Working towards a set of Local Govt. Financial Indicators

[ken]

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The April 2010 edition of LG "Debits & Credits" included a Best Practice Guide on Financial Indicators / Benchmarks with the view to sparking some debate & movement towards an NSW LG Industry set.

We decided to split Financial Indicators up into three categroies based upon their:

(i) Focus,
(ii) Goal &
(iii) Time Frame.

FOCUS: Financial Perfomance Indicators & Financial Position Indicators
GOAL: Operational Liquidity, Fiscal Responsibility & Financial Sustainability
TIME: Day to Day (short term), Councils Elected Term (medium term) & Inter Generational (long term)

As well as highlighing 6 different LG Industry Financial Indicators from various Jusrisdictions around Australia (& Inquires on LG Sustainability), we decided to list some Indicators that we thought should make the grade:

1. Operational Liquidity (short term focus)

- Available Working Capital
(expressed as a $ figure & representing a % of gross expenditure & % of income)
- Level of o/s Debtors and Inventories (expressed as a % of agreed base)


2. Fiscal Responsibility (elected term focus)

- Operating Surplus* (before Capital Income) (as a % of Revenue)
- Debt Service Ratio
- Total Debt outstanding as a % of Total Revenue
- Cost Efficiency per resident
- % of Expenditure/Services funded by Council set User Charges
- Level of ELE (expressed as a % of Total Salaries & Wages)

* excluding the effects of Fair Valuations

3. Financial Sustainability (long term intergenerational focus)

- Funding Adequacy Ratio for Replacement of Infrastructure Asset
- Asset Consumption Ratio

You can find the Best Practice guide attached to this post.

Why not post a reply with your ideas on what Financial Indicators should be included in a "base set" for Local Government & why !!

[headford40]

To my mind, anyone running a business needs to keep their eye on the following:

a) Ensuring that there is enough money on hand to pay their creditors and employees’ leave liabilities promptly without undue reliance on overdraft and to cover inventories and debtors. In other words, working capital.

b) That receivables are kept under strict control

c) The Business Plan, to ensure that targets are being met and that any significant deviations are quickly identified and rectified in order to maintain the long term viability of the Business.

d) That proposed Capital Expenditures take into account the capacity of the business to fund the Capital Works and the ongoing maintenance, repair and operating costs of the asset.

Looking at the above and then comparing them to Ken’s suggested Financial Indicators (FIs), there seems to be a common thread related to:
Operational Liquidity
Fiscal Responsibility
Financial Sustainability

This thread is also maintained in the Financial Indicators contained in the snapshot of six different ‘takes’ on LG Financial Indicators that Ken included in the April 2010 Edition of ‘Debits and Credits’.

The attraction of many of these FIs is that they are readily understandable, measurable and appropriate to LG. I look forward to reading the contributions of others to this most important topic.

[Matthew Sykes]

Ken,

How is the Funding Adequacy ratio for replacement of infrastructure assets determined per page 22 of the APril 2010 LG Debits & Credits newsletter?

Regards,

Matthew.

[ken]

Hi Matthew,

The Funding Adequacy Ratio for the Replacement of Infrastructure (that we recommend) is based upon a combination of:

(i) Actual Expense on Infrastructure Assets &

(ii) the movement in amounts set aside for Infrastructure Asset Replacement during the current year on the NUMERATOR, &

(iii) Depreciation Expense in the Denominator.

A Ratio of => 1 indicates that the Council & Community are adequately paying for their use of Infrastructure over the year, while a ratio of < 1 indicates that the Infrastructure has deteriorated in excess of the contribution paid by the Council & Community in the year at hand.

Our Ratio differs from others around in that we think monies set aside in an Infrastructrue Replacement Reserve need to be taken into account as part of the assessement of whether Council & the Commmunity are "paying their way" (as far as Infrastructure Funding & Utilisation goes).

Most Infrastructure Funding/Sustainability Ratio's ignore any Reserve balances set aside & concentrate only on current capital expenditure which ignores the fact that not all infrastructure needs replacement today but that Councils can (& should) provide & set aside at least the depreciation charge now (that reflects their usage) & so this reserve funding should be recognised in the ratio!!

Otherwise a Council that sets aside no Reserve funding would rate the same as a Council that does where both spent the same on replacement Capex in the current year. As well, a Council that spent no funds replacing capex (in comparison to another Council that did) but which put aside an even greater baalnce for future replacement in a Reserve would be assessed as worse than the Council that spent less on Asset Replacement in the current yeear only because it did not spend the funds (& only set them aside!!) when in reality the Council (that set aside the reserve funds) should surely be assessed as better becasue it allocated more funds for asset replacement!!

Hope this helps...