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Assumptions model CVC’s fiscal future

As Clarence Valley Council (CVC) moves to rectify its fiscal situation to meet benchmarks for its Fit for the Future submission to IPART, it has become apparent that without the implementation of the proposed special rates variation (SRV) and the cutting and/or modification of 24 identified ‘discretionary’ services, CVC will not be able to comply with the NSW Government’s requirements. Following a series of public information sessions over recent weeks, Geoff Helisma spoke with CVC’s corporate director, Ashley Lindsay, about some of the key issues. GH: At the SRV meeting at Maclean on Wednesday August 26, Leigh Barrington read out the following from CVC’s Fit for the Future submission to IPART: “In order to increase operating income further it has been assumed that User Charges & Fees will also need to be increased by 10% pa for 4 years commencing 2016/17 and then by 5% in 2020/21. From 2021/22 it has then been indexed by the estimated CPI of 2.5%. This assumption includes an allowance for increases in regulatory income associated with continuing building & development growth and the flow on effects of the Grafton Bridge and Pacific Highway works.” At the meeting you said Mr Barrington had misinterpreted that statement, which was included in the council’s ‘improvement proposal’ in the section, ‘key assumptions which underpin Council’s Long Term Financial Plan (adopted Scenario 3)’ on page 25. Can you explain what this means? AL: For the financial modelling for the council to increase its operating revenue, we’ve made the assumption that the user charges and fees will increase by 10% pa for 4 years commencing 2016/17 and then by 5% in 2020/21. Then from 2021/22 it will be 2.5%. That’s not to say that the fees will go up by 10 per cent. It’s the total quantity or the yield that we get from user charges and fees that will go up over the four years. We are making an assumption that we are going to get increased activity in building and development from the effects of the Grafton bridge and the Pacific Highway works. What we’re saying is we are going to get more revenue because of increased activity in our area, so the total yield from these charges and fees is going to increase by 10 per cent; it doesn’t effectively mean we’re going to put the individual charges up by 10 per cent. GH: So that’s a bad choice of words in the IPART submission? AL: It could have been worded a little bit better. It does say that this assumption includes an allowance for increases in regulatory income associated with continuing building and development growth. GH: The words are, specifically, ‘will need to be increased by 10 per cent per annum over the four years’, so that works out to be a rather larger amount [percentage wise] than the 46 per cent [for the SRV]. Can you define what user charges and fees are? AL: Those user charges and fees don’t include any associated with water, sewer, domestic waste, which all form a part of the rate notice. GH: In a nutshell, these are charges that are not included in the rates bill? AL: That’s right; they are things like caravan park fees, regulatory fees associated with development applications, building construction certificates, section 149 and 603 certificates, sports fields fees… GH: So to be clear, you’re not saying the actual fees will increase 10 per cent per year, you’re saying that it is an increase in revenue of 10 per cent per year – is that why the revenue drops to 5 per cent when the boom is over? AL: I wouldn’t say we’d say the boom is going to be over, but in the model, our assumption changes from 10 to five to 2.5 per cent. We really don’t know what impact the bridge and the Pacific Highway will bring to the area; it’s a bit of an unknown. We’ve made the assumption that there will be increased building activity and development. Over those four years, that 10 per cent assumption brings council just under $8million in revenue … that’s what the model predicts. I think people might be losing sight of the fact that it is just a model making assumptions. It’s hard to predict the future, so we made some assumptions to achieve the Fit for the Future benchmarks. Each year we will review the model. Once we’re two or three years into the model, the assumptions that we have made, they might not eventuate. The Pacific Highway upgrade may be delayed, it may not happen as we thought. It’s a difficult thing: we’re making some assumptions about the future, which we have no real control over. We must remember that each year the council reviews its budget and sets its fees and charges on an annual basis; so the decisions are made around that point in time. The rates are different because we have to seek approval from IPART. The fact is, in the model, we’re assuming that IPART is going to give us the approval and that the council [councillors] is going to implement the [rates] increase. GH: On several occasions you have spoken about changes to the accounting system, to which councils must now comply, regarding how depreciation is factored into the balance sheet; can you explain how this works and what it means? AL: Historically, councils have never funded depreciation when forming their annual budgets. The Fit for the Future benchmarks that have been put in place by the state government all now require [councils] to measure the depreciation more accurately and to also fund it. The very first benchmark is the operating performance ratio, which includes depreciation in the expenditure side of the equation. The state government requires councils to have a break even result and that includes the depreciation expense, so we have to fund the depreciation … in the order of $33million a year. One of the key things we have to do is to make sure that the depreciation is an accurate number. We’ve been working on that for the last two or three years. We’ve had assets completely re-valued by an independent valuation company. The result of that revaluation was that our depreciation expense was reduced by about $13million. In effect that means we don’t have to raise that additional $13million, so we saved ourselves $13million in expenditure. That’s the key to what we’re trying to achieve here: we’ve got to make sure that the data that we are relying on for our decision-making is accurate. GH: Given that the IPART submission relies heavily on an SRV and cutting or modifying the delivery of 24 ‘discretionary’ services, if the councillors decide to not apply for the full proposed SRV and/or the same outcome occurs with the services; how will CVC account for this; you will have to start again, won’t you? AL: We will have to make some alternative decisions [about] what we have in the Fit for the Future submission. The end game is that we’ve got to meet the benchmarks. In the first instance, IPART requires that we have to meet all of the benchmarks within the first five years. Our model, as it is now, doesn’t meet all of the infrastructure benchmarks until in the second five years of the 10-year plan. One of the key things council has found is that it’s financially unaffordable for councils, particularly us, to meet those benchmarks in the five-year timeframe. So what we’ve done is we’ve said ‘we can’t do it, but we are improving each year towards achieving the benchmarks within the 10-year period’. We’ll have to wait and see if IPART accepts that when they release their report in October. Obviously a lot of people are not supportive of the SRV, but if we don’t go ahead with it and get the additional revenue, it’s going to be very difficult to comply with the benchmarks the government has set. GH: On page 240 of the IPART submission (in the Strategic Asset Management Plan 2013/14 – 2022/23) it states that the new depot will be constructed at a preliminary cost of $3.5 million: why is this estimate different to the $13.5million estimate that the community is being advised of at the moment? AL: [Mr Lindsay took this question on notice and later emailed that the figure was a ‘typo’ error.] GH: The council has published a list of services, levies and costs that amount to a of $7.028million for the 2013/14 year. Can you provide some information about the government’s cost shifting to local government? AL: The cost shifting is something Local Government NSW seeks from councils each year. It’s one of those things where councils get involved in particular services: the government gives [councils] some seed funding and then slowly that gets reduced and councils get left funding the service, with minimal contributions from the state government. One big ticket items there is the annual contribution to the rural fire service ($783k) – pretty much an essential service that the council has no control over. Another example is the regulatory controls they have put over the development and building fees that we provide. Council provides regulatory control over those services … but the government sets the statutory fees that we have no control of. So it’s not a user-pays type charge that we can make. I guess that’s the development industry having some control over the government to a point. GH: How is the SRV submission process travelling? AL: There are significant numbers coming through. I think there will be more coming in now we’ve had the public meetings. I had a look through about 200 submissions on Friday [August 28; there were in excess of 2,400 at that time, and 400 online submissions]; they’re from a cross section of people right across the Clarence. Some people understand that we need the SRV and would like to see it stretched out over a longer period of time. Others are just dead against it and say that we should cut our services; cut our costs to meet our revenue.