 228 1,522 330 338 347 1,005 364 373 383 392 402 Payments Expenditure on assets Renewal of assets per asset management plans -1,369-2,594-1,723-3,700-1,769-2,057-2,429-3,234-2,752-2,824-2,254 Other renewals -1,732-1,490-2,550-744 -2,820-2,681-2,464-1,819-2,466-2,564-3,309 Upgrades -2,681-1,208-1,113-1,153-1,080-1,131-1,304-1,349-1,391-1,431-1,468 New assets -2,976-5,708-3,613-1,153-1,080-1,131-1,304-1,349-1,391-1,431-1,468 Gross expenditure on assets -8,758-11,000-9,000-6,750-6,750-7,000-7,500-7,750-8,000-8,250-8,500 Net cash provided by (used in) investing activites -8,530-9,478-8,670-6,412-6,403-5,995-7,136-7,377-7,617-7,858-8,098 Cash flows from financial activities Capital Grants 350 350 350 400 400 400 400 400 400 400 400 Repayment of loan receivables 4 15 16 17 19 20 21 23 12 0 0 Repayment of borrowings -193-110 -77-40 0 0 0 0 0 0 0 Net cash provided by (used in) financial activities 161 255 289 377 419 420 421 423 412 400 400 Net increase/(decrease) in cash and cash equivalents -2,395-3,570-2,472 190 591 1,484 758 1,035 1,064 1,106 1,179 Cash at the beginning of the financial year 12,640 10,245 6,675 4,203 4,394 4,985 6,469 7,227 8,262 9,326 10,432 Cash and cash equivalents at end of the financial year 10,245 6,675 4,203 4,394 4,985 6,469 7,227 8,262 9,326 10,432 11,612 Financial Management Strategy and Long Term Financial Plan Page 23
APPENDIX 4 STATEMENT OF FINANCIAL POSITION West Tamar Council - 10 Year Financial Plan Statement of Financial Position Assets Current assets Forecast Estimate Estimate Estimate Estimate Estimate Estimate Estimate Estimate Estimate Estimate 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24 $,000 $,000 $,000 $,000 $,000 $,000 $,000 $,000 $,000 $,000 $,000 Cash and cash equivalents (inclusive of term deposits) 10,245 6,675 4,203 4,394 4,985 6,469 7,227 8,262 9,326 10,432 11,612 Trade and other receivables 950 994 1,039 1,087 1,135 1,181 1,229 1,280 1,332 1,387 1,444 Inventories 250 254 258 262 266 271 275 279 284 288 293 Accrued revenue and prepayments 285 297 309 322 335 348 363 378 393 409 426 Total current assets 11,730 8,219 5,809 6,065 6,720 8,269 9,094 10,199 11,335 12,517 13,775 Non-current assets Infrastructure, Property, Plant & Equipment 195,000 205,000 218,000 225,000 233,000 240,000 248,000 256,000 264,000 272,000 280,000 Investments 63,000 63,000 63,000 63,000 63,000 63,000 63,000 63,000 63,000 63,000 63,000 Loan receivables 120 105 86 71 53 0 Total non-current assets 258,120 268,105 281,086 288,071 296,053 303,000 311,000 319,000 327,000 335,000 343,000 Total assets 269,850 276,324 286,895 294,136 302,773 311,269 320,094 329,199 338,335 347,517 356,775 Liabilities Current liabilities Trade and other payables 1,300 1,353 1,409 1,467 1,527 1,589 1,654 1,722 1,793 1,866 1,943 Borrowings 110 77 40 0 0 0 0 0 0 0 0 Provisions 1,750 1,844 1,946 2,035 2,119 2,206 2,296 2,390 2,488 2,590 2,697 Other current liabilities 55 56 58 59 61 62 64 65 67 69 70 Total current liabilities 3,215 3,331 3,453 3,561 3,706 3,857 4,014 4,178 4,348 4,525 4,710 Non-current liabilities Trade and other payables 15 16 16 17 18 18 19 20 21 22 22 Borrowings 117 40 0 0 0 0 0 0 0 0 0 Provisions 250 260 271 282 294 306 318 331 345 359 374 Total non-current liabilities 382 316 287 299 311 324 337 351 365 380 396 Total liabilities 3,597 3,647 3,740 3,860 4,018 4,181 4,352 4,529 4,714 4,906 5,106 Net assets 266,253 272,678 283,156 290,275 298,756 307,087 315,742 324,670 333,622 342,611 351,669 Equity Accumulated surplus 155,760 158,146 160,566 163,155 166,005 169,094 172,423 176,086 179,842 183,699 187,668 Reserves 110,493 114,531 122,590 127,120 132,751 137,994 143,319 148,583 153,779 158,912 164,000 Total equity 266,253 272,678 283,156 290,275 298,756 307,087 315,742 324,670 333,622 342,611 351,669 Financial Management Strategy and Long Term Financial Plan Page 24
APPENDIX 5 VARIABLE ASSUMPTIONS West Tamar Council - 10 Year Financial Plan Variable Assumptions Underpinning the Plan Forecast Estimate Estimate Estimate Estimate Estimate Estimate Estimate Estimate Estimate Estimate 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24 $,000 $,000 $,000 $,000 $,000 $,000 $,000 $,000 $,000 $,000 $,000 Operating Revenue Rates - Annual Increases 3.60% 3.00% 3.00% 3.00% 2.75% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% Growth in Rate Base 1.60% 1.60% 1.60% 1.60% 1.60% 1.60% 1.60% 1.60% 1.60% 1.60% 1.60% Fees & Charges Increase 2.75% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% Operating Grants 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% Interest Earnings 3.90% 3.75% 3.75% 3.75% 3.75% 3.75% 3.75% 3.75% 3.75% 3.75% 3.75% Other 2.75% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% Operating Expenses Employee Costs 3.86% 3.77% 3.93% 3.00% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% Materials & Services 2.75% 2.75% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% Depreciation 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% Other 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% Inidicator Estimates Inflation Rate 2.75% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% Construction Rate 2.75% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% Local Government Cost Index 2.75% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% Financial Management Strategy and Long Term Financial Plan Page 25
APPENDIX 6 KEY FINANCIAL INDICATORS West Tamar Council - 10 Year Financial Plan Key Financial Indicators Forecast Estimate Estimate Estimate Estimate Estimate Estimate Estimate Estimate Estimate Estimate 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24 Underlying Surplus / (Deficit) - $'000 733 207 212 301 532 740 949 1,252 1,312 1,380 1,460 Underlying Surplus Ratio Target >0.5% 3.4% 0.9% 0.9% 1.3% 2.1% 2.8% 3.5% 4.3% 4.4% 4.4% 4.5% Net Financial Liabilities Ratio Target > 0% 35% 18% 7% 7% 8% 13% 15% 17% 20% 22% 25% Net Financial Liabilities $'000-14,792-11,315-8,982-9,341-10,137-11,831-12,808-14,071-15,372-16,725-18,162 Current Ratio Target >1.1 3.65 2.47 1.68 1.70 1.81 2.14 2.27 2.44 2.61 2.77 2.92 Asset Sustainability Ratio Target =>75% 59% 75% 75% 75% 75% 75% 75% 75% 75% 75% 75% Asset Consumption Ratio Target 40-80% 67% 68% 69% 69% 70% 70% 71% 71% 72% 72% 73% Asset Renewal Funding Ratio Target 100% 132% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Debt Servicing Ratio Target <4% 1.0% 0.6% 0.4% 0.2% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Cash Balance $'000 Target > Current Liabilities 10,245 6,675 4,203 4,394 4,985 6,469 7,227 8,262 9,326 10,432 11,612 Current Liabilities $'000 3,215 3,331 3,453 3,561 3,706 3,857 4,014 4,178 4,348 4,525 4,014 Financial Management Strategy and Long Term Financial Plan Page 26
APPENDIX 7 SENSITIVITY ANALYSIS West Tamar Council - 10 Year Financial Plan Sensitivity Analysis Forecast Estimate Estimate Estimate Estimate Estimate Estimate Estimate Estimate Estimate Estimate 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24 $,000 $,000 $,000 $,000 $,000 $,000 $,000 $,000 $,000 $,000 $,000 Returns from Water Corporation Water Corporation Return estimates to 2021 are from publicly released estimates with CPI increases factored in the remaining years of the plan. Dollar impacts are shown below if the returns fall short by 25%. Current Estimate Water Corporation Return 1,375 984 1,245 1,399 1,600 1,800 2,000 2,300 2,358 2,416 2,477 Reduction of 25% to Water Corporation Return Impact -246-311 -350-400 -450-500 -575-589 -604-619 Cumulative Impact -246-557 -907-1,307-1,757-2,257-2,832-3,421-4,025-4,645 Rating Revised Estimate Water Corporation Return 1375 738 934 1,049 1,200 1,350 1,500 1,725 1,768 1,812 1,858 The below analysis demonstrates the sensitivity of the Long Term Financial Plan to changes in the level of rates income. The Long Term Financial Plan assumes a 3% annual increase in Rates. Reducing to 2.5% over the life of the plan. impact is calculated as follows: If the assumption is changed by 0.5% or 1% higher increase the Current Rate Increase % 3.60% 3.00% 3.00% 3.00% 2.75% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% Current Rate Revenue 14,862 15,546 16,261 17,009 17,749 18,476 19,234 20,022 20,843 21,698 22,588 Revised Rate Increase +0.5% 3.50% 3.50% 3.50% 3.25% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% Impact 74 156 245 342 446 559 681 813 954 1,107 Cumulative Impact 74 230 475 817 1,264 1,823 2,504 3,317 4,272 5,378 Revised Rate Revenue 14,862 15,620 16,417 17,254 18,091 18,923 19,793 20,704 21,656 22,652 23,694 Revised Rate Increase +1.0% 4.00% 4.00% 4.00% 3.75% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% Impact 149 312 493 689 902 1,132 1,382 1,653 1,946 2,262 Financial Management Strategy and Long Term Financial Plan Page 27