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Long Term Financial Plans

August 2015


Morrison Low analysed a number of long term financial plans while working with councils across NSW during the recent Fit for the Future process. The long term financial plans formed the basis of forecasting against the financial benchmarks as well as the asset based benchmarks such as the maintenance, renewals and backlog ratios. The information in the plans varied considerably between councils and we found a number of common themes across the documents and reporting structures that can and should be improved.

One of the most startling observations that we made was the huge variation in depreciation policies and consequent depreciation expense between councils, and the impact that these differences had on each council’s performance against the Fit for the Future benchmarks. Because depreciation affects operating performance and asset values, the impacts of having an overly conservative or overly aggressive depreciation policy are not confined to infrastructure benchmarks but also have a significant impact on financial indicators such as the operating performance and operating expenditure per capita. This highlights the importance of having up-to-date valuations and depreciation policies that accurately reflect the true degradation of the assets over time.

We also found that a number of councils lacked a clear methodology for allocating funding between capital and maintenance expenditure. In some cases, councils were not able to accurately and consistently distinguish capital and maintenance expenditure, often resulting in comparable expenditure being classified differently between councils. Having an accurate forecast of maintenance and capital renewals expenditure is also crucial to ensuring assets are maintained in a suitable manner. This importance is also reflected by the state government’s views in having three of the seven benchmarks based on assets and asset expenditure.

A good example of this is how heavy patch repairs in road works are allocated. If one council has this work activity classified as maintenance and another as renewals, the benchmarking ratios will be significantly different between the two. Because capital expenditure does not impact council's operating result, incorrect allocation will not only affect the renewals and maintenance ratios but also the operating performance and operating expenditure ratios. This difference in cost allocation can have considerable effects on councils’ perceived performance with the benchmarks.

The long term financial plan, although currently not an audited document, is going to play an increasingly important role as a measure of a council’s forecasted performance. The LTFP, along with a council’s improvement plan, will be a key document during current and future Fit for the Future evaluations. Because of this it is important that councils have an LTFP that accurately forecasts its asset values and depreciation as well as its capital and maintenance expenditure. These play a critical role in managing the council’s sustainability as well as aligning with asset management best practice.

For more information on long term financial planning contact Dan Bonifant