Financial Models Overview

Model 1 – Current situation (without corrective action) based on historical trend

Council had an adopted forecasted operating deficit (before capital grants) for 2021/22 of $12 million. In order to significantly reduce the adopted operating deficit and address financial sustainability, reductions include $6 million worth of operational programs project, services and $350 million in capital projects being deferred, reduced or deleted. The model outlines the forecast result based on the reduced 2021/22 budget. Based on this approach the adopted forecast deficit of $12 million has been reduced to a projected deficit of $4.5 million in 2021/22.

Model 2 – New Rates 2021 Proposal

(Special Rate Variation (SRV) of 5.8% each year over a 5 year period commencing in 2021/22 plus a further $12 million in savings identified over a number of years) Model 1 highlights the deteriorating financial results of current operations. Increasing deficits (sans Capital Grants income), if left unaddressed, will inevitably lead to council being unable to fulfil its mandated obligations. In addition, Council’s income is to be adversely affected by the termination of a current Special Rate Variation (from the former Hurstville City Council) with effect from 1 July 2021. This will reduce income by $2.3 million.

Consequently, Model 2 outlines the impact of a proposal to implement a permanent Special Rate Variation at 5.8% per annum (commencing 2021/22) for 5 years, to generate additional income of approximately $24 million over 5 years. This will be a permanent increase which its cumulative benefits will improve the financial sustainability of Council. An application has been made to IPART in this regard.

Model 2 also includes a proposition to reduce Council’s costs by $12 million over 3 years from 2020/21. The combined effect of these 2 measures is projected to resolve the unprofitable financial position of council and instill sustainable positive financial outcomes over the 10 years of the current Long Term Financial Plan.

Special Rate Variation Proposal

2021/22 2022/23

5.8% 5.8%

2023/24

5.8%

2024/25

5.8%

2025/26

5.8%

Model 3 – No Special Rate Variation: Expenditure Savings through Service reductions from 2021/22 onwards

Model 3 presents a potential scenario, where the application for a Special Rate Variation, as proposed in Model 2, is not approved by IPART or Council resolves to, not implement the increase. As an alternative, Council will be compelled to discontinue some services and/or reduce levels of service in many areas, in an attempt to decrease the cost burden on its operations. This is expected to reduce costs by approximately $43 million while income is also projected to reduce by around $7 million over the 5 year period. While there will be some improvement in council’s financial performance as compared to the current position, these measures are not expected to sustainably resolve the financial problems. In addition, services to the community will be discontinued and/or delivered at a reduced level, contrary to feedback received during the community consultation on the proposal.

Model Sensitivity

These models are based on assumptions which represent the most likely outcome, given the prevailing economic and operating environment. A 1% variations in any one of these assumed rates (e.g. Inflation, Wage increases, Interest on investments) could have substantial impacts on the net results.

A 1% increase in the Inflation rate can adversely affect the Result (net of Capital Grants) by about 14%. Similarly an additional 1% increase in wage costs can adversely affect the net result by about 46%.

Key Performance Indicators

A number of key performance indicators are used by the Office of Local Government to help determine the sustainability of NSW councils. These indicators, together with others that are in use in the commercial environment are shown. The indicators relevant to each stage of operations are shown in the tables. This is to provide a snapshot of the state of Council’s current financial position and the comparative results relating to each model.

As is evident from the key performance indicators, the longer term financial outlook for Council (based on the current service portfolio) is not favourable. While gross surpluses are being generated over the short term, the 10 year trend, as projected in the Long Term Financial Plan is downward. As the Operating Performance Ratio indicates, council generates inadequate operating income to cover its operating expenditure, with negative results increasing over the 10 year period.

Council is now working towards introducing corrective measures to arrest the decline in performance and ensure long term financial sustainability. Models 2 and 3 show financial outcomes of proposed actions.

The Operating Performance, Unrestricted Current and Cash Coverage ratios highlight the essential ingredients for sustainable financial operations. • The Operating Performance Ratio measures the extent of Council’ Revenue (net of Capital Grants) coverage of

Expenditure. This needs to be a positive figure and ideally, growing. • The Unrestricted Current Ratio measures Council’s liquidity. The benchmark based on successful organisations is set at 1.5 to 2.0. An increasing ratio over time shows improving liquidity and an environment where there is sufficient coverage of Current Liabilities from Current Assets. • The Cash Coverage Ratio measures Council’s cash coverage of expenditure. This shows the number of months that Council will be able to operate unhindered, in the event that Council is unable to generate any additional cash through its operations. The greater the number of months shown, the more comfortable is the operating environment. • Council’s Current Ratio is maintained at a healthy level throughout the 10-year period. While there is a projected decrease in Council’s cash balances, there is sufficient buffer to maintain adequate (above benchmark) levels of working capital.