Administrator backs “steady as she goes” financial plan

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Central Coast Council Administrator Rik Hart has resolved to adopt a long-term financial plan for the council based on assumptions that around $30 million in water and sewer charges will simply swap to rates notices from 2026-27 and that the current 13% special rate variation won’t end after 10 years.

By Jacquelene Pearson

According to Central Coast Council CEO, David Farmer, the Office of Local Government required the council to model multiple scenarios to determine its long-term financial sustainability. The outcome has been a preferred scenario that would see the council maintain its current income levels in real terms.

Mr Farmer introduced the long-term financial plan to the November 2023 Central Coast Council meeting by recounting that the $160 million of accumulated deficits between 2018 and 2021 were turned into a $40 million surplus in the 2021-22 financial year.

He said that “$110 million net turnaround” was “done with a range of perhaps the most drastic actions I have ever seen in a local authority in my time.”

For those who’ve forgotten the history of Central Coast Council, a short-term cashflow crisis in 2020 and the State Government’s refusal to bail out the mess it had created via a forced amalgamation in 2016, resulted in 25% of the council’s jobs being axed, services reduced and rates increased via a 13% special rate variation for 10 years.

“Last year we were able to maintain the surplus at about $35 million and that is predicted to come back again a little bit as we begin to restore service levels across the organisation,” Mr Farmer said.

He described the council’s current financial position as “stable” adding that the $82 million remaining on the crisis loan was expected to be repaid in full in December.

“We have moved from a crisis action plan into sustainability. We want to make sure we provide a council that can continue to provide services and maintain its assets in a standard the community expects, not get into catastrophic territory again. We never ever want to go there in the future,” Mr Farmer said.

He said the long-term financial strategy would allow council to maintain its services and “ensure we can reliably deliver services in the future, maintain the standard of our assets and not have any shocks to our customers.”

Mr Farmer reminded the meeting that council’s rates income is restricted by IPART in spite of “increasing cost pressures and the significant issue of staff resources in an incredibly competitive labour market.”

He also acknowledged the council’s aging asset base: “Significant parts of the asset base are not to the standard the community would expect but there is an increasing demand of community expectations. Not a day goes by when I don’t review a letter asking for something that the council is not doing.”

He said there were many “well-meaning, respectable community organisations that ask us to do something” and asked, “What do you cut to do those extra pieces of work?”

He said the aim was to keep achieving a sustainable operating position with a small sustainable surplus.

“What we need to do to maintain that is make sure expenditure doesn’t grow any faster than income,” Mr Farmer said.

One of the scenarios the Office of Local Government told the council to model was a base line which took into consideration that the council is expected to “lose two significant portions” of its income. IPART has said it will remove the council’s drainage charge from the 2026-27 financial year. Then in 2031-32 the 12% SRV comes off which represents $30 million in ongoing revenue.

And this is where the “steady as she goes” preferred scenario actually means IPART giving Central Coast Council another special rate variation in 2026-27 to compensate for the loss of the drainage charge. This may or may not result in higher costs for the ratepayer. That depends on what happens to the IPART rate peg between now and 2026-27.

Mr Farmer said maintaining current income was “not about a rate increase, but about maintaining the current level of rates in real terms. It involves maintaining current levels of rates and drainage charge but receiving drainage charge under the Local Government Act instead of under the Water Management Act.”

“Scenario 3 is the preferred scenario,” Mr Farmer said. “It essentially keeps up with a balanced budget within the margin of tolerances and we can work on the small variations and maintains cash.”

He said the preferred scenario “shows we can maintain assets in their current state for the next 10 years without the need for a rate increase.”

Commenting on the long-term financial plan after the council meeting, Administrator Hart said IPART will no longer allow council to include drainage charges in its water/sewer fees from the 2026-27 determination.

The plan, according to Mr Hart, is that: “The same number will be covered through the general rate charge. We will have to go to IPART for a Special Rate Variation (SRV) to include drainage in our general rate charge but the net impact on the community is zero.

“You have to go through the SRV process but you are maintaining the rates at the current status. It is a common practice. IPART, generally speaking, without exception, accept that. The alternative is they reduce income by $30 million which is what they did with water and sewer which was the death knell of the organisation,” Mr Hart said.

He said the council was required to produce a 10-year financial plan when negotiating the emergency $100 million with the bank (which we now know was either the ANZ or Commonwealth) that showed income exceeding expenditure. He said that is why the 13% SRV was required to last for 10 years.

“That is why the 10 year figure came in there because the bank required the 10 year plan; 13% was the minimum amount of money we were required to make the terms acceptable to the bank. It was never about the bank loan being used to pay off debt,” he said.

Mr Hart said he acknowledged that it is impossible to make 10-year forecasts accurate.

“That’s the problem with any forecast you are doing as a long term plan, it is impossible in a 10 year horizon to get it accurate. You have no idea what other influences are going to have,” he said.

IPART TO THE RESCUE?

Mr Hart said he believed IPART was working on changing the way it calculated the limits on rates that can be charged by local governments. The current rate peg not even allowing councils to keep their rates and charges abreast with the real rate of inflation.

“It is going to be an awful lot better,” he said. “We are going to get compensated more for staff costs and emergency service bills. The other area where they are not making a difference is on roads, weather events, the value of road works, and asset revaluations cost an extra $35 million which is off the bottom line.”

Mr Hart said 20% of a council’s income comes from grants which are not adjusted for inflation.

Even if IPART loosens its hold on how much councils can charge in rates and other fees, Mr Hart said local government was “slowly but surely falling behind. I don’t think the process for a moment should be you go out and ask for a 50% but bare in mind the average was 43%.”

And what of the NSW Government’s intervention to make councils supply more land for affordable housing?

“Local government is making it very loud and clear to the state government that if you are going to increase housing numbers, population and immigration numbers you must have infrastructure. And if you look to the contribution plans you can see the amount of money we collect is nowhere near the money we need to afford the infrastructure required. You are going to see the existing infrastructure fall behind.”

So the long-term financial plan is to maintain current income levels but infrastructure maintenance will fall behind. What about new infrastructure then?

“Those things come from grants,” he said. “You’ve got the politicization that goes on right across Australia because politicians make promises during election campaigns but we are doing that. We are putting a large regional library in place [in Gosford],” he said.

“That has come from largely federal grants but the problem with those big buildings, and IPART doesn’t take into consideration, the depreciation will be a $600,000 extra annual cost that will go against bottom line.”

According to Mr Hart depreciation and operating expenditure on the new library alone “would safely cost an extra $1 million per year… you cannot escape those numbers. You have to match that with income.

Kevin Brooks, who has been speaking at council meetings about what he sees as fundamental mismanagement of the organisation, said during the public forum on November 28, “This Long Term Financial Plan shows that the Administrator and CEO’s current management settings will deliver operating deficits in eight of the next 10 years. Over ten years, the cumulative net deficit in the Consolidated Fund will be an eyewatering $360M.

“The ‘financial turnaround’ the Administrator and CEO boasted about is now exposed as spin rather than reality.”

Mr Hart said Mr Brooks’ interpretation of the scenarios was over-simplified.

Mr Brooks said, “The report lacks transparency, but from the raw data it appears an application to IPART is being planned for a special variation rate hike of 25-30% – on top of inflation. It is financially irresponsible, and contrary to the accounting conventions of conservatism and prudence, to just make a groundless assumption in financial plans that this application will be approved.

“Another special rate variation is totally unjustified. Council cannot argue the previous special variation rate hike was insufficient when Council got the exact amount and the exact ten year timescale it applied for. That extra money was only ever intended for short term emergency purposes such as repaying loans from the financial crisis. A financial crisis – let’s not forget – the Administrator blamed on over-spending by previous Councillors.

“How come, now facing a cumulative deficit of $360M, none of the four options in tonight’s report shaves more than 1.5% off consolidated operating expenditure spiraling towards one billion dollars by 2033?

“Employee costs – that’s the money our unelected bureaucracy spends on itself – will be $301 million by 2033 – 85% more than in the Administrator’s first budget in 2021/22. None of the four options in this report shaves one dollar off that amount. What does that say about this Council’s commitment to productivity?

“The unaccountable bureaucracy once again protecting its own interests whilst inflicting rate hikes and service cuts on the community. And with no elected Councillors to blame this time, can you believe they are now blaming their best friend IPART?

“CEO David Farmer has been touring media outlets fretting that IPART’s rate peg doesn’t match CPI inflation. He knows full well councils themselves lobbied IPART to base rate peg on a council specific cost index rather than an economy wide measure such as CPI.

“He even wrote to IPART himself supporting the Council Base Cost Change Index – so why is he now complaining? Councils certainly weren’t complaining between 2010 and 2020 when rate peg averaged 2.5% per year across NSW compared with CPI inflation of just 1.9%.

“If this Council can’t balance its books after receiving a 30% increase in rates revenue in just three years, then it has a management problem not a revenue problem. Council doesn’t need more rate hikes. It needs long overdue reforms to improve management performance, efficiency, productivity, cost control, prioritisation, and culture.”

Mr Hart, commenting on discussions at the recent NSW Local Government Conference said it was “absolutely clear coming out of conference that challenges are the same right across the state, demand for services and infrastructure with diminishing resources including state government cost shifting.”

Responding to Kevin Brooks, Mr Farmer said scenario one or the “base model which Mr Brooks says, misleadingly suggests it is our situation, it is not our situation, we will be taking steps to address that.”

If IPART does change its methodology for calculating the rate peg, that may result in higher rates for Central Coast residents and businesses. Rates are calculated on land values, which are also likely to change over the next decade. An extension of the existing 13% SRV beyond the agreed 10 years and switching the drainage charge from the resident’s water bill to rates notice via another SRV could also have a compounding impact that would result in higher rates.

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