Organisational Sustainability of Small Councils

1.2 Legislation and better practice

1.3 Roles and responsibilities

1.4 Previous audits

1.5 Audit objective and scope

1.6 Method and cost

1.7 Structure of the report

The report is structured as follows:

• Part 2 examines the financial position of councils
• Part 3 discusses sustainability issues, challenges and strategies
• Part 4 examines support, guidance, monitoring and reporting undertaken by LGV.

3.3 Organisational sustainability challenges, issues and planning

Councils should have a sound understanding of the sustainability challenges and issues they face, and develop and implement strategies to address these. Issues and challenges are generally identified in council plans, strategic resource plans, annual reports, annual budgets and rating strategies. There are a number of common sustainability issues and challenges across the audited councils, including:

• having effective financial planning and asset management
• effectively and efficiently delivering services
• recruiting and retaining qualified and skilled staff
• dealing with the impact of population ageing and/or population changes
• dealing with the defined benefits superannuation shortfall.

3.3.1 Long-term financial planning

Effective long-term financial planning is crucial to sustainability and is particularly important for councils that are responsible for managing and generating service from a large stock of long-lived assets relative to their annual income. Councils need to deliver services that meet community needs in a financially sustainable manner, and plan for the needs of current and future generations. In the past, councils have relied on a short-term financial planning horizon, which was essentially limited to the annual budget processes. This approach limits councils' ability to adequately plan for their long-term financial sustainability.

Better practice

A long-term financial plan expresses in financial terms the activities and level of services that a council proposes to undertake or provide over the short, medium and long term to achieve the objectives in its council plan. It should guide future strategies and confirm that the council can remain financially sustainable.

It is not mandatory in Victoria for councils to develop a long-term financial plan and there is no existing statewide guidance to assist councils. However, in January 2012 the Commonwealth Government released a better practice guide (Institute of Public Works Engineering Australia Practice Note No. 6 – Long-Term Financial Planning – Version 1.0, January 2012). Based on this guide, a long-term financial plan:

• is a high-level document that can be easily understood by the community, rather than a series of complex spread sheets—although councils may develop these for internal use
• includes a brief narrative overview to help the reader understand the purpose of the plan, the basis of its preparation and the key conclusions that can be drawn from the financial data
• has robust and reliable financial data at a summary level based on accrual accounting financial statements, including projected income and expenditure, balance sheet and cash flow statement—accrual accounting is important for financial sustainability since it measures the performance and position of a council by recognising economic events regardless of when cash transactions occur to give a more accurate picture of the current financial condition
• has a clear financial strategy on which the plan is based, such as a rating strategy and borrowing strategy, for achievement of financial sustainability
• has a small number of key performance indicators for measuring financial sustainability that are relevant and appropriate—a relevant indicator has a logical and consistent relationship with the plan's objectives and an appropriate indicator is one that is underpinned by sufficient information to assess its achievement against objectives, outcomes and outputs—and include targets that are clearly linked to objectives
• has a sensitivity analysis that highlights key factors most likely to materially impact on the achievement of the plan's financial targets, such as anticipating a significantly high level of population growth in its area which may affect operating revenue and expenses
• is integrated with a council's asset management and capital works statement—see Section 3.3.2 Asset management planning
• is reviewed and updated at least annually
• is publicly reported.

Assessment of current plans

Golden Plains developed a long-term financial plan in 2006, while Buloke, Strathbogie and Towong developed their plans in the past two years. Yarriambiack has committed to developing a long-term financial plan in its last three annual budgets, but has not yet done so. While Yarriambiack advised that it prepares 10 years of financial projections as part of the development of its strategic resource plan, these do not contain the key elements of a long-term financial plan. Yarriambiack advised that it plans to engage an external party to develop a long-term financial plan.

Figure 3A summarises our assessment of existing council long-term financial plans against key attributes from the Commonwealth Government better practice guide, which sets out the recommended elements of a long-term financial plan.

Figure 3A
Assessment of long-term financial plans against better practice

Source: Victorian Auditor-General's Office.

Golden Plains and Strathbogie's plans are high-level, stand-alone documents that are publicly available, while Buloke's plan is incorporated into the council's strategic resource plan. Towong's plan consists of a series of spread sheets and, while four years of financial projections from the plan were reported in its strategic resource plan in the annual budget, the rest of the plan is not publicly available.

All of the plans contain the recommended financial data at a summary level based on accrual accounting financial statements, except Golden Plains which does not include a cash flow statement. Without this, it is difficult to measure some performance indicators, such as cash balance and discretionary retained earnings.

Buloke, Golden Plains and Strathbogie's indicators measure factors that define financial sustainability; including, operating surplus and underlying result. However, only Strathbogie's indicators are relevant and appropriate as they have a logical and consistent relationship with the plan's objectives. Strathbogie's is also the only plan that contains clear targets against indicators—such as those for asset renewal investment and borrowings—although it does this for only two of the six indicators. Buloke uses a large number of indicators, which could make it difficult for decision‑makers and stakeholders to interpret results and gain a clear understanding of outcomes or the council's position.

It is important that monitoring, evaluation and reporting of performance indicators is conducted routinely and remedial action is taken where performance targets or expected results are not achieved. Most of these plans have only recently been developed, so it is too early to say whether councils are doing this. The plans do not provide any information about whether the councils propose to review and/or report publicly on these indicators and if so, how often.

All of the councils have reviewed and updated their plans at least annually. However, they have not explained in their plans what, if any, changes have been made from the review process. For example, Buloke deleted, without explanation, one of the 2011‑12 plan's objectives to 'achieve a break even operating result within five years'. Buloke has advised that this objective was removed due to substantial costs relating to flood recovery impacting on the council's ability to achieve it. However, removing the objective without providing an explanation reduces transparency and does not represent good practice in performance monitoring and reporting.

While the plans, particularly Strathbogie's, reflect a number of better practice elements, work is needed by all councils to address deficiencies, and effectively plan their finances from a long-term perspective to support their sustainability.

3.3.2 Asset management planning

Effective asset management planning is also crucial to long-term sustainability. Councils' infrastructure assets represent a vast investment that has been built up over many generations and includes roads, bridges, drainage, buildings, parks and recreational facilities. Assets are acquired for their service delivery potential, so service delivery needs should form the basis of all asset management practices and decisions.

Robust asset management planning is required for councils to effectively manage their significant stock of assets. This planning is necessary to guide the scheduling of maintenance, refurbishment, renewal and replacement of assets and to achieve specific service levels, while minimising asset life cycle costs. Asset management plans should also set out expenditure projections as input for the long-term financial plan. Councils have more than one asset management plan because they generally develop separate plans to cover each major asset class.

A standard statement of capital works sets out actual against planned capital expenditure that relates to larger assets, including property, plant and equipment.

Current status

All of the audited councils had asset management policies, strategies and plans, and have made efforts to improve asset management through training and support programs, such as participation in the Municipal Association of Victoria's Asset Management Improvement 'STEP' program. As part of this program, each council completed self-assessments of their asset and financial management, and used these to develop a prioritised improvement plan. These assessments indicate that there is still scope for improvement, particularly in relation to asset management plans.

Integration with long-term financial plans

It is important that asset management plans and capital works statements are appropriately integrated with long-term financial plans so that these needs are adequately considered in financial planning. Of the four councils with long-term financial plans, each committed in their asset management policy or strategy to integrate their asset management plans with their long-term financial plans.

A key aspect of integrating asset and financial planning is for councils to develop 10‑year expenditure projections in asset management plans and then use these to populate the capital works statements in the long-term financial plan. While all long‑term financial plans contain a capital works statement, which covers material assets and their expenditure forecasts over the next 10 years, none of the asset management plans contain up-to-date 10-year expenditure forecasts. Councils' asset management plans either contain out-of-date figures (Buloke and Strathbogie), short-term projections (Golden Plains), and/or plans are still under development (Towong, Golden Plains and Strathbogie). This provides limited assurance that each council's asset management requirements were appropriately considered in developing the figures in the capital works statements. However, Buloke has advised that its plans have not been updated due to uncertainty related to the timing of funding for flood recovery.

3.3.3 Efficient and effective service delivery

Councils deliver a wide range of services to their communities. Some local government service delivery is mandated or unavoidable—for example, statutory obligations—while some is essentially discretionary to meet the needs of communities, such as providing swimming pools and family day care. Even within the context of necessary expenditures, there is scope to decide what the appropriate nature of the service and service levels should be.

Service reviews

The Local Government Act 1989 requires councils to provide services in accordance with the Best Value Principles, which include considering service cost and quality standards, value for money, and community expectations and values. The principles also call for balance between affordability and accessibility of services.

Councils should conduct regular service reviews in accordance with the Best Value Principles to assess the effectiveness and efficiency of their services, and to take action where necessary so that their services continue to meet the community's needs and prevent creating an unnecessary impost if inefficient.

Other than narrow reviews of specific services, such as to identify cost savings, none of the audited councils have undertaken comprehensive reviews of the services they provide in accordance with Best Value Principles. They have also not reviewed service levels to assess the effectiveness and efficiency of service delivery. This provides limited assurance that expenditure on service delivery is informed by an adequate understanding of community needs or the effectiveness and efficiency of council services. Nevertheless, all councils have committed to maintaining existing services and the independent review of Buloke's finances found that the council's commitment to maintaining existing service levels was unsustainable.

Only Towong has completed a service review based on the Best Value Principles, but this was only for one service—the councils' records management service. This review was facilitated by LGV in June 2012 in connection with the Local Government Reform Fund and was part of the Building Best Value Capacity Project in collaboration with four other councils—Alpine, Campaspe, Indigo and Moira. This is discussed further in Part 4.3.

Other reviews by the audited councils have been primarily limited to cost analysis and do not constitute a comprehensive service review in accordance with Best Value Principles. Examples of the reviews conducted include:

• Towong recently secured funding from the state government through the Sustainability Fund for a Demand Reduction Program that is currently being undertaken with Indigo Shire Council. This aims to achieve environmental and efficiency savings of $250 000 per year and such a program could be replicated across other councils.
• Buloke has conducted a number of reviews of services to identify cost savings. In response to recommendations from the Inspector of Municipal Administration's review, it has committed to undertaking a comprehensive analysis of services, which it suggests will be progressively implemented as resources allow. This is based on the Inspector's finding that it is financially unsustainable to maintain existing service levels. Work will include a cost-benefit analysis of discretionary services to determine which should be ceased, deferred or continued.

Consulting with the community about service delivery

Councils use a variety of mechanisms to engage with their communities to provide feedback on services and projects. However, the community consultation that occurs tends to be related to new projects, infrastructure or proposed services that councils plan to deliver, or to seek feedback on the draft council plan. Councils could not demonstrate they had adequately sought, considered and analysed community needs in relation to council services when initially formulating their council plans.

Better consultation with communities on their ability and willingness to pay for both existing and new services and assets when developing council plans could be used to assess overall service delivery levels. This could help councils to determine required levels and to prioritise the delivery of services appropriate to the needs of communities. The current approach provides limited assurance that council plans adequately reflect residents' needs as the community is not involved in the initial development.

Strathbogie is currently conducting community consultation to inform the development of its council plan, which includes conducting a survey that asks respondents to rank council services in importance. However, it is too early to assess the effectiveness of this in prioritising services and informing overall service levels.

Shared services

All audited councils participate in shared services with either neighbouring councils or other organisations in their region. This includes both internal operational activities and the delivery of council services. These arrangements generally involve sharing a component of the activity or service, such as information sharing to plan services, or sharing a resource, rather than the full delivery of a service. The main current and proposed shared services arrangements and the councils participating in them are shown in Figure 3B.

Figure 3B
Main types of shared services at audited councils

Note: Some councils also use the same contractor to deliver services, but not through a formal arrangement and this is not considered a shared service. These types of arrangements are not included in the table.

Source: Victorian Auditor-General's Office based on information from audited councils.

The necessary rationale for councils adopting shared services is generally not clearly documented and is therefore difficult to assess. Although it is reasonable to expect there to be savings and efficiencies through sharing these activities, there have been no evaluations of the arrangements and so the extent of this is not known. Therefore, it is not clear that sharing these services is improving the sustainability of these councils. With some exceptions, such as libraries, these arrangements are not mature or undertaken on a large scale.

3.3.4 Recruiting and retaining qualified and skilled staff

Small councils in regional and rural areas can face challenges in attracting appropriately qualified and skilled staff and may also experience difficulty in retaining staff. A council's location within the region and its proximity to large regional towns can also affect this.

This can be a particular problem when positions that are hard to fill and have a high turnover are critical to service delivery and council operations.

The State Services Authority (SSA) has identified common challenges for the public sector located in rural and regional Victoria, which also apply to small councils, including:

• a low interest or even no response to particular job advertisements
• a reliance on people needing to relocate to take up critical roles
• prospective candidates being unfamiliar with their region or living in a regional and rural area
• negative perceptions of rural and regional living
• no local tertiary institutions supplying graduates with the required qualifications
• private and not-for-profit organisations offering more attractive remuneration or conditions
• partners of applicants or new staff needing to find work in the area
• limited accommodation for staff or few options that meet their expectations.

Strategies

Workforce planning is one strategy that may assist councils to identify workforce needs, the barriers to attracting and retaining staff, and approaches to address the problem. SSA's 2006 Workforce Planning Toolkit for small to medium sized Victorian public service organisations recommends that a workforce planning framework include the following six elements:

• workforce analysis—analyse the workforce against organisational direction, internal workforce characteristics and capabilities, external labour market and environmental factors
• forecast future needs— identify future business needs, scenarios and workforce characteristics and capabilities
• analyse gaps— identify and analyse the gaps between future workforce needs and current workforce profile
• develop strategies—develop integrated business and human resources strategies to address the gaps between current and future workforce needs
• implement strategies—invest in strategies and change management processes to address workforce planning issues
• monitor and evaluate—evaluate the effectiveness of strategies to determine success of planned changes and impact on business performance.

All audited councils except Yarriambiack identified recruiting and retaining appropriately qualified and skilled staff as an issue, and some councils have implemented strategies to address these problems.

Golden Plains developed a workforce plan in 2009. This plan contains a number of elements recommended by the SSA's guide, including a workforce analysis, forecast of future needs, analysis of gaps and development of strategies. These strategies include succession planning for high priority positions, flexible employment arrangements, and working with regional universities to identify engineering students interested in a career in local government. However, there is no evidence that these strategies have been implemented or evaluated for their effectiveness. While there have been no formal evaluations of the plan itself, council advised it has been effective in informing decisions about staffing levels when preparing the annual budget, identifying gaps, career planning for existing staff, and potential replacement of key staff—due to pending retirement, for example.

Strathbogie completed an organisational review in January 2011, which included voluntary redundancies, the creation of several new positions and the development of a new organisation structure. The review recommended that Strathbogie develop a workforce plan, initially for outdoor staff, and then the whole organisation. However, council has not yet done so.

Councils also outsource positions, including statutory roles, such as building surveyors and planning officers. Councils advised that these positions can be difficult to fill and that this may be due to the remuneration offered being uncompetitive in the current employment market, applicants not wanting to relocate to regional areas, or only requiring part-time positions for these professions. While Yarriambiack advised that staff recruitment was not an issue, they also outsource these statutory positions. Outsourcing may address the issue in the short term, and maintain ongoing service delivery, however, councils have not assessed whether this is more cost effective than employing staff directly. It is also not addressing the core problem of recruiting and retaining staff and may not be sustainable in the long term.

3.3.5 Population ageing and/or population changes

Population ageing and/or population changes—such as high growth or decline—can present challenges to small councils. Population changes can impact on councils' rating base and change service delivery needs. Population decline can also result in higher unit costs of service delivery because of the fixed nature of some costs. Rapid population growth can place significant financial pressure on councils to put new or expanded services in place. Given declining and ageing populations, continuing to increase rates and charges may not be sustainable for some councils.

Figure 3C summarises the trends and forecasts in population changes for the audited councils from 2001 to 2031. It shows that with the exception of Towong, there are consistent trends for these councils across the 30-year period of either increasing (Golden Plains and Strathbogie) or decreasing (Buloke and Yarriambiack) populations.

Figure 3C
Past, current and projected populations, 2001 to 2031

Source: Victorian Auditor-General's Office.

Buloke and Yarriambiack have ageing populations, which together with population decline, raises particular sustainability issues for these councils. Growth rates in Golden Plains will result in it no longer being classified as a small council in the future.

Strategies

Buloke has developed a draft Positive Ageing Strategy 2013–19 to guide it in responding to the projected rapid growth of its aged population, but it does not address continuing population decline. While Yarriambiack had a 2009–12 Economic Development Strategic Plan that aimed to promote economic development in the shire, this plan contains limited analysis on population decline and does not directly link actions to address this issue.

Golden Plains has implemented strategies to deal with both a growing and ageing population. The council's 2012–16 Ageing Well in Golden Plains Strategy and Action Plan provides a detailed analysis of the shire's population demographics. The main aims of the plan are to enable the council to effectively respond to population growth, and to inform the direction, development and delivery of its aged services and programs. To assist in meeting growth in the number of young families, Golden Plains has implemented service improvement plans for kindergarten clusters and maternal and child health services.

Strathbogie is currently developing an Economic Development Master Plan 2013–17 to guide the future of economic development in the shire. The plan is expected to include strategies to promote consistent population growth.

Towong has investigated opportunities to encourage population growth in specific localities—Peninsula area, Corryong and Tallangatta—and developed a number of long‑term strategies for individual township development, including Tallangatta Tomorrow (complete), Our Bellbridge (project underway), and Upper Murray 2030 (funds committed but not commenced).

The strategies discussed above are relatively new or in development and have not been evaluated or reviewed, therefore it is not yet possible to assess their effectiveness in dealing with the population issues the councils are facing.

3.3.6 Defined benefits superannuation shortfall

As discussed in Part 2.3.3, funding calls to address shortfalls in the councils' defined benefits scheme has impacted on councils, and different strategies have been adopted by councils based on the super fund's (Vision Super) payment options to meet their liability. The impact of this shortfall highlights the vulnerability of small councils to unplanned events and their limited capacity to absorb impacts of this magnitude without compromising financial sustainability.

The payment of the shortfall could potentially result in additional borrowings, changes to service delivery, increases in rates, and the deferral of capital projects. While all audited councils noted the shortfall payment in their annual budget, only Buloke and Strathbogie made information publicly available about the financial impact of the payment on council. Buloke indicated there would be delays in some planned projects of at least 12 months and some changes to service delivery plans. Strathbogie does not expect a noticeable impact due to several grant applications for capital works projects being unsuccessful, which made funds the council had set aside to contribute to these projects available to pay the liability. Yarriambiack has only recently made a decision on its payment strategy. Figure 3D shows each council's liability as a percentage of total rates revenue and their strategy to address the liability.

Figure 3D
Council strategies to address superannuation funding shortfall

Source: Victorian Auditor-General's Office based on information from audited councils.

The Municipal Association of Victoria identifies that there are actions councils could take to reduce future calls on councils, such as making greater efforts to set aside capital that could be used to top up the scheme, and being mindful of the impact that large employee pay rises have on increasing the size of the benefit.

3.3.7 Effectiveness of strategies

Most existing performance indicators of the audited councils relate to financial sustainability and performance and asset management. Councils do not have relevant and appropriate performance indicators for specific actions or to measure sustainability beyond financial parameters. The material impact of specific actions and strategies adopted by councils on their sustainability is unclear. Strategies have either only been recently implemented, or councils have not undertaken adequate monitoring, reporting and evaluations of actions and the outcomes achieved to determine their impact.

For all of the audited councils, a small number of sustainability strategies are linked to performance measures in the council plan, such as the development of long-term financial plans or strategies to deal with population issues. These measures relate to developing the strategies themselves and not their effectiveness, and they do not constitute relevant and appropriate performance measures.

Recommendations

1. Councils should clearly identify and publicly report their sustainability challenges and associated strategies and actions, including how they will monitor, report and evaluate their effectiveness, using relevant and appropriate performance indicators.

2. Yarriambiack Shire Council should develop a long-term financial plan and all councils should update their existing plans in accordance with better practice.

3. Councils should review service planning and delivery in accordance with Best Value Principles as a priority, including:

• assessing overall service delivery levels to determine appropriate levels and provide the rationale for their decision
• consulting with their communities on their ability and willingness to pay for desired services in the development of the council plan
• developing a plan to regularly review all services over time.

4.2 Conclusion

4.3 Guidance and support to councils

While LGV does not have strategic priorities targeted specifically to the organisational sustainability of small councils, a number of priorities in its 2012–13 business plan are directly relevant to small councils and sustainability, including to:

• strengthen the capacity of the sector to plan strategically with the community and allocate available resources in a sustainable manner
• strive for long-term financial sustainability in the sector with growth in revenue raising levels matched to each municipality's demand for services and consideration of their capacity to pay.

Under the plan, LGV is accountable for 28 key deliverables that will contribute towards the achievement of the strategic priorities, including the delivery of various programs and the development of the local government performance reporting framework.

LGV provides a range of guidance and support to councils broadly related to sustainability. This includes issuing better practice guides covering areas, such as asset management, procurement and Best Value service delivery, including:

• Asset Management Policy, Strategy and Plan (2004)—guidelines for developing an asset management policy, strategy and plan

• Victorian Local Government Best Practice Procurement Guidelines (2013)—guidelines for dealing with the procurement cycle (planning, implementation, management and performance evaluation), reporting on procurement and meeting obligations under the Act

• A Guide to Achieving a Whole of Organisation Approach to Best Value (2006)—designed to assist in developing or enhancing formal or informal improvement and planning frameworks to effectively incorporate the Best Value Principles—developed in partnership with Local Government Professionals (LGPro) Corporate Planner's Network and the Best Value Commission.

The Asset Management Policy, Strategy and Plan and A Guide to Achieving a Whole of Organisation Approach to Best Value guides were developed several years ago and need to be reviewed. The 2006 Best Value guide is currently under review, and LGV advised that the 2004 asset management guidelines will be reviewed and updated in 2014.

LGV has initiated a number of strategies and programs aimed at sustainability that involve or apply to small councils. These include:

• Building Best Value Capacity—working with 10 regional and metropolitan councils to conduct Best Value service reviews of records management and customer service. Three small councils (Alpine, Indigo and Towong) were involved in the program. Project outcomes included the delivery of Best Value reviews, enhanced knowledge and skills in conducting Best Value reviews, and review and update of guidance. Legislative reform is also being considered in response to participating councils identifying a lack of clarity and definition in Best Value legislation as a barrier to conducting Best Value reviews.
• Procurement in Practice—working with five councils (including the small councils of Ararat, Golden Plains, Hepburn and Pyrenees) to undertake a collaborative procurement of their bituminous resealing programs. This is anticipated to result in potential cost savings of $3.1 million over five years if all participating councils elect to take up the contract options. Other program outcomes include procurement tools and templates being made available to the sector and project learnings informing the update of the 2012 guidelines.
• Asset Management, Financial Planning and Performance Measurement project—a research-based project that commenced in 2012, which will assess the quality of data and decisions that have been driven by asset management and financial planning programs across Victorian councils.
• Local Government Performance Reporting Framework—discussed in Part 4.4.
• A review of the status of asset management practices in Victorian local governmentsb>—the review was commissioned in October 2012. A discussion paper developed from this review will be the subject of five regional forums to inform the development of a strategic plan to guide a refocusing of asset management efforts across Victorian councils.

While LGV conducts evaluations of its programs, these could be improved. For example, LGV could collect information from participating councils to assist in determining the effectiveness and suitability of its program for individual councils and to inform the development of future programs.

LGV also works in partnership with peak and industry bodies on strategies and programs. Examples are described in Figure 4A.

Figure 4A
Strategies and programs delivered by Local Government Victoria in partnership with peak and industry groups

Source: Victorian Auditor-General's Office.

While LGV are involved in a number of programs relevant to supporting council sustainability, this audit identified a number of common issues across councils that may require more targeted support and guidance and/or coordination by LGV. These include the recruitment and retention of suitable staff, development of long-term financial plans, and dealing with population change. There is a range of guidance available outside of government, but LGV could play a more proactive facilitation role.

The Department of Planning and Community Development should:

1. review and update its asset management guidance

2. consider making the development of a long-term financial plan mandatory and provide support and guidance in the development of these

3. routinely review the guidance and support it provides so that it is aligned with areas of highest need and addresses gaps in councils' capability and capacity

4. expedite implementation of the planned local government performance reporting framework and make sure it includes appropriate sustainability indicators.

RESPONSE provided by Towong Shire Council