National financial sustainability study of local government

Executive summary

The Australian Local Government Association (ALGA) has commissioned PricewaterhouseCoopers (PwC) to undertake an independent analysis of the financial sustainability of local government in Australia.

Contents of the Executive summary:

Background
Extrapolation from state based sustainability results
Synthesising the findings of the state based reports and the PwC Analysis
Key financial issues impacting financial sustainability
What could be achieved through improved funding of local government?
Recommendations
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The Australian Local Government Association (ALGA) has commissioned PricewaterhouseCoopers (PwC) to undertake an independent analysis of the financial sustainability of local government in Australia. The full terms of reference and scope are provided in Appendix B.

The objective of this study is to assist the ALGA, in collaboration with state and territory local government associations, to develop a detailed plan to:

enable councils to better meet their fiscal obligations as well as the growing demands for infrastructure and services; and
provide a sound approach for targeted support to local government for consideration by other spheres of government.

In summary, the terms of reference for this study require PwC to:

assess the current and long-term viability of the local government nationally and by council types including the trends and differences;
identify the key financial issues affecting financial sustainability;
develop recommendations for improved financial sustainability (e.g. financial skills and potential sources of additional revenue); and
investigate the merit of reforming inter-government funding to develop a new model to improve sustainability.

The intention of this project is to provide a high level strategic national study that draws on the detailed analysis of a number of state based sustainability studies, in order to provide an indication of the sustainability of the nationwide Local Government (LG) sector. The resources available to complete this study preclude an in-depth and individual analysis to be undertaken of each of the 700 councils. The extensive diversity of the sector also makes it difficult to provide a detailed "how to" guide for improving sustainability that would apply to the varying circumstances of each council. Thus, this study assesses key characteristics that contribute to the unsustainability of councils currently at risk, and develops a range of internal and funding reform options that target these issues and attempt to improve the long-term sustainability of the sector as a whole.

Background

Context of Local Government

Local government in Australia is a dynamic and extremely diverse sector that combines the individual character and operations of over 700 councils.

These are extremely diverse in size and shape from Brisbane City Council (population 950,000 and annual expenditure of approximately $1.7 billion) to very small councils like Jerilderie Shire (population 1,908 and annual expenditure $6.8 million). Consistent with these diverse characteristics, the financial position of individual councils also varies substantially.

LG plays an integral role in the Australian economy and within local communities. In terms of economic activity, LG has an annual expenditure of almost $20 billion, which represents around 2% of GDP, and employs around 1.3% of the Australian labour force. Moreover, LG provides a significant proportion of the essential services and infrastructure that underpins all local and regional communities. For the numerous regional and more remote communities LG is often the only institutional presence and one of the key drivers of economic activity.

The key benefits of the LG sector, as outlined by the Australian Government¹, include:

wide and established national network of public administration, including a significant presence in rural and regional Australia;
strong links to the community and is accountable to the communities its represents;
practical service orientation and good organisational skills which make it capable of innovative, speedy and flexible responses.
links between LG and local business and industry puts councils in a good position to foster a 'bottom up' approach to regional development;
provide information to support Commonwealth regional policy development and implementation; and
ideal entry point for access to information about other governments' services and programmes.

¹ DOTARS, Submission No. 103., p. 39., in House of Representatives, SCEFPA, 2003, Rates and Taxes: A Fair Share for Responsible Local Government, p. 91

Increase in LG service scope

Over the past thirty years, the functions undertaken by local government in Australia have evolved with a generally expanded scope that now includes a range of social and human services in addition to the physical infrastructure of roads and waste. Most local councils, due to community pressure, state and Australian Government inducements and the withdrawal of services by other levels of government, now provide a growing range of social and human services. Some smaller councils due to constrained budgets have, by necessity, needed to contain their scope to the traditional services. The Inter-Governmental Agreement on Cost Shifting, coupled with greater caution by councils prior to expanding services, may moderate recent levels of service expansion.

This diversity in size and subsequent income streams has meant that councils have differing capacities to fund the requests by their communities for greater services. Managing these demands is particularly challenging for many councils that have a narrow revenue base or for which the revenue base that has seen only modest growth.

Particularly for the 60% of councils that are rural and remote councils of which many have experienced static or declining population bases, which translate to stable or declining council revenue. This is an ongoing challenge in the context of strong economic growth which typically sees communities demanding a corresponding increase in local infrastructure and services. Consequently, individual councils have had mixed success in managing and funding community demands for more services whilst retaining a healthy financial position.

Efficiency improvements

Over the past decade there has been growing awareness and progress across the sector about the need to improve the efficiency and sustainability of LG. As such a large body of work has been undertaken over recent years, driven by state associations in addition to state and federal governments that analyses the sector and compiles evidence that a large number of councils are facing financial difficulties. This is part of an ongoing process to ensuring that there is a robust understanding of sustainability issues at the state and federal level.

As a consequence, over the past decade a number of councils have implemented a range of successful reforms to improve their efficiency and sustainability. Significant efficiency reforms have been achieved through the following approaches:

outsourcing non-core operations, which was formalised in Victoria by the compulsory competitive tending (CCT) policy during the 1990s;
structural reforms that have included mandatory and voluntary amalgamations in NSW, Victoria, SA and Tasmania to consolidate the LG sector;
corporatisation of commercial services in order to increase the returns to LG, for e.g. the recent Local Government Infrastructure Services initiative in Qld (see section 2.6 for further details);
regional service delivery is a widespread practice among councils to deliver a range of services such as waste services, purchasing and procurement, road and infrastructure maintenance, recruitment, etc;
shared services where either a council or the state association becomes the lead provider for service provision, particularly for corporate services such as finance, HR, etc.

State based sustainability studies

The results of recently completed sustainability studies commissioned and funded by state local government associations in NSW, SA & WA provided some of the impetus for this study. Each of these studies was managed by an independent board, with the analysis undertaken by Access Economics (Access). SA was the first state to complete such a study, with the results published in August 2005. This was followed by NSW (May 2006), and the very recent completion of the WA report in August 2006.

The Municipal Association of Victoria (MAV) has also led the efficiency reform process undertaking considerable work on analysing the trends and long-term sustainability of LG finances in Victoria. The MAV has developed an index to reflect the ongoing long-term viability of individual councils that combines borrowings, unfunded superannuation liabilities (USL) and the cumulative deficit / surplus in capex versus total capital spending.

The viability index analyses data since 1997/98 and compares this overall long-term debt (both financial and any underspend on renewals) against rate revenues. Based on 2004/05 data MAV concluded that 10% of the 79 councils in Victoria are unsustainable.

In collating the results of the MAV study and the three separate Access studies it appears that around 35% of councils across these states are not financially sustainable. Access found that the proportion of unsustainable councils varies between 25% in NSW and 58% in WA. However, in observing these results it is important to note that the Access approach excluded capital grants from the operating results, which hence paints a more urgent picture of the sustainability of local government. In this PwC study, capital grants are viewed as an ongoing and important revenue source, the exclusion of which can overstate the financial unsustainbility of local government.

Overall, this PwC Study is seeking to provide a strategic-level national assessment of the degree to which financial sustainability is a significant concern and, if so, to recommend options to assist councils in need.

Assessment of current and long-term viability of local government and the differences between types of councils

The recent sustainability studies commissioned by state LG associations have confirmed widespread concerns from a number of commentators that a sizable proportion of councils face long-term financial sustainability problems. Where councils report operating deficits or, more particularly, operating cashflow deficits, there is a strong tendency to defer or scale back renewals expenditure to upgrade existing infrastructure. This deferral of renewals, particularly in community infrastructure (e.g. community centres, swimming pools, libraries), has been a key factor in creating a backlog of renewals work. This tendency by some councils to defer community infrastructure renewals arises because the other two broad categories of infrastructure (being water/sewerage and roads) have specific user charges to fund renewals or Australian Government Grants (e.g. Roads to Recovery or R2R) to support periodic upgrading. Even with R2R a sizable proportion of rural councils still have ongoing challenges funding the adequate renewal of their local roads.

Our ability to accurately assess the financial viability and sustainability of different types of councils across Australia has been constrained by a range of data limitations, including:

mixed approaches to measuring and recording financial data associated with inconsistencies between states;
the infrequent asset re-valuations (typically 5 yearly) as well as differences in assumed asset lives impacting the accuracy of reported depreciation levels; and
incomplete financial and asset management records particularly for smaller councils, including a large proportion of Northern Territory Councils. A key data shortcoming across a large proportion of councils across the nation is accurate information on capital expenditure and renewals expenditure and inconsistent separation of maintenance, renewals and capital expenditure.

PwC has subsequently utilised two approaches to assess viability namely:

Financial ratio analysis using a survey of 100 councils: PwC has obtained data which were then stratified to match both the proportion of councils per state/territory and the proportion of councils in each of seven DOTARS size categories.
Extrapolation from state based sustainability results: from the three Access based inquiries (NSW, SA and WA) and MAV study in Victoria, PwC has extrapolated to provide an indicative estimate of the national sustainability gap and infrastructure backlog. The Access approach used a more sophisticated method to defining financial sustainability based on forward looking renewals and own source revenue capacity. Similarly, MAV has access to a better breakdown of capex expenditure in order to estimate the likely infrastructure backlog and has examined the trends in Victorian financial viability over the medium term. Extrapolation is required as this PwC Study has a strategic or national focus and the scope does not include detailed individual council analysis as utilised by the state based studies to evaluate sustainability.

Financial ratio analysis

Table E.1 below provides a summary of survey of 100 councils the financial viability of councils within the seven size Australian Classification of Local Government (ACLG) categories developed by DOTARS. A full explanation and definition of these financial key performance indicators (KPI) can be found in Appendix C.

Table E.1: Summary of financial KPI by ACLG
Financial Sustainability Summary KPIs DOTARS category	% Councils with Interest Coverage <3 (EBIT / borrowing costs)	Median Operating Surplus as a % of Total Revenue	% Councils with Deficit greater than 10% of Total Revenue	Median Sustainability Ratio (capex/depreciation)	% Councils with Sustainability Ratio <1	Median current ratio (current assets / current liab.)	% of councils with current ratio <1	Median rates coverage (%)(rates as a % of total expenses)	% of councils with rates coverage <0.4
Average	35.8	10.0%	16.0	1.8	8.0	2.6	21.4	47.9	40.4
Urban capital city	40	5.0%	28.6	2.0	8.0	4.5	14.3	55.8	0.0
Urban regional	41.7	4.2%	16.7	1.3	0.0	2.8	9.1	66.5	16.7
Urban fringe	37.5	14.1%	12.5	2.1	16.7	3.4	25.0	62.5	0.0
Urban development	41.7	7.6%	8.3	1.6	0.0	1.0	50.0	65.2	0.0
Rural remote	28.6	10.3%	18.8	2.3	8.3	2.6	12.5	25.4	87.5
Rural agricultural	32.6	11.7%	15.9	1.7	0.0	2.6	20.5	42.4	54.5
Rural significant. growth	n/a	-8.0%	n/a	2.4	n/a	2.4	n/a	47.5	n/a

The results above indicate that:

Approximately 36% of councils have an interest coverage ratio (EBIT/interest) of less than 3. The interest coverage level of 3 generally represents a threshold where credit risk begins to be more significant and a large unexpected event with adverse cashflow implications can potentially place pressure on ability to meet interest payments.
Councils have a median operating surplus of 10% of total revenue. However this is an unadjusted operating surplus in that it includes revenues which are committed to specific purposes (eg Section 94 developer contributions). Some 16% of councils also have an operating deficit of over 10% of revenue. Such councils have a tendency to defer renewals expenditure which creates a risk of developing maintenance backlogs.
The median sustainability ratio (capex/depreciation) in this sample was 1.8:1. Some 8% of councils have a sustainability ratio of less than 1. The proportion less than 1 is understated as council asset values are often conservative with infrequent updates and many assets still in active use have reached their accounting life and are fully depreciated. Hence in reality, if asset values and depreciation amounts were more accurate, the national median sustainability ratio is likely to be closer to 1:1. A ratio of less than 1 indicates that the capital being consumed in an accounting sense exceeds the capital being replaced into the asset base.
Councils have a median current ratio (current assets / current liabilities) of 2.6, however 21% are less than 1. The ratio of 1 is a key threshold for testing liquidity issues. In particular the urban fringe, urban development, rural remote and rural agricultural categories all have potential liquidity problems with 12 - 50 % less than 1.
Councils across the nation have a median of 48% of costs covered by rates, ranging from 25 to 66%. Of concern is the fact that 87% and 54% of rural remote and rural agricultural councils respectively have rates covering less than 40% of costs creating a dependence on government grants.

Extrapolation from state based sustainability results

The Access Economics and MAV results for NSW, WA, SA and Vic are summarised in Table E.2 below. Both sustainability studies had four main KPIs:

Backlog in infrastructure renewals
Underspend on existing infrastructure renewals per annum
The estimated funding gap per annum to rectify the Underspend and clear the backlog
The percentage of Councils assessed as unsustainable.

We understand that both the Access and MAV approach to estimating the annual underspend on existing infrastructure renewals has taken into account existing Australian Government support to clear backlogs primarily in the form of the R2R Program. However, the Access results exclude capital grants, based on the premise that their inclusion would overstate the revenue available for operational activities. The PwC analysis diverges from this approach and is of the view that capital grants are an important and necessary part of LG revenue that should be included in the analysis, and hence reports slightly improved sustainability in comparison to the Access results.

It is important to note that the MAV estimates are for the period from 1997/98 - 2004-05 due to concerns about the accuracy of the data recorded for non-current assets under the different accounting standards that applied prior to this period.

Combined, the NSW, Victoria, SA and WA represent around 63% of total national councils, 76% of the national population and 72% of the nation's local roads. This provides an adequate sample to assess the sustainability position across the nation.

However, the results between states vary; for example the average NSW council underspend is $3.29m pa compared with in $0.29m SA. The more favourable sustainability results for SA appear to be mainly explainable by substantial parts of rural and remote SA (approximately 85% of SA land area) being unincorporated, or not subject to local council governance. Accordingly, the extent of council backlogs and underspend varies widely between NSW, WA, SA and Vic.

This wide variance between the jurisdictions in the state based studies suggests there is merit in replicating the detailed state level analysis in Tasmania, Queensland and the Northern Territory to obtain a more accurate national evaluation.

Nevertheless, the results to date potentially provide sufficient data to extrapolate a range for the likely national position in term of backlogs, underspends and gaps. To develop this range we have applied three cases:

A Low Case: where we apply the average of WA, Vic and SA average result per Council to 259 councils in QLD, Tasmania and the NT.
A Mid Case: where we apply the average of WA, Vic, SA and NSW average result per Council to 259 councils in QLD, Tasmania and the NT. Under this approach, an indicative estimate of the potential aggregate backlog for all 700 Australian Local Councils across the country is approximately $13.6 billion with an annual funding gap² of $1.0 billion. Based on the results for NSW, WA, SA and Vic, the jurisdiction analysis results also suggest that approximately 35% of Councils are currently unsustainable.
A High Case: where we apply the NSW average result per Council to 259 councils in QLD, Tasmania and the NT.

In assessing the types of councils which are more viable, whilst there will always be numerous exceptions, the councils with stronger financial positions are generally those with reasonable scale in operations and population (more often, larger urban or regional councils). Such councils typically have stronger rates income and economic bases with more sophisticated asset management and financial governance systems. The less financially viable councils tend to be smaller (often rural, remote or small metropolitan), usually with constrained own-source revenue streams and a lack of economies of scale compounded by weakness in financial and asset management capabilities. However, there is also a proportion of larger councils with viability problems arising due to a range of factors. These include: significant expansion into new services, a suppression of rates rises to improve voter appeal and, potentially, some elements of ineffective cost management whereby the level of expenditure controls and budgeting processes to manage cost growth may not have been adequate.

²The Access Economics methodology measures the annual infrastructure funding gap as the difference between the required annual spend on renewals as indicated by annual depreciation expense and the amount actually spent.

Table E.2: Infrastructure backlog estimate, extrapolated from Access Economics and MAV results
Access Economics & MAV Financial Sustainability Summary Results	Backlog in infrastructure renewals ($m)	Underspend on existing infrastructure renewals pa ($m)	Est. Funding gap pa ($m) (to cover backlog & annual underspend) to be generated via savings or extra revenue / grants	Est. Funding gap per council pa ($m)	% of Councils unsustainable
NSW (152 LGBs - Access)	$6,300	$500	$900	$5.9	25%
SA (68 LGBs - Access)	$300¹	$20	$40	$0.6	38%
WA (142 LGBs - Access)	$1,750	$110	$220	$1.5	58%
Vic (79 LGBs - MAV)	$806²	$81	$203	$2.6	10%
Total NSW/WA/SA/Vic (441 LBGs: 63% of LGBs, 76% population & 73% of local road km)	$9,156	$711	$1,362	$3.1	35%
Low Case National Estimate (700 LGBs)(apply WA, Vic and SA average result per Council to 259 councils in QLD, Tas & NT)	$11,482	$892	$1,767	$2.5
Mid Case National Estimate (700 LGBs)(apply WA, Vic, SA and NSW average result per Council to 259 councils in QLD, Tas & NT)	$13,584	$1,060	$2,049	$2.9	35%
High Case National Estimate (700 LGBs) (apply NSW average result per Council to other 259 councils in QLD, Tas & NT)	$16,119	$1,237	$2,329	$3.3

Notes:
¹Access estimate for SA based only the backlog developed over last 10 years and full backlog will be higher.
²MAV estimate of infrastructure backlog is in 2003/04 dollars, for the period between 1997/98 - 2003/04, hence is understated.

Synthesising the findings of the state based reports and the PwC Analysis

The results of the Access and MAV state based sustainability studies and the PwC analysis both confirm that a significant part of the local government sector have financial sustainability problems. The PwC estimate that approximately 10 - 30 % of Australia's councils have sustainability issues broadly reflects the results of the state based reports that between 25% and 40% of councils, in the states analysed, could be unsustainable. Common findings across these studies are that councils with sustainability issues are likely to be developing infrastructure backlogs due to service expansions, moderate operating cost growth, minimal revenue growth giving rise to persistent underlying operating deficits and constraints on renewal expenditure. Hence, such councils have a funding gap between current and required revenue to enable them to clear the backlog and lift renewals expenditure to the optimal level.

Further broad conclusions can be drawn from the PwC analysis, when the survey results are segmented into the seven DOTARS council categories:

The majority of larger metropolitan councils are generally viable or have the ability to self-effect an improvement in financial sustainability. Some metropolitan councils have become over stretched generally due to service expansions. Further use of community consultations and use of flexible user pays systems may assist in effective prioritisation of local government services and infrastructure.
Urban Fringe councils' are mixed as some have large viability issues with some scope for internal improvements, while others are in a strong position with only minor scope for internal reform. Hence, only some of these councils appear to be dependent on additional government funding to restore sustainability.
Rural Remote and Rural Agricultural have more pronounced viability problems. These councils typically have relatively larger scope for internal reforms, however these councils often battle against lack of scale and extra funding for renewal of existing community infrastructure is required for most.

While significant process has been made by local government to increase their financial management effectiveness and understanding of the need for robust AMP, this analysis suggests internal reforms alone will not resolve sustainability issues for a large part of the local government sector. Hence, such councils may need to either reduce existing services / assets, or to seek additional revenue. As council own-revenue options are limited, this lends significant merit to consider reforms to intergovernmental transfers.

Key financial issues impacting financial sustainability

The common characteristics of councils typically facing financial sustainability constraints often include:

minimal (or negative) revenue growth
cost growth which has typically exceeded revenue growth. Expenditures have been rising by an average of CPI +2-3% per annum. This cost growth is mainly due a combination of factors including a rising skill level required for most senior roles requiring higher remuneration, award wage rises of typically 4% pa for most mid to lower level roles, stronger cost escalations in the maintenance and construction sectors as well as service diversification. The divergence between cost and revenue growth can lead to operating deficits which in turn are often partly funded by deferring some infrastructure renewals expenditure.
increasing involvement in non-core service provision due to escalating community demands, coupled with a related tendency by some councils to 'step-in' to provide a non-traditional service
a tendency by some councils to run operating deficits creating a need to defer or underspend on renewal of infrastructure, particularly community infrastructure which is often repeated annually creating a backlog
limited access for some councils to strong financial and asset management skills which are critical to identifying sustainability problems, optimising renewals expenditure and improving revenue streams
small proportion of councils also have limited access to rate revenue due to relatively small annual rate increases and a low initial rating base.

The sample of 100 councils together with the state based sustainability results indicate that local government needs to generate more cashflow to adequately maintain and renew infrastructure - particularly community infrastructure. The recent sustainability inquiries have significantly improved the understanding of the local government sector of the sustainability problem. Councils have and are undertaking substantial ongoing efficiency reform programs to improve financial viability. However, for many councils (more often rural, remote and urban fringe), despite making sizable improvements in efficiency, there will be a need to either reduce services or downsize their asset base unless additional revenue can be secured. In assessing how to increase own-source revenues, the councils with sustainability issues often have limited options, which means that a rise in inter-governmental transfers appears the most appropriate solution.

Some councils are also experiencing financial challenges due to significant population growth (e.g. sea and tree change areas) as infrastructure is augmented to meet demand. However, over the longer term, once the transitionary impacts moderate, a larger scale population, coupled with a modern asset base and sound asset management practices, should improve the prospects for such councils to be financially sustainable.

What could be achieved through improved funding of local government?

Improved funding for local councils, particularly for the renewal of community assets, would assist local communities by enabling councils to return important community infrastructure to acceptable levels of condition. In conjunction with improved financial and asset management practices, more appropriate funding levels for local government infrastructure and related services would help to ease the pressure of operating deficits. In addition, such extra funding would support the clearance of backlogs in renewals expenditure (identified by Access and the MAV) and then also support more regular periodic maintenance to retain service levels.

Importantly, additional funding would assist local government to take full advantage of their ability to flexibly gauge and respond to the changing demands at a community level. With increasing demands for a broader scope and higher standard of community services okilieand infrastructure, it is important that local government has the resources to ascertain the priorities of the community, and to subsequently inform and consult with the community on the trade-offs of council provided infrastructure and services.

Enabling a council to respond directly to the service and infrastructure demands of an informed community would:

Strengthen local communities by ensuring and adequate standard of key facilities for the ongoing provision of a range of significant social and recreational services.
Provision of greater choice and consultation on council provided services and infrastructure would encourage more participation in community activities raising levels of inclusion and wellbeing. This would promote increased community cohesion and safety, particularly in rural areas.
Enable the implementation of local programs to meet and include the diverse needs of the community that support cultural diversity, access and equity, equal opportunity, involving minority groups.
Support sustainable environmental strategy for each community to improve local environmental outcomes.
Enhance business and community links with regional areas to promote regional equity and development.
Promote further economic development and the generation of employment benefits through links with the business community.
Improve the quality of life of local residents through the support and alignment of health and welfare agencies within the area.
Support local recreation, arts and culture and an appreciation of heritage in order to promote vibrant and active communities.

Recommendations

PwC has developed 11 recommendations based on a 'twin track' approach for improving financial sustainability through the pursuit of:

Internal reforms by some councils to improve their efficiency and effectiveness (recommendations a-d).
Suggested changes to inter-government funding for improved financial sustainability to primarily assist the types of councils with sustainability challenges (recommendations e-h).

Internal reforms required by some councils

Local government is now a key sphere of government in its own right and it has management structures to competently deliver on its core accountabilities.

A sizable proportion of councils, including the vast majority of the larger LGBs, have made significant progress in reforming operations to improve efficiency and many of these councils now only need to focus on continued improvement through productivity gains which all entities should pursue. While the sustainability report undertaken in SA indicated that sustainability is more linked to policy and skills rather than size, evidence from other states indicates that scale, and implicitly size, does assist in improving sustainability. It is likely that this divergence in results is largely due to the majority of SA being an unincorporated zone, which would minimise the incidence of rural councils that cover large areas with a small population base and limited opportunities for economies of scale. Overall, some councils still have scope to further improve their efficiency and effectiveness mainly by improving their scale, financial management and asset management.

Recommendations to improve council internal performance practices are targeted at the four key objectives, outlined below. In making these recommendations it is acknowledged that due to the extensive divergence between councils, the applicability of each recommendation will vary between each council. Moreover, the sustainability work led by state based LG associations has led to the implementation of a number of focussed programs, with progress underway to address the key themes of these recommendations.

Improving efficiency, effectiveness and scale
- Further realise the gains from greater economies of scale and reduce unit costs via approaches such as regional or shared service provision, outsourcing, use of statewide purchasing agreements etc.
Expanding own-source revenue
- Work with State Government to remove or relax legislative impediments and improve the capacity of local government to raise revenue from its own sources.
Set clear and appropriate priorities
- Establish a robust long-term service plan which defines what council will provide and how services will be undertaken
- Exercise caution prior to stepping-in to attempt to resolve regional, state or national issues without a sound funding plan
- Secure long term funding (not just capital grants) prior to establishing new services / infrastructure.
Deepen asset management and financial capacity
- Work with other spheres of government to facilitate improved asset management and financial skills through government funded programs (e.g. the Size, Shape and Sustainability Review in Queensland and the MAV Step Program) to lift the skills in all councils to a reasonable base level.
- Utilise total asset management plans and systems to better manage asset renewals and replacement and integrate into broader long-term council objectives.
- Undertake more regular asset condition reporting for key infrastructure.
- Develop nationally consistent LGB financial and asset management data. There is a need for a new national program to improve the consistency and quality of LGB data to enable more robust and accurate analysis and planning producing a uniform national approach to measuring viability and financial sustainability. Ideally this would be supported by the Australian Government in order to achieve optimal results.

Suggested reforms to inter-government transfers

PwC sees significant merit in some reforms to inter-government transfers, but these need to be targeted to primarily assist the types of councils with sustainability challenges.

The specific suggested reforms to inter-government transfers are:

Establish a new Local Community Infrastructure Renewals Fund (LCIRF): this fund would support councils in the more timely funding of renewals work for over $12Bn in building assets covering a range of existing community infrastructure such as community centres, aged care facilities, libraries, health clinics, sport and recreation facilities of appropriate scale etc.. The community infrastructure asset base is ageing with large parts established in the 1950s meaning it now requires renewals and upgrading. The fund could be distributed based on relative need eg using the R2R or FAGs General Purpose distribution methods or perhaps a new or hybrid approach. It is suggested that the size of LCIRF could be set so as to provide a similar level of renewals support as provided by R2R (e.g. around $200-250 million pa).
Revise the escalation methodology for FAGS from a mix of population growth and CPI, to a new escalation formula tailored more to local government cost movements (e.g. a combination of the ABS Wage Cost Index and Construction Cost Index coupled with population growth).
Make funding for R2R permanent: this program has delivered substantial benefits and there would be significant merit to extend its duration, and further augmenting the R2R funding levels (including escalating the program size by the ABS Construction Cost Index).
State Governments to provide funding to support local council efficiency reforms: a significant proportion of councils, often the smaller LGBs, have inadequate in-house skills to improve efficiency and financial plans. Hence, there appears to be merit in state governments providing partial funding to aid the development of tailored state based reform programs along the lines of the support provided by the QLD Government ($25m over 5 years) in the Size, Shape and Sustainability Program and the Step Program developed by MAV.