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The Feb 2014 Mid Year Review

At the Feb 25 2014 Council Meeting, a Mid Year Review of the budget for 2013/14 was presented.

The annual budget for 2013/14 planned an income of $110,218,000 and an expenditure of $100,299,000 leaving a surplus of of $9,919,000.

 

There may be good reasons why budgets need to be revised in the middle of the financial year. Circumcstances, opportunities, objectives and other things may change.

Manningham Council gave these reasons:

"During the Mid Year Review (MYR), the Executive Management Team reviewed financial performance in the year to date and considered the impacts of changed circumstances and priorities." (page 3, point 1.3)

 

Looking a little deeper at the reasons.

As you read the Mid Year Review, Manningham Council elaborated on it's reason for making changes to the budget:

"The Mid Year Review outcomes are presented in the attached report against the Goals established in the Financial Strategy for Balanced Budget, Liquidity and Sustainability. These targets include:

  • Net Operating Result

  • Underlying result Ratio

  • Capital Budget

  • Cash and Investments position

  • Working Capital Ratio

  • Indebtedness Ratio

  • Investment Gap Ratio" (page 3, point 1.6)

 

Many of the reasons given revolve around these 'ratios' or 'targets'. Please let me explain what they are.

The Victorian Auditor General's Office (VAGO) developed a set of measures that are usually ratios between different amounts of money. The VAGO set the the following measures:

  • Positive Underlying Result Ratio,

  • Self Financing Ratio,

  • Indebtedness Ratio,

  • Working Capital Ratio,

  • Adjusted Working Capital Ratio,

  • Investment Gap Ratio,

  • Infrastructure Investment Gap,

  • Rates Applied To Capital.

The state government uses these ratios as targets to measure the council's performance.

They are similar to 'key performance indicators' that you may be familiar with in your place of work. These ratios are important for our council

However these ratios are not the sort of things that you or I would use to run our household budget. They were developed by bureaucrats for bureaucrats. Unfortunately for you and me, councils can often make themselves look better against these measures either by spending more money and/or increasing their rates and charges to obtain more money.

Please do not think that these measures ensure sound money management as you or I would think of it.

 

The interesting term 'Financial Sustainability'.

Manningham Council often uses the curious term 'financial sustainability' in their financial documents. Sustainability sounds good. 'Sustainability' is a word widely used in environmental circles and has a positive connotation. When applied to the world of money it suggests, to me at least, of living within one's means, i.e. living 'sustainably'.

But we would be very wrong to think this.

To our council, financial sustainability has nothing to do with living within one's means. To our council, 'financial sustainability' means performing well against these ratios or targets set down by Victorian Auditor General's Office.

"The Financial Strategy's Objectives and Goals record the fundamental approach of Council to good financial management. To enable the Council to measure achievement of the Goals, a number of Financial Strategy Targets have been developed". (page 8. Section 2 "Financial Strategy Targets")

From the council's document you might get the impression that the council developed these measures. They might have developed one or two targets, but the vast majority were set by the VAGO.

 

The mid year review tweaks some of these measures.

The council lists the ratios or targets the mid year review will effect:


 

Note there is a dramatic improvement in the two of the measures. These are the 'working capital ratios'. The other measures change slightly but are still well within their target range.

The two measures that improve dramatically effect the council's 'liquidity', that is, it's ability to have quick access to cash. We are not given the reason for this change. However in the table above, note the qualification regarding 'liquidity targets': "No deficit budgets unless liquidity targets achieved". Improving these 'liquidity' targets opens the door in the future for the council to run a budget deficit, that is spend more in a year than they are able to take in.

We will have to wait to see if a budget deficit comes about in following years.

 

The Mid Year Review benefits who?

What is interesting is the way the council intends to use the changes coming from the Mid Year Review.

The council does not regard the Mid Year Review as a revision to it's budget. They will still measure their performance against their original budget, however the revised forecasts will be used for performance reporting back to the state government starting from Feb 2014. (pages 7 and 8. Section 1 "Executive Summary")

So this 'tweaking' of the budget at mid year will just be used when reporting back to the state government. Manningham council is still going to operate according to the original budget they set at the start of the financial year. They are still going to spend and do what they intended in the original budget. However these mid year revisions only effect these ratios (or KPI's) against which the council is measured. And these revised measures are going to be reported back to the state government. All this sounds a little suspicious to me.

Private companies may review their budgets to take into account changes in the trading circumstances, changes in costs, changes in markets, changes in customer demands and so on.

Manningham council however, had very different things in mind. They were not thinking of residents needs or changes in the circumstances or opportunities. Their purpose is to change the measures by which they are rated by the state government.

As you read the Mid Year Review, Manningham council gives the impression that the Mid Year Review was driven by 'prudent financial restraint', 'careful financial management' and their favourite 'sustainable' financial management. But these are just words. The reason for the change was primarily to tweak the performance measures used to measure their performance.

 

Let us look at the mid year changes to the budget in more detail.

Where is additional money is being spent? Where are savings being made? We can see a common theme in the changes.

In the mid year review, the council's income is forecast to go up by $200,000 but it's spending is going to increase by $700,000. This increase in spending can easily be accommodated because, in the original budget, the council planned to spend some $10m less than they took in. So a small increase in expenditure can easily be accommodated.

However our council often talks about it's efficiency gains, productivity improvements and cost reductions. Is it too much to expect these revisions would bring about a decrease in expenditure and an increase in the surplus for the year? Apparently it is too much to expect. Please consider the following:


Changes to Expenditure.

See page 11, Expenditure.

Changes in Spending:

An extra $702,000 on employee costs, i.e. wages, salaries, etc.

The lions share of the new spending goes to the staff as pay rises and other staff costs.

 

An extra $153,000 on 'utilities'.

The library at the Pines is costing more than expected. Rent appears to be increasing and 'utility' costs, that is electricity, water, gas are increasing above what is expected. What puzzles me is how can a library use so much extra water that a revision to the budget is required? It is more likely that the gas and electricity expenses of the library increased beyond what was planned. Gas and electricity in a library would most likely be used for heating. So is that where the additional money is going?

Similarly the 'utility' costs at MC2 also increasing above what was expected by some $82,000. Again, I ask, how can office space use so much extra water that a revision to the budget is required? The additional utility costs are probably gas and electricity for heating, which is where the majority of these expenses would to be. I was under the impression that the MC2 building was going to be a show piece for environmental sustainability but apparently is uses more water, gas and electricity (probably to heat it) than first expected. True to form, the council will pass much of these additional costs onto the tenants of the building. I wonder what the tenants really think now if they rented space thinking that the MC2 building was going to be more environmentally efficient and would reduce costs in these areas.

While the council preaches 'environmental sustainability' to the rest of us, they, their friends and associates certainly like to stay warm, regardless of cost.

 

'Other' Expenses by $265,000.

These 'other' expenses include $120,000 to set up a new 'Project Management Office' at the council. So this money also is being spent on staff as well.

$167,000 for legal expenses. Manningham council has large legal expenses often due to cases brought to VCAT. Many of these disputes are centered around the interpretation of the council's own design rules. Often the council does not like what their own design rules allow developers to build. In such instances emotion and passion usually get caught up in the building approval process, as I have described elsewhere on this site. The council and developers often end up at VCAT thrashing it out. What puzzles me is that at the heart of the problem is the council's own design rules. I can't understand why the council doesn't simply change the design rules so they are clear and they deliver what the council wants. If they did, these disputes and costs could be avoided or at least minimized.

A saving of $90,000 on the cost of the fire service levy on council properties. The council uses this saving to justify spending on new staff. But the council plans to spend much more than $90,000 per year on new staff. Using this small saving to justify a far greater spending on staff does not give the impression the council is being responsible with money. For example, if you save $90 per year, does that justify spending an additional $700 per year?

 

Reduced waste 'Contractor' charges by $230,000.

The council is pressuring waste contractors to reduce their charges in the areas of 'fuel, CPI and carbon tax'. How they are able to do this, I would like to know. The rest of us have to pay the going prices and charges in all these areas.

 

Reduced maintenance costs at MC2 $80,000.

Again the council may be pressuring contractors to reduce their fees.

 

Interest expenses $205,000.

The interest the council pays to borrow money has decreased. This is because instead of going to banks to borrow money, the council now borrows money from the bond market and obtains lower interest rates. Manningham Council can now borrow money and run up massive debts just like the federal government can.

 

It doesn't seem the council has cut very deep to save money.

It appears that it is other people, private workers and contractors who have been pushed to reduce their expenses. Salary and working conditions of council workers appear to be out of bounds when it comes to reducing costs. In this Mid Year Review of the budget, money is still being lavished on this one area.

From beginning to end of the Mid Year Review, the council has been taking care of number one and pushing others to reduce their expenses.

 

Where is the additional money coming from?

See page 9. Section 3 'Net Operating Result'.

 

Rates (down $31,000) and Waste Charges (down $37,000).

Rates and waste charge are forecast to fall. I don't think this is because the council is reducing the amount they bill us. There are quite a few properties in Manningham that are unable to pay their rates each year.

 

Fee, Fines and other charges (forecast to increase by $97,000).

 

Interest earned on investments (forecast to increase by $157,000).

This increase in interest earned is due to an increase in the amount of our money the council is saving in the bank.

 

Operating grants from state government (forecast to increase by $444,000).

This is money received from the state government to run certain services such as Home and Community Care, Child Care, Youth Services. Note that the state government earmarks money for certain purposes instead of relying on the council to decide where to best spend it.

 

Capital grants from the state government (forecast to decrease by $1,058,000).

Quarry Fill Royalty (forecast to increase by $341,000)

The council says this increase in revenue is due to 'higher tonnages'. But have you noticed the big increases in tip fees over the years? The high tip fees are more likely to discourage tip usage than bring about higher tonnages. I think higher tip fees probably also contribute to this increase in revenue.

 

Reduced expenses rehabilitating Coldstream Organic Site after closure ($154,000)

The council did not spend as much as planned to clean the place up.

 

Taking ratepayers to court for their unpaid rates ($100,000).

Interestingly, the council says the legal expenses are almost the same as the money they get back from ratepayers.

 

Getting more than expected when selling property ($226,000).

The council got $226,000 more for the old Arts Center in Foote Street than they first expected.

 

Does all this sound like 'Sound, Sustainable, Prudent' money management to you?

Does this sound like the council 'has the fundamentals right'? To me, it certainly does not.

To me, it sounds more like scraping the barrel for whatever additional money they can get.

Our council uses words like 'prudent', 'sustainable', 'sound', etc. in nearly all their financial reports. But these are just words.

Manningham council appears to be casting around for whatever money they can get and pressuring others to reduce their costs while spending all they can on themselves, not the residents or ratepayers, but their own staff's pay and working conditions.

 

What about all these productivity gains they talk about?

In their financial documents, Manningham Council talks about productivity improvements, efficiency gains, restraint in spending, and so on. But these are just words. Any gains Manningham Council makes in these areas are so minuscule that they do not even cause a ripple in the finances.

There has been no productivity improvement, no efficiency gains, no restraint. Their mid year review gives no evidence of this at all. In fact the evidence points in the opposite direction. The Mid Year Review reinforces the fact that the council takes care of themselves and their own interests, first and foremost. All this talk of productivity improvements, efficiency gains, restraint in spending, and so on is just talk probably intended just to keep the residents quiet.

 

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