Local government expert, John Comrie explains why a long-term financial plan is crucial to any entity with long-lived assets.

By Brian McCormack

John Comrie has headed both the Office of Local Government and the LGA in SA, been CEO of a large local government and a contributor to legislative reform. In 2006, he formed JAC Comrie and consults to local governments on their governance performance, financial strategies, accountability and service delivery. He is also main author of IPWEA’s Long Term Financial Planning Practice Note No 6 and designer of the IPWEA’s LTFP workshop program.

WHY IS AN EFFECTIVE LONG TERM FINANCIAL PLAN SO IMPORTANT TO LOCAL GOVERNMENT?
Because most services are generated from long-lived assets, in other words, assets that last a long time, but not forever. In some years they may require little or no maintenance, but in other years they might incur costly repair or renewal. So a long term financial plan (LTFP) lets an entity accommodate that “lumpiness” of funding needs. Essentially, it’s a roadmap that may not pinpoint each bump or twist along the way, but which gets you there in the end – provided that service levels are affordable over the life of the asset.

CAN YOU EXPAND ON THAT LINK BETWEEN ASSETS AND SERVICE LEVEL AFFORDABILITY?
It means forecasting what has to be spent on assets to provide a level of service, and then checking if funds will be accessible over time. But affordability is not the same as available cash, as a council may need to borrow funds at peak renewal times and repay the loan in a trough. So it has to ensure it can generate revenue in an equitable way from ratepayers, and that it has the capacity to finance those peaks. If it can’t, then current or proposed levels of service from assets may not be affordable and may have to be reduced. For instance, plans to build a second swimming centre may have to be shelved, or the re-sealing of a rural road network scaled back or delayed.

HOW DO YOU DETERMINE THOSE FACTORS?
The long answer is in IPWEA’s LTFP Practice Note 6 (http://www.ipwea.org.au/LTFP)! But in summary: First the asset manager determines the level of service to be provided and what assets will cost to operate and maintain to provide that service level, and when they need to be renewed to minimise whole of life asset management costs. Then the financial experts examine how the funds are to be raised over time. It needs smoothing out, because equitably, ratepayers should pay a relatively consistent amount, regardless of whether asset related outlays cost $10m one year or $1m the next. Budgeting based on accrual accounting enables this. If an asset is deemed to have a 50-year life, the share of the cost of the consumption of its service potential each year needs to be recognised as an annual expense. That's depreciation. So the financial people factor it in and calculate likely borrowing needs and the capacity to repay debt.

HOW HARD IS IT TO CALCULATE THE FUNDING?
It’s certainly not simple, but you shouldn’t get too bogged down in trying to forecast the uncertain or unknowable. For instance, it's now mandatory in most states for local governments to prepare 10-year asset management and long term financial plans. That’s good, because a 10-year plan focuses the attention on determining affordable, preferred service levels and assessing capacity to borrow funds when necessary. It also generates appropriate regard to intergenerational equity in revenue raising and service level decisions.

HOW OFTEN SHOULD YOU REVIEW AN LTFP?
It shouldn’t need amendment too often – an annual review at the time of developing the annual budget should suffice. This should be completed by a more thorough review at the time of reviewing major strategic plans, say every three to five years. The amendments are usually driven by things like service level preferences, new technology or radical cost changes. For instance, social change might mean adding a skateboard rink to a park, or climate change might mean switching to an alternate source of power for the provision of lighting in a facility.

WHAT’S THE NEXUS BETWEEN ASSET MANAGERS AND THEIR FINANCIAL COUNTERPARTS?
Well, provided both do their tasks efficiently they don’t have to constantly compare notes. But they can’t afford to remain in isolation either – and there is sometimes a tendency to do that. Essentially they are both on the same team with similar broad objectives, so there needs to be fairly regular interchange and review meetings. I must say, that in running the IPWEA’s current LTFP workshops, I was pleasantly surprised at how much both sets of managers have come to appreciate each others’ challenges. 

WHAT ELSE EMERGED FROM THE WORKSHOPS? 
Many councils were already using the practice note to guide development of a LTFP and had used the Excel model we developed. The model has shown users they have more capacity to address perceived asset management backlogs than they thought. By looking longer term, they see the merit of using debt as warranted and the impact of adjusting long-run service levels and revenue-raising decisions. 

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