The following article is based on information from the 2019-2020 report issued by the Office of Local Government (OLG). The 2020/21 information is yet to be produced. It highlights concerns with Council’s cash flow situation and suggests Council might not currently be meeting three key State Government Fit for the Future ratios.
By Rob Sturmann
The ratios referred to below were put in place by the State Government in 2014/15 so IPART could assess whether NSW Councils were ‘Fit for the Future.’ If they were deemed to not be so it was strongly suggested they should merge with other Councils.
The CHCC was deemed to be fit, after a bit of ‘tweaking’ by Council, back then but interestingly in the IPART report the NSW Treasury’s TCorp reported that in 2015 the CHCC had “Weak FSR and a Negative Outlook.”
‘FSR’ I believe stands for Financial Sustainability.
The OLG still refers to these ratios in it’s reports and on this regularly updated webstite.
For the Coffs Harbour City Council (CHCC) in 2019/20 the Debt Service Ratio was 2.3. But in Group 5, the NSW group the CHCC is in, the average was 4.98. This means as at 30/6/2020 the CHCC had for every dollar of debt exactly $2.30 available to pay out the debt. Others in the Group had on average almost $5 to cover every dollar of debt they had.
For the Cash Expense Ratio, or how long we can survive without a top up of funds, the CHCC had 8.7 month’s worth of cash on hand as at 30 June 2020. The Group average was 12.5 months and the state average was 13 months. Anything above three months is considered acceptable by the OLG.
For the Operating Performance Ratio, that is Council’s achievement in containing expenditure within operating income, the result for 2019/2020 was a minus 0 (-0.1). This is below the 0% benchmark. The Group 5 average was 1.6. This means Council was failing this OLG ratio last year.
Leaving aside the above OLG 2019/21 published report it is disturbing to think that CHCC has a mere $4.467M in unrestricted cash reserves as presented to Council in the agenda for the 23 September 2021 meeting.
To maintain the previous year’s achievement, it means the monthly expenses need to be a little over $500,000 per month. One suspects that figure is way under what is needed.
And we don’t know what outstanding liabilities relate to the $4.467m in available cash.
The above Figure shows the 20219/20 CHCC Performance Ratio when compared to the Group 5 average. Go here for the original.
As but one possible expense we might not currently know about let’s use penalties for Yarrila Place. For example if the penalty payment to Lipman is $10,000 per day and hypothetically council may owe one month of that then the reserve is reduced by 60% (ie $300,000).
Should the daily penalty rate be $20,000 per day then CHCC is going backwards. And this does not cover any other financial obligation that might be owed or that might ‘pop up’.
What might this all mean?
Further to my comments above the future of CHCC retaining the OLG “Fit for the Future” rating is in doubt.
Without using the benefit of the current (2020/2021) ratios then let’s look at how the ratios will change.
Operating Performance. There will be a loss of income because the annual profit from operating the Airport will; not exist.
In addition we have a loan to be serviced and rental on the Rigby House deal to be paid.
In short, income goes down and expenses go up.
The CHCC will be further behind in its ability to pay expenses from within the budget. This assumes the CHCC do not cut services for day-to-day operations.
The Cash Expense ratio also decreases. Council must pay off both principal and interest on the loan and find the money for the rent of Rigby House. At a rough guess this is $1.7m for the loan plus rent of $800,000 and $125,000 in interest .
By my calculations we exhaust half of the available ($4.5M) unrestricted cash inside a year.
Inside two years and we could be broke. We will fail the benchmark of three months cash in reserve.
The Debt Service Ratio is also in jeopardy.
When the available unrestricted cash reduces and the new liabilities of rent on Rigby House and interest payment are factored in the CHCC will have considerably less money available to pay each dollar of debt.
This places three of the seven benchmark ratios in doubt.
Remember the advance for the Airport whilst substantial might just be used to pay down the “Waste Mismanagement” legal costs looked at by Council in an extraordinary meeting last Monday 27th September.
There is no future additional income of any substance identified right now.
The only solution open to Council then may be to greatly reduce day to day operations. Or expenditure on maintaining existing assets.
And just imagine the ‘stink’ if the CHCC suggests a special rate variation to tide things over so they can do what they are normally just meant to do!
But what about Rates?
Now of course Council gets about 40% of its income from rates over four installments every three months, but some of that is ‘ringfenced’ for water, sewerage, environment levies and waste water infrastructure to name a few. Also, Council needs to keep money aside for internal contingent liabilities, referred to in the 26 September accounts presented to council as ‘internal restrictions’.
Internally restricted monies are for things such as depreciation of assets, staff wages, leave, long service leave etc.
When all those tagged rate levies and internally restricted contingent liabilities are taken into account there is very little left over. That is why the OLG Case Expense Ratio is important and arguably why the CHCC might not meet that Fit For The Future ratio now in late September 2021.
Given Covid then I suspect the Council income is less than the projected figure.
It also suggests to me that things might be very tight and possibly would not pass the Cash Expense Ratio at the very least if it were to be applied now for the Fit for the Future exercise.” – Rob S
The full 2019/20 CHCC Your Council report by the OLG can be found here. All figures reproduced here can be found at this hyperlink.
Rob Steurmann regularly writes in-depth investigative finance pieces for CCO. He is a retired Federal Government forensic auditor.
Previous CCO articles from last week, focusing on unspent developer contributions, relating to the 23 September CHCC meeting agenda and the annual accounts therein can be found here; https://coffscoastoutlook.com.au/council-has-almost-21m-in-unspent-developer-contributions-in-the-bank/.