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The TCorp reports on CVC’s ‘modest improvement’

The New south Wales Treasury Corporation (TCorp) has assessed Clarence Valley Council’s (CVC) Financial Sustainability Rating (FSR) as “Weak with an Outlook of Neutral”.
The TCorp’s Financial Assessment and Sustainability Report reviewed CVC’s “consolidated historic financial information and the 10-year financial forecast within Council’s General Fund LTFP [Long Term Financial Plan]”, which was adopted in June.
“This is a modest improvement from the previous review when Council had a FSR of Weak and an Outlook of Negative,” the report states.
Significantly, the TCorp noted that CVC “has relied on a net increase in borrowings of $23.6m to fund its capital program over the past five years, increasing the total borrowings to $135.9m, a level which the TCorp believes is the maximum level of borrowings that Council can sustain”.
The council’s current debt portfolio, as at June 30, 2016, is $129.759m according to the LTFP.
Consultant Ernst & Young has advised that the council’s sustainable debt target is a maximum of $110m.
Meanwhile, the TCorp report points out that, despite an operating improvement over the past two years, “the operating result is forecast to return to deficits larger than the 2015 result for a minimum of the next nine years, despite the [yet to be approved or adopted] proposed multi-year SRV in Scenario 3”.
The council’s corporate director, Ashley Lindsay, said that a significant part of the forecast deficits was attributed to depreciation of the council’s assets.
“Thirty per cent of our expenses are depreciation,” he said. “We have to make sure that number is accurate – TCorp made comment on our modelling and we are going to get that reviewed.”
The council has engaged organisational performance consulting firm Morris and Lowe to complete the review.
Scenario 3 includes an application for a special rate variation (SRV) of 5.44 per cent (inclusive of an assumed rate peg 2.5 per cent) for each of seven years from 2017/18 to 2023/24, which is a cumulative increase of 41 percent that would be permanently built into the rate base from July 1, 2024.
This proposal would raise an additional $26.965m; however, whether or not the council goes ahead with the SRV application will be a decision for the new council to make following the September 10 local government election.
“Consultation [about the SRV] with ratepayers and the community will be conducted during October/November 2016,” the council’s operational plan states.
The TCorp’s review of CVC’s “10-year forecast results, under Scenario 3, indicates … [CVC] will be able to achieve a Moderate Sustainability rating in 2022, and this improvement is expected to continue for the remaining years”.
Councillors received and noted the report, unanimously, at the July council meeting.
The mayor, Richie Williamson said the report “clearly highlights the challenges [CVC] is dealing with”.
“It also highlights where we are making progress; and we are making progress.
He pointed out the importance of maintain the council’s assets because, “if we don’t invest in what we already own, the numbers will only go one way and that is south.
“There is some requirement on CVC that we ensure we are sustainable for the long term; that challenge hasn’t gone away, nor has that challenge, to date, been met.”
When the new council is elected, it “will need to reconsider its financial options”, Mr Ashley said.
Or, as the TCorp report put it: “Council has undertaken significant work to understand its underlying financial position in order to be in a position to identify the options to become financially sustainable.
“The continuation of this work is paramount if the Council is going to achieve its long term goal of becoming sustainable.”