Why does Council prepare a Long Term Financial Plan?
The Local Government Act 1999 requires Council to prepare a Long Term Financial Plan (LTFP) as part of its Strategic Management Plan. This means that members of the public are to be a given a reasonable opportunity to be involved in the development and review of the Council’s plan.
Council considers that its Long Term Financial Plan (LTFP) is a fundamental instrument of accountability and provides projections for Council’s planned activities over a ten year timeframe.
The key objective of Council’s LTFP is financial sustainability in the medium to long term, while still achieving Council’s corporate objectives as specified in its Strategic Plan, Corporate Plans and Functional Strategies. At the same time the LTFP ensures that there is an understanding of the impact of decisions made today on future sustainability. This means ensuring the cost effective delivery of works and services, and the appropriate maintenance and renewal of our asset base in a financially sustainable manner.
The purpose of this plan is not to provide specific detail about individual works or services. The LTFP provides a decision making tool that allows various assumptions and sensitivity analysis to be carried out that will indicate the ability of Council to deliver cost effective services to our community in the future in a financially sustainable manner.
A Council LTFP must contain estimated financials for a period of at least ten years. It should include estimates of the key ratios, operating surplus, net financial liabilities and asset renewal funding. This illustrates the expected long term financial performance of the Council, and hence whether financial sustainability is being achieved.
The model is a fluid document, continually reviewed, modified and refined as new information is discovered, usually at each Budget Review and during the construction and adoption of the annual budget.
How does Council prepare the plan?
The 10 year LTFP is prepared using a number of assumptions, with regard to projected rate income, projected fees, charges and grants and also includes assumptions about future operational and capital expenditure. Given that long term financial plans are derived from an estimate of future performance, it should be appreciated that actual results are likely to vary from the information contained in the LTFP.
The LTFP is based on a model which projects Council’s future financial performance based on a very large range of variables applied to its performance in recent years. Because there are a large number of variables the model is quite complex. In order to use it to guide each year’s budget setting process, the key variables have been divided into two groups:
» Controllable variables – items that Council can control such as service levels, capital expenditure, rate increases and wage increases
» Non-controllable variables – items outside Council’s control, such as interest rates, inflation and economic growth (eg. residential development, new businesses, etc).
For controllable variables, Council is able to model different levels of activity to see what effect they have on financial performance. The long term effects of each decision can then be assessed.
For non-controllable variables, the plan uses reasonable long term estimates which do not change (except to update them at the beginning of each budget cycle). In this way the impact of different choices about the controllable variables can be assessed. For instance, inflation measured by CPI has fluctuated substantially in recent years. Because inflation works differently on different elements of Council’s income and expense it can quickly and materially distort the LTFP, especially in its later years.
What key conclusions may be drawn from the plan?
Importantly the current LTFP demonstrates that the Council is financially sustainable over the 10 year term of the LTFP, whilst achieving the objectives outlined in the Strategic Plan. This includes:
» Implementation and funding of the appropriate level of maintenance and renewal of the portfolio of infrastructure assets
» Meeting the ongoing expectations of service delivery to our community
» Managing the impact of cost shifting from other levels of government
» Enabling the delivery of strategies identified within the Strategic Plan as well as other endorsed Functional Strategies
» The appropriate use of debt as a means of funding new capital expenditure
» Ensuring the financial sustainability of Council’s operations.
Financial sustainability has been demonstrated through adherence to the agreed target ranges in all of the following three key ratios:
1. Operating Surplus Ratio, target range 0% to 10%
2. Net Financial Liabilities Ratio, target range 0% to 100%
3. Asset Renewal Funding Ratio, (formerly titled Asset Sustainability Ratio) target range 90% to 110%
In achieving these targets, which are explained in more detail below, there is a level of certainty provided to the community that financial sustainability will be maintained.
How can I provide feedback?
The LTFP is available for inspection from 2 March to 27 March 2020 at Council’s Libraries and Community Centres, and on Council’s website ahc.sa.gov.au
Interested persons are invited to make a written submission by no later than 5.00pm, Friday, 27 March 2020. Submissions may be made online at engage.ahc.sa.gov.au, via post to PO Box 44, Woodside SA 5244 or email@example.com.
The results of the feedback provided will be discussed with Council and incorporated into the Final Long Term Financial Plan prior to consideration of the 2020-21 Annual Business Plan and Budget.