What are the Annual Financial reports? So how is the City of Melville performing financially?
Like all organisations, the City’s annual financial reports provide a historical snap shot of the financial performance of the organisation in the previous financial year.
The City’s financial reports are provided as part of the Annual Community Report, an important document which is delivered formally to the community at the Annual General Meeting.
The financial reports are prepared using qualified accounting methodologies in accordance with State legislation, Australian Accounting standards and Department of Local Government guidelines. The financials are audited by an external independent auditor and measured against key financial ratios, which are standards defined clearly by the Department of Local Government.
How does the City manage its finances?
Through the stewardship of the City’s thirteen elected members, the financial performance of the organisation has seen the City benchmarked by independent third parties and review agencies as being in the top two to three Local Governments in Western Australia for financial sustainability.
Overall, the City of Melville has maintained its position as one of the top local governments for financial health, achieving 98/100 in the 2016-2017 Financial Health Indicator (FHI) measure, following on from 98 in 2015-2016 and 99 in 2014-2015.
You can view data at www.mycouncil.wa.gov.au about the City of Melville and compare how we are performing with other Councils.
How does the City set its budget?
When managing our finances, setting budgets, capital works programs and rates, the City’s priority is to minimise impacts on ratepayers across the generations and to ensure at the same time that we are able to continue delivering the services, programs and facilities our community expect.
Like every other local government today, the challenge is to ensure financial sustainability while delivering a diverse range of community services, and mitigating financial impacts on our ratepayers for current and future generations.This is an ongoing and complex challenge and the reason for which the City employs a Long Term Financial Plan.
In addition to the Long Term Financial Plan, the City employs accounting principles based on State legislation and in accordance with Australian Accounting standards for its annual financial statements, considering intergenerational requirements of the Local Government Act and also being guided by the financial information interpretation detailed by the Department of Local Government.
What is the operating surplus and why not give it straight back to ratepayers?
The City’s focus when preparing the budget and Long Term Financial Plan, is to minimise and smooth out impacts on ratepayers over the long term while still continuing to deliver the services, programs and facilities our community expect.
Budgets are based on certain assumptions that are set by officers in consultation with elected members through budget workshops and Corporate Plan reviews and are adopted as part of the Long Term Financial Plan and annual budget process.
Levels of rates increases are approved by Council when adopting the Long Term Financial Plan.
This then forms the basis for setting the budget for the upcoming financial year which is also approved by Council.
It must be understood that due to the assumptions, future predictions and fluctuations in the markets a budget can never be exact.
In developing the 2017-2018 Budget, long term decisions took into account the real impacts of rising costs over time, in order to ensure current residents pay an equitable contribution towards the consumption of services, and that future residents are protected from price shocks, asset failure or reduction of services which would arise if this approach was not taken.
We work to ensure sustainability and intergenerational equity.
The 2017-2018 Budget was achieved without resorting to loan borrowings to fund any operating or capital programs and provided for $34.9m in capital expenditure with $12.9m committed to City owned buildings, including $1.6m to refurbish and upgrade Leisure Fit Melville, and $850k to refurbish and upgrade AH Bracks Library.
Why are Reserves needed?
The philosophy of keeping rates low through return of surpluses ignores an intergenerational approach and sense of community, as keeping rates low today will be at the cost of future ratepayers – our children and grandchildren.
With $1 billion in assets that will need to be either replaced or renewed sometime in the future, returning surplus amounts directly back to current ratepayers ignores the intergenerational impacts of operational decisions and does not consider asset management inheritance, meaning we would simply be passing on costs to the next generations. Reserves allow the City to take care of ageing assets and the community as well.
By transferring surplus funds to reserves, the City returns funds to ratepayers indirectly, either through additional services or projects which are supported by elected members, or to smooth the burden of future rates.
What is the Operating Surplus Ratio?
The City’s focus is to minimise impacts on ratepayers, which is the essence of the purpose of reserves – to minimise and smooth out impacts on ratepayers over the long term, and the Department of Local Government’s Operational Guidelines clearly indicate that the transfer of surplus amounts to cash reserves is regarded as a key element of good practice.
The level of Council’s Reserves is dictated by the required funding/expenditure identified in the Long Term Financial Plan, which has been approved by Council with the support of financial and infrastructure modelling.
With $1 billion in assets that will need to be replaced or renewed sometime in the future the majority of the City’s Reserves have been setup for this purpose, as approved by Council. The level of Council’s Reserves is dictated by the required funding/expenditure as identified in the Long Term Financial Plan, which has been approved by Council with the support of financial and infrastructure modelling.
The financial statements give a very clear overview of the range of Reserves held, which includes Restricted Reserves that are for provisions – outstanding liabilities (Staff Annual Leave, LSL, underground power, security levy, waste etc).
The City has established a Rates Equalisation Reserve “to temporarily retain any surplus carried forward funds as shown in the audited Annual Financial Report Rate Setting Statement in excess of the estimated surplus funds brought forward amount identified in the following year’s Annual Budget Rate Setting Statement to subsequently be used to reduce the need to raise rates in future years or to meet any budget shortfalls identified during the mid-year or other budget reviews”.
This provides a smoothing mechanism by which funds can be drawn from this Reserve so as to prevent fluctuations in rates increases from one year to the next.
The majority of these Reserves provide a smoothing mechanism for this expenditure and to ensure intergenerational equity.
The other major Reserve (Land and Property) is to ensure the City invests in assets that can provide alternative revenue streams so as to reduce its reliance on Rates.
Carry Forward Reserve transfers are funds that have already been approved by Council for specific capital projects and are not available to be used for operational purposes.
What are the Asset Consumption and Asset Renewal Funding Ratios?
The Department of Local Government’s Operational Guidelines deems an ‘Operating Surplus Ratio’ to be a key indicator of a local governments financial sustainability.
If a local government consistently achieves a positive Operating Surplus Ratio’ greater than 15% and demonstrates a long term financial plan that considers asset management and the community’s service level needs then it is considered to be financially sustainable.
The City achieved a result of 18% in the 2017-2018 financial year. A positive ratio indicates the percentage of own source revenue available to help fund proposed capital expenditure, transfer to cash reserves or to reduce debt.
This reinforces the requirements of the Local Government Act in relation to intergenerational equity that financial decisions take account of the ratepayers of today and future ratepayers.
The City’s excellent results are one of the reasons Melville has been benchmarked by independent third parties and review agencies as being in the top three Local Governments in Western Australia for financial sustainability.
You can view data at www.mycouncil.wa.gov.au about the City of Melville and compare how we are performing with other Councils.
What are Asset Management Plans and why do you need them?
The Asset Consumption Ratio and the Asset Renewal Funding Ratio are two entirely separate ratios and not related.
The Department of Local Government guidelines which illustrate these ratios are not the complete picture of how well the organisation is funding historic asset management gaps, ongoing asset upgrade and renewal programs.
- The Asset Consumption Ratio seeks to highlight the aged condition of a local government’s stock of physical assets
- The Asset Renewal Funding Ratio indicates whether the local government has the financial capacity to fund asset renewal as required, and can continue to provide existing levels of services in future, without additional operating income or reductions in operating expenses.
The level of capital expenditure identified in the Long Term Financial Plan is a Council decision.
What causes movement in the Reserve Balance?
An asset is something that has potential or actual value to the organisation, such as roads, paths, parks, lights, gym equipment, stormwater, buildings, foreshore, jetties and boardwalks, bus shelters, furniture and IT.
The City’s Asset Management plans are predicated on the assumption that current assets are “fit for purpose” although in there are some cases where they are not, and therefore need to be remodelled or rebuilt to ensure they are fit for purpose. For example some sporting club change rooms currently lack women’s facilities.
Asset Management is based on three priorities.
- Fund operating and maintenance - Look after what you have
- Fund renewal - Ensure existing assets meet ratepayer expectations
- Fund upgrades and new next - Requires Business Case
With $1 billion in assets that will need to be replaced or renewed sometime in the future the City has set-up Reserves for this purpose, as approved by Council.
The level of Council’s Reserves is dictated by the required funding/expenditure as identified in the Long Term Financial Plan, which is approved by Council with the support of financial and infrastructure modelling.
What causes movement in Fair Value of Land?
Reserve balances can move from year to year. This movement can be explained by a variety of factors such as transfers for projects not completed in (which reconciles with carry forwards for the next financial year) and unexpected projects – for example audit reviews of assets can identify repairs before anticipated.
The future utilisation of Reserves will be incorporated in elected member discussions on the Long Term Financial Plan that will occur in 2019.
Financial Management Regulations require that all assets are revalued at least every three years.
During the 2017-2018 year, land, among other asset classes were revalued by external independent valuers. The last time this exercise was undertaken was in the 2014-2015 financial year, where the revaluation adjustment was an increment of $373,924,627 for land. However, the final impact on the asset revaluation for the 2017-2018 financial year was a decrement of $281,707,282.
In 2017-2018 the valuation included the use of a discount method to value the City's lands which are zoned as parks, recreation and public purpose on the basis the land could not be sold, whereas the previous valuation had used the cost approach (replacement cost) under the accounting standard i.e. based on what it would cost the City to acquire such land. As a result no discount was applied to the land values and this resulted in a significant movement in the fair value of land.
Both methodologies are in accordance with the Accounting Standard AASB13. In addition the mining boom in WA has had a significant impact on the City land value of Western Australia in 2014-2015. Further detail is included in note 12 (i) and note 13 of the City’s Annual Financial Report 2017-2018.
As highlighted by an independent external auditor, the change in the City’s balance sheet due to the revaluation of land represents a nominal paper value not a cashflow impact.The auditors also confirm this movement in the fair value of land is not unique to the City of Melville and a number of metropolitan local government authorities experience movements in valuations.