What is Financial Sustainability?
Financial sustainability measure a Council’s capacity to meet current and future expenditure as it falls due. It has several metrics that examine the different dimensions of a Council’s capacity to meet its current and future spends as they fall due. The different indicators are:
|Underlying result (per cent)||Adjusted net surplus/ total underlying revenue||A positive result indicates a surplus. The larger the percentage, the stronger the result. A negative result indicates a deficit. Operating deficits cannot be sustained in the long term.Underlying revenue does not take into account non-cash developer contributions and other one-off (non‑recurring) adjustments.|
|Liquidity||Current assets/ current liabilities||Measures the ability to pay existing liabilities in the next 12 months.A ratio higher than 1:1 means there is more cash and liquid assets than short‑term liabilities.|
|Self-financing (per cent)||Net operating cash flows/ underlying revenue||Measures the ability to replace assets using cash generated by the entity’s operations.The higher the percentage, the more effectively this can be done.|
|Indebtedness (per cent)||Non-current liabilities/ own-sourced revenue||Comparison of non-current liabilities (mainly comprised of borrowings) to own-sourced revenue. The higher the percentage, the less able to cover non‑current liabilities from the revenues the entity generates itself.Own-sourced revenue is used (rather than total revenue) because it does not include capital grants, which are usually tied to specific projects.|
|Capital replacement||Capital expenditure/ depreciation||Comparison of the rate of spending on infrastructure with its depreciation. Ratios higher than 1:1 indicate that spending is faster than the depreciation rate.This is a long-term indicator, as capital expenditure can be deferred in the short‑term if there are insufficient funds available from operations, and borrowing is not an option.|
|Renewal gap||Renewal and upgrade expenditure/depreciation||Comparison of the rate of spending on existing assets through renewing, restoring, and replacing existing assets with depreciation. Ratios higher than 1:1 indicate that spending on existing assets is greater than the depreciation rate.Similar to the investment gap, this is a long‑term indicator, as capital expenditure can be deferred in the short term if there are insufficient funds available from operations, and borrowing is not an option.|
Dec 2012 Status:
The last 2 financial years indicate Monash City’s financial sustainability position, which has an overall low risk rating.
In the next cycle 2012/13 budget planning, the Defined Benefit Shortfall of $12.4 mio may lower aspects of:
- Underlying result indicator going red –ie Council is not generating enough revenue to cover operating costs (including the cost of replacing assets reflected in depreciation expense) ie incurring an operating deficit, or
- Liquidity indicator going red – having sufficient working capital to meet short-term commitments.
What this means is inevitable rate rises – how much and whether the 4 Years SRP plan already factored this superannuation liability needs public clarification. We will monitor this situation and report updates when available – click here for progress updates.