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Dangerous 'financial stability' and 'financial sustainability'.

Please refer to Manningham Council's 'Council Plan 2012-2017' and 'Financial Strategy 2013-2023' documents.

Our council keeps telling us about their prudent management, their financial stability and their financial sustainability. These are all very impressive but what they mean is not what you may think. They are not being prudent with money as you or I might be. What they mean is something very different.

When our council talks about prudence, stability and sustainability, they are talking about a set of measures set down by the Victorian Auditor General (see page 4 of Financial Plan). Manningham performs well against these measures and so you may think that our council is managing money carefully, however you would be very badly mistaken.

If you look at each measure, not one of them encourages our Council to manage costs carefully or reduce costs. In fact, these measures do the exact opposite and all are very dangerous for ratepayers.

 

Let's consider these measures one by one (see pages 5 to 11, Financial Plan).

 

1) Positive Underlying Result Ratio


This is:
 

Adjusted Net Surplus (Money council has left over at the end of the year)

---------------------------------------------------------------------------------------

Total Underlying Revenue (Total money council brings in)

 

The bigger the number the better for the Council. The idea is get the council to have some money left over at the end of the year. 

The number can be made bigger by either:

a) Reducing spending to have more money left over at end of the year (highly unlikely) or;

b) Increasing rates and service charges and add extra income to cash reserves (much more likely.)

Note that Manningham council typically has in excess of $30million in cash reserves (money in the bank).

 

 

2) Self Financing Ratio

 

Net Cast Inflow from Operating Activities (money from fees and charges)

-------------------------------------------------------------------------------------------

Underlying Revenue (Total money council brings in from rates and charges)

 

The bigger the number the better for the Council. The idea is to have the council raise money from fees, licences, etc. 

Again how do they make this number bigger? Either by:

a) Decreasing income from rates. (which has never happened) or:

b) Increase fees and charges for council services (much more likely).

 

 

3) Indebtedness Ratio

 

Non Current Liabilities (money borrowed)

--------------------------------------------------

Own Source Revenue

 

The smaller the better. Here, the idea is to have the amount of money borrowed small in comparison to the councils revenue.

You make the number small by either:

a) Reducing borrowings (which might happen however Manningham Council often goes into debt.) or;

b) Increase your income i.e. rates, fees and charges. (much more likely).

 

 

4) Working Capital Ratio

 

Current Assets (what ratepayers and others owe the council)

------------------------------------------------------------------------

Current Liabilities (what the council owes to others)

 

The bigger the number the better. The idea is to have the money coming in to the council much greater than the money going out.

To get the number bigger you either;

a) Increase what people owe you (increase charges, fees and rates. Much more likely) or;

b) Reduce what the council pays others (wages, spending, etc. highly unlikely).

 

 

5) Adjusted Working Capital Ratio

 

Current Assets (what ratepayers and others owe the council)

-------------------------------------------------------------------------------

Current Liabilities less long service leave (what council owes others)

 

The bigger the number the better. The idea here is to leave out the long service leave entitlements from the prior measure. 

The measure can be made bigger as before either by:

a) Increase council rates, fees and charges (much more likely);

b) Reduce spending and/or staff wages (highly unlikely).

 

 

6) Investment Gap Ratio

 

Capital Expenditure

------------------------

Depreciation

 

The bigger the number the better. The goal is to have the council spend money on new community assets or to replace existing assets. 

To make this number bigger, the council either:

a) increases spending on capital works (highly likely)

b) reduces depreciation (by making things last longer, which has certain problems).

Depreciation is often determined by an assets useful life and it's usage, etc. So it tends to be fixed. Another problem is that the more that is spent on capital works, the greater the value to depreciate. 

 

 

7) Infrastructure Investment Gap

 

Capital Expenditure on renewal and upgrade of assets

----------------------------------------------------------------

Depreciation

 

The bigger the number the better. The idea is to get the council to spend money repairing and upgrading public assets. 

To make this number bigger, the council either:

a) increases spending on capital works (much more likely)

b) reduces depreciation (by making things last longer which has problems. See comments for measure 6.).

 
 

 

8) Rates applied to Capital

 

Internally funded capital

----------------------------

Property Rates

 

The bigger the number the better. Basically the goal is to have the council fund capital works using money it raises from rates and charges, etc.

To make the number bigger the council can:

a) reduces rates (has never happened)

b) increase rates and use the increase to fund capital works (much more likely)

c) reduce other expenses and spend the savings on capital works (very unlikely)

 

 

Did you notice that the council can achieve a favourable outcome against all these measures by either increasing spending or increasing the money they take from the public?

If these measures are supposed to promote 'sustainability', 'stability', 'financial prudence' and so on as they say, how can this be?

How can anyone be 'financially prudent' or 'financially sustainable' by spending more and more and not focusing on the careful management of costs, ensuring what they spend money on is actually wanted and needed, and so on?

 

Just what are these measures?

These 'measures' are invented by bureaucrats in the state government and are meant to measure the performance of other bureaucrats in local government.

They were not formulated with the interests of the ratepayers in mind. Instead, they were formulated with the interests of the local government bureaucrats in mind. What they wanted to do, and actually achieved, was to develop a set of 'measures' that could be sold to the public as promoting 'prudent' 'stable' and 'sustainable' financial management. While in reality these measures did the exact opposite. What these measures actually do is justify and entrench the existing wasteful management practices typically found in local councils.

As can be seen above, the council can make themselves look better against each of these 'measure' by either spending more money or taking more money from you and me.

If the bureaucrats in the state government had actually put proper measures in place that made the bureaucrats in local government work harder, think harder and spend less, reduce staff, and so on, what do you think would happen at the next union meeting when all these people get together?

 

These measures allow them to give each other a big pat on the back for doing what bureaucrats do best -- spend other people's money.  

 

Our council (and others) are trying to hoodwink people into thinking one thing when in actual fact the exact opposite is taking place. They put a lot of time into selecting and inventing these measures to give the public one impression when in actual fact, government and council workers are taking care of number one.

Our council then promotes itself as being 'financially prudent', 'financially sustainable' and so on, by saying it performs well against these measures set up by the VAGO. These measures then achieve what they were intended for -- to deceive ratepayers and let government and council workers get away without doing anything that is even remotely financially sustainable or prudent.

 

13 Aug 2013.

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