CENTRAL COAST COUNCIL CEO TALKS FINANCIAL RECOVERY

In each edition of Council Magazine we choose one local government from across Australia to shine a spotlight on. This edition, we feature an exclusive interview from Central Coast Council CEO, David Farmer, discussing the Council’s turbulent past three years which resulted in a unique success story – pulling themselves out of a dramatic $160 million debt, building a new future for the community and providing advice for other Councils regarding cash management.

Central Coast Council, located on New South Wales’s east coast, was established 12 May 2016, after merging together Gosford City and Wyong Shire Councils.

Central Coast is one of the largest councils in the state with a population of 341,000 and the sixth largest urban area in Australia, covering 1,681km2 – which is geographically larger than the city of Canberra.

HOW DID THE CENTRAL COAST COUNCIL BUILD SUCH A DEBT?

The problem for Central Coast Council began with a serious cash flow issue, caused by two successive substantial deficits; one around $90 million and one around $70 million, which led to a significant shortage of cash.

Around the same time, Council began the process to expand its capital program, which further escalated the financial situation.

Mr Farmer explained that usually councils manage their cash through the size of their capital program, and if in deficit, a council would reduce their capital program until they got their operating position back into balance.

“Our Council did the exact opposite of that, as it was running into substantial deficits, it also increased its capital program. This led to what doesn't happen in local government very often, which is a really significant cash flow problem,” Mr Farmer said.

“Usually when councils have a significant deficit, they slow the capital program and let the region’s assets slowly deteriorate while they resolve the issue.

“But we didn't, which meant essentially we ran out of cash.

“What we found is the Council was funding these deficits and an expanded capital program by dipping into those restricted funds,” Mr Farmer said.

Restricted funds are funds given to councils for development contributions, grants, or to support specific annual charges for services like wastewater and sewer services, and are to be set aside and not used for any other purpose.

“When the penny dropped that this was occurring, technically and legally, Council couldn't continue to pay the bills. It wasn’t able to make payroll or its creditors,” Mr Farmer said.

Time The Face The Music

Following the realisation that Central Coast Council’s cash problem was not going to be remedied without drastic action, Council received early payment of its FAGS grant from the Office of Local Government.

On 30 October 2020, the New South Wales Minister for Local Government at the time, Shelley Hancock, announced the immediate suspension of the elected council and the Chief Executive, Gary Murphy, had his contract terminated by the interim Administrator, Dick Persson.

On 12 April 2021, David Farmer was appointed as the CEO and an emergency plan with administrator support – created by former acting CEO, Rik Hart – was implemented.

“We had to make almost 300 people redundant. Huge damage to the organisation's reputation. The Council got sacked, senior staff left. The Council's still paying back the debt of that period of time, which it had to take on because it didn't trim its sails earlier,” Mr Farmer said.

“We got into the problem we were in for essentially three reasons. One, the Council was very ambitious with its capital program. Two, there was a lack of spending control in our general operations. And three, we're the only local government in New South Wales that's got external regulation of our water and sewer charges because of our size.”

As Mr Farmer mentioned, on top of their growing debt, Central Coast Council received an adverse pricing determination from the Independent Pricing and Regulatory Tribunal (IPART), New South Wales, which was acting as the external regulator for water and sewer pricing, due to its large size.

Due to the lack of a capable pricing submission by Council and a subsequent price reduction by IPART, Council lost approximately $40 million per year, for a three year period, in income from water and sewer charges.

“It's both ours and IPART’s fault, ours because we didn't submit a capable pricing submission and they then reduced our water and sewer prices for three years,” Mr Farmer said.

“So not only did we have an increased capital program, not only did we have poor cost control, but we had a significant reduction in income.”

Introducing The Financial Recovery Plan

Following the staffing changes and internal investigation, the Central Coast Council implemented its Financial Recovery Plan

The plan included borrowing approximately $150 million to refinance and repay the restricted funds that had been unlawfully spent, and required emergency loans.

“It was extremely difficult to get the loans. Banks don't normally lend money to councils just to bolster working capital, they lend money to councils against infrastructure, to build a bridge or a pipeline,” Mr Farmer said.

“It was quite difficult and we were in a position where if we weren't going to be able to get the loans, we essentially weren't solvent.

“It was a pretty dramatic situation. We managed to get those loans, but those loans had a range of strings attached and that required the Council to turn the business around very quickly.”

The Financial Recovery Plan has a number of key characteristics, including:

∞ Restricting the size of the capital program to about $175 million

∞ Selling around $60 million worth of assets

∞ A significant reduction in salaries, wages, materials and services

∞ Removing approximately 600 positions from the staff establishment with almost 300 redundancies

∞ Restoring the water and sewer charges back to previous levels

Mr Farmer explained that even after these drastic changes, it still needed a 13 per cent rate increase over and above the rate cap of two per cent.

By following the processes as outlined in the plan closely and strictly, the Council has managed to turn around the finances and reduce the massive amount of debt.

Halfway through the current financial year, Council is now running into a second significant surplus and has been able to set aside $50 million to go towards an early repayment of those $150 million in emergency loans.

“It's a very interesting story and one that local governments don't normally get themselves into,” Mr Farmer said.

“They normally may well be in financial difficulty, but they deal with that by just under-investing in their infrastructure. This Council didn't. It burned its cash and therefore had to act pretty dramatically to deal with those issues.”

A Warning To Fellow Councils

As previously mentioned, Mr Farmer said Central Coast Council’s situation was unusual for a local government to be in – but was caused by a multitude of issues intercepting at once, with the biggest being inaction in the face of financial problems.

“If you didn't act yesterday, act today. The people, the leadership of the organisation, that's the elected and the senior staff, will place the blame at each other's feet. But they all knew there were problems, and didn't act quick enough, and the situation just got worse and worse and worse and worse. And it led to a really quite catastrophic situation,” Mr Farmer said.

“The simple lesson is you just need to act. You think the decision is too hard to take, well the decision will be harder to take in a month's time and it'll be even harder to take in six months time.”

CENTRAL COAST COUNCIL’S PLANS FOR THE FUTURE

Central Coast Council continues to focus on removing the emergency debt as well as rebuilding its reputation to the wider community and residents.

“This year is about rebuilding those things: increasing our performance and rebuilding capability, starting to run some surpluses, reinvesting funds in areas of greatest need, and working on our customer service,” Mr Farmer said.

“The financial crisis is well and truly over, and we are now into repairing the organisation, repairing its capability to deliver for its community and repairing its reputation, because obviously it was a very public failure.

“We are also now hiring and want talented people to join us, as this is an organisation on a pathway to being a great Council, with great people already working here that do excellent work for the community. The continual delivery of services is testament to staff who remained in the organisation and delivered for their community despite significant challenges.

“During the period the Council has been under administrator, without the normally expected inclusion of councillors, it's reflected on everybody who works in the organisation. So we're very keen to rebuild the organisation, its performance, and its standing in the eyes of its community.”