Finances

2019/20
NSW Overview

Operating Performance Ratio (%)


Operating Performance Ratio

The operating performance ratio measures a council’s achievement in containing operating expenditure within operating income. The benchmark for this ratio is 0% or greater.

An operating deficit occurs when total expenses are greater than total income (excluding all capital amounts). This includes a council’s day to day income and expenses. Total expenses include depreciation, amortisation and impairment.

In 2019-20, councils’ operating performance ratio results ranged from -35.3% to 28.4%.

Councils are encouraged to budget for surplus results and to take into account the condition and maintenance requirements of assets in this process. The ratio is calculated by total continuing operating revenue (excludes fair value adjustments, net gain/loss on sale of assets, net share/loss on joint ventures) excluding capital grants and contributions, less operating expenses, divided by total continuing operating revenue (excluding capital grants and contributions).


Financial Benchmarks 2019-20

State avg. Metro Metro fringe Regional Large rural Rural Benchmark
Own Source Revenue (%) 63.1 78 67 69 56 42 >60
Unrestricted Current Ratio (No.) 3.8 3.36 3.43 2.94 4.06 5.91 >1.5:1
Debt Service Cover Ratio (No.) 70.3 264.54 19.43 4.98 37.15 30.93 >2.0
Debt Service Ratio (%) 4.5 1.78 4.37 7.79 4.22 1.77 >0 <20%
Cash Expense Cover Ratio (Months) 13.3 12.38 14.75 13 13.66 14.02 >3.0
Rates & Annual charges outstanding (%) 6.9 4.42 4.81 6.79 8.08 9.65 <5 metro <10 rural

Own Source Revenue

Own source revenue ratio measures financial flexibility. It indicates the degree of reliance on external funding sources such as grants and contributions received by councils. A council has improved financial flexibility with a higher level of own source revenue. Own source revenue includes rates, annual charges and user fees and charges. The benchmark for this ratio is 60% or greater.

Councils’ own source revenue ratios ranged from 24.3% to 91.3% in 2019-20.

The ratio is calculated by total continuing operating revenue (excludes fair value adjustments, net gain/loss on sale of assets, net share/loss on joint ventures) less all grants and contributions divided by total continuing operating revenue (excludes fair value adjustments, net gain/loss on sale of assets, net share/loss on joint ventures) inclusive of capital grants and contributions.

Unrestricted Current Ratio

The unrestricted current ratio (UCR) measures the adequacy of working capital and the ability of a council to satisfy its obligations in the short term. It does not include externally restricted activities such as water, sewer or specific grants and contributions.

An unrestricted ratio of 4.45 means that council has $4.45 in unrestricted current assets to meet each $1.00 of unrestricted current liabilities. A ratio of less than 1.5 is considered unsatisfactory and could indicate, along with other financial indicators, that the council may face some financial risk.

For 2019-20, councils’ UCRs ranged from -0.3 to 21.5.

The ratio is calculated by current assets less all external restrictions divided by current liabilities less specific purpose liabilities.

Debt Service Cover Ratio

This ratio measures the availability of operating cash to service debt including interest, principal and lease payments. Councils have approximately twice as many financial assets as they do outstanding borrowings. The benchmark for this ratio is greater than 2.0.

A high ratio indicates the council has significant capacity to repay debt.

For 2019-20, councils’ debt service cover ratios ranged from 0 to 5786.2.

The ratio is calculated by operating results (excludes fair value adjustments, net gain/loss on sale of assets, net share/loss on joint ventures) before capital, excluding interest and depreciation/impairment/amortisation divided by principal repayments (from Statement of Cashflow) and interest on loans.

Debt Service Ratio

The debt service ratio measures the proportion of general income that is used to repay debt and interest charges. Prudent and active debt management is a key part of councils’ approach to both funding and managing infrastructure and services over the long term.  It is considered appropriate for councils to hold some level of debt.  The benchmark for this ratio is greater than 0% and less than 20%.

For 2019-20, councils’ ratios ranged from 0% to 28.4%.  Six councils reported they have no debt.

Councils with low or zero debt may be placing the funding burden on current ratepayers when in fact it would be more appropriately spread across generations. The ratio is calculated by the cost of debt service (interest expense and principal repayments) divided by total continuing operating revenue (excludes fair value adjustments, net gain/loss on sale of assets, net share/loss on joint ventures) excluding capital grants and contributions.

Cash Expense Cover Ratio

This ratio indicates the number of months a council can continue paying for its immediate expenses without additional cash inflow. Benchmark for this ratio is greater than 3 months.

For 2019-20 councils’ cash expense cover ratio results ranged from 0.6 months to 38.1 months. The ratio is calculated by current year’s cash, cash equivalents and term deposits divided by payments from the cash flow of operating and financing activities, multiplied by 12.

Rates & Annual Charges Outstanding Ratio

This ratio assesses the impact of uncollected rates and annual charges on liquidity and the efficiency of councils’ debt recovery. Some councils may have agreements in place to assist ratepayers in an attempt to reduce the debt owed to council. The benchmark for outstanding rates is <5% for city and coastal councils and <10% for regional and rural areas.

Councils’ outstanding rates and annual charges ratios ranged from 1.6% to 21.1%. The amounts outstanding ranged from $180,000 for one council to $14.58 million for another. Total rates and charges outstanding for the sector was $427.2 million in 2019-20, compared to $361.2 million in 2018-19. This ratio is calculated by rates and annual charges outstanding divided by rates and annual charges levied by council.


Income Sources 2019-20 (%)

The major source of income for councils is rates and annual charges. This includes residential, business, farming and mining rates, along with any special rates charged by councils. Annual charges include domestic waste, other waste charges, water and sewer (where these services are provided by the council) and stormwater management.

User charges and fees include activities such as water usage, drainage, parking fees, caravan parks, leisure centres, child and aged care services, building and regulatory services and private works.

Expenditure 2019-20 (%)

Employee costs are the greatest expense to councils (38% on average) and include wages, salaries, leave entitlements, superannuation, workers compensation, fringe benefits and payroll tax.

Materials and contracts are also a large expense item for councils (27% on average). Materials and contracts consist of raw materials, contractor and consultancy costs, audit services and legal fees.

Depreciation is a non-cash expense that converts the capital cost of an asset into an operational expense. It reduces the value of assets as a result of wear and tear, age or obsolescence. Assets must be replaced or renewed at the end of their useful life.

The expenditure on depreciation indicates the amount of asset use that has occurred to the value of all council’s assets during the year. Average depreciation expenditure was 22% of total operating expenses in 2019-20. The result for individual councils varies significantly, from a low of 12% to a high of 41%.

Number of Councils with Operating Surplus/Deficit Results

Total operating income for all councils in 2019-20 was $12.4 billion ($15.3 billion including capital grants and contributions) and total expenditure was $12.5 billion, translating into a net operating deficit for the sector of $86.3 million. This compares to a total net operating surplus of $159 million in 2018-19.

The number of councils that have reported a net operating deficit before capital in 2019-20 was 60 with 68 councils reporting a net operating surplus. This compares with 70 councils reporting a surplus in 2018-19. Of those councils reporting an operating deficit, 57% reported deficits of greater than $2.5 million.

Operating deficit amounts for individual councils ranged from $12,000 to $83.8 million.


Rating Income 2019-20

$M

All rateable land within a council area is categorised into one of four categories – residential, farmland, business or mining. The Local Government Act 1993 sets out the criteria councils are to apply when determining the appropriate rating category for land. Councils may also sub-categorise parcels of land. Rating structures can be calculated in one of three ways:

  • entirely on the land value of the property
  • on a combination of the land value of the property and a fixed amount per property
  • entirely on the land value, but subject to a minimum amount

The relative contribution by rating categories varies significantly between councils, and is influenced by factors such as location, economic activity, council policies and land valuation.

Councils may increase their general rates income each year by the rate-pegging limit, which is determined by the Independent Pricing and Regulatory Tribunal (IPART). For 2019-20, the limit was set at 2.7%. The rate peg applies to a council’s total rating income, not to individual parcels of land. Rates for individual parcels will change depending on changes in the relative land value and the rating structure of a council. Councils may also apply to IPART for a rate increase above the rate-pegging limit.