Reading The Signs

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Larry OConnor
Reading the Signs
Summary Report of Key Findings

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Reading the Signs
Summary Report of Key Findings

Author:
Larry OConnor, May 2014

Contact details:
Correspondence: Larry OConnor
PO Box 299
Merbein, VIC 3505

Suggested citation:
OConnor, L.F. 2014, Reading the Signs Summary Report of Key Findings, Merbein, Victoria.

Larry OConnor 2014
All rights reserved.

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Disclaimer

This report has been produced in the interests of clear, open, and informed community
debate about what is a significant issue for the Mildura community. As such, I wish to
formally assert that the following report has been produced in the public interest and at no
point in time have I ever sought to soil the character or good reputation of any persons
connected directly or indirectly by employment or other means of association with the
Mildura Rural City Council or persons or parties involved in the public debate surrounding
the Mildura Rural City Councils Budget 2013/14 and associated public debate surrounding
the Mildura Rural City Councils rating strategy, regardless of the stance that any such
persons or parties may have taken in this debate, and regardless of the nature or extent of
involvement that any such persons or parties have had or may have had with the Mildura
Rural City Council or any particular organizations via employment or otherwise
commercial, non-commercial, public, political or other - connected directly or indirectly to
the Mildura Rural City Council and/or debate in question.

In addition, the views and opinions expressed in this report are entirely those of the author
who has a genuine interest in informed public debate on matters of significance to the
Mildura community and do not reflect, and nor should be taken to reflect, the views and
opinions of La Trobe University nor any of the Universitys employees, students, associates,
agents or other stakeholders.

In service to the community of Mildura.

Larry OConnor
Colossians 3:23-24.
February 2014.

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Caveat A note on financial modelling

The analysis presented in this report has at times been based financial modelling, the data
for which was sourced from an extensive review of publicly available data. Whilst all due
care has been taken when developing the financial modelling used for the analysis
presented in this report, it must be noted that all financial modelling is based upon
assumptions and relationships that may not hold equally true in all specific instances to
which the modelling may be applied. Like all financial modelling, the findings generated are
only valid to the extent that the assumptions underlying the modelling hold true. In all
cases the author has disclosed any assumptions that have been made so the reader can
form their own assessment about the legitimacy of the modelling presented.

The author is of the view that the modelling contained herein is robust and defendable.
However, the reader is encouraged to examine the report as presented, the validity of the
modelling and data upon which the modelling has been based, with the view to forming
their own conclusions about the validity of the findings as presented in this report.

In the interests of clear, open, consultative and informed community debate about what is a
significant issue for the Mildura community.

Larry OConnor
February 2014.

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Authors note in relation to the numbering of sections, tables and figures throughout this
report

The readers attention is drawn to the numbering system used throughout this report:

Tables and figures have been numbered with three numbers in the format - X.X.X.

For example: Figure 7.4.12.

The three numbers refer to the following:

- The first number (7) refers to the chapter in which the table or figure is located. In the
above example, this would be Chapter 7;

- The second number refers to the Part or Section of the chapter in which the table or
figure is located. In the above example, the 4 refers to Part 4 of Chapter 7;

- The third number refers to the number of the table or figure within each chapter Part or
Section. In the above example, 7.4.12 means that the table or figure is the 12
th
table or
figure in the 4
th
Part of Chapter 7.

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Reading the Signs Overview of Report Contents

Chapter Title / Topic
1 Background: An overview of some key issues in the Victorian Local
Government sector
2 Overview: Approach to subject matter, Data Sources and Methodology
3 An historical review of the MRCCs performance in the context of the
Victorian Local Government sector (2005-10)
4 Mildura Rural City Council: Long-term Financial Ratio Analysis
5 A review of the Mildura Rural City Councils financial performance relative to
the Regional and Rural City peer group 2007/08-2011/12
6 A review of the Mildura Rural City Councils financial performance relative to
the Similar Size Council peer group 2007/08-2011/12
7 Re-thinking the notion of financial sustainability within the context of the
Victorian Local Government Sector
8 An analysis of the MRCCs debt strategy: Part 1 & Part 2
9 Developing a risk profile for the MRCC
10 28 Issues of Concern: Part 1, Part 2 & Part 3
11 A review of the MRCCs rating strategy with recommendations going
forward: Part 1 & Part 2
12 A sustainable budget strategy for the MRCC
13 Introducing metered parking services across the Mildura CBD and 15
th
Street
retail precinct: An evaluation
14 Summary of key findings and recommendations by individual chapter
Appendices

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Chapter 14 Summary of key findings and
recommendations by individual chapter

ABSTRACT
The purpose of this chapter is to present a chapter-by-chapter summary of the key
findings and recommendations reported in Chapters 3 13 of the Reading the Signs
report.

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Table of Contents

Chapter 14 Summary of key findings and recommendations by individual chapter ....................... 13
Summary of key findings Chapters 3-6 Combined ..................................................................... 17
A summary of the MRCCs actual and projected financial performance (2007/08-2016/17) - 10 key
facts and 32 key graphs ............................................................................................................... 19
10 key facts.............................................................................................................................. 19
MRCC - 32 key graphs .............................................................................................................. 25
Specific findings Chapter 3: Comparative Performance Evaluation of MRCC and Regional and
Rural Cities peer group (2005-10) ................................................................................................ 59
Specific findings Chapter 5: Comparative performance evaluation MRCC v Regional and Rural
City peer group (2007/08-2011/12) ............................................................................................. 67
Specific findings Chapter 6: Comparative performance evaluation MRCC v Similar Size Councils
peer group (2007/08-2011/12) .................................................................................................... 83
Summary of key findings Chapter 7 Re-thinking the notion of financial sustainability in the
Victorian Local Government Sector ............................................................................................ 101
Summary of key findings Chapter 8: A review of the MRCCs debt strategy with accompanying
recommendations ..................................................................................................................... 113
Key recommendations in relation to the MRCCs debt strategy .................................................. 141
Summary of key findings Chapter 9: Developing a risk profile for the MRCCs 2013/14 budget
projections ................................................................................................................................ 145
Summary of key findings Chapter 10: 28 Issues of Concern ..................................................... 157
Summary of key findings Chapter 11: A review of the MRCCs rating strategy with
recommendations going forward ............................................................................................... 175
20 Recommendations in relation to the MRCCs rating strategy ................................................. 193
Summary of key findings Chapter 12: Developing a long-term sustainable budget strategy for the
MRCC ........................................................................................................................................ 203
Proposed Sustainable Budget Strategy: Preferred Option ($000)........................................... 209
Proposed Sustainable Budget Strategy: Fall-back Option ($000) .......................................... 213
Key comparative graphs: MRCC Budget 2013/14 versus Proposed Sustainable Budget Strategy .... 217
14 Key (non-negotiable) Budget Principles for the MRCC ........................................................... 239
Summary of key findings Chapter 13: An evaluation of metered parking as a non-rate revenue
source ....................................................................................................................................... 241

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Summary of key findings Chapters 3-6 Combined

A summary of the key findings from Chapters 3 6 is presented in the following pages
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A summary of the MRCCs actual and projected financial performance (2007/08-2016/17) - 10 key facts and 32 key
graphs

10 key facts
A review of the MRCCs actual and projected financial performance over the 2007/08-2016/17 period resulted in the following 10 key observations:
Indicator Explanation Reference
1. Geographic
& Socio-
economic
- Geography The MRCCs municipality is the largest within the State of Victoria at 22 087 square kilometres
7.67 times the average municipality size of 2 881 square kilometres;
- Population The resident population of the MRCC municipality is 53 877 21.8 % less than the average for
Victorian municipalities (64 900);
- CIV Base - The MRCCs municipality-wide CIV base is $6 591 million 38.5 % less than the average of 18
other Regional & Rural Cities and Similar Size Councils (the G18 group of local Councils) ($10.713 million);
- SEIFA Index of Relative Advantage & Disadvantage The Mildura community is the 3
rd
most
disadvantaged community in the State of Victoria, and the most disadvantaged community in the G18
group of local Council areas.

Implication: The MRCC faces an underlying cost disadvantage and relatively low CIV-base both contribute to higher
rate levies across the municipality. This is a significant challenge given that the Mildura community is the 3
rd
most
disadvantaged community in Victoria.
Figure 1
Figure 2
Figure 3
Figure 4
2. Earnings
quality
- The MRCCs operating results have been dominated by capital grants and non-monetary (book entry)
items and adjustments although reported results have been compliant with Generally Accepted
Accounting Principles (GAAP) within the Local Government sector the MRCCs reported operating results
are fundamentally unreliable as an indicator of underlying operational performance.

Implication: The MRCCs reported headline operating results cannot be interpreted as an indicator of underlying
operational performance.
Figure 5
Figure 6

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10 key facts (Cont)
3. Operating
performance
- The MRCCs Underlying Surplus / (Deficit) less Capital Grants has been in a cumulative deficit since
2009/10 a scenario that is projected to continue through to at least 2016/17.
- The MRCCs Net Cash Flow from Operations has been deteriorating significantly since 2011/12.
- The MRCCs Net Cash Flow has deteriorated significantly since 2008/09 and there is no significant recover
projected during the budget forecast period.

Implication: The MRCCs operating performance has been in a consistent decline for much of the 5 years. This has
direct ramification for liquidity and debt due insufficient operating surpluses being available to fund on-going
operations.
Figure 7
Figure 8
Figure 9

4. Liquidity The MRCCs liquidity has deteriorated significantly during the post-2009/10 period:
- Current Ratio has deteriorated significantly during post-2008/09 period from 2.5 to 1.1 during the
budget forecast period.
- Holdings of Cash & Cash Equivalents have deteriorated significantly since 2011/12 and are currently
less than one half the sector averages to Regional and Rural City and Similar Size Councils.
- The only reason why the Current Ratio was above 1.0 as at 30 June 2013 was due to the fact that a $4.0
million loan over 10 years was raised on 28 June 2013 to replenish the MRCCs working capital and the
MRCC received an early payment of external grant monies from the Victorian Grants Commission
equivalent to $6.05 million (a total of $10.05 million) this money is designated for the 2013/14 financial
year but was included in the end-of-year results for 2012/13.

Implication: The MRCCs liquidity is bordering on high risk based upon the Victorian Auditor Generals current
financial sustainability indicators. The MRCC has projected a Net Cash Deficit of $11.7 million for 2013/14 with no
substantial Net Cash Flow surpluses for the remainder of the budget forecast period (2013/14-2016/17).
Figure 10
Figure 11

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10 key facts (Cont)
5. Indebtedness - The MRCCs indebtedness has increased significantly during the post 2010/11 period and is projected to
continue to increase throughout the budget forecast period even through there is projected to be a
significant reduction in projected capital expenditures;
- The cost of MRCCs annual debt servicing payments has increased by approximately 30 % in the last 3
years as annual principal and interest obligations increase in line with the MRCCs increasing
indebtedness;
- As of 30 June 2013 the MRCC was the 3
rd
most indebted local Council in the G18 peer group with debt
equivalent to 43.89 % of Rate Base;
- Significantly, the MRCCs average debt term is projected to increase to over 20 years during the budget
forecast period more than double the average debt term for the G18 peer group. This is resulting in a
significant increase in interest costs that must be carried by the Mildura community.

Implication: The MRCCs increasing indebtedness is a major problem that must be dealt with. It is symptomatic of a
local Council that is living beyond its means.
Figure 12
Figure 13
Figure 14
Figure 15
Figure 16
Figure 17
6. Capital
expenditure
&
Depreciation
- The MRCCs annual growth in depreciation allocations (0.95 %) is not keeping pace with the annual
growth rate in depreciable assets (4.37 %) this is leading to an under-allocation of depreciation on an
annual basis.
- During 2007/08-2011/12 the MRCCs depreciable assets grew by 21 % but annual depreciation allocations
contracted by 4.35 % - the MRCC was the only local Council in the G18 peer group where this was the
case the MRCC is clearly an anomaly in this regard.
- The annual short-fall in depreciation allocations is estimated to be at least $1.475 million per annum, and
up to $4.8 million per annum.

Implication: The MRCCs under-funding of depreciation is resulting in annual operating results being over-stated and is
contributing directly to its increasing indebtedness as monies that would otherwise be allocated to the funding of
future asset renewal and upgrade expenditures is being used to fund on-going operating activities. The under-
allocation of depreciation is essentially resulting in the MRCC living beyond its means.
Figure 18
Figure 19
Figure 20
Figure 21
Figure 22
Figure 23
Figure 24

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10 key facts (Cont)
7. External grant
funding
- Both annual operating grant funding and capital grant funding are declining as a percentage of Underlying
Revenue although in actual dollar terms operating grants are growing at an average annual rate of 1.3 %
see Figure 29;
- The significant decline in capital grant funding in 2014/15 is exacerbated by the fact that the MRCC has
been the beneficiary of historically unprecedented levels of capital grant funding during the 2010/11-
2013/14 period.

Implication: The MRCC is going to have to develop growth in alternative non-rate revenue streams in order to off-set
slow operating grant funding growth and contracting capital grant funding.
Figure 25
Figure 29

8. Operational
efficiency
Three key indicators are a cause for concern:
- Underlying Revenue per $1 of employee benefits shows a consistent downward trend for 2007/08-
2016/17 from $3.07 to $2.20. This compares unfavourably with the average for the Regional and Rural
Cities peer group of $2.82, and an average for Similar Size Councils peer group of $3.23;
- Employee Benefits as a percentage of Total Operating Expenses have demonstrated a consistent upward
trend during 2007/08-2016/17 from 36.76 % to 46.75 %;
- Employee Benefits as a percentage of Materials, Contractors and Service Costs have demonstrated a
consistent upward trend during 2007/08-2016/17 from 100.53 % to 154.20 %. This compares
unfavourably with the Regional and Rural City peer group average of 100.0 % and the Similar Size Council
average of 89.47 %.

Implication: The above figures indicate that the MRCCs Employee Benefits costs are significantly higher than they
should be given the size of the MRCC in terms of Underlying Revenue indicating the presence of over-staffing.
Figure 26
Figure 27
Figure 28

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10 key facts (Cont)
9. Growth - During the 2007/08-2016/17 period the MRCCs annual average Underlying Revenue growth rate has
been 2.79 %. The MRCCs annual average Total Operating Expenses growth rate has been 4.15 %. This
scenario is fundamentally unsustainable.
- Given contracting revenue streams, the MRCC must either take steps to increase revenue, reduce
expenditures, or a combination of the two.

Implication: An average annual growth rate in operating expenses that is greater than the average annual growth rate
in Underlying Revenue is unsustainable in the medium to long-term.
Figure 29
Figure 30
10. Composition
of revenue &
expenses
Two key observations can be made from the changing composition of the MRCCs revenue streams and expenses
during 2007/08-2016/17:
- The MRCCs Rate Base dependency is increasing significantly as non-rate sources of income contract.
Rate Base as a percentage of Underlying Revenue has increased from 47.7 % in 2007/08 to a
projected 64.8 % in 2016/17;
- Employee costs becoming increasingly dominant accounting for a projected 46.75 % of Total
Operating Expenses by 2016/17 compared to 36.8 % in 2007/08.

Implication: The MRCCs increasing Rate Base dependency is going to place increasing pressure on the MRCC to
increase rates by at least 5.0 % per annum into the foreseeable future just to maintain some semblance of Underlying
Revenue growth. In addition, the MRCCs stated policy of minimising the use of contract labour and maintain EFT staff
levels is a major factor contributing to the MRCCs Operating Expense growth rate being at 4.15 % per annum, which is
1.36 % greater than the annual average growth rate in Underlying Revenue.
Figure 31
Figure 32

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MRCC - 32 key graphs

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Figure 1 Victorian Local Government Sector: Local Government Area (LGA) Size (Square Kilometres)

Definition: Size of Victorian Local Government Areas (LGAs) based upon Square Kilometres.
Interpretation: The larger the number, the more geographically dispersed an LGA. Local Councils with large, geographically dispersed LGAs face potential
cost disadvantages (on a cost per unit of service delivery basis) due to lower concentrations of population and rateable properties. The exact extent to
which this may be the case is unknown.
Sector Average: 2881.
MRCC: 22 087 square kilometres 7.67 times larger than the Sector average. The MRCC LGA is clearly the largest LGA in Victoria, accounting for over 10 %
of the State of Victoria. The geographical dispersion of the municipality will have implications for the MRCCs underlying cost structure although the exact
extent to which this is the case is unknown.

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Figure 2 Victorian Local Government Sector: Estimated Resident Population by LGA (June 2010 ABS)

Definition: Estimated resident population of each local Councils Local Government Area (LGA).
Interpretation: Highlights the relative size of each local Councils responsibilities using LGA resident population as a proxy for demand for local Council
service provision. Councils with lower populations may not be able to exploit economies of scale and therefore there is a greater likelihood that the per
unit cost of Council service delivery will be higher.
Sector Average: 68 900.
MRCC: 53 877 21.8 % below the Sector average of 68 900.

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28

Figure 3 Victorian Local Government Sector: SEIFA Index of Relative Socio-economic Advantage and Disadvantage (2011)

Definition: Summarizes variables that indicate relative disadvantage. Index ranks areas on a continuum from most disadvantaged to most advantaged.
Interpretation: An area with a high score on this index has a relatively high incidence of advantage and a relatively low incidence of disadvantage.
Sector Average: 989
MRCC: 924. 6.57 % below Sector average.
MRCC Ranking: 3
rd
lowest in Victoria 77
th
of 79. This significance of this is in the Mildura communitys capacity to pay for local Council service delivery. All
other things being equal, on the basis of the SEIFA Index of Relative Advantage and Disadvantage, the Mildura community has the 3
rd
lowest capacity to pay
for local Council service delivery in the State of Victoria.

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29

Figure 4 Total Capital Improved Value (CIV) ALL Rateable Property Types - by Local Council ($ million)

Definition: Total Capital Improved Value of all property types against which rates are levied. Numbers in $million.
Interpretation: Higher total Capital Improved Values within an LGA means that lower rates can be levied to raise the necessary rate revenue to fund a local
Councils activities. Local Councils with lower total Capital Improved Value of rateable properties are at a significant disadvantage in terms of capacity to
raise revenue and therefore are compelled to levy higher rates accordingly.
Average: $10 713 million for G18 peer group. Average is $8 756 if Geelong is removed from analysis.
MRCC: $6 591 million 38.5 % below G18 average. MRCC is 24.7 % below G17 average (that is, G18 peer group less Geelong).
Evaluation: MRCC is at a substantial relative disadvantage in terms of capacity to raise revenue via rates due to total Capital Improved Value of rateable
properties being significantly below (38.5 %) the average of the 18 local Councils included in the analysis.

$-
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
$45,000
$50,000
30

Figure 5 Non-monetary Items and Capital Grants as a percentage of Headline Surplus / (Deficit)

Definition: [Non-monetary items + Capital Grants] / Headline Surplus / (Deficit)
Interpretation: The higher the number, the less reliable Headline Revenue is as an indicator of underlying operational performance.
Benchmark: 20.0 % - above which Headline Revenue a poor indicator of underlying operational performance.
MRCC Status (as at 30 June 2013): 112.54 % - Headline Surplus for 2012/13 is a poor indicator of underlying operational performance.
MRCC Trend: Improvement in ratio during 2013/14-2016/17 (projected) but significantly above benchmark.
MRCC v Benchmark: MRCCs reported Headline Surplus is significantly above benchmark throughout 2007/08-2016/17 period.
Significance: MRCCs reported Headline Surplus / (Deficit) is a poor indicator of underlying operational performance throughout 2007/08-2016/17.

19.23%
46.53%
38.45%
9.64%
64.46%
30.87%
6.65%
14.64%
16.98%
15.86%
10.02%
17.66%
65.61%
114.91%
34.88%
81.66%
91.39%
95.25%
80.80%
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29.25%
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104.06%
124.55%
99.35%
112.54%
98.04%
109.89%
97.78%
85.88%
0.00%
20.00%
40.00%
60.00%
80.00%
100.00%
120.00%
140.00%
2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17
Non-monetary
items
Capital Grants
Combined Non-
monetary items &
Capital Grants
Benchmark - 20 %
31

Figure 6 Comparison of Headline Surplus / (Deficit), Underlying Surplus / (Deficit), and Underlying Surplus / (Deficit) less Capital Grants

Definition: Underlying Surplus / (Deficit) = Headline Surplus / (Deficit) less Non-monetary (book entry) items.
Interpretation: Underlying Surplus / (Deficit) less Capital Grants is the preferred measure for underlying operating performance.
Benchmark: No prescribed benchmark.
MRCC Status (Projected as at 30 June 2013): Deficit = $(6.593) million.
MRCC Trend: Long-term trend for Underlying Surplus / (Deficit) less Capital Grants has been deteriorating since 2007/08.
MRCC v Benchmark: n.a.
Significance: MRCCs underlying operational performance deteriorated significantly during the 2007/08-2012/13 period. Underlying operational
performance is projected to be essentially breakeven over the budget forecast period. This is a major concern as the MRCC has no room to move in terms
of unexpected / unforeseen increases in costs or decreases in revenue. In addition, the MRCCs capacity to service debt has deteriorated significantly. The
MRCCs Underlying Surplus / Deficit less Capital Grants indicates that the MRCCs capacity to service increased debt without increasing revenue and/or
reducing expenditures has fundamentally evaporated.
$11,367
$15,570
$3,847
$7,250
$22,327
$18,826
$16,705
$3,367
$2,933
$3,172
$9,181
$8,326
$2,368
$6,551
$7,934
$13,014
$15,594
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$2,669
$8,042
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$146
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$328
-$333
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$448
-$5,000
$-
$5,000
$10,000
$15,000
$20,000
$25,000
2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17
Headline Surplus /
Deficit ($'000)
Underlying Surplus /
Deficit ($'000)
Deficit less Capital
Grants ($'000)
32

Figure 7 Underlying Surplus / Deficit less Capital Grants as percentage of Underlying Revenue less Capital Grants

Definition: Underlying Surplus / (Deficit) less Capital Grants / Underlying Revenue less Capital Grants.
Interpretation: Underlying Surplus / (Deficit) less Capital Grants is the true measure of underlying operational performance. Should be above 0.
Benchmark: 0.00.
MRCC Status (as at 30 June 2013): Deficit = -2.63 %.
MRCC Trend: Significant deterioration during 2007/08-2012/13. Projected to breakeven during budget forecast period.
MRCC v Benchmark: Below benchmark in 4 of 6 years during 2009/10-2014/15 period.
Significance: MRCCs underlying performance has fundamentally deteriorated during 2007/08-2012/13 period. Projected performance during budget
forecast period is breakeven with no room to move in the event of unforseen events / expenditures. In addition, the capacity of the MRCC to service debt
has deteriorated significantly at a time when the MRCCs indebtedness is increasing.

10.06%
6.62%
-0.19%
-2.22%
0.16%
-2.63%
0.38%
-0.37%
0.07%
0.45%
-4.00%
-2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17
(Deficit) as %
Underlying Revenue
Benchmark
33

Figure 8 Net Cash Flow from Operations as percentage of Underlying Revenue

Definition: Net Cash Flow from Operations / Underlying Revenue.
Interpretation: The higher the number, the better the performance.
Benchmark: RRC Average (2007/08-2011/12) 27.25 %. SSC Average (2007/08-2011/12) 27.04 %.
MRCC Status (as at 30 June 2013): 21.94 % - below RRC and SSC peer group averages.
MRCC Trend: Consistent deterioration during 2007/08-2016/17 period. Significant deterioration during budget forecast period.
Significance: MRCCs Net Cash Flow from Operations has been exhibiting a deteriorating trend throughout the 2007/08-2012/13 period. This is projected
to deteriorate further during budget forecast period.

26.70% 26.78%
26.16%
25.27%
34.93%
21.94%
26.73%
21.97%
21.08%
20.79%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17
NCF from Operations
as percentage
Underlying Revenue
RRC Average
(2007/08-2011/12) -
27.25 %
SSC Average (2007/08-
2011/12) - 27.04 %
34

Figure 9 Net Cash Flow as percentage of Underlying Revenue

Benchmark: RRC Average (2007/08-2011/12) 2.60 %. SSC Average (2007/08-2011/12) 1.45 % %.
MRCC Status (as at 30 June 2013): 4.61 % - above RRC and SSC peer group averages.
MRCC v Benchmark: Below RRC benchmark in 8 of 10 years during 2007/08-2016/17 period. Below SSC benchmark in 7 of 10 years during 2007/08-
2016/17 period.
Significance: MRCCs Net Cash Flow from Operations has been exhibiting a deteriorating trend throughout the 2007/08-2012/13 period. Poor Net Cash
Flows projected to deteriorate further during budget forecast period.

2.82%
3.91%
1.36%
-4.78%
1.54%
4.61%
-11.44%
0.37% 0.37% 0.37%
-14.00%
-12.00%
-10.00%
-8.00%
-6.00%
-4.00%
-2.00%
0.00%
2.00%
4.00%
6.00%
2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17
NCF as percentage
Underlying Revenue
RRC Average
(2007/08-2011/12)
2011/12)
35

Figure 10 Current Ratio

Definition: Current Assets divided by Current Liabilities.
Interpretation: Prima facie indicator of capacity to meet short-term financial obligations.
Benchmark: RRC Average (2007/08-2011/12) 2.24. SSC Average (2007/08-2011/12) 2.42. Auditor Generals High Risk benchmark 1.0.
MRCC Status (as at 30 June 2013): 1.73 Significantly below RRC and SSC peer group averages.
NOTE: Current Ratio at 30 June 2013 would be 1.22 if $4.0 loan on 28 June 2013 & bringing forward of $6.05 million in VCG funding from 2013/14 are
excluded from the analysis.
MRCC Trend: Consistent and significant deterioration during 2007/08-2016/17 period. During budget forecast period MRCCs Current Ratio is only
marginally above the Auditor Generals High Risk benchmark of 1.0.
MRCC v Benchmark: Below RRC and SSC benchmarks in 8 of 10 years during 2007/08-2016/17 period.
Significance: MRCCs liquidity has been deteriorating significantly throughout the 2007/08-2012/13 period.

2.43
2.53
1.64
1.76
1.38
1.73
1.07 1.08 1.08
1.10
0.00
0.50
1.00
1.50
2.00
2.50
3.00
2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17
Current Ratio
RRC Average
(2007/08-2011/12)
2011/12)
Auditor General - High
Risk Benchmark
36

Figure 11 Holdings of Cash and Cash Equivalents as percentage of Rate Base

Definition: Total Cash and Cash Equivalents divided by Rate Base.
MRCC Status (as at 30 June 2013): 54.83 % Below RRC and SSC peer group averages.
MRCC Status (as at 30 June 2013): If bringing forward of $6.05 million VGC funds from 2013/14 is excluded from the analysis = 42.35 % Significantly
below RRC and SSC peer group averages.
MRCC Trend: Consistent and significant deterioration during 2011/12-2016/17 period.

62.35%
66.88%
60.03%
56.77%
72.44%
54.83%
29.41%
28.69%
27.66%
26.68%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
80.00%
2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17
Holdings of Cash &
Cash Equivalents as %
Rate Base
RRC Average
(2007/08-2011/12)
2011/12)
37

Figure 12 MRCC: Actual Level of Indebtedness (Total Liabilities & Interest Bearing Debt) (2007/08-2016/17) ($000)

Actual and projected indebtedness (2007/08-2016/17):
Total Liabilities The MRCCs overall level of indebtedness has been consistently increasing since 2010/11. Projected Total Liabilities of $53.011 million
in 2016/17 is 51.13 % higher than $35.077 million in 2007/08.
Interest Bearing Debt The MRCCs indebtedness as measured by outstanding Interest Bearing Debt has been consistently increasing since 2010/11.
Projected Interest Bearing Debt of $26.304 million in 2016/17 is 59.05 % higher than $16.538 million in 2007/08.

$35,077
$36,750
$36,230
$32,797
$50,735
$47,271
$48,061 $48,097
$49,905
$53,011
$16,538
$18,075
$16,715
$15,286
$19,616
$23,133 $23,333
$22,735
$23,884
$26,304
$-
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17
Total
Liabilities
Interest
Bearing
Debt
38

Figure 13 MRCC: Actual & Projected Level of Indebtedness relative to Underlying Revenue less Capital Grants (2007/08-2016/17)

Commentary:
Relative to Underlying Revenue less Capital Grants, the MRCCs level of indebtedness increased significantly during the 2010-2012/13 period and the
data presented in the above graph indicates that the increased level of indebtedness has become the new tolerable norm for the MRCC with no
evidence of significant reduction throughout the budget forecast period.

43.87% 43.65%
44.70%
40.94%
56.51% 56.60%
55.12%
53.19%
52.70%
53.43%
20.68%
21.47%
20.62%
19.08%
21.85%
27.70%
26.76%
25.14% 25.22%
26.51%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17
Total
Liabilities as
%
Underlying
Revenue
less Capital
Grants
Interest
Bearing
Debt as % of
Underlying
Revenue
less Capital
Grants
39

Figure 14 MRCC: Impact of Increasing Indebtedness upon actual / projected annual finance costs (2007/08-2016/17)

Commentary:
The significant increase in the MRCCs interest bearing debt in 2011/12 (from $15.286 million to $19.616 million an increase of $4.330 million)
effectively increased the MRCCs actual / projected annual finance costs by approximately $450 000 - $500 000. The major reason for the actual /
projected annual finance costs remaining at a relatively consistent level during the 2012/13-2016/17 even though interest bearing debt is projected to
increase to $26.304 million by 2016/17 during this period is due to the use of longer loan terms as indicated in successive MRCC Budget documents.

$1,084
$1,024
$1,135
$1,047
$970
$1,440
$1,564
$1,452 $1,460
$1,529
$1,574
$963
$1,360
$1,429
$1,270
$1,483
$1,648
$1,598
$1,851
$1,580
$2,658
$1,987
$2,495 $2,476
$2,240
$2,923
$3,212
$3,050
$3,311
$3,109
$-
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17
Interest
Cost
Principal
Repayments
Total Debt
Servicing
Payments
40

Figure 15 MRCC: Estimated Weighted Average Debt Portfolio Term (Years) by year (2008/09-2016/17)

Commentary:
Based upon both the estimated average debt portfolio term and estimated weighted average debt portfolio term, the MRCCs estimated debt portfolio
term (in years) is trending upwards that is, the estimated average debt portfolio term is projected to get longer over the budget forecast period.

17.50 17.50 17.50
15.77
15.15
17.09
18.82
20.50
21.50
18.62 18.62 18.62
18.24
17.52
17.25
17.91
19.48
20.51
0.00
5.00
10.00
15.00
20.00
25.00
2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17
Estimated
Average Debt
Portfolio Term
(Years)
Estimated
Weighted
Average Debt
Portfolio Term
(Years)
41

Figure 16 Comparison with other local Councils: Interest Bearing Debt as % Rate Base

Definition: Total Interest Bearing Debt / Rate Base (Rates & Charges) as at 30 June 2013.
Interpretation: The higher the number, the more indebted a local Council is relative to its Rate Base.
G18 Average: 31.71 %.
MRCC: 43.89 % - 38.41 % above G18 average.
Evaluation: MRCCs indebtedness, as measured by total Interest Bearing Debt, is significantly higher than the G18 average. The MRCC is clearly the 3
rd

most indebted Council within the G18

0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
80.00%
90.00%
100.00%
42

Figure 17 Comparison with other local Councils: Estimated years to repay interest Bearing Debt

Definition: Total Interest Bearing Debt as at 30 June 2013 / Annual Principal Payments made during 2012/13.
Interpretation: A higher number indicates that a local Council is going to take a longer time to repay debt based upon 2012/13 principal payments..
G18 Average: 8.88 years. If Shepparton is excluded from the analysis G17 average is 7.11 years.
MRCC: 15.60 years 75.68 % above G18 average, 119.4 % above G17 average.
Evaluation: Based upon principal payments made during 2012/13, the MRCC is going to take significantly longer to repay its existing debt relative to the
G18 average. In essence this means that the MRCC is incurring significantly greater interest costs on its debt relative to the G18 peer group.

0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
45.00
43

Figure 18 Depreciation Allowance versus Depreciable Assets (Infrastructure, Property, Plant & Equipment)

Definition: Depreciable Assets (rounded to nearest $10 000) versus Depreciation Allowance (rounded to nearest $1000).
Interpretation: Generally, Depreciation Allowance should move in the same direction and by similar proportionate amounts as the movement in the total
book value of Depreciable Assets.
MRCC Status (Projected as at 30 June 2013): Marginal increase in Depreciation Allowance.
MRCC Trend: Absolute growth in Depreciable Assets over 2007/08-2016/17 period = 39.33 %. Absolute growth in annual Depreciation Allowance over
2007/08-2016/17 period = 8.59 %.
Average annual growth rate comparison: Depreciable Assets 4.37 %; Annual Depreciation Allowance 0.95 %.
Significance: The data suggests that Depreciation Allowance is being managed due to significant increases in depreciable assets not being matched with
similar proportionate increases in Depreciation Allowance which has significant implications for reported operating results which have fundamentally
been understated during the post-2009/10 period. In addition, annual Depreciation Allowance allocations will inevitably be insufficient to cover asset
renewal and upgrade expenditures going forward.

46107
45462
48472
47399
55930
60147
61495
62272
63180
64239
14975 15098 14710 15150
14323
15608
15050
15644 15950 16262
0
10000
20000
30000
40000
50000
60000
70000
2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17
Depreciable Assets
(IPPE) ($'0000)
Depreciation
Allowance ('000)
44

Figure 19 Average Depreciation Rate applied to Depreciable Assets (2007/08-2016/17)

Definition: Total Depreciation Allowance divided by Total Depreciable Assets (Infrastructure, Property, Plant & Equipment).
Interpretation: Generally, Depreciation Allowance should move in the same direction and by similar proportionate amounts as the movement in the total
book value of Depreciable Assets.
MRCC Status (as at 30 June 2013): 2.59 % - significantly lower than the average depreciation rate applied during 2007/08-2010/11.
MRCC Trend: Average Depreciation Rate being applied to depreciable assets has been consistently declining during post-2008/09. Of particular concern
is the clear reduction in the average depreciation rate in 2009/10, 2011/12, and 2013/14 (projected).
Significance: The data suggests that Depreciation Allowance is being managed due to significant increases in depreciable assets not being matched with
similar proportionate increases in Depreciation Allowance which has significant implications for reported operating results which have fundamentally
been understated during the post-2009/10 period.

3.25%
3.32%
3.06%
3.19%
2.56% 2.59%
2.45%
2.51% 2.52% 2.53%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17
Average Depreciation
Rate
45

Figure 20 Annual Depreciation Short-fall (2007/08-2016/17)

Definition: Total Depreciation Allowance less [Expenditure on Depreciable Assets (Infrastructure, Property, Plant & Equipment) + Capital Grants].
Interpretation: Any shortfall in Depreciation Allowance must be covered by existing cash reserves or new borrowings.
MRCC Status (as at 30 June 2013): Depreciation shortfall - $1.443 million. Moving average (2007/08-2012/13) - $1.475 million per annum.
MRCC Trend: With the exception of 2010/11 and 2014/15 (projected), there has been / is projected to be a consistent and significant annual depreciation
shortfall throughout 2007/08-2016/17. Of particular concern is the clear spikes in the depreciation short-fall in 2009/10, 2011/12, and 2013/14
(projected) three years in which there were also significant reductions in depreciation allocations (see Figure 4.5.3).
Significance: As noted, the under-allocation of Depreciation Allowance effectively means that monies that would ordinarily be set aside for funding future
capital works programs are made available and used for funding on-going operating activities. This amounts to an effective de-funding of capital
investment programs in order to fund annual operating activities.

$3,487
$1,968
$5,116
-$2,351
$7,404
$1,443
$8,240
$23
$2,190
$3,868
$3,487
$2,728
$2,361
$691
$1,011
$1,475
$1,383
$1,033
$246
$606
-$4,000
-$2,000
$-
$2,000
$4,000
$6,000
$8,000
$10,000
2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17
Annual
Depreciation
Shortfall
Moving
average
46

Figure 21 Cumulative Depreciation Short-fall, increasing debt & running down of cash reserves (2007/08-2016/17) ($000)

Definition: Cumulative Depreciation Short-fall, cumulative Interest Bearing Debt, and year-end holdings of Cash & Cash Equivalents.
Interpretation: Any depreciation short-fall must be funded via debt and/or existing cash reserves.
Note: Balance of Cash & Cash Equivalents at 30 June 2013 would be $22.848 if $6.05 million in VGC funding brought forward from 2013/14 is excluded from
the analysis.
MRCC Trend: Average Depreciation Rate being applied to depreciable assets has been consistently declining during post-2008/09. Of particular concern
is the clear reduction in the average depreciation rate in 2009/10, 2011/12, and 2013/14 (projected).
Significance: An inadequate Depreciation Allowance has significant implications for reported operating results which have fundamentally been understated
during the post-2009/10 period. Correlation between cumulative Depreciation shortfall and increase indebtedness = 0.9267. R
2
value = 0.8587.

$3,487
$5,455
$10,571
$8,220
$15,624
$17,067
$25,307 $25,330
$27,520
$31,388
$24,141
$27,530
$25,923 $25,691
$35,304
$28,898
$16,436
$16,788
$17,151 $17,530
$16,538
$18,075
$16,715
$15,286
$19,616
$23,133
$23,333
$22,735
$23,884
$26,304
$-
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17
Cumulative
Depreciation
Shortfall
Holdings of
Cash & Cash
Equivalents
Interest
Bearing Debt
47

Figure 22 Growth: Capital Assets (Infrastructure, Property, Plant & Equipment IPPE)

Note: Data for La Trobe for 2007/08 not available.
Definition of Measure: [Capital Assets (IPPE) (2011/12) / Capital Assets (IPPE) (2007/08)] - 1.
Interpretation of Measure: Indicates the absolute Capital Assets (IPPE) growth over the period 2007/08 2011/12. An average annual growth rate can be
calculated by dividing the absolute growth over the 2007/08 2011/12 period by 5.
G18 Peer group Average: Average absolute Capital Assets (IPPE) growth over 2007/08 2011/12 period 28.90 %.
MRCC Performance: 13
th
of 17 in terms of average absolute growth in Capital Assets (IPPE) over 2007/08 2011/12 period 21.31 %.

38.12%
23.58%
30.87%
51.64%
61.18%
21.31%
41.09%
31.27%
34.06%
37.77%
15.93%
1.94%
37.98%
16.21%
14.19%
22.87%
11.37%
28.90%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
48

Figure 23 Growth: Depreciation Expense (Infrastructure, Property, Plant & Equipment IPPE)

Note: Data for La Trobe for 2007/08 not available.
Definition of Measure: [Depreciation - IPPE (2011/12) / Depreciation - IPPE (2007/08)] - 1.
Interpretation of Measure: Indicates the absolute Depreciation - IPPE growth over the period 2007/08 2011/12. An average annual growth rate can be
calculated by dividing the absolute growth over the 2007/08 2011/12 period by 5.
G18 Peer group Average: Average absolute Depreciation - IPPE growth over 2007/08 2011/12 period 23.85 %.
MRCC Performance: Average absolute growth in Depreciation - IPPE over 2007/08 2011/12 period -4.35 %.
MRCC Ranking: MRCC is the ONLY Council in the G18 peer group to record negative absolute growth in Depreciation - IPPE during 2007/08-2011/12 period.
This is a major concern given that the MRCCs Capital Assets (IPPE) grew in absolute terms by 21.31 % during the same period see Figure 22. This suggests
that the MRCCs Depreciation IPPE provisions have been fundamentally under-stated / inadequate during the 2007/08-2011/12 period.

18.03%
43.16%
21.27%
12.72%
32.43%
-4.35%
28.64%
21.02%
26.07%
23.62%
57.56%
14.60%
21.59% 21.45%
30.18%
9.67%
27.87%
23.85%
-15.00%
-5.00%
5.00%
15.00%
25.00%
35.00%
45.00%
55.00%
65.00%
49

Figure 24 MRCC: Asset Renewal & Upgrade Expenditures versus Annual Depreciation Allocations (2007/08-2016/17): Actual $

Note: No data available for 2007/08 in relation to split between Asset Renewal, Upgrade and/or Expansion.
Key trends:
Average expenditure on asset renewal and upgrade (2008/09-2016/17) - $20.167 million per annum.
Average depreciation allocation (2008/09-2016/17) - $15.345 million per annum.
Average shortfall in depreciation allocation (2008/09-2016/17) = $20.167 - $15.345 = $4.822 million per annum.
The data presented in the above graph clearly highlights that the MRCCs depreciation allocations have not been sufficient to meet on-going asset
renewal and upgrade expenditure needs.
It is acknowledged that approximately $12.1 million was spent on upgrading drainage as a result of the February 2011 flood event but this
expenditure was essentially catch-up expenditure for drainage works that should have been done previously. Even if this additional $12.1 million
expenditure is removed from the analysis, the average annual asset renewal and upgrade expenditure would be $18.822 million, resulting in an annual
average shortfall in depreciation allocations of: $18.822 - $15.345 = $3.477 million per annum.

$14,975 $15,098
$14,710
$15,150
$14,323
$15,915
$15,050
$15,644
$15,950
$16,262
$17,996
$15,571
$18,959
$29,822
$25,548
$24,216
$15,099
$16,408
$17,881
$-
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17
Annual
Depreciation
Allocation
Asset Renewal
& Upgrade
50

Figure 25 External Grant Funding as % of Underlying Revenue

Definition: Operating Grants / Capital Grants / Total External Grants (as the case may be) divided by Underlying Revenue.
Interpretation: Prima facie indicator of access to / dependence upon external grant funding (State and/or Federal).
MRCC Status (as at 30 June 2013): Total grants 34.77 %.
MRCC Trend: Operating grants have been in consistent decline since 2008/09. Total grant funding in significant decline throughout budget forecast
period largely due to a significant decline in projected Capital Grant funding throughout the budget forecast period.
MRCC v Benchmark: n.a..
Significance: Decline in external grant funding is significant as it represents a significant source of revenue for the MRCC. Significant decline in capital
grants during budget forecast period is significant due to loss of income, but also the capacity of the MRCC to cost shift into capital grants is being reduced
significantly.

25.07%
26.38%
23.04%
22.78%
25.29%
20.13%
12.94%
21.08%
20.78%
20.32%
1.40%
3.16% 3.02%
9.42%
7.98%
14.65%
14.90%
3.43%
2.44% 2.19%
26.47%
29.55%
26.06%
32.20%
33.27%
34.77%
27.84%
24.50%
23.22%
22.51%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17
Operating Grant
Funding
Capital Grant Funding
Total External Grant
Funding
51

Figure 26 Underlying Revenue per $1 of Employee Benefits

Definition: Underlying Revenue divided by Employee Benefits.
Interpretation: Prima facie indicator of operational efficiency based upon total employee costs. A higher number indicates a greater degree of operational
efficiency.
Benchmark: RRC (2007/08-2011/12) $2.82; SSC (2007/08-2011/12) $3.23.
MRCC Status (as at 30 June 2013): $2.79.
MRCC Trend: Consistent declining trend throughout 2007/08-2016/17 actual and projected period. Spike in 2012/13 and to a lesser extent 2013/14 can
be explained by significant capital grant funding in these two years which is included in Underlying Revenue.
MRCC v Benchmark: Significantly below RRC and SSC averages throughout post-2009/10 period.
Significance: Clear evidence that the MRCCs operational efficiency has been deteriorating.

$3.07
$2.99
$2.65
$2.53
$2.22
$2.79
$2.61
$2.26
$2.22 $2.20
$2.82 $2.82 $2.82 $2.82 $2.82 $2.82 $2.82 $2.82 $2.82 $2.82
$3.23 $3.23 $3.23 $3.23 $3.23 $3.23 $3.23 $3.23 $3.23 $3.23
$-
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17
MRCC
RRC (2007/08-
2011/12)
SSC (2007/08-
2011/12)
52

Figure 27 Employee Benefits as percentage of Total Operating Expenses

Definition: Employee Benefits divided by Total Operating Expenses.
Interpretation: Prima facie indicator of operational efficiency based upon Employee Expenses using Total Operating Expenses as a proxy for the size /
scope of a local Councils on-ground activities. A higher number indicates poorer relative operational efficiency based upon employee costs.
Benchmark: RRC (2007/08-2011/12) 38.07 %; SSC (2007/08-2011/12) 34.60 %.
MRCC Status (as at 30 June 2013): 40.87 %.
MRCC Trend: Consistently deteriorating trend throughout 2007/08-2016/17 period.
MRCC v Benchmark: Significantly higher than RRC and SSC averages throughout post-2009/10 period.
Significance: Results clearly show that the MRCCs employee costs as a percentage of total operating expenses are clearly higher than the RRC peer group
and SSC peer group of local Councils. All other things being equal, employee costs at MRCC are comparatively high relative to the RRC peer group and SSC
peer group of local Councils.

36.76% 36.99%
38.81%
42.74%
49.12%
40.87%
45.26%
45.71%
46.25%
46.75%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17
MRCC
RRC Average
SSC Average
53

Figure 28 Employee Benefits as % of Materials, Contractors and Service Costs

Definition: Employee Benefits divided by total Materials, Contractors, and Service Costs.
Interpretation: Prima facie indicator of operational efficiency using Materials, Contractors, and Service Costs as a proxy for the size / scope of a local
Councils on-ground activities. A higher number indicates lower relative operational efficiency.
Benchmark: RRC (2007/08-2011/12) 100.0 %; SSC (2007/08-2011/12) 89.47 %.
MRCC Status (as at 30 June 2013): 104.43 %.
MRCC Trend: Consistent and significant declining trend during post-2009/10 period. During budget forecast period, MRCCs employee costs are
consistently more than 50 % higher than the RRC and SSC peer group averages relative to on-ground service delivery.
MRCC v Benchmark: Significantly higher than RRC and SSC peer group averages throughout post-2009/10 period.
Significance: Clear evidence that the MRCCs employee costs are significantly higher than RRC and SSC local Councils relative to on-ground service delivery.
This is a prima facie indicator that the MRCC is over-staffed and/or wage/salary levels are too high. Given that the majority of positions at the MRCC are
covered by an Industrial Award, over-staffing is the more likely cause.

100.53%
96.34%
98.55%
118.71%
151.72%
104.43%
147.71%
149.84%
152.01%
154.20%
0.00%
20.00%
40.00%
60.00%
80.00%
100.00%
120.00%
140.00%
160.00%
180.00%
2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17
MRCC
RRC Average
SSC Average
54

Figure 29 Relative growth in MRCCs Total Revenue components (2007/08-2016/17)

Clear trends in the MRCCs Underlying Revenue component growth:
Rate Base Average annual growth rate (2007/08-2016/17 ) 6.1 %;
Statutory fees, fines and Charges Average annual growth rate (2007/08-2016/17 ) - -3.4 %;
Operating grants - Average annual growth rate (2007/08-2016/17 ) 1.3 %;
Capital Grants Average annual growth rate (2007/08-2016/17 ) 4.1 %;
Other Charges Consistent downward trend from 10.9 % in 2007/08 to a projected 5.4 % by 2016/17.
Implication for MRCC: There is a need to look seriously at potential options for increasing non-rate sources of revenue, particularly given the MRCCs
underlying Achilles Heel in the form of a very low Total CIV base.

$38,715
$41,154
$43,184
$45,258
$48,734
$52,203
$55,877
$58,524
$62,009
$65,703
$8,827
$8,295 $8,463
$6,673
$8,775
$5,475
$4,834 $5,027 $5,228 $5,437
$20,327
$22,936
$19,225
$20,149
$24,672
$17,423
$19,310
$19,735
$20,169
$20,613
$-
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17
Rate Base
Statutory fees,
fines & user fees
Cash
Contributions
Operating Grants
Capital Grants
Reimbursements
& Subsidies
Other Income
55

Figure 30 Growth: Underlying Revenue, Total Operating Expenses, Consumer Price Index (CPI)

Definition: Underlying Revenue and Total Operating Expenses for 2007/08-2016/17 (actual and projected).
Note: CPI figures multiplied by 100 so as to allow for super-imposing on same axis. Relative growth in CPI unchanged.
Interpretation: A closing of the gap between Underlying Revenue and Total Operating Expenses indicates that Total Operating Expenses are growing at a
rate greater than Underlying Revenue.
Benchmark: Consumer Price Index (CPI) Average annual growth 2007/08-2016/17 actual and projected = 2.6 %.
MRCC Status (as at 30 June 2013): n.a. focus is upon long-term trend.
MRCC Trend: Over 2007/08-2016/17 actual and projected period, Total Operating Expenses have been growing at an average annual rate of 4.15 %
per annum compared to growth in Underlying Revenue at 2.79 % per annum. Hence the closing of the gap between the two throughout the budget
forecast period.
MRCC v Benchmark: Both Underlying Revenue and Total Operating Expenses have been growing at a rate greater than CPI.
Significance: Growth rate in Total Operating Expenses exceeding growth rate in Underlying Revenue is an unsustainable scenario in the medium to long-
term.

81091
86934
83568
88443
97566
104970
102464
93626
97070
101431
71910
78608
81200 81892
89632
91956
86870
90752
94635
98762
0
20000
40000
60000
80000
100000
120000
2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17
Underlying Revenue
Total Operating
Expenses
Consumer Price Index
(CPI) (relative growth
rate)
56

Figure 31 Changing composition of MRCCs Underlying Revenue (2007/08-2016/17)

Clear trends in the MRCCs Underlying Revenue composition:
Rates - Rates have increased from 47.7 % of Underlying Revenue in 2007/08, to 50.9 % in 2012/13, and are projected to increase to 64.8 % of
Underlying Revenue by 2016/17. The MRCC is becoming significantly more dependent upon its underlying Rate Base as a major source of revenue;
Operating Grants Consistent downward trend from 25.1 % in 2007/08 to a projected 20.3 % by 2016/17;
Other Charges Consistent downward trend from 10.9 % in 2007/08 to a projected 5.4 % by 2016/17.
Implication for MRCC: There is a need to look seriously at potential options for increasing non-rate sources of revenue, particularly given the MRCCs
underlying Achilles Heel in the form of a very low Total CIV base.

47.7%
47.3%
51.7%
51.2%
49.9%
50.9%
54.5%
62.5%
63.9%
64.8%
10.9%
9.5%
10.1%
7.5%
9.0%
5.3%
4.7%
5.4% 5.4% 5.4%
25.1%
26.4%
23.0% 22.8%
25.3%
17.0%
18.8%
21.1% 20.8%
20.3%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17
Rates
Other Charges
Cash
Contributions
Operating Grants
Capital Grants
Reimbursements
& Subsidies
Other Income
57

Figure 32 Composition: Total Operating Expenses

Definition: Actual and projected costs by category divided by Total Operating Expenses.
Interpretation: Provides insight into the composition of the MRCCs costs and how this composition may be changing over time. Contributes to providing a
basis for informed cost management strategies.
MRCC Trend: Key trends:
- Employee Benefits are accounting for an increasingly larger proportion of total operating costs;
- Contractors, Materials & Services are accounting for a progressively smaller proportion of total operating costs;
- Depreciation & Amortization costs are accounting for a progressively smaller proportion of total operating costs.
Significance: The above two trends are a concern as it indicates that the MRCCs employee costs are increasing relative to other areas of expenditure at the
same time as translation of expenditures into on-ground service delivery is declining.

36.80%
37.00%
38.80%
42.70%
49.10%
40.90%
45.30% 45.70%
46.20%
46.70%
36.60%
41.30%
39.40%
36.00%
32.40%
39.13%
34.20% 34.10% 34.00% 33.90%
20.80%
19.20%
18.10% 18.50%
16.00%
16.97% 17.30% 17.20% 16.90% 16.50%
5.80%
2.50%
3.70%
2.80% 2.50%
3.20% 3.20% 3.00% 2.90% 2.90%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17
Employee Benefits
Contractors,
Materials & Services
Depreciation &
Amortization
Finance & Other
58

59

Specific findings Chapter 3: Comparative Performance Evaluation of MRCC
and Regional and Rural Cities peer group (2005-10)

60

61

Table 1 Summary: Evaluating the MRCC within context of 79 councils making up the Victorian Local Government sector

Measure

Mildura Rural
City Council
(MRCC)

Victorian Local
Government
Sector -
Average
Victorian
Regional and
Rural Cities
(RRC) -
Average

Similar Sized
Councils (SSC)
- Average

Evaluation
1. Size of Local
Government Area
(LGA) (Square
Kilometres)
22 087 2 881 4 166 6 869 MRCC LGA clearly the largest in Victoria
representing over 10 % of entire State.
MRCC may be at a relative cost disadvantage
due to geographic dispersion of LGA population
and rateable properties
2. Population 53 877

68 900

67 657

49 340

MRCC LGA population 21.8 % below Sector
average.
Population growth rate in MRCC LGA during
2005-10 below Sector, RRC & SSC averages this
is a major concern in-so-far as future economic
growth within the MRCC LGA is concerned.
Lower population growth within MRCC LGA may
be symptomatic of underlying economic fragility
of region.
3. Population
growth rate
( 2005-10)
5.63 % 6.40 % 6.22 % 7.54 %
4. Number of
rateable
properties
27 287

32 747

32 803

24 823

MRCC 49.38 % below Sector average.
MRCC grew at a rate slower than Sector and SCC
during 2005-10.

Note: Combined effect of large LGA, below
average population and number of rateable
properties is likely to result in an increase in
average cost per unit of service delivery relative
to other local Councils, all other things being
equal.
5. Growth in
number of
rateable
properties (2005-
10)
4.52 % 8.93 % 8.44 % 12.07 %
62

Table 1 Summary: Evaluating the MRCC within context of 79 councils making up the Victorian Local Government sector (Cont)

Measure

Mildura Rural
City Council
(MRCC)

Victorian Local
Government
Sector -
Average
Victorian
Regional and
Rural Cities
(RRC) -
Average

Similar Sized
Councils (SSC)
- Average

Evaluation
6. SEIFA Index of
Relative Socio-
economic
Advantage and
Disadvantage
924
3
rd
lowest in
State
989 956 982

Poor SEIFA index numbers for MRCC LGA is a
major concern. The MRCC LGA community is
clearly one of the most disadvantaged
communities in Victoria.
7. SEIFA Index of
Relative Socio-
economic
Disadvantage
935
5
th
lowest in
State
997 970 993
8. SEIFA Index of
Economic
Resources
941
5
th
lowest in
State
993 965 1002
9. SEIFA Index of
Education and
Occupation
930
6
th
lowest in
State
998 956 970
10. Rates and charges
per assessment as
of 2010, and
growth for 2005-
10 period
$1574
34.24 %
$1326
34.24 %
$1450
36.83 %
$1435
35.58 %
MRCC significantly higher than Sector, RRC and
SSC averages.
Growth in Rates and Charges per Assessment on
par with Sector during 2005-10 period.
63


Measure

Mildura Rural
City Council
(MRCC)

Victorian Local
Government
Sector -
Average
Victorian
Regional and
Rural Cities
(RRC) -
Average

Similar Sized
Councils (SSC)
- Average

Evaluation
11. Residential rates
and charges per
assessment as at
2010, and growth
for 2005-10
period
$1294
24.83 %
$1119
35.52 %
$1181
34.61 %
$1435
35.84 %
MRCC significantly higher than Sector average,
but below SSC average.
Growth in Residential Rates and Charges during
2005-10 among lowest in Sector.
12. Operating
expenditures per
assessment as of
2010, and growth
for 2005-10
period
$2976
32.08 %
$2527
19.47 %
$2858
17.71 %
$2680
20.21 %
Significantly higher than Sector and SCC average.
Growth in operating expenditures per
assessment during 2005-10 significantly above
Sector, RRC and SSC averages. This is a major
concern.
13. Revenue (Rates &
Charges) less
Expense growth
differential (2005-
10)
2.16 % 14.77 % 19.12 % 15.37 % MRCCs performance significantly worse than
Sector, RRC and SSC averages. A major concern
MRCC unable to contain costs in line with
Sector and peer group (RRC & SSC) averages.
14. Operating
expenditure per
assessment
Rates & Charges
per assessment
multiple (2010)

1.89

1.89

1.97

1.88
MRCC on par with Sector and SCC average.
Marginally below RRC average.
64


Measure

Mildura Rural
City Council
(MRCC)

Victorian Local
Government
Sector -
Average
Victorian
Regional and
Rural Cities
(RRC) -
Average

Similar Sized
Councils (SSC)
- Average

Evaluation
15. Capital
expenditure per
assessment as of
2010, and growth
for 2005-10
period

$819
73.86 %
$717
69.66 %
$838
73.13 %
$822
96.97 %
MRCC on par with Sector averages with a
consistently upward trend. Due to volatile
nature of capital expenditure decisions from
year to year, no significant insights provided.
16. Infrastructure
renewal
percentage as of
2010, and trend
for 2005-10
period
94 %
Improving
trend
75 %

82 %
Improving
trend
68 %
Consistent,
improving
trend
MRCC consistently above sector / peer group
averages.
17. Infrastructure
renewal and
maintenance
percentage as of
2010, and trend
for 2005-10
period
96 %
Inconsistent
trend
85 % 88 %
Improving
trend
78 %
Deteriorating
trend
MRCC consistently above sector / peer group
averages.
65


Measure

Mildura Rural
City Council
(MRCC)

Victorian Local
Government
Sector -
Average
Victorian
Regional and
Rural Cities
(RRC) -
Average

Similar Sized
Councils (SSC)
- Average

Evaluation
18. Liabilities per
assessment as of
2010, and growth
for 2005-10
period
$1328
25.45 %
$869
27.46 %
$1192
28.41 %
$1228
25.94 %
MRCC debt is significantly higher than Sector
and RRC averages. Although growth in liabilities
per assessment significantly lower than Sector,
RRC and SSC averages, MRCC commencing from
a high base.
19. Liabilities per
assessment as
percentage of
rates & charges
per assessment
(2010)
84.35 % 65.50 % 89.88 % 92.64 % MRCC significantly more indebted than Sector
average, although below RRC and SSC averages.
20. Operating results
per assessment as
of 2010, and
trend for 2005-10
period
$141 000
Improving
trend
$458 000 $282 000
Deteriorating
trend
$348 000
Consistent (no
clear upward
or downward
trend)
MRCC below Sector average but above RRC and
SSC averages during 2005-09.
Note: Operating results can vary significantly
from year-to-year.

66

67

Specific findings Chapter 5: Comparative performance evaluation MRCC v
Regional and Rural City peer group (2007/08-2011/12)

68

Table 1 - Summary: MRCCs Socio-Economic Context
Measure MRCC 2011/12 MRCC - Trend Peer Group Peer Group - Trend Assessment
1. SOCIO-ECONOMIC INDICATORS
a. Population 50 997

53 877
1

Population has
declined by 1.6 %
during 2006-2011
period
65 723 Population has grown
by 2.12 %.
MRCC LGA population 22.4 %
below RRC LGA average.
Stagnant population growth a
real concern.
b. LGA size 22 087 square
kilometres
Largest LGA in
Victoria
n.a. 4 144 square
kilometres
n.a. MRCC LGA largest in Victoria,
5.33 times larger than RRC
average LGA size.
c. Number of Rateable
Properties
27 813

n.a. 33 390 n.a. MRCC 16.7 % below RRC
average.
d. Geographical
dispersion of
Rateable Properties
(RPs)
1.26 RPs per square
kilometre
n.a. 34.46 RPs per
square kilometre
n.a. MRCC LGA the most
geographically dispersed of
the 11 RRCs.
e. SIEFA Index of
Relative Advantage /
Disadvantage
924 77 of 79 in
Victoria (3
rd
lowest)
Ranking has fallen
from 68 of 79 in
2006 (11
th
lowest)
RRC Average - 956 n.a. MRCC LGA community the
most disadvantaged of the 11
RRC communities.
f. SIEFA Index of
Relative
Disadvantage
935 75 of 79 in
Victoria (5
th
lowest)
n.a. RRC Average - 970 n.a. MRCC LGA community the
RRC communities.
g. SIEFA Index of
Economic Resources
941 75 of 79 in
Victoria (5
th
lowest)
n.a. RRC Average - 965 n.a. MRCC LGA community the
RRC communities.
h. SEIFA Index of
Education and
Occupation
930 74 of 79 in
Victoria (6
th
lowest)
n.a. RRC Average - 956 n.a. MRCC LGA community the 2
nd

RRC communities.

1
Note: Population figures based upon official ABS Census data. The author acknowledges that differences do exist in official records in relation to population figures.
Department of Planning and Community Development (Victoria) cite population of Mildura Rural City LGA as 53877 as of June 2009.
69

Table 1 - Summary: MRCCs Socio-Economic Context (Cont)
i. Rates & Charges per
person
$955.62 2
nd
most
expensive of 11 RRCs
n.a. RRC average -
$842.01
n.a. MRCC 13.49 % higher than
RRC average.
j. Rates & Charges per
person adjusted for
SEIFA Index of
Advantage and
Disadvantage
$1013.54 n.a. RRC average -
$862.90
n.a. MRCC 17.46 % higher than
RRC average.
k. Rates & Charges per
Rateable Properties
$1752.20 4
th
most
expensive of 11 RRCs
n.a. RRC average -
$1631.30
n.a. MRCC 7.4 % higher than RRC
average.
l. Rates & Charges per
Rateable Property
adjusted for SEIFA
Index of Advantage
and Disadvantage
$1858.39 n.a. $1671.78 n.a. MRCC 11.16 % higher than
RRC average.
m. Regional
Competitive Index
(Regional Australia
Institute 2013)
1 = Least
Competitive
11
th
of 11 RRCs in
Victoria
n.a. Average = 2.64 n.a. MRCC LGA rated as among the
least competitive in Australia.
11
th
of 11 in Victorian RRC
peer group.
Summary: Lower population and lower absolute number of rateable properties, combined with significantly larger geographic dispersion of LGA put MRCC
at a relative cost disadvantage compared to other RRCs. In essence, this means that the cost per unit of service delivery can be expected to be higher with
the MRCC relative to other local Councils which have larger resident populations and more rateable properties within a geographically smaller LGA. The
exact size of this relative cost disadvantage is unknown but must be considered in any comparative analysis of the MRCC with other local Councils.
Significantly, the MRCC LGA community is one of the most disadvantaged communities in Victoria based upon a range of different SEIFA measures,
including income, access to non-income economic resources, education, and skills-base. The MRCC LGA community is the most disadvantaged community
within the RRC peer group based upon 3 of 4 SIEFA indexes included in the analysis (Index of Relative Socio-economic Advantage and Disadvantage, Index
of Relative Socio-economic Disadvantage, Index of Economic Resources), and 2
nd
most disadvantaged in relation to the 4
th
SIEFA index included in the
analysis (Index of Education and Occupation (low skills / education base), but also among the most expensive in terms of rates and charges on both a per
person and per rateable property basis. Finally, according to the Regional Australia Institute, the MRCC LGA is among the least competitive in Australia,
and ranks 11
th
out of 11 Regional and Rural Cities in Victoria, the only Council within the RRC peer group that is rated in the least competitive category.

70

Table 2 - Summary: MRCCs Earnings Quality 2007/08-2011/12
Measure MRCC MRCC - Trend Peer Group Peer Group - Trend Assessment
2. EARNINGS QUALITY the degree to which reported (Headline) operating results are indicative of underlying operational performance
a. Reported (Headline)
Operating Results
Above RRC average
in 3 of 5 years
between $3.847 -
$22.327 million
No clear trend due
to inconsistencies
between years.
Average between
$9.165 - $13.050
million
Clear, though moderate
upward trend.
MRCC ranked 5
th
of 11 RRCs.
2011/12 result of $22.327
million best result within RRC
peer group
b. Headline Operating
Results [ Headline
Surplus / (Deficit) as
percentage of
Headline Revenue]
Above RRC average
in 3 of 5 years,
averaging 12.56 %
across the 5 years

Evidence of
improving trend in
reported Headline
Results. Range:
4.52-19.94 %
Range:
9.79-12.10 %,
averaging 11.07 %
across the 5 years

Slightly improving trend
over 2007/08-2011/12
period
MRCC Headline results
compare very favourably with
RRC peer group
c. Non-monetary
(book entry) items
as percentage of
Headline Results
Range between 9.64
64.46 %.
Above 20 % in 3 of 5
years
Evidence of an
increasing trend
Range between
12.06 79.02 %.
Above 20 % in 4 of
5 years
Slightly decreasing
trend
Quality of MRCCs Headline
results questionable due to
significance of non-monetary
items
d. Capital Grants as
percentage of
Headline Results
Range between
10.02 114.89 %.
years
Evidence of an
increasing trend
Range between
56.97 174.98 %.
Evidence of a clearly
increasing trend.
Quality of reported earnings in
3 of 5 years questionable due
to significance of capital
grants.
e. Combined Non-
monetary items and
Capital Grants as
percentage of
Headline Results
Range between
29.25 124.53 %.
Above 20 % in all 5
years
Clearly increasing
trend
Range between
86.96 260.16 %.
Significantly above
20 % in all 5 years
Clearly increasing trend Significant size of non-
monetary and capital grant
items in reported (Headline)
results indicate that the
MRCCs reported operating
results during 2007/08-
2011/12 are not a reliable
indicator of underlying
Summary: Non-monetary Items, book entry adjustment items, and Capital Grants account for a significant percentage of the MRCCs reported Headline
Results (Surplus / Deficit) ranging between 29.25 124.53 % during the 2007/08-2011/12 period. Using 20 % as the benchmark above which reported
(Headline) earnings are considered to be a poor indicator of underlying operational performance, the MRCCs reported Headline Results are not considered
to be a reliable measure of the MRCCs underlying operational performance.
71

Table 3 - Summary: MRCCs Liquidity 2007/08-2011/12

3. LIQUIDITY the degree to which an organization is able to meet financial obligations as and when they fall due (akin to solvency)
a. Underlying Surplus /
(Deficit)
Range between
$2.368 8.948
million. Above RRC
peer group average
in 4 of 5 years
Marginally
deteriorating trend
2008 - $8.948 million
2012 - $7.934 million
Range between
$2.872 6.425
million
Clearly increasing trend
2008 2.872 million
2012 4.930 million
MRCC underlying Surplus
compares favourably with RRC
peer group. Deteriorating
trend a concern at time when
RRC peer group is trending
upwards
b. Underlying Surplus /
(Deficit) less Capital
Grants
Range between
$(1.779) 7.809
million. Above RRC
peer group average
in all 5 years
Clearly deteriorating
trend
2008 $7.809 million
2012 $0.146 million
RRC average -
Underlying deficit
in 4 of 5 years.
trend. Average deficit
for 2011/12 - $(4.060)
million
Although above RRC peer
group average, MRCC
performance deteriorating
significantly during 2007/08-
2011/12 period
c. Underlying Surplus /
(Deficit) as a
percentage of
Underlying Revenue
Range between 2.83
11.07 %. Average
across 5 years 7.79
%
trend
2008 11.07 %
2012 8.13 %
Range between
2.73 6.72 %.
Average across 5
years 5.0 %
Upward (improving)
trend
MRCC has been performing
better than RRC peer group
average across all 5 years.
Results do show a
deteriorating trend.
d. Net Cash Flow from
Operations as
percentage of
Underlying Revenue
On par with RRC
peer group. Range
between 25.27-
34.93 %.
Slightly deteriorating
trend before spike in
2011/12
Range between
22.33-31.18 %
Clearly improving
(upward) trend
MRCCs Net Cash Flow from
Operations has been on par
with RRC peer group
e. Net Cash Flow as
percentage of
Underlying Revenue
Range between -4.78
3.91 %. Average
across 5 years
0.974 %
trend
2008 2.84 %
2012 1.54 %
(-4.78 % in 2011)
Range between
0.34 4.44 %.
Average across 5
years 2.596 %
Evidence of slightly
deteriorating trend
MRCCs Net Cash Flow as % of
Underlying Revenue has
deteriorated over the
2007/08-2011/12 period and
has been significantly less than
RRC peer group average.
72

Table 3 - Summary: MRCCs Liquidity 2007/08-2011/12 (Cont)

f. Current Ratio Range between 1.38
2.53. Average
across 5 years
1.948
trend.
2008 2.43
2012 1.38
Range between
1.77-2.42. Average
across 5 years
2.236
Consistent during
2007/08-2010/11.
Significant decrease to
1.77 in 2011/12
2008 2.35
2011 2.33
2012 1.77
MRCCs Current Ratio is clearly
deteriorating over the 5 years
and is significantly lower than
RRC peer group average
g. Holdings of Cash and
Cash Equivalents
(CCEs) as percentage
of Rate Base
Range between
56.77 72.44 %.
Below RRC peer
group average in 4 of
5 years
Slight upward trend.
CCEs as percentage
of Rate Base.
2008 62.35 %
2012 72.44 %
Range between
64.29 74.30 %.
Clearly improving trend.
CCEs as percentage of
Rate Base.
2008 64.29 %
2012 70.48 %
MRCC generally on par with
RRC peer group average.
Summary: MRCCs Underlying Surplus and Underlying Surplus less Capital Grants are clearly demonstrating a deteriorating trend over the 2007/08-
2011/12 period which is a concern as this indicates a gradual deterioration in underlying operational performance over the 2007/08-2011/12 period. Not
surprisingly, deteriorating underlying performance is resulting in deteriorating Net Cash Flows over the same period. Although holdings of cash and cash
equivalents have been on par with the RRC peer group, the MRCCs Current Ratio has deteriorated significantly over the 2007/08-2011/12 period. In a
nutshell, deteriorating Net Cash Flows (in actual dollar terms and as a percentage of Underlying Revenue) and deteriorating Current Ratio over the
2007/08-2011/12 period support the view that the MRCCs liquidity has deteriorated significantly over the 2007/08-2011/12 period.

73

Table 4 - Summary: MRCCs Indebtedness 2007/08-2011/12

4. INDEBTEDNESS the amount of total liabilities, including interest bearing debt that is owing to external parties.
a. Total Liabilities ($) Total Liabilities as at
30 June 2012 $50.7
million. 4
th
most
indebted Council in
RRC peer group.
Clearly increasing
trend Total
Liabilities grew by
44.64 % during
2007/08-2011/12.
2008 - $35.1 million
2012 - $50.7 million
Average Total
Liabilities as at 30
June 2012 $45.2
million.
Average growth in
Total Liabilities for RRC
peer group during
2007/08-2011/12
63.78 %
MRCCs level of indebtedness
has increased significantly
during 2007/08-2011/12
period
b. Total Liabilities as
percentage of
Underlying Revenue
At 30 June 2012
52.0 %
Clearly increasing
trend.
2008 43.38 %
2012 52.0 %
At 30 June 2012 -
44.80 %
Slightly increasing trend
2008 41.76 %
2012 44.80 %
MRCCs Total Liabilities as
percentage of Underlying
Revenue 16.07 % higher than
c. Interest Bearing
Debt (IBD) ($)
Total IBD as at 30
June 2012 - $19.616
million. 3
rd
most
indebted Council in
RRC peer group.
Clearly increasing
trend. Interest
Bearing Debt grew
by 18.62 % during
2007/08-2011/12.
2008 - $16.5 million
2012 - $19.6 million
Average Total IBD
as at 30 June 2012 -
$14.705 million.
Clearly increasing trend.
Interest Bearing Debt
grew by 22.11 % during
2007/08-2011/12.
MRCCs level of outstanding
interest bearing debt has
increased significantly during
2007/08-2011/12. As of 30
June 2012, MRCCs
outstanding interest bearing
debt was 33.4 % higher than
the RRC peer group average
d. Interest Bearing
Debt as percentage
of Rate Base
At 30 June 2012
40.25 %
Very slight
decreasing trend.
IBD as percentage of
Rate Base 42.71 % in
2008.
At 30 June 2012
34.43 %
Significantly decreasing
trend from 42.91 % in
2008 to 34.43 % in
2012.
MRCC 2
nd
most indebted
Council in RRC peer group
16.9 % higher than RRC peer
group average at 30 June
2012.
e. Interest Bearing
Debt as percentage
of Underlying
Revenue
At 30 June 2012
20.11 %
Consistent IBD as
percentage of
Underlying Revenue
2008 20.45 %
2012 20.11 %
At 30 June 2012
15.99 %
trend
2008 - 21.21 %
2012 - 15.99 %
MRCC 2
nd
most indebted
Council in RRC peer group
25.8 % higher than RRC peer
group average at 30 June
2012.
74

Table 4 - Summary: MRCCs Indebtedness 2007/08-2011/12 (Cont)

f. Underlying Surplus /
Deficit to Borrowing
Costs Multiple
2008 8.25
2012 8.18
Consistent 8.25 in
2008.
At 30 June 2012
8.84
Clearly improving trend
from 5.36 in 2008 to
8.84 in 2012
MRCC on par with RRC peer
group average at 30 June 2012
g. Underlying Surplus /
Grants to Borrowing
Costs Multiple
2008 7.2
2012 0.15
Significantly
deteriorating trend
from 7.2 in 2008, to
0.15 in 2012
At 30 June 2012
-4.26. This is a
disastrous result
for RRC peer group
Significantly
deteriorating trend
from -0.18 in 2008 to -
4.26 in 2012
MRCCs capacity to cover
borrowing costs after Capital
Grants removed from analysis
has all but evaporated.
Significantly better than RRC
peer group average, but in no
way an acceptable result.
h. Net Cash Flow to
Borrowing Costs
Multiple
2008 2.12
2012 1.55
(2011 - -4.04)
Deteriorating trend
1.55 in 2012
At 30 June 2012
0.65. A very poor
result
Significantly
deteriorating trend
0.65 in 2012
borrowing costs based upon
Net Cash Flow has
deteriorated significantly
during the 2007/08-2011/12
period. Although marginally
better than RRC peer group
average in 2012, a poor result.
Summary: Depending upon the measure used, the MRCC is the 2
nd
or 3
rd
most indebted Council within the RRC peer group. There has been significant
growth in both Total Liabilities (44.64 %) and Interest Bearing Debt (18.62 %) during the 2007/08-2011/12 period, growing at an average annual rate of 9.93
% and 3.72 % respectively during the 2007/08-2011/12. Although the MRCCs Interest Bearing Debt as of 30 June 2012 was still 40.25 % of the MRCCs Rate
Base, and therefore classified as low risk based upon Victorian Auditor Generals guidelines (40% is the benchmark), the clear trend of increasing
indebtedness at a time when the RRC peer groups level of indebtedness relative to both Underlying Revenue and Rate Base is decreasing is a concerning
observation. This concern is heightened due to the fact that the MRCCs capacity to meet annual borrowing costs associated with Interest Bearing Debt
as measured by both Underlying Surplus less Capital Grants to Borrowing Costs Multiple and Net Cash Flow to Borrowing Costs Multiple - has been
declining during the 2007/08-2011/12 period.

75

Table 5 - Summary: MRCCs Capital Asset Management 2007/08-2011/12

5. CAPITAL INVESTMENT indicators of how local Councils are managing their capital assets (Infrastructure, Property, Plant and Equipment)
a. Average
Depreciation Rate
Infrastructure,
Property, Plant &
Equipment (IPPE)
assets
At 30 June 2012
2.56 %
Clear downward
trend from 3.25 %
in 2008 to 2.56 % in
2012. Depreciation
rate applied to
capital assets higher
than RRC peer group
average.
At 30 June 2012
2.21 %
Clear downward trend
from 2.52 % in 2008 to
2.21 % in 2012. All
Councils within the RRC
peer group with the
exception of La Trobe
have been reducing the
rate at which they are
depreciating capital
assets
A significant decline in the
actual depreciation rate
applied in 2011/12 is a
concern. Given that MRCCs
capital assets have grown
during the 2007/08-2011/12
period (see Table 7), the fall in
average depreciate rate
indicates deliberate
intervention by MRCC
management in Accounting
Policy relating to depreciation.
b. Capital Stock
Multiple
Range between 5.23-
5.73. MRCCs capital
stock multiple is
lowest in RRC peer
group.
Slightly increasing
trend from 5.7 in
2008 to 5.73 in 2012
Range between
7.30-7.66.
Slightly declining trend
7.32 in 2012
On-going capital renewal and
maintenance impost on
operating budget lower for
MRCC relative to other
Councils in RRC peer group
c. Capital Replacement
Ratio
Range between 1.24-
2.06.
2008 5.7
2012 5.73
Significantly
increasing trend
largely due to
significant increase
in capital investment
in 2011/12 (re
February 2011 flood
event)
Range between
1.27-1.93.
Significantly increasing
trend. Expenditures
associated with flood
reparations in 2011 a
large contributor to
increased Capital
Replacement Ratio in
2011/12.
group average
Summary: Capital Stock Multiple is lower than RRC peer group average. Capital Replacement Ratio on par with RRC peer group average. Decline in
Average Depreciation Rate applied to capital assets (IPPE) is a major concern as it indicates deliberate intervention by MRCC management in Accounting

76

Table 6 - Summary: MRCCs External Grant Funding 2007/08-2011/12

6. EXTERNAL GRANT FUNDING Amount of external grant funding received from State and/or Federal governments.
a. Operating grants as
percentage of
Underlying Revenue
Range between
22.78 26.40 %.
Consistently above
RRC peer group
average.
Consistent no clear
evidence of trend.
2008 25.14 %,
2012 25.29 %
Range between
20.74 23.97 %
Consistent.
2008 22.74 %
2012 22.63 %
MRCC ranks 3
rd
in RRC peer
group in relation to the receipt
of operating grants relative to
Underlying Revenue
b. Capital grants as
percentage of
Underlying Revenue
Range between 1.41
9.42 %.
Consistently below
RRC peer group
average.
Clearly increasing
trend.
2008 1.41 %
2012 7.98 %
Range between
4.91 10.27 %
2008 4.91 %
2012 10.27 %
MRCC significantly below RRC
peer group average during
2007/08-2009/10. Significant
increase in Capital Grants
during 2010/11-2011/12
brings MRCC more into line
with RRC peer group average.
c. Total grants as
percentage of
Underlying Revenue
Range between
26.03 33.27 %
Clearly increasing
trend.
2008 26.55 %
2012 33.27 %
Range between
27.65 32.90 %
2008 27.65 %
2012 32.90 %
group average.
Summary: MRCC has done well in relation to Operating Grant funding ranking 3
rd
in RRC peer group relative to Underlying Revenue. Performance in
relation to Capital Grant funding has not been as good although more in line with RRC peer group average during 2010/11-2011/12. Overall, MRCC on par
with RRC peer group in terms of total Operating and Capital Grants received relative to Underlying Revenue. With an average Total External Grants as a
percentage of Underlying Revenue between 27.65 32.90 %, it is clear that all Councils within the RRC peer group are significantly dependent upon
external grant funding to remain financially viable.

77

Table 7 - Summary: MRCCs Growth in Key Financial Indicators 2007/08-2011/12

7. GROWTH in order to be financially sustainable in the long-term, growth rate in Underlying Revenue must exceed growth rate in Total Expenses AND
Growth rate in Liabilities and Interest Bearing Debt.
a. Rate Base 25.88 % n.a. 31.90 % n.a. MRCC Rate Base growth
significantly less than RRC
peer group average
b. Underlying Revenue 20.66 % n.a. 41.56 % n.a. MRCC Underlying Revenue
growth significantly less than
c. Underlying Revenue
less Capital Grants
12.62 % n.a. 32.61 % n.a. MRCC Underlying Revenue
less Capital Grants growth
peer group average
d. Total Expenses 24.64 % n.a. 35.68 % n.a. MRCC Total Expenses growth
peer group average
e. Net Income (Growth
in Underlying
Revenue less Growth
in Total Expenses)
-3.98 %
Total Expenses have
been growing at a
rate that is 3.98 %
greater than
Underlying Revenue.
This is a
fundamentally
unsustainable
scenario.
n.a. 5.88 %
Note: Peer group
average skewed by
Horsham (32.91 %)
and Wodonga
(43.25 %). In all, 6
of 11 Councils in
RRC peer group
have a negative
Net Income growth
rate.
n.a. Negative Net Income Growth
rate is a MAJOR problem. It is
a scenario that is
unsustainable in the long-
term. Long-term prognosis if
Net Income growth rate does
not change perpetual
operating deficits.
78

Table 7 - Summary: MRCCs Growth in Key Financial Indicators 2007/08-2011/12 (Cont)

f. Total Liabilities 44.64 %
Significantly lower
than RRC peer group
average.
Average annual
growth rate 8.93 %
60.07 % Average annual growth
rate 12.01 %
Although MRCC growth in
Total Liabilities significantly
lower than RRC peer group
average, two (2) significant
points need to be highlighted:
(i) MRCCs initial indebtedness
already high; (ii) growth rate
in Total Liabilities significantly
greater than growth rate in
Underlying Revenue
g. Interest Bearing
Debt
18.62 %
Significantly higher
than RRC peer group
average.
Average annual
growth rate 3.72 %
11.23 %

Average annual growth
rate 2.25 %
MRCCs growth in Interest
Bearing Debt is significantly
higher than RRC peer group
average for 2007/08-2011/12
period.
h. Depreciation
Capital Assets (IPPE)
-4.35 %
Significantly lower
than RRC peer group
average
The ONLY Council in
RRC peer group to
record negative
growth in
Depreciation
Expense during
2007/08-2011/12
period.
in Depreciation Expense
4.45 %
Negative growth in
Depreciation Expense a
MAJOR concern. Particularly
given growth in Capital Assets
of 21.31 % during same time
period. Indicates direct
intervention in accounting
policy to reduce Depreciation
Expense.
79

i. Growth in Capital
Assets
(Infrastructure,
Property, Plant &
Equipment)
21.31 % Average annual
growth rate 4.26 %
rate 7.42 %
MRCCs growth in Capital
Assets lowest in RRC peer
group.
j. Growth Differential
(Depreciation of
Capital Assets v
Growth in Capital
Assets)
-25.55 %
3
rd
worst result for RRC peer group.
Growth Differential of -25.55 % indicates
that the MRCC is not matching Depreciation
Expense to changes in Capital Asset values.
-14.83 %
Indicates that Councils in RRC peer group are
not matching depreciation expense to
changes in capital asset valuations.
Depreciation Expense is being fundamentally
understated.
Depreciation Expense is being
fundamentally understated.
Consistent with finding that
there has been intervention to
reduce Depreciation Expense
(see Table 5).
k. Operating Grants 21.38 % n.a. 40.63 % n.a. MRCCs growth in operating
grants during 2007/08-
2011/12 2
nd
worst in RRC peer
group.
Summary: There are a number of MAJOR concerns from the results presented in Table 7:
- Growth rates in revenue (Rate Base 25.88 %, Underlying Revenue 20.66 %, Underlying Revenue less Capital Grants 12.62 %) significantly lower
than RRC peer group averages;
- Growth rate in Total Expenses at 24.64 % is lower than RRC peer group average but significantly higher than growth rate in Underlying Revenue
(20.66 %) and Underlying Revenue less Capital Grants (12.62 %);
- Negative Net Income Growth rate of -3.98 % in relation to Underlying Revenue (or 12.02 % for Underlying Revenue less Capital Grants) is
fundamentally unsustainable in the longer term;
- Growth rate in Total Liabilities (44.64 %) and Interest Bearing Debt (18.62 %) significantly greater than growth rate in Underlying Revenue less
Capital Grants (12.62 %) this scenario is unsustainable in the longer term;
- Negative Growth Differential (Depreciation Expense versus Capital Assets) of -25.55 % is a major concern and indicates a significant under-
statement of Depreciation Expense.
Taken together, the five key findings highlighted above should raise significant concerns about the on-going financial health of the MRCC.

80

Table 8 - Summary: MRCCs Operating Efficiency 2007/08-2011/12

8. OPERATING EFFICIENCY indicators of the relationship between inputs and outputs. Operating efficiency will ultimately have an impact (positive or
negative) upon on-going financial performance.
a. Total Expenses /
Underlying Revenue
Range between
88.93 97.17 %
Slightly increasing
trend.
2008 88.93 %
2012 91.87 %
Range between
93.28 97.27 %

Slightly decreasing
trend.
2008 97.27 %
2012 93.50 %
MRCC under RRC peer group
average in 4 of 5 years.
b. Total Expenses /
Rate Base
Range between 1.81
191
Consistent
2008 1.8574
2012 1.8392
Range between
1.98 2.05
Slightly increasing trend
2008 2.0137
2012 2.0488
MRCC consistently under RRC
peer group average
/ Employee Benefits
2012 2.22 Deteriorating trend
2008 3.06
2012 2.22
2008 2.94
2012 2.48
2009/10-2011/12 period
d. Employee Benefits /
Rate Base
2012 90.35 % Deteriorating trend
2008 68.28 %
2012 90.35 %
2008 71.12 %
2012 89.27 %
group average
e. Employee Benefits
as percentage of
Total Expenses
2008 36.76 %
2012 49.12 %
2008 35.29 %
2012 43.67 %
MRCC consistently higher than
RCC peer group average
f. Employee Benefits
as percentage of
Materials,
Contractors and
Services Costs
2008 0.9279
2012 1.5172
2008 0.8462
2012 1.2758
RCC peer group average.
Deterioration in trend
between 2007/08-2011/12
significantly worse than RRC
peer group average
81

Table 8 - Summary: MRCCs Operating Efficiency 2007/08-2011/12 (Cont)

g. Growth in Total
Expenses
24.64 % n.a. 35.68 % n.a. MRCC Total Expenses growth
peer group average
h. Growth in Employee
Benefits
66.56 % n.a. 66.09 % n.a. MRCC Employee Benefits
growth on par with RRC peer
group average
i. Materials,
Contractors and
Services costs as
percentage of
Underlying Revenue
29.75 %
2
nd
worst result in
RCC peer group
Deteriorating trend
2008 35.23 %
2012 29.75 %
32.4 % Deteriorating trend
2008 41.2 %
2012 32.4 %
peer group average with a
Translation of Underlying
Revenue into on-ground
service delivery is poor and
getting worse.
Summary: Note: Defined Benefits Plan Superannuation Special Call included for all 11 Councils in RRC peer group.
Performance of the MRCC in terms of operational efficiency is mixed:
- On basis of Total Expenses as a percentage of Rate Base - MRCC (183.9 %) slightly under RRC peer group average (204.9 %).
- On basis of Employee Benefits as a percentage of total operating expenses MRCC (49.12 % in 2012) consistently higher than RRC peer group
average (43.67 %), indicating that there may be potential over-staffing at MRCC. This is particularly so in relation to Employee Benefits as
percentage of Materials, Contractors and Service Costs, which is an indicator of employment costs relative to on-ground service delivery. On the
basis of this measure, the MRCCs performance (151.7 %) is significantly higher than RRC peer group average (127.6 %).
- In relation to growth in Total Expenses, MRCC (24.64 %) has performed significantly better than RRC peer group average (35.68 %).
- In relation to growth in Employee Benefits, MRCC (66.56 %) has performed on par with RRC peer group average (66.09 %).
- In relation to translation of Underlying Revenue into on-ground service delivery, the MRCCs performance (29.75 %) is poor relative to RRC peer
group average (32.4 %) and deteriorating (along with the RRC peer group of Councils as a whole).

82

Table 9 - Summary: MRCCs Rate Base as percentage of Underlying Revenue 2007/08-2011/12

9. OTHER INDICATORS size of Rate Base relative to Underlying Revenue.
a. Rate Base as a
percentage of
Underlying Revenue
2012 49.95 % Increasing trend
2008 47.88 %
2012 49.95 %
2012 46.34 % Decreasing
2008 48.70 %
2012 46.34 %
MRCC trending in opposite
direction to RRC peer group.
Significance highlights why
reliance upon indebtedness
relative to Rate Base can be
misleading if size of Rate Base
relative to Underlying
Revenue is not taken into
account, nor changes in the
relative size of Rate Base
Revenue over time. Thus, a
set rule such as Debt = 40 % of
Rate Base will hide increasing
indebtedness if a Councils
Rate Base relative to
Underlying Revenue is
increasing.
Summary: MRCCs Rate Base relative to Underlying Revenue is increasing. This is significant due to the fact that the MRCC has been citing Interest Bearing
Debt relative to Rate Base but have failed to acknowledge that the MRCCs Rate Base relative to Underlying Revenue is increasing. As such, increases in
Interest Bearing Debt are being understated. Indebtedness must be cited relative to Underlying Revenue as this will automatically cater for any changes in
the relative size of a Councils Rate Base relative to Underlying Revenue.

83

Specific findings Chapter 6: Comparative performance evaluation MRCC v
Similar Size Councils peer group (2007/08-2011/12)

84

85

Table 1 - Summary: MRRCs Socio-Economic Context relative to Similar Sized Councils peer group
a. Population 50 997

53 877
2

Population has
declined by 1.6 %
during 2006-2011
period
48 627 Population has grown
by 4.58 %. Peer group
average dominated by
Cardinia 26.67 %
growth
MRCC LGA population 4.87 %
above SSC LGA average.
Stagnant population growth a
real concern.
b. LGA size 22 087 square
kilometres
Largest LGA in
Victoria
n.a. 6 869 square
kilometres
n.a. MRCC LGA largest in Victoria,
3.22 times larger than SSC
average LGA size.
c. Number of Rateable
Properties
27 813

n.a. 24 823 n.a. MRCC 9.9 % above SSC
average.
d. Geographical
dispersion of
Rateable Properties
(RPs)
1.26 RPs per square
kilometre
n.a. 15.06 RPs per
square kilometre
n.a. MRCC LGA the most
geographically dispersed of
the 10 SSCs.
e. SIEFA Index of
Relative Advantage /
Disadvantage
924 77 of 79 in
Victoria (3
rd
lowest)
Ranking has fallen
from 68 of 79 in
2006 (11
th
lowest)
SSC Average - 982 n.a. MRCC LGA community the
SSC communities.
f. SIEFA Index of
Relative
Disadvantage
935 75 of 79 in
Victoria (5
th
lowest)
n.a. SSC Average - 993 n.a. MRCC LGA community the
SSC communities.
g. SIEFA Index of
Economic Resources
941 75 of 79 in
Victoria (5
th
lowest)
SSC communities.
h. SEIFA Index of
Education and
Occupation
930 74 of 79 in
Victoria (6
th
lowest)
SSC communities.

2
Note: Population figures based upon official ABS Census data. The author acknowledges that differences do exist in official records in relation to population figures.
Department of Planning and Community Development (Victoria) cite population of Mildura Rural City LGA as 53877 as of June 2009.
86

Table 1 - Summary: MRCCs Socio-Economic Context (Cont)
i. Rates & Charges per
person
$955.62 2
nd
most
expensive of 11 SSCs
n.a. SSC average -
$855.21
n.a. MRCC 11.74 % higher than SSC
average.
j. Rates & Charges per
person adjusted for
SEIFA Index of
Advantage and
Disadvantage
$1136.61 n.a. SSC average -
$963.23
average.
k. Rates & Charges per
Rateable Properties
$1785.98 5
th
most
expensive of 11 SSCs
n.a. SSC average -
$1680.39
average.
l. Rates & Charges per
Rateable Property
adjusted for SEIFA
Index of Advantage
and Disadvantage
$2124.23 n.a. $1880.21 n.a. MRCC 12.98 % higher than SSC
average.
m. Regional
Competitive Index
(Regional Australia
Institute 2013)
1 = Least
Competitive
11
th
of 11 SSCs in
Victoria
n.a. Average = 3.20 n.a. MRCC LGA rated as among the
least competitive in Australia.
10
th
of 10 in Victorian SSC peer
group.
Summary: MRCC has slightly higher population and absolute number of rateable properties compared to SSC peer group average, but also has a
significantly larger geographically dispersed LGA. As to how these factors contribute toward any relative cost disadvantage (and therefore relative cost per
unit of service delivery) compared to other Councils within the SSC peer group is unknown. Significantly, the MRCC LGA community is one of the most
disadvantaged communities in Victoria based upon a range of different SEIFA measures, including income, access to non-income economic resources,
education, and skills-base. The MRCC LGA community is the disadvantaged community within the SSC peer group based upon all 4 SIEFA indexes included
in the analysis (Index of Relative Socio-economic Advantage and Disadvantage, Index of Relative Disadvantage, Index of Economic Resources, Index of
Education and Occupation (skills / education base). However, the MRCC LGA is also among the most expensive in terms of rates and charges on both a per
person and per rateable property basis. Finally, according to the Regional Australia Institute, the MRCC LGA is among the least competitive in Australia,
and ranks 10
th
out of 10 within the SSC peer group of local Councils, the only LGA within the SSC peer group that is rated in the least competitive category.

87

Table 2 - Summary: MRCCs Earnings Quality 2007/08-2011/12
2. EARNINGS QUALITY the degree to which reported (Headline) operating results are indicative of underlying operational performance
a. Reported (Headline)
Operating Results
Above SSC average
in 3 of 5 years
between $3.847 -
$22.327 million
No clear trend due
to inconsistencies
between years.
Average between
$9.341 - $12.367
million
Clear, though slight
upward trend.
MRCC ranked 2
nd
or 3
rd
of 10
SSCs. 2011/12 result of
$22.327 million 2
nd
best result
within SSC peer group
b. Headline Operating
Results [ Headline
Surplus / (Deficit) as
percentage of
Headline Revenue]
Above SSC average
in 3 of 5 years,
averaging 12.56 %
across the 5 years

Evidence of
improving trend in
reported Headline
Results. Range:
4.52-19.94 %
Range:
11.61-15.21 %,
averaging 12.93 %
across the 5 years

Consistent over
2007/08-2011/12
period
2008 12.99 %
2012 12.97 %
MRCC Headline results
compare very favourably with
SSC peer group
c. Non-monetary
(book entry) items
as percentage of
Headline Results
Range between 9.64
64.46 %.
years
Evidence of an
increasing trend
2008 10.02 %
2012 64.46 %
Range between
48.64 208.70 %.
Above 20 % in all 5
years
Slightly decreasing
trend
2008 60.76 %
2012 50.06 %
Quality of MRCCs Headline
results questionable due to
significance of non-monetary
items
d. Capital Grants as
percentage of
Headline Results
Range between
17.66 114.89 %.
years
Evidence of an
increasing trend
2008 19.23 %
2012 34.88 %
Range between
85.64 245.59 %.
Evidence of a clearly
increasing trend.
2008 84.40 %
2012 99.01 %
Quality of reported earnings in
3 of 5 years questionable due
to significance of capital
grants.
e. Combined Non-
monetary items and
Capital Grants as
percentage of
Headline Results
Range between
29.25 124.53 %.
Above 20 % in all 5
years
Clearly increasing
trend
2008 29.25 %
2012 99.35 %
Range between
111.15 145.16 %.
Significantly above
20 % in all 5 years
No clear trend evident
2008 145.16 %
2012 144.28 %
Significant size of non-
monetary and capital grant
items in reported (Headline)
results indicate that the
MRCCs reported operating
results during 2007/08-
2011/12 are not a reliable
indicator of underlying
Summary: Non-monetary Items and Capital Grants account for a significant percentage of the MRCCs reported Headline Results (Surplus / Deficit)
ranging between 111.15 145.16 % during the 2007/08-2011/12 period. Using 20 % as a benchmark above which reported earnings are considered to be a
poor indicator of underlying operational performance, the MRCCs reported Headline Results during the 2007/08-2011/12 period are not a reliable
measure of the MRCCs underlying operational performance.
88

Table 3 - Summary: MRCCs Liquidity 2007/08-2011/12

a. Underlying Surplus /
(Deficit)
Range between
$2.368 8.948
million. Above SSC
peer group average
in 4 of 5 years
Marginally
deteriorating trend
2008 $8.948
million
2012 - $7.934 million
Range between
$1.860 5.183
million
2008 1.860 million
2012 3.538 million
MRCC underlying Surplus
compares favourably with SSC
peer group. Deteriorating
trend a concern at time when
SSC peer group is trending
upwards
b. Underlying Surplus /
Grants
Range between
$(1.779) 7.809
million. Above SSC
peer group average
in all 5 years
trend
2008 $7.809
million
2012 - $0.146 million
SSC average -
Underlying deficit
in 4 of 5 years.
trend. Average deficit
for 2011/12 - $(4.111)
million
Although above SSC peer
group average, MRCC
performance deteriorating
significantly during 2007/08-
2011/12 period
c. Underlying Surplus /
(Deficit) as a
percentage of
Underlying Revenue
Range between 2.83
11.07 %. Average
across 5 years 7.79
%
trend
2008 11.07 %
2012 8.13 %
Range between
1.84 11.61 %.
Average across 5
years 6.46 %
Upward (improving)
trend
2008 1.84 %
2012 4.14 %
MRCC has been performing
better than SSC peer group
average across all 5 years.
Results do show a
d. Net Cash Flow from
Operations as
percentage of
Underlying Revenue
On par with SSC peer
group. Range
between 25.27-
34.93 %.
trend before spike in
2011/12
Range between
22.89-31.91 %
Clearly improving
(upward) trend
2008 22.89 %
2012 31.91 %
MRCCs Net Cash Flow from
Operations has been on par
with SSC peer group average
e. Net Cash Flow as
percentage of
Underlying Revenue
Range between -4.78
3.91 %. Average
across 5 years
0.974 %
trend
2008 2.84 %
2012 1.54 %
Range between -
5.28 7.89 %.
Average across 5
years 1.15 %
Evidence of significantly
improving trend, albeit
from a poor base
2008 - -5.28 %
2012 2.89 %
MRCCs Net Cash Flow as % of
Underlying Revenue has
deteriorated over the
2007/08-2011/12 period and
has been less than SSC peer
group average in 3 of 5 years.
89

Table 3 - Summary: MRCCs Liquidity 2007/08-2011/12 (Cont)

f. Current Ratio Range between 1.38
2.53. Average
across 5 years
1.948
trend.
2008 2.43
2012 - 1.38
Range between
1.99-2.65. Average
across 5 years
2.42
Consistent during
2007/08-2010/11.
Significant decrease to
1.994 in 2011/12
MRCCs Current Ratio is clearly
deteriorating over the 5 years
and is significantly lower than
SSC peer group average
g. Holdings of Cash and
Cash Equivalents
(CCEs) as percentage
of Rate Base
Range between
56.77 72.44 %.
Below SSC peer
group average in 4 of
5 years
Slight upward trend.
2008 62.35 %
2012 72.44 %
Range between
51.19 71.46 %.
Clearly improving trend.
2008 51.19 %
2012 71.45 %
SSC peer group average.
Summary: MRCCs Underlying Surplus and Underlying Surplus less Capital Grants are clearly demonstrating a deteriorating trend which is a concern as this
indicates a gradual deterioration in underlying operational performance over the 2007/08-2011/12 period. Not surprisingly, deteriorating underlying
performance is resulting in deteriorating Net Cash Flows over the same period. Although holdings of cash and cash equivalents have been on par with the
SSC peer group, the MRCCs Net Cash Flow and Current Ratio have both been deteriorated significantly over the 2007/08-2011/12 period.

90

Table 4 - Summary: MRCCs Indebtedness 2007/08-2011/12

a. Total Liabilities ($) Total Liabilities as at
30 June 2012 $50.7
million. 4
th
most
indebted Council in
SSC peer group.
Clearly increasing
trend Total
Liabilities grew by
44.64 % during
2007/08-2011/12.
Average Total
Liabilities as at 30
June 2012 $39.8
million.
Average growth in
Total Liabilities for SSC
peer group during
2007/08-2011/12
33.65 %
MRCCs level of indebtedness
has increased significantly
during 2007/08-2011/12
period. Rate of increase 32.66
% higher than SSC peer group
average
b. Total Liabilities as
percentage of
Underlying Revenue
At 30 June 2012
52.0 %
Clearly increasing
trend up from
43.38 % in 2008.
At 30 June 2012
49.42 %
Clearly decreasing trend
2008 54.92 %
2012 49.42 %
MRCCs Total Liabilities as
percentage of Underlying
Revenue only slightly higher
than SSC peer group average
c. Interest Bearing
Debt (IBD) ($)
Total IBD as at 30
June 2012 - $19.616
million. 3
rd
most
indebted Council in
SSC peer group.
Clearly increasing
trend. Interest
Bearing Debt grew
by 18.62 % during
2007/08-2011/12.
2008 $16.5 million
2012 - $19.6 million
Average Total IBD
as at 30 June 2012 -
$16.734 million.
Clearly decreasing
trend. Interest Bearing
Debt reduced by 3.07 %
during 2007/08-
2011/12.
2008 17.3 million
2012 16.7 million
MRCCs level of outstanding
interest bearing debt has
increased significantly during
2007/08-2011/12. As of 30
June 2012, MRCCs
outstanding interest bearing
debt was 17.4 % higher than
the SSC peer group average
d. Interest Bearing
Debt as percentage
of Rate Base
At 30 June 2012
40.25 %
Very slight
decreasing trend.
IBD as percentage of
Rate Base 42.71 % in
2008.
At 30 June 2012
39.74 %
trend
2008 59.90 %
2012 39.74 %
MRCC 3
rd
most indebted
Council in SSC peer group
even though IBD as
percentage of Rate Base only
marginally higher than SSC
peer group average
e. Interest Bearing
Debt as percentage
of Underlying
Revenue
At 30 June 2012
20.11 %
Consistent IBD as
percentage of
Underlying Revenue
20.45 % in 2008
At 30 June 2012
20.44 %
trend
2008 33.24 %
2012 20.44 %
MRCC on par with SSC peer
group as at 30 June 2012
91

Table 4 - Summary: MRCCs Indebtedness 2007/08-2011/12 (Cont)

f. Underlying Surplus /
Deficit to Borrowing
Costs Multiple
At 30 June 2012
8.18
Consistent
2008 8.25
2012 8.18
At 30 June 2012
5.42
Marginally deteriorating
trend
2008 6.98
2012 5.42
MRCC better than SSC peer
group average as at 30 June
2012
g. Underlying Surplus /
Grants to Borrowing
Costs Multiple
At 30 June 2012
0.15
Significantly
deteriorating trend
2008 - 7.2
2012 - 0.15
At 30 June 2012
-7.23. This is a
disastrous result
for SSC peer group
Significantly
deteriorating trend
2008 - -0.17
2012 - -7.23
borrowing costs after Capital
Grants removed from analysis
has all but evaporated.
Significantly better than SSC
peer group average, but in no
way an acceptable result.
h. Net Cash Flow to
Borrowing Costs
Multiple
At 30 June 2012
1.55
Deteriorating trend
2008 2.12
2012 1.55
At 30 June 2012
3.08. Significant
improvement over
prior 2 years
Significantly improving
trend albeit from a
poor base
2008 - -1.43
2012 3.08
borrowing costs based upon
Net Cash Flow has
deteriorated significantly
during the 2007/08-2011/12
period. Although marginally
better than SSC peer group
across the 5 years, 2012 result
(1.55) less than SSC peer
group average (3.08)
Summary: Depending upon the measure used, the MRCC is between the 2
nd
and 4
th
most indebted Council within the SSC peer group. There has been
significant growth in both Total Liabilities and Interest Bearing Debt during the 2007/08-2011/12 period, growing at an average annual rate of 9.93 % and
3.72 % respectively during the 2007/08-2011/12. Although the MRCCs Interest Bearing Debt as of 30 June 2012 was still 40.25 % of Rate Base, and
therefore classified as low risk based upon Victorian Auditor Generals guidelines, the clear trend of increasing indebtedness at a time when the SSC peer
groups level of indebtedness relative to both Underlying Revenue and Rate Base is decreasing is a concerning observation. This concern is heightened due
to the fact that the MRCCs capacity to meet annual borrowing costs associated with Interest Bearing Debt has been declining during the 2007/08-2011/12
period.

92

Table 5 - Summary: MRCCs Capital Asset Management 2007/08-2011/12

5. CAPITAL indicators of how local Councils are managing their capital assets (Infrastructure, Property, Plant and Equipment)
a. Average
Depreciation Rate
Infrastructure,
Property, Plant &
Equipment (IPPE)
assets
At 30 June 2012
2.56 %
Clear downward
trend from 3.25 %
in 2008 to 2.56 % in
2012. Depreciation
rate applied to
capital assets higher
than SSC peer group
average in all 5
years.
At 30 June 2012
2.20 %
Clear downward trend
from 2.46 % in 2008 to
2.20 % in 2012. 4
Councils within the SSC
peer group (Baw Baw,
Campaspe, Macedon
Ranges & Wellington)
have increased their
average depreciation
rate applied to capital
assets
A significant decline in the
actual depreciation rate
applied in 2011/12 is a
concern. Given that MRCCs
capital assets have grown
during the 2007/08-2011/12
period (see Table 7), the fall in
average depreciation rate
indicates deliberate
intervention by MRCC
management in Accounting
b. Capital Stock
Multiple
Range between 5.23-
5.73. MRCCs capital
stock multiple is
lowest in SSC peer
group.
Slightly increasing
trend
2008 5.70
2012 5.73
Range between
7.38-7.92.
Slightly declining trend
2008 7.92
2012 7.43
On-going capital renewal and
maintenance impost on
operating budget lower for
MRCC relative to other
Councils in SSC peer group
c. Capital Replacement
Ratio
Range between 1.24-
2.06.
Significantly
increasing trend
largely due to
significant increase
in capital investment
in 2011/12 (re
February 2011 flood
event)
Range between
1.18-1.78.
Significantly increasing
trend. Expenditures
associated with flood
reparations in 2011 a
large contributor to
increased Capital
Replacement Ratio in
2011/12.
MRCC on par with SSC peer
group average
Summary: The MRCCs Capital Stock Multiple is lower than SSC peer group average. Capital Replacement Ratio on par with SSC peer group average.
Decline in Average Depreciation Rate applied to capital assets (IPPE) is a major concern as it indicates deliberate intervention by MRCC management in
Accounting Policy relating to depreciation.

93

Table 6 - Summary: MRCCs External Grant Funding 2007/08-2011/12

6. EXTERNAL GRANT FUNDING Amount of external grant funding received from State and/or Federal governments.
a. Operating grants as
percentage of
Underlying Revenue
Range between
22.78 26.40 %.
Consistently above
SSC peer group
average.
Consistent no clear
evidence of trend.
2008 25.14 %,
2012 25.29 %
Range between
18.60 22.29 %
trend
2008 21.74 %
2012 20.80 %
MRCC ranks in top 2 in SSC
peer group in relation to the
receipt of operating grants
Revenue
b. Capital grants as
percentage of
Underlying Revenue
Range between 1.41
9.42 %.
Consistently below
SSC peer group
average.
Clearly increasing
trend.
2008 1.41 %
2012 7.98 %
Range between
6.54 10.02 %
2008 6.54 %
2012 10.02 %
MRCC significantly below SSC
peer group average in 4 of 5
years. Significant increase in
Capital Grants during
2010/11-2011/12 brought
MRCC more into line with SSC
peer group average.
c. Total grants as
percentage of
Underlying Revenue
Range between
26.03 33.27 %
Clearly increasing
trend.
2008 26.55 %
2012 33.27 %
Range between
27.46 30.61 %
Slightly increasing
trend.
2008 28.28 %
2012 29.82 %
SSC peer group average.
Summary: MRCC has done well in relation to Operating Grant funding ranking in top 2 in SSC peer group relative to Underlying Revenue. Performance in
relation to Capital Grant funding has not been as good although more in line with SSC peer group average during 2010/11-2011/12. Overall, MRCC on par
with SSC peer group in terms of total Operating and Capital Grants received relative to Underlying Revenue. With an average Total External Grants as a
percentage of Underlying Revenue between 27.46 30.61 %, it is clear that all Councils within the SSC peer group are significantly dependent upon
external grant funding to remain financially viable.

94

Table 7 - Summary: MRCCs Growth in Key Financial Indicators 2007/08-2011/12

a. Rate Base 25.88 % n.a. 36.33 % n.a. MRCC Rate Base growth
significantly less than SSC peer
group average
b. Underlying Revenue 20.66 % n.a. 44.02 % n.a. MRCC Underlying Revenue
growth significantly less than
less Capital Grants
12.62 % n.a. 37.84 % n.a. MRCC Underlying Revenue
less Capital Grants growth
group average
d. Total Expenses 24.64 % n.a. 37.60 % n.a. MRCC Total Expenses growth
group average
e. Net Income (Growth
in Underlying
Revenue less Growth
in Total Expenses)
-3.98 %
Total Expenses have
been growing at a
rate that is 3.98 %
greater than
Underlying Revenue.
This is a
fundamentally
unsustainable
scenario.
n.a. 7.99 %
Note: In all, 6 of 11
Councils in SSC
peer group have a
negative Net
Income growth
rate.
n.a. Negative Net Income Growth
rate is a MAJOR problem. It is
a scenario that is
unsustainable in the long-
term. Long-term prognosis if
Net Income growth rate does
not change perpetual
operating deficits.
95


f. Total Liabilities 44.64 %
Significantly lower
than SSC peer group
average.
Average annual
growth rate 8.93 %
rate 13.68 %
Although MRCC growth in
Total Liabilities significantly
lower than SSC peer group
average, two (2) significant
points need to be highlighted:
(i) MRCCs initial indebtedness
already high; (ii) growth rate
in Total Liabilities significantly
greater than growth rate in
Underlying Revenue
g. Interest Bearing
Debt
18.62 %
Significantly higher
than SSC peer group
average.
Average annual
growth rate 3.72 %
0.99 %

Average annual growth
rate 0.198 %
MRCCs growth in Interest
Bearing Debt is significantly
higher than SSC peer group
average for 2007/08-2011/12
period.
h. Depreciation
Capital Assets (IPPE)
-4.35 %
Significantly lower
than SSC peer group
average
The ONLY Council in
SSC peer group to
record negative
growth in
Depreciation
Expense during
2007/08-2011/12
period.
in Depreciation Expense
4.39 %
Negative growth in
Depreciation Expense a
MAJOR concern. Particularly
given growth in Capital Assets
of 21.31 % during same time
period. Indicates direct
intervention in accounting
policy to reduce Depreciation
Expense.
96

7. GROWTH in order to be financially sustainable in the long-term, growth rate in Underlying Revenue must exceed growth rate in Total
Expenses AND Growth rate in Liabilities and Interest Bearing Debt.
i. Growth in Capital
Assets
(Infrastructure,
Property, Plant &
Equipment)
21.31 % Average annual
growth rate 4.26 %
rate 5.08 %
MRCCs growth in Capital
Assets approximately mid-way
in SSC peer group.
j. Growth
Differential
(Depreciation of
Capital Assets v
Growth in Capital
Assets)
-25.55 %
3
rd
worst result for SSC peer group.
Growth Differential of -25.55 % indicates
that the MRCC is not matching Depreciation
Expense to changes in Capital Asset values.
-3.49 %
Indicates that Councils in SSC peer group are
not matching depreciation expense to
changes in capital asset valuations.
Depreciation Expense is being fundamentally
understated.
Depreciation Expense is being
fundamentally understated.
Consistent with finding that
there has been intervention to
reduce Depreciation Expense
(see Table 5).
k. Operating Grants 21.38 % n.a. 46.32 % n.a. MRCCs growth in operating
grants during 2007/08-
2011/12 2
nd
worst in SSC peer
group.
Summary: There are a number of MAJOR concerns from the results presented in Table 7:
- Growth rates in revenue (Rate Base 25.88 %, Underlying Revenue 20.66 %, Underlying Revenue less Capital Grants 12.62 %)
significantly lower than SSC peer group averages;
- Growth rate in Total Expenses at 24.64 % is lower than SSC peer group average but significantly higher than growth rate in Underlying
Revenue (20.66 %) and Underlying Revenue less Capital Grants (12.62 %);
- Negative Net Income Growth rate of -3.98 % in relation to Underlying Revenue (or 12.02 % for Underlying Revenue less Capital Grants)
is fundamentally unsustainable in the longer term;
- Growth rate in Total Liabilities (44.64 %) and Interest Bearing Debt (18.62 %) significantly greater than growth rate in Underlying
Revenue less Capital Grants (12.62 %) this scenario is unsustainable in the longer term;
- Negative Growth Differential (Depreciation Expense versus Capital Assets) of -25.55 % is a major concern and indicates a significant
under-statement of Depreciation Expense.
Taken together, the five key findings highlighted above should raise significant concerns about the on-going financial health of the MRCC.
97


8. OPERATING EFFICIENCY indicators of the relationship between inputs and outputs. Operating efficiency will ultimately have an impact
(positive or negative) upon on-going financial performance.
j. Total Expenses /
Underlying
Revenue
Range between
88.93 97.17 %
Slightly increasing
trend.
2008 88.93 %
2012 91.87 %
Range between
92.64 98.16 %

Slightly decreasing
trend.
2008 98.16 %
2012 95.86 %
MRCC under SSC peer group
average in 4 of 5 years.
k. Total Expenses /
Rate Base
Range between 1.81
191
Consistent
2008 1.8574
2012 1.8392
Range between
1.82 1.93
Slightly decreasing
trend
2008 1.9261
2012 1.9073
MRCC under SSC peer group
average in 3 of 5 years
l. Underlying
Revenue /
Employee Benefits
2008 3.06
2012 2.22
2008 3.17
2012 2.74
2009/10-2011/12 period
m. Employee Benefits
/ Rate Base
2008 68.28 %
2012 90.35 %
2008 63.92 %
2012 74.36 %
MRCC significantly above SSC
peer group average
n. Employee Benefits
as percentage of
Total Expenses
2008 36.76 %
2012 49.12 %
2008 33.13 %
2012 39.06 %
98

o. Employee Benefits
as percentage of
Materials,
Contractors and
Services Costs
2008 92.79 %
2012 151.72 %
2008 78.75 %
2012 110.14 %
RCC peer group average.
Deterioration in trend
between 2007/08-2011/12
significantly worse than SSC
peer group average
p. Growth in Total
Expenses
group average
q. Growth in Employee
Benefits
group average
r. Materials,
Contractors and
Services costs as
percentage of
Underlying Revenue
2008 35.23 %
2012 29.75 %
2008 41.80 %
2012 34.95 %
peer group average.
Translation of Underlying
Revenue into on-ground
service delivery is
deteriorating
Summary: Note: Defined Benefits Plan Superannuation Special Call included for all 10 Councils in SSC peer group.
On basis of Total Expenses as a percentage of Underlying Revenue - MRCC (97.17 %) is on par with SSC peer group average (95.86 %).
On basis of Employee Benefits (total employee costs) MRCC is consistently higher than SSC peer group average by a significant margin in 3 of 4
indicators using Employee Benefits, indicating that there is likely to be over-staffing at MRCC. As with analysis with RRCs, this is particularly so in relation to
Employee Benefits as percentage of Materials, Contractors and Service Costs, which is an indicator of employment costs relative to on-ground service
delivery.
In relation to growth in Total Expenses, MRCC (24.64 %) has performed significantly better than SSC peer group (37.60 %).
In relation to growth in Employee Benefits, MRCC (66.56 %) has performed somewhat worse than SSC peer group (61.91 %).
In relation to the translation of Underlying Revenue into on-ground service delivery, the MRCC has performed worse than SSC peer group and the
performance of the MRCC and the SSC peer group as a whole is deteriorating in relation to this measure.

99

Table 9 - Summary: MRCCs Rate Base as percentage of Underlying Revenue 2007/08-2011/12

9. OTHER INDICATORS size of Rate Base relative to Underlying Revenue.
a. Rate Base as a
percentage of
Underlying Revenue
2012 49.95 % Increasing trend
2008 47.88 %
2012 49.95 %
2012 50.83 % Slightly decreasing
trend
2008 51.34 %
2012 50.83 %
MRCC trending in opposite
direction to SSC peer group.
Significance highlights why
reliance upon indebtedness
relative to Rate Base can be
misleading if size of Rate Base
Revenue is not taken into
account, nor changes in the
relative size of Rate Base
Revenue over time. Thus, a
set rule such as Debt = 40 % of
Rate Base will hide increasing
indebtedness if a Councils
Rate Base relative to
Underlying Revenue is
increasing.
Summary: MRCCs Rate Base relative to Underlying Revenue is increasing. This is significant due to the fact that the MRCC has been citing Interest Bearing
Debt relative to Rate Base but have failed to acknowledge that the MRCCs Rate Base relative to Underlying Revenue is increasing. As such, increases in
Interest Bearing Debt are being understated. Indebtedness must be cited relative to Underlying Revenue as this will automatically cater for any changes in
the relative size of a Councils Rate Base relative to Underlying Revenue.

100

101

Summary of key findings Chapter 7 Re-thinking the notion of financial
sustainability in the Victorian Local Government Sector

The key findings from the analysis presented throughout this chapter include:

1. The current process used by the Victorian Auditor Generals Office (VAGO) for evaluating
the financial sustainability of local Councils is fundamentally sound; however the author
is of the view that there are limitations inherent in the measurement of local Council
financial sustainability. These limitations include:

o The use of financial sustainability benchmarks (indicators) that appear to be too
soft;
o Local Government accounting practices that allow for the reporting of potentially
misleading results through the inclusion of prepaid grant monies in Operating
Income in the year of receipt (as opposed to recording prepaid grant monies as
prepaid revenue a current liability), and the inclusion of non-monetary (book
entry) adjustments in reported Operating Income;
o There is a case for expanding the number of financial sustainability indicators
from six (6) to 10 in order to enhance the overall financial sustainability
assessment of individual local Councils; and,
o The current financial sustainability assessment process does not consider the
context within which local Councils operate in particular, their local
communitys capacity and revenue growth potential.

2. The author proposed a revised set of financial sustainability indicators with tighter
minimum parameters. This adjusted set of financial sustainability indicators are
summarised in Table 1;

3. Not surprisingly, the application of the authors revised financial sustainability indicators
to two groups of local Councils the Regional and Rural Cities peer group, and a second
Similar Size Council peer group resulted in a downgrade of both peer group averages
from low risk to medium risk in terms of an overall financial sustainability assessment;
102

4. The MRCC was located mid-way in both the Regional and Rural City and Similar Size
Council peer groups in terms of an overall financial sustainability assessment with a
medium risk rating;

5. An evaluation of the MRCCs financial sustainability over the 2007/08-2016/17 actual
and projected period revealed a significant deterioration in the MRCCs financial
sustainability assessment from 2011/12 to 2012/13 with no projected recovery over the
budget forecast period (2013/14-2016/17) see Figure 2. This prognosis is consistent
with the financial ratio analysis presented in Chapter 4 of this report;

6. The deterioration in the MRCCs financial sustainability assessment was characterised by
a combination of deteriorating Operating Results, deteriorating solvency, increasing
indebtedness, and poorer projected capital replacement performance;

7. An Affordability v Revenue Raising Potential matrix was proposed as a way of
evaluating a local Councils financial sustainability within the context of its own local
community see Figure 3;

o An analysis of the G18 group of local Councils found that the MRCCs local
community had the second lowest capacity to pay for local Council service
delivery (the Rural City of Swan Hill had the lowest) with the effective level of
Rates and Charges already at 4.07 % of median household income;
o The MRCC was ranked 12
th
within the G18 peer group of local Councils in terms of
the potential for future revenue growth;
o The MRCC was found to be located in Quadrant 1 Low Affordability and Low
Potential for Revenue Growth see Figure 3;

103

8. There are a number of implications stemming from being located in Quadrant 1,
including:

- The affordability of existing rates and charges is already an issue being currently at
4.07 % of median household income, the MRCCs rates and charges are the 2
nd

highest within the G18 peer group;
- Future rate levy increases will further exacerbate this affordability issue and
therefore the MRCC should be seriously looking at capping future rate levy increases
to at a maximum CPI growth rate (2.5 % p.a.). If the MRCC was to do this, then over
time the relative affordability of the MRCCs rates and charges compared to the G18
peer group will improve significantly given the normalized practise of annual rate
levy increases of 4.0 7.0 % across the Victorian local government sector;

- Due to low potential for revenue growth, there is a higher dependence upon rate
levy increases for revenue growth highlighting the need to look to non-rate base
sources of revenue growth and options for reducing expenditure. Existing levels of
service delivery need to be assessed on the basis of community need as opposed to
the impact upon the MRCCs organization or revenue base;

- The MRCC must look at reducing the current degree of subsidized service delivery
from the MRCCs rate base through increasing the degree of service provision on a
user-pays basis;

- Economic growth across the municipality must remain (as it currently is) a long-term
strategic priority of the MRCC.

9. The value of the Affordability v Revenue Raising Potential matrix become very clear
when the matrix was overlayed with each individual local Councils financial
sustainability assessment.

- The above analysis demonstrates the value of the Affordability v Revenue Raising
Potential matrix as a tool for evaluating a local Councils financial sustainability
104

within the context of its own local community (municipality). In particular,
Wodonga, Baw Baw and Geelong were each categorised as high risk under the
authors adjusted financial sustainability criteria, but it is clear that their future
prospects are varied due to their location in Quadrants 1, 2 and 4 respectively see
Figure 5.

10. The analysis using the Affordability v Revenue Raising Potential matrix highlights the fact
that the assessment of a local Councils financial sustainability should never be divorced
from local context;

11. In seeking to envision a financially sustainable local Council, it was found that common
characteristics of a financially sustainable local Council would include:

- Solvent - Being able to meet current and future expenditure obligations as and when
they fall due;
- Responsive - Being able to meet current and future community needs for local
Council service delivery;
- Sound risk management - to be able to adequately cope with unforeseen
circumstances which may impact materially upon expenditure and/or revenue
policies; and,
- Strategic - A long-term decision horizon.

12. A sustainable budget strategy was devised, consisting of 12 key principles:

a. The use of an extended budget forecast period of 7 years to provide greater insight
into the longer-term ramifications of budget decisions;

b. The use of cash-based revenue and expenditure forecasts free of non-monetary
(book entry) items, accrual and other adjustments;

c. The annual operating budget must be balanced after capital grants are taken into
account in the absence of non-monetary (book entry) items, changes in effective
105

depreciation rates, new borrowings, and/or liquidation of assets (financial or non-
financial);

d. A sustainable budget strategy should incorporate an annual contingency fund
allocation equivalent to at least 1.0 % of total Operating Cash Inflows in addition to a
Minimum Operating Surplus requirement equivalent to 2.0 % of total Operating Cash
Inflows in order to position a local Council to be able to respond to significant
unforeseen expenditure commitments without having to resort to raising new debt
finance, and without having to make any significant changes to revenue or
expenditure policies;

e. A target-costing approach to budgeting is recommended as it requires a local Council
to fit proposed levels of service delivery within pre-determined budget parameters
rather than building a budget around desired levels of service delivery;

f. The annual growth rate in total expenditures must not exceed the average annual
growth rate in Underlying Revenue and/or total Operating Cash Inflows;

g. Keeping interest bearing debt levels below 20 % of Underlying Revenue less Capital
Grants, and debt terms to a maximum of 7.5 years in order to contain interest costs;

h. A capital investment program should be measured and kept within parameters that
do not necessitate excessive debt financing;

i. Annual depreciation allocations must be fully funded and sufficient to fund all capital
renewal / upgrade expenditures;

j. Annual rate levy increases should be capped at the lower of 2.5 % per annum or the
CPI growth rate in order to avoid real incursions into a local communitys capacity
to pay for local Council service delivery;

106

k. User fees and charges should reflect full-cost recovery care must be taken to
accurately assess the full-cost of all forms of service delivery and User fees and
charges need to then be set accordingly;

l. Capital grants should not be accepted where there is tangible evidence of cost-
shifting by other spheres of government (State or Federal).

All 12 key budget principles are consistent with the concept of financial sustainability.

13. A review of the MRCCs financial performance during the 2007/08-2012/13 period and
projections contained in the MRCCs Budget 2013/14 document reveals that the MRCC
has fallen short in relation to 11 of the 12 key budget principles noted above. In relation
to the 12
th
principle ensuring that capital grants did not result in cost-shifting by other
spheres of government (State or Federal) to the MRCC could not be determined on the
basis of publicly available data. It is the authors assertion that the failure of the MRCC
to meet the 12 key principles noted above provides significant insight into why the
MRCCs financial performance has been deteriorating, and why this deteriorating
financial performance is projected to continue throughout the budget forecast period in
the absence of any significant remedial intervention.

107

Table 1 Proposed Adjusted Financial Sustainability Indicators

Indicator
Parameters
High Risk Medium
Risk
Low Risk
1. Underlying Result
- Adjusted [Underlying] Net Surplus /
Underlying Revenue
- [(Underlying Surplus less Capital Grants) /
(Underlying Revenue less Capital Grants)]

< 0

< -10 %

0.0 5.0 %

-10 % - 0

> 5.0 %

> 0
2. Liquidity
- Current Assets / Current Liabilities
- Holdings of Cash and Cash Equivalents /
Rate Base

< 1.5

< 50 %

1.5 2.0

50 70 %

> 2.0

> 70 %
3. Self-financing
- Net Cash Flow from Operations / Underlying
Revenue
- Net Cash Flow / Underlying Revenue

< 20 %
< 0 %

20 30 %
0 5 %

> 30 %
> 5 %
4. Indebtedness
- Total Liabilities / (Underlying Revenue less
Capital Grants)
- Interest Bearing Debt / (Underlying
Revenue less Capital Grants)

> 55 %

> 27.5 %

40 55 %

20 27.5 %

< 40 %

< 20 %
5. Capital Replacement
- Capital Expenditure (IPPE) / Depreciation
(IPPE)
- Depreciation (IPPE) / Infrastructure,
Property, Plant and Equipment Assets (IPPE)

1.0

2.5 %

1.0 1.5

2.5 3.0 %

> 1.5

> 3.0 %

108

Figure 2 Summary: Overall Financial Sustainability Assessment - MRCC (2007/08-
2016/17)

Definition of Measure: Combined scores for Underlying Result, Liquidity, Self-financing,
Indebtedness, and Capital Replacement using adjusted financial sustainability indicators.

Benchmark for risk categories: Low Risk - 26; Medium Risk 20-26; High Risk - < 20.

MRCC Performance and Trend: MRCC assessed as medium risk during 2007/08-2011/12
period. MRCC assessed as high risk during 2012/13-2016/17 period. Clear evidence of a
deteriorating trend across the 2007/08-2016/17 period. There was a significant
deterioration in the MRCCs financial sustainability during 2011/12-2012/13 with no real
prospect of recovery during the budget forecast period based upon current budget forecasts
as presented in the MRCCs 2013/14 budget document.

24 24
22 22
23
18
19
18
19 19
0
5
10
15
20
25
30
2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17
109

Figure 3 Affordability v Revenue Raising Potential Matrix

Local Council Financial Sustainability - Projecting forward
4.7
4.6
4.50 A
4.40 A Council A
4.30 B Council B
4.20 C Council C
4.10 D Council D
4.00 E Council E
3.90
3.80
3.70 B
3.60
3.50
3.40 Assessment - Strategic Financial Management
3.30 D
3.20 Rate Levy Non-Rate Subsidized User-pays Operating Assessed
3.10 Increases Base Income Services Services Expenditure Difficulty
3.00 C Council A Minimize Maximize Reduce Increase Reduce High
2.90 Council B Minimize Maximize Reduce Increase Reduce Mod-High
2.80 Council C Minimize Maximize Reduce Increase Reduce Mod-High
2.70 Council D Minimize Maximize Reduce Increase Reduce Moderate
2.60 Council E Minimize Maximize Reduce Increase Reduce Low
2.50
2.40 Assessed Difficulty - relative to other local Councils in different quadrants.
2.30 E
2.20
2.10
2.00
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17
Revenue Raising Potential
Legend:
Local Council Financial Sustainability: Affordability v Revenue Raising Potential
E
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QUADRANT 1
Low affordability &
Low potential for revenue
growth
QUADRANT 2
Low affordability &
High potential for revenue
growth
QUADRANT 3
High affordability &
Low potential for revenue
growth
QUADRANT 4
High affordability &
High potential for revenue
growth
110

Figure 4 Application of Affordability v Revenue Raising Potential Matrix

4.7
4.6
4.50 8
4.40 1 Ballarat
4.30 2 Bendigo
4.20 3 Geelong
4.10 4 Shepparton
4.00 7 5 Horsham
3.90 6 La Trobe
3.80 13 7 Mildura
3.70 5 11 18 8 Swan Hill
3.60 4,15 12 9 Wangaratta
3.50 9 1 10 Warrnambool
3.40 11 Wodonga
3.30 10 12 Baw Baw
3.20 6 13 Campaspe
3.10 14 Cardinia
3.00 15 East Gippsland
2.90 2 16 Macedon Ranges
2.80 3 17 Nillumbik
2.70 14 18 Wellington
2.60
2.50 16
2.40 17
2.30
2.20
2.10
2.00
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17
Legend:
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(
%
)
111

Figure 5 Affordability v Revenue Raising Potential Matrix with Financial Sustainability Assessment overlay

4.7
4.6
4.50 8
4.40 1 Ballarat
4.30 2 Bendigo
4.20 3 Geelong
4.10 4 Shepparton
4.00 7 5 Horsham
3.90 6 La Trobe
3.80 13 7 Mildura
3.70 5 11 18 8 Swan Hill
3.60 4,15 12 9 Wangaratta
3.50 9 1 10 Warrnambool
3.40 11 Wodonga
3.30 10 12 Baw Baw
3.20 6 13 Campaspe
3.10 14 Cardinia
3.00 15 East Gippsland
2.90 2 16 Macedon Ranges
2.80 3 17 Nillumbik
2.70 14 18 Wellington
2.60
2.50 16
2.40 17
2.30
2.20 High Risk
2.10 Moderate Risk
2.00 Low Risk
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17
L.F. O'Connor 2014.
Legend:
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(
%
)
Legend - Financial
Sustainability Assessment:
112

113

Summary of key findings Chapter 8: A review of the MRCCs debt strategy
with accompanying recommendations

Setting the context: Preliminary comments on the MRCCs increasing indebtedness

The MRCC has had a somewhat chequered history when it comes to the use of debt.
Specifically, the MRCC has in the past and in more recent times used debt to fund non-
capital investment-related expenditures, and has on a number of occasions made use of
excessively long loan terms of up to 30 years. Indeed, the MRCC has stated in its last two
budget documents that all new borrowing will be on a principal and interest basis for a
20-30 year term (MRCC Budget 2012/13, Section 3, p.1; MRCC Budget 2013/14, p.22). The
use of excessively long loan terms is causing the MRCCs estimated weighted average debt
portfolio term to blow out to in excess of 20 years and is resulting in a significant increase in
the cost impost upon the local community.

In addition, the MRCC has signalled its intent to keep borrowings at or near 40 per cent of
its rate base over the budget forecast period without disclosing any strategy for debt
reduction. Combined with clear evidence that the MRCCs capacity to service debt has
deteriorated significantly during the past three years, and with no clear prospects of a turn-
around during the current budget forecast period, the underlying financial risk of the MRCC
has increased significantly and is going to have very real ramifications in terms of the
MRCCs future capacity to respond to unforeseen circumstances and to invest in major
community infrastructure assets going forward.

The following graphs highlight the issues noted above.

114

115

Figure 1 MRCC: Actual Level of Indebtedness (Total Liabilities & Interest Bearing Debt) (2007/08-2016/17) ($000)

Actual and projected indebtedness (2007/08-2016/17):
Total Liabilities The MRCCs overall level of indebtedness has been consistently increasing since 2010/11. Projected Total Liabilities of
$53.011 million in 2016/17 is 51.13 % higher than $35.077 million in 2007/08.
Interest Bearing Debt The MRCCs indebtedness as measured by outstanding Interest Bearing Debt has been consistently increasing since
2010/11. Projected Interest Bearing Debt of $26.304 million in 2016/17 is 59.05 % higher than $16.538 million in 2007/08.

$35,077
$36,750
$36,230
$32,797
$50,735
$47,271
$48,061 $48,097
$49,905
$53,011
$16,538
$18,075
$16,715
$15,286
$19,616
$23,133 $23,333
$22,735
$23,884
$26,304
$-
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17
Total
Liabilities
Interest
Bearing
Debt
116

Figure 2 MRCC: Actual & Projected Level of Indebtedness relative to Underlying Revenue less Capital Grants (2007/08-2016/17)

Commentary:
Relative to Underlying Revenue less Capital Grants, the MRCCs level of indebtedness increased significantly during the 2010-2012/13
period and the data presented in the above graph indicates that the increased level of indebtedness has become the new tolerable norm
for the MRCC with no evidence of significant reduction throughout the budget forecast period.

43.87% 43.65%
44.70%
40.94%
56.51% 56.60%
55.12%
53.19%
52.70%
53.43%
20.68%
21.47%
20.62%
19.08%
21.85%
27.70%
26.76%
25.14% 25.22%
26.51%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17
Total
Liabilities as
%
Underlying
Revenue
less Capital
Grants
Interest
Bearing
Debt as % of
Underlying
Revenue
less Capital
Grants
117

Figure 3 MRCC: Impact of Increasing Indebtedness upon actual / projected annual finance costs (2007/08-2016/17)

Commentary:
The significant increase in the MRCCs interest bearing debt in 2011/12 (from $15.286 million to $19.616 million an increase of $4.330
million) effectively increased the MRCCs actual / projected annual finance costs by approximately $450 000 - $500 000. The major reason
for the actual / projected annual finance costs remaining at a relatively consistent level during the 2012/13-2016/17 even though interest
bearing debt is projected to increase to $26.304 million by 2016/17 during this period is due to the use of longer loan terms as indicated in
successive MRCC Budget documents.

$1,084
$1,024
$1,135
$1,047
$970
$1,440
$1,564
$1,452 $1,460
$1,529
$1,574
$963
$1,360
$1,429
$1,270
$1,483
$1,648
$1,598
$1,851
$1,580
$2,658
$1,987
$2,495 $2,476
$2,240
$2,923
$3,212
$3,050
$3,311
$3,109
$-
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17
Interest
Cost
Principal
Repayments
Total Debt
Servicing
Payments
118

Figure 4 MRCC: Estimated Weighted Average Debt Portfolio Term (Years) by year (2008/09-2016/17)

Commentary:
Based upon both the estimated average debt portfolio term and estimated weighted average debt portfolio term, the MRCCs estimated debt portfolio
term (in years) is trending upwards that is, the estimated average debt portfolio term is projected to get longer over the budget forecast period.

17.50 17.50 17.50
15.77
15.15
17.09
18.82
20.50
21.50
18.62 18.62 18.62
18.24
17.52
17.25
17.91
19.48
20.51
0.00
5.00
10.00
15.00
20.00
25.00
2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17
Estimated
Average Debt
Portfolio Term
(Years)
Estimated
Weighted
Average Debt
Portfolio Term
(Years)
119

Figure 5 Underlying Surplus / Deficit less Capital Grants as percentage of Underlying Revenue less Capital Grants

Definition: Underlying Surplus / (Deficit) less Capital Grants / Underlying Revenue less Capital Grants.
Interpretation: Underlying Surplus / (Deficit) less Capital Grants is the true measure of a local Councils capacity to service debt.
Benchmark: 0.00.
MRCC Status (as at 30 June 2013): Deficit = -2.63 %.
MRCC Trend: Significant deterioration during 2007/08-2012/13. Projected to breakeven during budget forecast period.
Significance: MRCCs underlying performance has fundamentally deteriorated during 2007/08-2012/13 period. Projected performance during
budget forecast period is breakeven with no room to move.

10.06%
6.62%
-0.19%
-2.22%
0.16%
-2.63%
0.38%
-0.37%
0.07%
0.45%
-4.00%
-2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17
(Deficit) as %
Underlying Revenue
Benchmark
120

Figure 6 Net Cash Flow from Operations as percentage of Underlying Revenue

MRCC Status (as at 30 June 2013): 21.94 % - below RRC and SSC peer group averages.
Significance: MRCCs Net Cash Flow from Operations has been exhibiting a deteriorating trend throughout the 2007/08-2012/13 period. This
is projected to deteriorate further during budget forecast period.

26.70% 26.78%
26.16%
25.27%
34.93%
21.94%
26.73%
21.97%
21.08%
20.79%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17
NCF from Operations
as percentage
Underlying Revenue
RRC Average
(2007/08-2011/12)
2011/12)
121

Figure 7 Net Cash Flow as percentage of Underlying Revenue

Benchmark: RRC Average (2007/08-2011/12) 2.60 %. SSC Average (2007/08-2011/12) 1.45 % %.
MRCC Status (as at 30 June 2013): 4.61 % - above RRC and SSC peer group averages.
MRCC v Benchmark: Below RRC benchmark in 8 of 10 years during 2007/08-2016/17 period. Below SSC benchmark in 7 of 10 years during
2007/08-2016/17 period.
Significance: MRCCs Net Cash Flow from Operations has been exhibiting a deteriorating trend throughout the 2007/08-2012/13 period. Poor
Net Cash Flows projected to deteriorate further during budget forecast period.

2.82%
3.91%
1.36%
-4.78%
1.54%
4.61%
-11.44%
0.37% 0.37% 0.37%
-14.00%
-12.00%
-10.00%
-8.00%
-6.00%
-4.00%
-2.00%
0.00%
2.00%
4.00%
6.00%
2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17
NCF as percentage
Underlying Revenue
RRC Average
(2007/08-2011/12)
2011/12)
122

Figure 8 Current Ratio

Definition: Current Assets divided by Current Liabilities.
Benchmark: RRC Average (2007/08-2011/12) 2.24. SSC Average (2007/08-2011/12) 2.42. Auditor Generals High Risk benchmark 1.0.
MRCC Status (as at 30 June 2013): 1.73 Significantly below RRC and SSC peer group averages.
NOTE: Current Ratio at 30 June 2013 would be 1.22 if $4.0 loan on 28 June 2013 & bringing forward of $6.05 million in VCG funding from
2013/14 are excluded from the analysis.
MRCC Trend: Consistent and significant deterioration during 2007/08-2016/17 period. During budget forecast period MRCCs Current Ratio
is only marginally above the Auditor Generals High Risk benchmark of 1.0.

2.43
2.53
1.64
1.76
1.38
1.73
1.07 1.08 1.08
1.10
0.00
0.50
1.00
1.50
2.00
2.50
3.00
2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17
Current Ratio
RRC Average
(2007/08-2011/12)
2011/12)
Auditor General - High
Risk Benchmark
123

Figure 9 Holdings of Cash and Cash Equivalents as percentage of Rate Base

Definition: Total Cash and Cash Equivalents divided by Rate Base.
MRCC Status (as at 30 June 2013): 54.83 % Below RRC and SSC peer group averages.
MRCC Status (as at 30 June 2013): If bringing forward of $6.05 million VGC funds from 2013/14 is excluded from the analysis = 42.35 %
Significantly below RRC and SSC peer group averages.
MRCC Trend: Consistent and significant deterioration during 2011/12-2016/17 period.

62.35%
66.88%
60.03%
56.77%
72.44%
54.83%
29.41%
28.69%
27.66%
26.68%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
80.00%
2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17
Holdings of Cash &
Cash Equivalents as %
Rate Base
RRC Average
(2007/08-2011/12)
2011/12)
124

125

Summary of key findings

1. The use of debt as a part of an organizations financing strategy within the Local
Government sector is distinguished from the private sector in at least three ways:

The aim of a financing strategy is to maximise value for money for the local
community;
Many assets financed by debt within the Local Government sector do not generate
economic returns, and therefore debt cannot be justified on the basis that it is being
used to fund capital investment;
The absence of economic returns being generated from assets being financed by
debt means that the use of debt finance creates obligations to service debt from on-
going operating budgets;
The level of debt that a local Council should carry depends upon a range of factors
including existing levels of debt, current and projected Net Cash Flows, the
underlying Capital Improved Value base for the municipality;
There are three factors which contribute to the overall cost of debt: (i) the amount
of debt outstanding; (ii) the average term of debt; and (iii) the average interest rate;
The use of debt on the basis of inter-generational equity (that is, that future
generations should contribute to the cost of current infrastructure investments) is
contrary to any notion of prudent financial management as it inevitably involves the
use of longer loan terms and thereby increases the total cost of infrastructure assets;
and,
A set of 12 guidelines for a financially prudent debt policy were proposed these
guidelines are summarised in Table 8.1.

126

Table 8.1 Preliminary guidelines for a financially prudent debt policy

(i) A ban on the use of debt to fund ongoing operating activities except where there are
genuine and unforeseen working capital deficiencies. In such cases, short-term
bridging finance may be used for a period not exceeding 12 months;

(ii) Debt must never be used as a means of achieving financial sustainability indicator
targets (for example, the Current Ratio);

(iii) The use of short-term bridging finance can be minimized through creating a
contingency fund to which annual allocations from the operating budget are made
to create a reserve for unforeseen but necessary expenditures;

(iv) Given that debt is primarily used as a funding source for non-income generating
capital investment, minimising the cost of debt must be a primary objective;

(v) The actual size of debt should be kept to a minimum through ensuring that annual
depreciation allocations create sufficient reserves to fund all asset renewal and
maintenance expenditures;

(vi) The annual capital investment expenditure budget is smoothed over a number of
years in order to reduce the size of new borrowings that may be required to meet
chunky expenditures typically associated with capital expenditure;

127

Table 8.1 Preliminary guidelines for a financially prudent debt policy (Cont)

(vii) Debt terms should be kept within a 5-7.5 year range, with an absolute maximum
10-year debt term where circumstances warrant the use of a longer debt term;

(viii) The decision to use fixed or variable interest rate loans should be made on the
basis of minimising the overall cost of a loan over the life of the loan;

(ix) Interest only repayment periods must be avoided interest only periods add to a
loans term and increases the total cost of debt finance over the life of the loan;

(x) In years when there is an operating surplus, surplus monies must be transferred to a
reserve to fund future capital expenditure programs rather than used for funding an
expansion in annual service delivery;

(xi) In years when capital and/or operating grant funding allocations are received in
advance (for example, grant allocations for the year 20X1-X2 being received in
May/June 20X1), the monies received in advance must be set aside in a reserve and
not be used to fund operating activities relating to the current year. This measure is
aimed at ensuring that annual service delivery levels are funded from revenue being
generated and/or received during the same financial year; and,

(xii)Debt financing can never be justified on the basis of inter-generational equity or
similar notions that supposedly attempt to allocate the cost of capital investments
over an extended period of time in order that future users also contribute to the cost
of the capital investment. Such notions are financially imprudent as it inevitably
leads to longer-term loan periods being negotiated which increases the total cost of
assets being created.
128

2. The MRCCs debt policy appears to consist of three pillars:

Keeping debt levels within 40-45 % of rate revenue;
Using loan terms of 20-30 years;
Using debt as a funding source for capital works programs.
It was found that the policy of keeping debt levels within 40-45 % of rate revenue
ignored the changing composition of the MRCCs Underlying Revenue, thus enabling
an effective increase in debt by up to 27 % without breaching the 40-45 % of rate
revenue rule;
The MRCCs signalled intent to keep debt levels at or near 40 % of Rate Base over the
budget forecast period is an anomaly within the G18 peer group of local Councils;
The use of loan terms of 20-30 years is an anomaly within the G18 peer group and is
adding significantly to the cost of the MRCCs on-going operations;
As noted in Point 1 debt can never be justified in the basis that it is being used to
fund capital works; and,
There is evidence to suggest that the MRCCs actual practice in relation to the use of
debt is contrary to the debt policy espoused by the MRCC in relation to loan terms
and the purpose for which debt has been used.

3. There is clear evidence that the MRCC is making use of long-term loans that is resulting
in an increase in the MRCCs weighted average debt portfolio term and is resulting in
significant and avoidable interest costs being incurred by the MRCC. Specifically;
The estimated average term of the MRCCs debt portfolio has increased significantly
post-2010/11 and is projected to continue to increase throughout the budget
forecast period (2013/14-2016/17);
The MRCCs estimated average loan term (projected to be 16.65 years in 2016/17) is
significantly higher than the G18 peer group average (projected to be 8.68 years in
2016/17).

129

4. The cost of debt finance increases significantly as a loan term is increased beyond 5-10
years. Specifically:

A loan taken over 30 years will result in total interest costs equivalent to 3.23 times
the interest costs of an equivalent loan taken over 10 years;
A loan taken over 20 years will result in total interest costs equivalent to 2.07 times
the interest costs of an equivalent loan taken over 10 years;
Two loans raised by the MRCC in 2003/04 amounting to $6.5 million and taken over
30 years is going to cost the Mildura community an additional $6.25 million in
interest costs compared to a scenario whereby both loans were taken over 10 years;
The MRCCs representations which have sought to justify increased indebtedness on
the basis of taking advantage of low interest rates are false on two counts: (i)
savings resulting from low interest rates are being off-set by the use of excessively
long loan terms; and (ii) not all loans raised by the MRCC during the past 2 years
have been negotiated at low interest rates. For example, a $1.0 million loan was
raised by the MRCC in September 2012 which was taken over 30 years at an interest
rate of 7.4 %, which is significantly above any notion of low interest rates.
Specifically, the MRCCs weighted average interest rate on outstanding debt as at 30
June 2013 was 6.22 %, and the MRCC negotiated a 12-month $1.0 million loan in
October 2013 for an interest rate of 3.29 %.

5. The MRCCs use of excessive loan terms is creating a false sense of affordability and is
effectively obscuring the true cost of debt from the local community. In particular, the
MRCC has failed to disclose in their 2013/14 Budget document any explanation of the
consequences (increased costs) of using longer-term loan facilities even though the use
of longer-term loan facilities is resulting in a material increase in the MRCCs total
interest costs and increasing the real cost of ongoing operations of the MRCC.

130

6. Reducing loan terms is the key to reducing the MRCCs cost of increasing indebtedness;

If the MRCC was to reduce the term of its $23.133 million debt portfolio as at 30
June 2013 to 10 years, projected interest savings will be in the order of $18.4 million
(based upon the MRCCs Weighted Average Interest Rate of 6.22 % as at 30 June
2013);
If the MRCC was to reduce the term of its $23.133 million debt portfolio as at 30
June 2013 to 7.5 years, projected interest savings will be in the order of $20.5 million
(based upon the MRCCs Weighted Average Interest Rate of 6.22 % as at 30 June
2013) see Table 8.2.

131

Figure 8.2 Summary of alternative debt strategy scenarios

A. SUMMARY Repayment of existing debt as at 30 June 2013 - $23.133 million over
X years @ 6.22 % ($000)
Annual
Repayments
Total Interest
Cost
Projected
Interest Savings
Projected debt
30 June 2017
Existing strategy $3 171 $27 062
1
$26 304
Proposed
strategy:
2

5 years $5 525 $4 490 $22 572 $5 201
7.5 years $3 953 $6 543 $20 519 $12 099
10 years $3 176 $8 626 $18 436 $15 509
1
Based upon current projected repayments for 2013/14-2016/17 (MRCC Budget 2013/14, p.54)
+ repayment of $26 304 million over 20 years @ 6.22 % with no new borrowings.
2
Proposed strategy includes moratorium on new borrowings until existing debt is repaid in full.

B. SUMMARY Repayment of existing debt as at 30 June 2013 - $23.133 million over
X years @ 5.50 % ($000)
Annual
Repayments
Total Interest
Cost
Projected
Interest Savings
Projected debt
30 June 2017
1
$26 304
Proposed
strategy:
2

5 years $5 417 $3 953 23 109 $5 135
7.5 years $3 847 $5 746 21 316 $11 953
10 years $3 069 $7 557 19 505 $15 331
1
2

C. SUMMARY Repayment of existing debt as at 30 June 2013 - $23.133 million over
X years @ 7.00 % ($000)
Annual
Repayments
Total Interest
Cost
Projected
Interest Savings
Projected debt
30 June 2017
1
$26 304
Proposed
strategy:
2

5 years $5 642 $5 077 $21 985 $5 273
7.5 years $4 069 $7 419 $19 643 $12 257
10 years $3 294 $9 803 $17 259 $15 699
1
2

132

7. Two key strategies that will be effective in breaking the MRCCs trend of increasing
indebtedness include:

The introduction of a moratorium on new borrowings from 2013/14 to be kept in
place for at least the budget forecast period (2013/14-2016/17);
Increasing the Principal v Interest payment differential (that is, keeping annual debt
servicing payments at a level that ensures a material excess of principal reduction
compared to annual interest charges); and,
The need for the MRCC to take action in regard to the MRCCs projected increasing
indebtedness is significant given the size of projected savings that can be achieved:

Scenario 1: The simultaneous introduction of a moratorium on new borrowings from
2013/14 and a commitment to reduce the MRCCs debt portfolio term to 10 years
will result in projected interest savings of $17.765 million, and reduce the projected
level of outstanding debt as at 30 June 2017 by $10.795 million from the MRCCs
current budget projection of $26.304 million to $15.509 million.

Scenario 2: The simultaneous introduction of a moratorium on new borrowings from
2013/14 and a commitment to reduce the MRCCs debt portfolio term to 7.5 years
will result in projected interest savings of $19.876 million, and reduce the projected
level of outstanding debt as at 30 June 2017 by $14.205 million from the MRCCs
current budget projection of $26.304 million to $12.099 million.

Scenario 3: If the MRCC was to increase its debt servicing payments by $1.5 million
per annum to an average of $4.671 million per annum, the MRCCs projected
outstanding debt as at 30 June 2017 will be reduced by $6.305 million, and total
projected interest savings would be in the vicinity of $16.9 million.

133

8. Given the MRCCs current and projected operating results and Net Cash Flow projections
as presented in the 2013/14 budget document, the MRCC faces a very real risk of on-
going normalized reliance upon debt to fund operating budget shortfalls. Such a
scenario will result in a continuation of the already established trend of increasing
annual costs associated with servicing increased indebtedness with clear implications for
on-going operating budgets.

9. Whether the MRCC should use fixed or variable interest rate loans is a decision that can
only be made when a new loan is being negotiated and will depend upon the most cost
effective options available at that time. By far the biggest issue being faced by the
MRCC is the use of longer-term loan periods which is resulting in a significant interest
cost impost being incurred by the MRCC.

For example, in October 2013 the MRCC negotiated a $1.0 million over 12 months at
a variable interest rate of 3.29 %, which will result in a total projected interest cost of
$0.329 million.

In September 2012 the MRCC also negotiated a $1.0 million loan but in this second
instance the loan term was 30 years and the interest rate negotiated was 7.4 %. The
total interest cost of this second loan is projected to be $1.515 million, 4.6 times the
total interest cost of the first-mentioned loan.

10. The MRCCs signalled intent to keep debt at or near 40 % of Rate Base will allow for the
MRCC to effectively increase its level of indebtedness by over 27 % over the budget
forecast period without breaching the 40 % of Rate Base parameter due to the
projected change in the MRCCs Underlying Revenue composition. Unlike a number of
other local Councils in the G18 peer group, the MRCCs 2013/14 Budget document
provides no detail on how the MRCC intends to neither manage its increasing
indebtedness nor how and over what time period it is going to be reduced.

134

11. The MRCCs response to concerns raised about the MRCCs increasing indebtedness has
been inadequate and lacking in sufficient detail to allow the Mildura community to make
an informed evaluation of the situation that is unfolding.

12. The underlying financial risk of the MRCC is increasing principally due to increasing
indebtedness at a time when projected operating results, Net Cash Flows and holdings
of cash reserves are deteriorating, and the MRCCs Rate Base dependency is projected to
increase significantly. As a result, the MRCCs current debt strategy is going to
contribute to on-gong pressure for the MRCC to increase rates by at least 5.0 % per
annum into the foreseeable future as the MRCCs annual debt servicing obligations
increase see Figure 8.3. This is a significant concern given that the average level of
rates imposed by the MRCC are already the highest within the G18 peer group at
0.007304 cents per $1 CIV compared to the average for the G18 peer group of 0.004545
cents per $1 CIV.

135

Figure 8.3 MRCC: Annual Debt Servicing Commitments ($000)

13. The MRCCs exhibited propensity to maintain overall debt levels at or near 40 % of Rate
Base which effectively results in the level of MRCCs interest bearing debt increasing in
line with growth in the MRCCs Rate Base is at odds with many other local Councils
who are exhibiting a clear intent to reduce levels of indebtedness in spite of increases in
their capacity to service increased levels of debt.

A comparison of the MRCC with 13 other local Councils included in the G18 peer group
revealed that 6 have debt levels averaging at or near 40 % of Rate Base (Mildura,
Cardinia, Warrnambool, Ballarat, Wangaratta, and Wodonga). Of these 6, 4 have an
exhibited intent to reduce debt by an average of 21.50 % over the budget forecast
$2,658
$1,987
$2,495
$2,476
$2,240
$2,923
$3,212
$3,050
$3,311
$3,109
$1,574
$963
$1,360
$1,429
$1,270
$1,483
$1,648
$1,598
$1,851
$1,580
$1,084
$1,024
$1,135
$1,047
$970
$1,440
$1,564
$1,452 $1,460
$1,529
$-
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17
Total Debt Servicing Payments Principal Repayments
Interest Payments
136

period (2013/14-2016/17). Mildura (marginal decrease of 4.31 %) and Wangaratta
(increase of 13.24 %) appear to be anomalies on this basis.

14. The MRCC has consistently claimed that debt is used to fund its capital works program
which is the formal policy as stated in the MRCCs Strategic Resource Plan 2013/14-
2016/17.
Two points need to be highlighted in relation to this stated policy position:
Due to the of economic returns, it is inappropriate to justify debt on the basis of
funding capital investment within the Local Government sector; and,
During 2012/13 a $4.0 million loan was raised over 10 years in order to fund working
capital due to a failure on the part of the MRCC to make adequate provision for its
Defined Benefits Plan Superannuation Special Call liability.

15. The MRCCs interest rate risk exposure has increased in line with its increasing
indebtedness, but due to a failure on the part of the MRCC to disclose its debt portfolio
in the 2013/14 budget document, the exact size of this interest rate risk exposure
cannot be determined. The author estimates that for every 0.25 % increase in the
MRCCs weighted average interest rate on outstanding debt, the MRCCs annual debt
servicing costs will increase by approximately $57 500 (based upon an outstanding debt
balance of $23 million).

16. The MRCCs increasing indebtedness is having an increasing impact upon annual
operating budgets as annual debt serving payments increase. The annual interest costs
associated with the MRCCs outstanding debt as increased from an average of
approximately $1.05 million per annum during 2007/08-2011/12 to $1.489 million per
annum during 2012/13-2016/17 (actual and projected period), an increase of 41.8 % -
see Figure 8.3.

137

17. There has been a significant reduction in the degree of transparency in relation to the
MRCCs debt policy in successive budget documents during the 2007/08-2012/13 period.
In the 2008/09 and 2009/10 budget documents, the MRCC disclosed the entire
outstanding debt portfolio individual loans, interest rate, loan term and other loan-
specific details. The MRCCs 2010/11, 2011/12, 2012/13 and 2013/14 budget
documents contain no such disclosures. This lack of disclosure severely limits the local
communitys capacity to make an informed assessment of the MRCCs practices in
relation to the use of debt.
The MRCCs general level of disclosure in relation to its use and management of debt is
significantly less detailed than many other local Councils within the G18 peer group.

18. A comparative analysis of the MRCCs indebtedness was undertaken against the
Regional and Rural Cities peer group of local Councils, and a Similar Size Council peer
group. The key findings of this comparative analysis were:

In relation to the Regional and Rural Cities (RRC) peer group: Depending upon the
measure used, the MRCC is the 2
nd
or 3
rd
most indebted Council within the RRC peer
group. There has been significant growth in both Total Liabilities (44.64 %) and
Interest Bearing Debt (18.62 %) during the 2007/08-2011/12 period, growing at an
average annual rate of 9.93 % and 3.72 % respectively during the 2007/08-2011/12.
Although the MRCCs Interest Bearing Debt as of 30 June 2012 was still 40.25 % of
the MRCCs Rate Base, and therefore classified as low risk based upon Victorian
Auditor Generals guidelines (40% is the benchmark), the clear trend of increasing
indebtedness at a time when the RRC peer groups level of indebtedness relative to
both Underlying Revenue and Rate Base is decreasing is a concerning observation.
This concern is heightened due to the fact that the MRCCs capacity to meet annual
borrowing costs associated with Interest Bearing Debt as measured by both
Underlying Surplus less Capital Grants to Borrowing Costs Multiple and Net Cash
Flow to Borrowing Costs Multiple - has been declining during the 2007/08-2011/12
period.

138

In relation to the Similar Size Council (SSC) peer group: Depending upon the
measure used, the MRCC is between the 2
nd
and 4
th
most indebted Council within
the SSC peer group. There has been significant growth in both Total Liabilities and
Interest Bearing Debt during the 2007/08-2011/12 period, growing at an average
annual rate of 9.93 % and 3.72 % respectively during the 2007/08-2011/12.

Although the MRCCs Interest Bearing Debt as of 30 June 2012 was still 40.25 % of
Rate Base, and therefore classified as low risk based upon Victorian Auditor
Generals guidelines, the clear trend of increasing indebtedness at a time when the
SSC peer groups level of indebtedness relative to both Underlying Revenue and Rate
Base is decreasing is a concerning observation.

This concern is heightened due to the fact that the MRCCs capacity to meet annual
borrowing costs associated with Interest Bearing Debt has been declining during the
2007/08-2011/12 period.

19. A comparative analysis of the MRCCs outstanding debt as at 30 June 2013 against the
G18 peer group of local Councils (which includes the Regional and Rural Cities (RRC) and
Similar Size Council (SSC) peers groups) revealed the following:

The MRCCs percentage of interest bearing debt that was classified as greater than 5
years was 60.63 %, compared to the G18 peer group average of 42.56 %;
The MRCCs average effective interest rate was 6.24 %, compared to the G18 peer
group average of 7.01 %;
The MRCCs annual debt servicing payments were only 12.64 % of total interest
bearing debt, compared to the G18 peer group average of 24.97 %;
The MRCCs estimated time to repay outstanding interest bearing debt based upon
repayments made during 2012/13 and no new borrowings was 15.6 years, compared
to the G18 peer group average of 8.88 years.

139

20. A comparative analysis of the MRCCs debt strategy as disclosed in the 2013/14 Budget
document against the G18 peer group of local Councils for the 2013/14-2016/17 budget
forecast period revealed the following:

The MRCCs Underlying Revenue growth rate is projected to be -1.66 %, compared to
the G18 peer group average of 2.89 %;
The MRCCs indebtedness is projected to increase to 26.5 % of Underlying Revenue
less Capital Grants, significantly higher than the G18 peer group average of 21.28 %;
The MRCCs projected capital expenditure program will average 27.7 % of Underlying
Revenue, compared to the G18 peer group average of 29.6 %.
In other words, the MRCC is projected to increase its indebtedness at a time when
Underlying Revenue is projected to contract and the MRCCs projected capital works
program is less than the G18 peer group average.
Although the MRCCs estimated average effective interest rate on outstanding debt
is expected to be 6.36 % compared to the G18 peer group average of 6.81 %, the use
of significantly longer loan terms by the MRCC (projected average - 14.4 years)
compared to the G18 peer group average (projected average - 8.91 years) is resulting
in an estimated cost per $1.0 million of debt for the MRCC being $556 000 per
annum, 45.9 % higher than the G18 peer group average of $381 000.

21. An analysis of the MRCCs current budget projections extended beyond 2016/17 reveals
a very real likelihood that the MRCCs outstanding debt will balloon to over $29 million
by 2019/20 if there is no significant change in the MRCCs current financial strategy and
current revenue and expenditure growth rates do not change.

140

141

Key recommendations in relation to the MRCCs debt strategy

There are seven (7) key recommendations arising from the key findings presented in this
Chapter.

1. It is recommended that the MRCC adopt a formal debt policy that incorporates the
following key features:

(i) A ban on the use of debt to fund ongoing operating activities except where there are
genuine and unforeseen working capital deficiencies. In such cases, short-term bridging
finance may be used for a period not exceeding 12 months;

(ii) Debt must never be used as a means of achieving financial sustainability indicator
targets (for example, the Current Ratio);

(iii) The use of short-term bridging finance can be minimized through creating a contingency
fund to which annual allocations from the operating budget are made to create a
reserve for unforeseen but necessary expenditures;

(iv) Given that debt is primarily used as a funding source for non-income generating capital
investment, minimising the cost of debt must be a primary objective;

(v) The actual size of debt should be kept to a minimum through ensuring that annual
depreciation allocations create sufficient reserves to fund all asset renewal and
maintenance expenditures;

(vi) The annual capital investment expenditure budget is smoothed over a number of years
in order to reduce the size of new borrowings that may be required to meet chunky
expenditures typically associated with capital expenditure;

142

(vii) Debt terms should be kept within a 5-7.5 year range, with an absolute maximum 10-
year debt term where circumstances warrant the use of a longer debt term;

(viii) The decision to use fixed or variable interest rate loans should be made on the basis
of minimising the overall cost of a loan over the life of the loan;

(ix) Interest only repayment periods must be avoided interest only periods add to a
loans term and increases the total cost of debt finance over the life of the loan;

(x) In years when there is an operating surplus, surplus monies must be transferred to a
reserve to fund future capital expenditure programs rather than used for funding an
expansion in annual service delivery;

(xi) In years when capital and/or operating grant funding allocations are received in advance
(for example, grant allocations for the year 20X1-X2 being received in May/June 20X1),
the monies received in advance must be set aside in a reserve and not be used to fund
operating activities relating to the current year. This measure is aimed at ensuring that
annual service delivery levels are funded from revenue being generated and/or received
during the same financial year; and,

(xii)Debt financing can never be justified on the basis of inter-generational equity or similar
notions that supposedly attempt to allocate the cost of capital investments over an
extended period of time in order that future users also contribute to the cost of the
capital investment. Such notions are financially imprudent as it inevitably leads to
longer-term loan periods being negotiated which increases the total cost of assets being
created.

2. Compliance with the debt policy suggested in Recommendation 1 (above) must be
mandatory with any proposed deviation from the policy requiring a report to the
MRCCs elected Councillors which clearly outlines the reasons for the proposed
deviation from policy and associated financial implications. It is recommended that any
143

proposed deviation from the MRCCs debt policy require at least a two-thirds majority
vote of elected Councillors before approval is granted for the proposed deviation.
3. The MRCC must introduce an indefinite moratorium on new borrowings commencing
from 2013/14.

4. The MRCCs outstanding debt of $23.133 million as at 30 June 2013 must be re-financed
and consolidated into a single loan to be repaid over a maximum loan term of 7.5 years.
This will result in real savings in interest costs accruing to the MRCC in the vicinity of
$20.519 million.

5. The MRCCs current policy of using 40-45 % of Rate Base as a guideline for low-risk
debt level must be replaced with a guideline based upon Underlying Revenue less
Capital Grants which is a preferred measure of a local Councils capacity to service debt
due to the exclusion of non-monetary (book entry) items can capital grants.

6. The maximum debt parameter for indebtedness equivalent to 20 % of Underlying
Revenue less Capital Grants should be introduced.

7. The MRCC must increase its disclosures in relation to the use and management of debt.
Specifically, future budget documents must contain the following minimum disclosures:

A review of the MRCCs historical indebtedness relative to Rate Base and
Underlying Revenue less Capital Grants;
A clear statement of debt strategy that addresses (i) the purposes of which debt is
used; and (ii) a clear strategy for debt reduction;
Financial projections which clearly show the MRCCs projected level of
indebtedness over a minimum 5-year forecast period;
A complete loan portfolio detailing (i) individual loans and terms under which each
individual loan was negotiated; and (ii) the total projected interest cost associated
with each individual loan so as to enable the local community to make a clear
evaluation of the MRCCs compliance with stated debt policy;
144

145

Summary of key findings Chapter 9: Developing a risk profile for the MRCCs
2013/14 budget projections

The MRCCs major areas of risk exposure are summarised below:

Areas of greatest risk exposure:
Changes in projected Underlying Revenue: A 1.0 % change in projected Underlying
Revenue will have a corresponding impact upon annual Operating Surplus / (Deficit) and
Net Cash Flow figures in the order of $1 million. Given the thin projected annual
operating results and Net Cash Flow figures in MRCCs Budget 2013/14, a 1.0 %
reduction in projected Underlying Revenue will result in Operating Deficits and Net Cash
Flow deficits throughout the budget forecast period.

Consider the following scenarios:
o If actual Underlying Revenue falls short of Underlying Revenue projections by as
little as 1.0 %, projected Operating Results and Net Cash Flows will be reduced by
between $936 000 - $1.025 million per annum during the budget forecast period;
o This will result in the MRCCs projected Net Cash Flows being in perpetual deficits
of between $586 000 - $6.695 million throughout the budget forecast period.
o If actual Underlying Revenue falls short of Underlying Revenue projections by 2.0
%, projected Operating Results and Net Cash Flows will be reduced by between
$1.873 - $2.049 million per annum during the budget forecast period;
of between $1.523 - $7.719 million throughout the budget forecast period.

Changes in projected core operating costs and/or Total Expenses: A 1.0 % change in
projected Core Operating Costs and/or Total Expenses will have an impact upon annual
Operating Surplus / (Deficit) and Net Cash Flow figures in the order of $800 000 - $1
million over the budget forecast period. Given the thin projected operating results and
Net Cash Flow figures in MRCCs Budget 2013/14, a 1.0 % increase in projected Core
146

Operating Costs and/or Total Expenses will result in Operating Deficits and Net Cash
Flow deficits throughout the budget forecast period.
In relation to Core Operating Costs, consider the following scenarios:
o If actual Core Operating Costs exceed Core Operating Cost projections by as little
as 1.0 %, projected Operating Results and Net Cash Flows will be reduced by
between $843 000 958 000 per annum during the budget forecast period;
o If actual Core Operating Costs exceed Core Operating Cost projections by 2.0 %,
projected Operating Results and Net Cash Flows will be reduced by between
$1.685 - $1.916 million per annum during the budget forecast period;

In relation to Total Expenses, consider the following scenarios:
o If actual Total Expenses exceed Total Expenses projections by as little as 1.0 %,
$869 000 988 000 per annum during the budget forecast period;
o If actual Total Expenses exceed Total Expenses projections by 2.0 %, projected
Operating Results and Net Cash Flows will be reduced by between $1.737 -
$1.975 million per annum during the budget forecast period;

Removal of Capital Grant funding with 20 % cost shifting or more: The removal of
Capital Grant funding with 20 % cost shifting will result in Operating Deficits and Net
Cash Flow deficits throughout the budget forecast period. This result highlights the
dependency that the MRCC has upon Capital Grants in order to achieve an Operating
Surplus and positive Net Cash Flow.
147

Consider the following scenarios:

o If Capital Grants are removed from the analysis and the MRCC has engaged in
cost shifting into Capital Grants equivalent to 20 % of Capital Grants received,
$444 000 - $3.053 million per annum during the budget forecast period;
o If Capital Grants are removed from the analysis and no corresponding
adjustments are made to the MRCCs expenditures, projected Operating Results
and Net Cash Flows will be reduced by between $2.221 15.266 million per
annum during the budget forecast period;

Area of lowest identified risk exposure:
Interest rate risk: Although the MRCCs interest rate risk exposure will increase over the
budget forecast period as a result of increasing indebtedness, the need to borrow a further
$10 million in new loans during the budget forecast period in addition to any other loan re-
financing, a movement in interest rates of 25 basis points (that is, 0.25 %) will translate into
a budget impact of less than $100 000 per annum or less.

For example, if the MRCCs Weighted Average Interest Rate was to increase by 0.25 %,
projected Operating Results and Net Cash Flows will be reduced by up to $58 000 $66 000
per annum during the budget forecast period (depending upon how much new interest
bearing debt is accessed and how much existing interest bearing debt is re-financed).

Caveat on findings presented in this chapter: The other significant point that must be kept
in mind in relation to the above key findings is the fact that the MRCC is projected to be in a
fundamentally less sound financial position at the beginning of the 2013/14 year, and
throughout the 2013/14-2016/17 budget forecast period, compared to the Councils
148

financial position during the 2007/08-2010/11 period. Deteriorating underlying operating
results and net cash flows during the 2010/11-2012/13 period combined with projected
stagnating Headline Revenue growth, projected increases in operating costs, and projected
increasing indebtedness during the 2013/14-2016/17 period will create significant solvency
problems in the absence of direct and significant actions to ameliorate these projected
developments.

This means that the MRCCs capacity to tolerate or absorb poor financial results will be
significantly eroded over the budget forecast period. In short, there is not much room for
error in-so-far as budget projections are concerned. The scenario analysis presented in this
chapter clearly supports this view.

A summary of the key insights from each area of scenario analysis examined is presented in
Tables 9.1 and 9.2.

149

Table 9.1 - Summary of Scenarios Considered
Major Scenarios Sub-Scenarios
1
Comments significance of each area of analysis:
A. Impact of change in CIV
Farming Properties
(Scenarios 1.1-1.12)
Variations in CIV Farming Properties ranging from +15 %
through to 15 % and the likely impact this will have on
MRCCs Rate Base and the resulting impact upon Operating
Results (Surplus / Deficit) and Net Cash Flow.
The next CIV Farming Property assessments are due in January
2014 and will impact upon MRCCs budget projections from 1 July
2014 onwards (the latter half of the budget forecast period).
B. Impact of change in projected
Rate Base
Variations in projected Rate Base ranging from +6 % through to
-6 % and the resulting impact upon Operating Results (Surplus /
Deficit) and Net Cash Flow.
MRCCs Rate Base is accounting for an increasing proportion of
MRCCs Total Revenue. As such, a minor fluctuation in the Rate
Base is going to have an increasing impact upon Total Revenue.
C. Impact of change in projected
Total Revenue
Variations in projected Total Revenue ranging from +6 %
through to -6 % and the resulting impact upon Operating
A small change in MRCCs Total Revenue will have a material
impact upon budget projections.
D. Impact of change in Projected
Core Operating Costs
Variations in projected Core Operating Costs ranging from +6 %
MRCCs Core Operating Costs (employee benefits, materials and
contractors, depreciation & amortization) account for 97 % of
MRCCs Total Expenses. A small change in MRCCs Core Operating
Costs will have a material impact upon budget projections.
E. Impact of change in projected
Total Expenses
Variations in projected Total Expenses ranging from +6 %
A small change in MRCCs Total Expenses will have a material
impact upon budget projections.
F. Impact of change in projected
Operating Grant Funding
Variations in projected Operating Grant Funding ranging from
+6 % through to -6 % and the resulting impact upon Operating
Operating grants account for approximately 18-21 per cent of
MRCCs Total Revenue during the budget forecast period. As such,
minor changes in the size of operating grants received will have a
material impact upon budget projections.
G. Impact of Interest Rate Risk
exposure
Variations in projected Weighted Average Interest Rate on
Interest Bearing Debt ranging from +1.5 % through to -1.5 %
and the resulting impact upon Operating Results (Surplus /
Given MRCCs increasing indebtedness (in the form of Interest
Bearing Debt), and MRCCs preference for long (20-30 year) loan
terms, MRCCs interest rate risk exposure continues to increase
throughout the budget forecast period.
H. Impact of self-imposed Rate
Base growth limit to CPI
Variations in projected Rate Base ranging from +6 % through to
-6 % and the resulting impact upon Operating Results (Surplus /
Deputy Mayor has publicly signalled desire of Council to limit
growth in Rate Base to CPI (assumed 2.5 %). In the absence of
significant on-going cost savings, such a move will significantly
increase the MRCCs financial risk.
1
There are 12 sub-scenarios within each major scenario, giving a total of: 8 12 = 96 scenarios, through 12 windows of analysis, providing: 96 12 = 1152 scenarios
considered in the following analysis.
Each scenario has been considered through 12 windows of analysis:

150

Table 9.2 12 Windows of Analysis for each of the 8 scenarios examined
Twelve (12) windows of analysis Comments significance of each area of analysis:
1. MRCC Draft Budget 2013/14 As is The eight (8) scenarios considered in the preceding table have been evaluated using the
unadjusted data as presented in the MRCC Draft Budget 2013/14.
2. Removal of Non-recurrent (Capital) Grant
funding with MRCC costing shifting into
Capital Grant funding at a rate of 5 %
Non-current (Capital) Grant funding is a significant variable and has a significant impact upon
MRCCs Operating Results and Net Cash Flow. It is also important to highlight that non-recurrent
(capital) grant funding can also obscure MRCCs underlying financial performance. As such, the
removal of non-recurrent (capital) funding is necessary in order to gain insight into MRCCs
underlying financial performance / health. The assumption of 5 % cost shifting by MRCC means
that when Capital Grants have been removed from the analysis, accompanying expenditures
equivalent to 95 % of the Capital Grants removed have also been removed from the analysis. As
such, the projected Operating Surplus / (Deficit) and Net Cash Flow will be adjusted by an amount
equivalent to 5 % of the Capital Grants removed from the analysis.

151

Table 9.2 12 Windows of Analysis for each of the 8 scenarios examined (Cont)
funding with no accompanying adjustment to
MRCC expenditures
underlying financial performance / health. The non-adjustment to MRCC expenditures means that
projected Operating Surplus / (Deficit) and Net Cash Flow will be adjusted by an amount equivalent
to the Capital Grants removed from the analysis.
7. MRCCs history of prior budget accuracy No budgeting exercise is without a margin for error something which has not been built into the
MRCC Draft Budget 2013/14 as it stands. MRCCs budgets for the preceding five (5) years were
reviewed in order to gain insight into MRCCs prior history in-so-far as budget accuracy
(comparison with what actually eventuates in practice) is concerned. This prior budget accuracy
was then built into MRCCs Draft Budget 2013/14 in order to gain what might be perhaps a more
realistic basis upon which to evaluate MRCCs financial sustainability over the budget forecast
period.
152

8. Combined impact of (i) MRCCs history of
prior budget accuracy, and (ii) Removal of
Non-recurrent (Capital) Grant funding with
MRCC costing shifting into Capital Grant
funding at a rate of 5 %
The combined impact of the removal of non-current (capital) grant funding and building in MRCCs
history of prior budget accuracy allowed for an analysis of MRCCs underlying financial
sustainability without the obscurity of non-current (capital) grant funding and what may be
considered a more realistic set of budget numbers after building MRCCs prior budget accuracy into
the analysis. The assumption of 5 % cost shifting by MRCC means that when Capital Grants have
been removed from the analysis, accompanying expenditures equivalent to 95 % of the Capital
Grants removed have also been removed from the analysis. As such, the projected Operating
Surplus / (Deficit) and Net Cash Flow will be adjusted by an amount equivalent to 5 % of the Capital
Grants removed from the analysis.
Surplus / (Deficit) and Net Cash Flow will be adjusted by an amount equivalent to 10 % of the
Capital Grants removed from the analysis.
153

Non-recurrent (Capital) Grant funding with no
accompanying adjustment to MRCC
expenditures
the analysis. The non-adjustment to MRCC expenditures means that projected Operating Surplus /
(Deficit) and Net Cash Flow will be adjusted by an amount equivalent to the Capital Grants
removed from the analysis.

154

A risk profile of the Mildura Rural City Council was subsequently developed see Table 9.4
(over-page). The basis of distinction between the different degrees of risk exposure have
been summarized in Table 9.3 below:

Table 9.3 Distinguishing between degrees of risk exposure

Legend:

- Very significant risk (1 % movement in key variable/s results in a movement in Operating
Surplus / (Deficit) and/or Net Cash Flow greater than $1 million)

- Significant risk (1 % movement in key variable/s results in a movement in Operating Surplus
/ (Deficit) and/or Net Cash Flow greater than $500 000 but less than $1 million)

- Moderate risk (1 % movement in key variable/s results in a movement in Operating Surplus
/ (Deficit) and/or Net Cash Flow of greater than $100 000 but less than $500 000)

- Low risk (1 % movement in key variable/s results in a movement in Operating Surplus /
(Deficit) and/or Net Cash Flow of less than $100 000)
155

Table 9.4 - MRCC Sensitivity Analysis: Summary of Results MRCC Risk Profile

Unchanged

Removal of Capital Grants Various Scenarios
Prior
Budget
Accuracy

Prior Budget Accuracy + Removal of Capital Grants
Various Scenarios

As is
based upon
original
2013/14
Draft
Budget
Projections

Removal
of Capital
Grants,
5 % cost
shifting

Removal
of Capital
Grants,
10 % cost
shifting

Removal
of Capital
Grants,
15 % cost
shifting

Removal
of Capital
Grants,
20 % cost
shifting

Removal
of Capital
Grants

Incorp. Of
Prior budget
accuracy
into
2013/14
Draft
Budget
Projections
Prior
budget
accuracy
+
Removal
of Capital
Grants,
5 % cost
shifting
Prior
budget
accuracy
+
Removal
of Capital
Grants,
10 % cost
shifting
Prior
budget
accuracy
+
Removal
of Capital
Grants,
15 % cost
shifting
Prior
budget
accuracy
+
Removal
of Capital
Grants,
20 % cost
shifting

Prior
budget
accuracy
+
Removal
of Capital
Grants
1. Impact of change in
CIV Farming
Properties

projected Rate Base

projected Total
Revenue

Projected Core
Operating Costs

projected Total
Expenses

projected Operating
Grant Funding

7. Impact of Interest
Rate Risk exposure

8. Impact of self-
imposed Rate Base
growth limit to CPI

Note: Light green shading for scenarios on right-hand side of Table 9.2 indicate that these scenarios project fundamentally better outcomes due to the incorporation of
prior budget accuracy into the scenario analysis. MRCCs prior budget accuracy indicates that Total Revenue has historically been understated by 14.66 %, and Total
Expenses have been historically understated by 11.50 %. Thus, initial projected Operating Results and Net Cash Flows have been adjusted upwards to reflect this fact.

156

157

Summary of key findings Chapter 10: 28 Issues of Concern

In the following table, a summary of the 28 issues of concern raised in this chapter is
presented. For each issue of concern, (i) the issue of concern is identified; (ii) a brief
summary is provided in order to highlight why the identified issue is an issue of concern;
and (iii) a brief summary of the findings in relation to the issue of concern is presented.

158

159

Table 10.1.1 - Summary of key findings: 28 issues of concern
Issue of concern Why is it an issue of concern? Finding/s
1. Growth in
indebtedness at a
time when the
capacity to service
debt is
deteriorating
Growth in indebtedness at a time when the capacity to
service debt is deteriorating results in an increase in an
organizations underlying financial risk. Financial risk
being defined as the capacity of an organization to
service debt and meet other financial obligations.
- MRCCs indebtedness in terms of Total Liabilities and Interest
Bearing Debt, and in actual dollar terms and as a percentage of
Underlying Revenue less Capital Grants, has been increasing
during the last 3 years and in projected to continue to increase
during the budget forecast period;
- MRCCs capacity to service debt in terms of deteriorating
operating results, deteriorating liquidity and Net Cash Flows, and
inadequate growth in net income to generate sufficient operating
surpluses to service increase indebtedness.
2. There are a number
of significant
concerns in relation
to the MRCCs Debt
Strategy
As noted in Chapter 8, the MRCCs debt strategy is
resulting in significant on-going cost imposts for the
Mildura community. In addition, deliberate choices on
the part of the MRCC to maintain high levels of debt will
limit the capacity of the MRCC to respond to
unforeseen events and to engage in new capital
investment programs going forward.

- The use of excessively long loan terms is resulting in a significant
cost impost for the Mildura community;
- Debt has been used to fund Working Capital. There is evidence to
suggest that debt is being used to gap fill annual operating
budgets;
- There is a demonstrated tendency to max out the credit card
which is leaving MRCC with a reduced capacity to respond to
unforeseen events and/or engage in future capital investment
programs;
- MRCC Budget 2013/14 contains no strategy for debt reduction
this is an anomaly within the G18 peer group of local Councils.
- Introducing a moratorium on new borrowings and re-financing
debt to a maximum 7.5-10 years are the two keys for reducing the
MRCCs indebtedness and reducing significant debt-related costs.
3. Borrowing $4.0
million over 10
years to fund
Working Capital
As a general rule, the use of debt to fund Working
Capital is symptomatic of poor financial management,
impending financial distress, or a combination of the
two.

- The use of $4.0 in debt to fund Working Capital has effectively
added $1.281 million to operating costs. This has come about
primarily through poor planning on the part of the MRCC as the
Council had prior notice of the Special Call (although not the actual
amount).
160

Table 10.1.1 Summary of key findings: 28 issues of concern (Cont)
4. MRCC has been
experiencing
consistent negative
net income growth
symptomatic of
inadequate control
over operating
costs
In order to be financially sustainable in the long-term,
an organization must be able to control operating costs
by keeping the growth in operating costs at least within
the parameters of growth in total revenue. That is, if
total revenue grows by 4.0 per cent, then increases in
operating costs must be kept to a maximum of 4.0 per
cent.

On-going negative net income growth (that is, where
the growth rate in Operating Expenses exceeds the
growth rate in Underlying Revenue) is symptomatic of
inadequate control over operating costs and will lead to
perpetual operating deficits in the longer-term
regardless of an organizations starting point.
- MRCCs Net Income Growth during 2007/08-2016/17 has been / is
projected to be -1.3 %;
- During 2005-10, MRCCs Net Income Growth differential was 2.16
% - significantly below Victorian LG sector was 14.77 %, RRC
19.12 %, SSC 15.37 %;
- Contributing factors include:
- Excessive growth in operating expenditures (32.08 %) compared to
LG Sector average of 14.77 %, RRC 19.12 %, and SSC 15.37 %;
- Poor revenue growth during 2007/08-2011/12 at 20.66 %
compared to RRC 41.56 %, and SSC 44.02 %.
- Poor revenue growth brought about due to 5 of 6 non-rate
sources of income exhibiting negative growth rates.
- The MRCC must limit expenditure growth to CPI and/or Underlying
Revenue growth rate.
5. The MRCC s
reported
(Headline) results
for 2011/12 and
2012/13 included
significant non-
monetary items
Non-monetary items are essentially book entries and
cannot therefore be used to service debt or fund
operations. As such, the MRCCs reported (Headline)
results for 2011/12 and 2012/13 convey a potentially
mis-leading picture of the MRCCs underlying
- The reported Headline operating results for the MRCC in 2011/12
contained non-monetary (book entry) items totalling $14.645
million, which accounted for 64.7 % of the Headline operating
surplus of $22.327 million.
- The reported Headline operating results for the MRCC in 2012/13
contained non-monetary (book entry) items totalling $7.605
million, which accounted for 40.4 % of the Headline operating
surplus of $18.826 million.
- As such, the MRCCs reported Headline operating surpluses during
the past 2 years do not reflect the MRCCs underlying operational
performance.
161

6. Poor earnings
quality over
extended period of
time

Although consistent with Local Government sector
accounting practice, the MRCCs reported operating
results during the 2009/10-2011/12 period and
projected operating results for the 2012/13-2013/14
period contain significant non-monetary (book entry)
and capital grant items which effectively render the
reported / projected operating results meaningless as
an indicator of underlying operating performance.
- Non-monetary (book entry) items and adjustments and capital
grant have accounted for between 29..25 150.65 % of the
MRCCs reported Headline operating results during 2007/08-
2012/13.
- As such, the MRCCs reported Headline results during this period
cannot be used as an indicator of underlying operational
performance.
7. There have been
material reductions
in the average
depreciation rate
applied to
Infrastructure,
Property, Plant &
Equipment (IPPE)
assets during
2009/10 - 2013/14

A reduction in annual depreciation allowances at a time
when the value of depreciable assets has actually been
increasing is an anomaly.

Potential ramifications include:
(i) An effective de-funding of future asset
maintenance and renewal programs at the
same time as reporting improved operating
results (due to a reduction in operating
expenses); and,
(ii) Using saved monies to fund on-going
operating activities.
- The MRCCs average depreciation rate applied to IPPE assets
decreased significantly in 2009/12 and 2011/12, and is projected
to decrease again during 2013/14.
- This has happened in spite of significant growth in IPPE assets
During 2007/08-2011/12, the average growth in Depreciation
Expense for the RRC peer group of local Councils 22.25 %, and
SSC 21.93 %, MRCC -4.35 %. The MRCC was the only local
Council within the G18 peer group to record a negative growth
rate in depreciation allocations during 2007/08-2011/12.
- There is evidence that suggests that the MRCC has under-allocated
monies to depreciation to the tune of $4.8 million per annum
during 2008/09-2016/17 (actual and projected allocations).
- The reduction in depreciation allocations has been substantially
matched by a reduction in cash reserves and an increase in debt
which suggests that the MRCC has effectively been de-funding
asset maintenance and renewal programs in order to fund
operations, and bridging the short-fall in depreciation allocations
through running down cash reserves and debt.
- Based upon this analysis, reported annual operating results during
2009/10-2016/17 have effectively been over-stated by an average
of $4.06 million.
162

8. In 2011/12 and
2012/13 the MRCC
has included
external grant
monies received in
advance in
operating income,
resulting in an over-
statement of
reported operating
results in both
years
Although deemed acceptable practice according to
Local Government sector accounting principles, the
inclusion of external grant monies received in advance
in operating income (rather than as pre-paid income
as per private sector accounting practice) effectively
results in an over-statement of operating results
equivalent to the amount of external grant monies
received in advance.
- The MRCCs reported operating results for 2011/12 included
external grant monies of $6.157 million received in advance for
the 2012/13 financial year.
- The MRCCs reported operating results for 2012/13 included
external grant monies of $6.05 million received in advance for the
2013/14 financial year.
- As such, the MRCCs reported operating results for 2011/12 were
effectively over-stated by $6.157 million, and the MRCCs
reported operating results for 2012/13 were effectively over-
stated by $6.05 million.
- This over-statement has been acknowledged by the MRCC Mayor
and CEO in the introduction to the MRCCs Annual Report in both
years.
9. There is mounting
evidence that the
MRCC is
experiencing
increasing solvency
problems

In order for an organization to be financially sustainable
in the long-term, it must be both profitable and solvent.
Although periods of unprofitability and/or low levels of
solvency can be tolerated in the short-term, there must
always be a return to profitability and/or solvency in
the medium term. In the case of the MRCC, the
Councils profitability in the form of underlying
operating results after Capital Grants are removed from
the analysis, and the Councils Net Cash Flow have been
deteriorating for 3-4 years and, based upon projections
in the MRCC Draft Budget 2013/14, will not show any
significant signs of improvement during the budget
forecast period.

Signs of MRCCs increasing solvency problems include:
(i) The liquidation of $13.8 million in financial assets to fund
2012/13 Statement of Cash Flows;
(ii) A significant deterioration in holdings of Cash and Cash
Equivalents during the last 3 years;
(iii) Statements contained in official MRCC Council Minutes /
Business Papers citing inadequate working capital as a
justification for proceeding with a $4.0 million loan over 10
years; and,
(iv) A projected Net Cash Flow deficit of $11.7 million for 2013/14.
163

10. The MRCCs
employee costs
indicate that
staffing levels at
the MRCC may be
too high
Employee costs account for approximately 43.0
per cent of the MRCCs total operating
expenses. This is projected to increase to 46.7
% by 2016/17. Excessive employee costs may
indicate over-staffing or a Councils involvement
in an excessive level of non-core service
delivery functions.
- Using five (5) proxy indicators, the MRCCs total annual staffing costs
compare unfavourably to RRC peer group on 3 of 5 proxy indicators, and in
comparison with SSC peer group of local councils, 5 of 5;
- These findings indicate that the MRCCs staffing costs are excessive
relative to other local Councils and is suggestive of potential over-staffing.
11. The level of rates
levied by the MRCC
are among the
highest within the
G18 peer group
even though the
MRCC community is
the 3
rd
most
disadvantaged
community in
Victoria
The imposition of taxes on households /
communities will always be an area of public
policy that is controversial and subject to a
diversity of opinion. However, at a most
general level, the idea of a progressive tax
system is largely in line with a broader societal
ethos of fairness within Australian society.

The high level of rates across the MRCC
municipality is contrary to the notion of
progressivity within the tax system, and has
direct implications for the municipalitys cost of
living, economic competitiveness, and
employment.

- The MRCC community is the 3
rd
most disadvantaged community in Victoria
based upon the latest SEIFA Index of Relative Socio-economic Advantage
and Disadvantage;
- Within the G18 peer group of local Councils, the MRCCs residential rate,
at 0.007035 cents per $1 CIV, is 62 % higher than the G18 average of
0.004338 cents per $1 CIV;
- Within the G18 peer group of local Councils, the MRCCs farmland
property rate, at 0.007035 cents per $1 CIV, is 93 % higher than the G18
average of 0.003637 cents per $1 CIV;
- Within the G18 peer group of local Councils, MRCCs average rate levy
applied to rateable properties, at 0.007304 cents per $1 CIV, is 61 % higher
than the G18 average of 0.004545 cents per $1 CIV;
- Within the G18 peer group of local Councils, the MRCC Communitys
capacity to pay for local Council service delivery is ranked the lowest
(along with the Rural City of Swan Hill);
- Within the G18 peer group of local Councils, the relative cost of local
Council service delivery relative to median household income is 57 %
higher than the G18 average.
164

12. Speculation that
the MRCC was
potentially seeking
to re-incorporate
Mildura Airport into
MRCC operations

When an organization is experiencing financial distress,
one of the ways in which an organization may address
the situation is through acquiring a revenue stream
and/or cash reserves through taking over or merging
with another organization that is in a relatively stronger
financial position. Such behaviour is well documented
in the management literature. In relation to the MRCC,
during the early part of 2013, there was speculation
that the MRCC was potentially seeking to re-acquire the
Mildura Airport Pty Ltd - which had previously been set
up as a separately managed wholly-owned subsidiary of
the MRCC. The Mildura Airport Pty Ltd has been
experiencing significant growth during the past decade
in terms of passenger throughput and profitability.
Reported profits for the Mildura Airport Pty Ltd were in
the vicinity of $430 000. During the 2012/13 financial
year the Mildura Airport Pty Ltd also received significant
capital grant funding to expand the local terminal
building (the expansion was completed in July 2013).
Although MRCC has rejected the speculation and claimed that the
Mildura Airport Pty Ltd is fully accounted for in MRCC annual
accounts, the re-incorporation of Mildura Airport Pty Ltd into MRCC
operations as a business unit (as opposed to a separate wholly owned
subsidiary) would mean:
- Grant income received by Mildura Airport Pty Ltd would be
included in Grant income of MRCC (and therefore Headline
Revenue of MRCC);
- Operating surplus (profits) of Mildura Airport Pty Ltd would
become part of MRCCs operating surplus (instead of a revaluation
increment being recognised in Comprehensive Income); and,
- Cash Reserves held by Mildura Airport Pty Ltd would be under the
direct control of MRCC.

Although the speculation was not substantiated, the argument that it
would be financially beneficial for the MRCC to re-incorporate the
Mildura Airport Pty Ltd back into the MRCC as an operational business
unit is plausible.
165

13. The portrayal of
MRCCs financial
performance in
Budget 2013/14
document is
potentially
misleading

The MRCCs performance in relation to:
- Past and projected operating performance;
- Rating policy in particular, claimed / projected
rate increases; and,
- Expenditure control;
As presented in the MRCCs Budget 2013/14 document
is potentially misleading to the local community.
- Reported past and projected operating results include non-
monetary (book entry) items such that cumulative operating
surpluses for 2011/12-2013/14 total $52.48 million. Actual
Underlying Results reveal a cumulative surplus of $XX;
- The incorporation of the Drainage Differential Rate into the
Residential Rate will result in the Drainage Differential Rate
effectively being subject to annual indexation for the first time;
- Although it was claimed that rates were only increased by 5.0 %
for 2013/14, the annual increase in total Rates & Charges which
is the total bill that a ratepayer must pay - is projected to be 7.04
%;
- The cost of service delivery is portrayed as decreasing by 10.66 %,
when in fact the cost of service delivery is projected to increase by
2.11 % during 2013/14.
14. There is a lack of
public information
in relation to CEO
and SMT Key
Performance
Indicators for
performance
and/or
performance
bonuses
There is an abundance of literature in Accounting and
Management journals which have clearly documented
the direct link between the behaviour / decision-making
of senior managers in organizations with Key
Performance Indicators (KPIs). Indeed, the reason why
an organization, its board or other governing body, puts
into place clear, specific KPIs is in order to encourage
performance in a particular direction. Any modern
organization would be remiss if its governing body did
not develop and impose a set of clearly specified KPIs.

MRCC Senior Management Team Key Performance Indicators (KPIs)
are not publicly available.
166

15. Lack of detail in
Draft Budget
2013/14 in relation
to risk (sensitivity)
analysis and debt
reduction strategies
Modern-day organizations operate in many different
local, geographic, political and economic contexts but
no matter the context, risk management and planning
for uncertainty are part and parcel of any strategic
planning and budgeting process. As such, when setting
a budget for the coming 3-5 years, it is important to
factor potential risk exposure/s into the analysis with
the aim of evaluating the impact in financial terms
of any changes in key variables underpinning budget
assumptions. A failure to incorporate risk management
into an annual budgeting process potentially leaves an
organisation exposed and/or under-prepared for any
detrimental changes in key areas of risk exposure
during the budget forecast period.

MRCC Budget 2013/14 document contains no formal risk analysis in
relation to future budget projections.
16. The MRCC is
exhibiting a
combination of
indicators which
are consistent with
an organization
that is experiencing
financial distress
Financial distress can be defined as a situation in which
an organizations financial position and/or performance
is such that, all other things being equal, there is an
increased risk that the organization may not be able to
achieve its stated objectives
- The MRCC is exhibiting 10 of 13 classic indicators of financial
distress. This finding is consistent with the financial ratio analysis
presented in Chapter 4, and with a number of other observations
noted throughout this report.
167

17. MRCCs Strategic
Resource Plan
promotes a
financial plan will
result in increased
underlying financial
risk
The financial plan presented in the MRCCs Strategic
Resource Plan promotes increased indebtedness at a
time when both operating results and solvency are
deteriorating significantly.
- An analysis of the MRCCs Budget 2013/14 clearly indicates that
underlying financial risk is going to increase during the budget
forecast period due to (i) deteriorating operating results; (ii)
deteriorating solvency; (iii) increasing indebtedness; (iv) an
absence of any material operating surplus from which the
capacity to repay debt is derived; and (v) a material increase in the
MRCCs level of indebtedness.
- Significantly, neither the MRCC Budget 2013/14 document, nor
that MRCC Strategic Resource Plan 2013/14-2016/17 contain a
clear strategy for reducing the MRCCs increasing indebtedness.
of legitimate
questions that need
to be asked about
the MRCCs internal
governance
structure and/or
processes
Sound internal governance processes are critical to the
on-going operation of any organization. A review of
one of the MRCCs recent Annual Reports found that
many recommendations being made by the Internal
Audit Committee were not being implemented. This
raised concerns about the MRCCs governance structure
and processes.
- In relation to the MRCC, there is evidence of (i) non-
implementation of recommendations from the internal audit
committee; (ii) a reduction in transparency in relation to the
MRCCs reported performance in relation to the implementation
of recommendations from the internal audit committee; (iii) a sub-
optimal governance structure.
- The author has made a range of recommendations to improve the
MRCCs internal governance processes and performance
reporting.
168

of concerns in
relation to the
MRCCs response to
concerns raised
about the MRCCs
increasing
indebtedness
In June 2013 concerns were raised about the MRCCs
increasing indebtedness. The MRCCs response to these
concerns was somewhat dismissive, contained factual
inaccuracies, and lacked substantive detail
Key findings included (but were not limited to) the following:
- The MRCC is the 3
rd
most indebted local Council in the G18 peer
group of local Councils;
- Although the MRCCs debt level is officially classified as low risk,
this assessment is based upon a potentially mis-leading measure
of indebtedness and ignores the impact of the MRCCs increasing
Rate Base dependency which will allow the MRCC to increase its
indebtedness by 27 % during the budget forecast period without
breaching the 40 % of Rate Base low risk benchmark;
- In addition, the MRCCs deteriorating financial performance and
resulting deterioration in solvency and therefore the MRCCs
capacity to servicing its increasing indebtedness is ignored in this
analysis;
- The MRCC has been making use of excessive loan terms which has
resulted in a significant increase in the cost of debt relative to
other local Councils the use of excessive loan terms is obscuring
the true cost of the MRCCs increasing indebtedness to the local
community;
- Based upon projected principal repayments over the budget
forecast period, the MRCCs projected average term for
outstanding debt (assuming no new borrowings) is 14.40 years,
which is 62 % higher than the G18 average of 8.91 years;
- The MRCCs cost of servicing every $1 million of debt is estimated
to be 46 % higher than the G18 peer group average due to the use
of excessive loan terms; and,
- The MRCC has signalled intent to keep debt at or near 40 % of its
Rate Base in spite of a significant reduction in projected capital
works during the budget forecast period. This is an anomaly
within the G18 peer group of local Councils.
169

20. The MRCCs future
capacity to respond
to unforseen events
and/or to embark
upon significant
new capital
developments is
being threatened
by current and
projected
underlying financial
issues
The MRCCs underlying financial issues are translating
into a reduced capacity to respond to unforseen events
and/or to embark on significant new capital projects.
This has direct implications for the local Community.
- During the past 2-3 years the MRCC has run down its cash
reserves, increased its indebtedness, and failed to exhibit fiscal
discipline in relation to expenditure control;
- The MRCCs Budget 2013/14 document forecasts cumulative
operating deficits and cumulative Net Cash Flow deficits for the
budget forecast period (2013/14-2016/17) which signal a
weakened financial position for the duration of the budget
forecast period;
- The capacity of the MRCC to embark upon significant new
initiatives such as the proposed Indoor Sporting Complex has been
significantly reduced without the MRCC receiving significant
external grant funding and the MRCC increasing its currently high
level of indebtedness;
- Public statements by the MRCC Mayor and CEO are supportive of
this analysis.
170

21. Based upon the
MRCCs current and
projected
discretionary
decision-making
and financial
performance, rate
levy increases of at
least 5-7 % per
annum will
continue into the
foreseeable future
The average rate applied to rateable properties across
the MRCC municipality is already 0.007304 cents per $1
CIV, which is 61 % higher than the G18 peer group of
local Councils average of 0.004545 cents per $1 CIV.
Combined with the fact that the local communitys
capacity to pay for local Council service delivery is the
lowest (along with the Rural City of Swan Hill) within
the G18 peer group, continued rate levy increases of at
least 5 % per annum are unacceptable.
There are at least five (5) reasons why the MRCCs rate increases
cannot be limited to CPI within the foreseeable future:
- Current budget projections do not allow for a reduction in rate
increases below 5 % without forcing the MRCC into perpetual
operating deficits;
- The MRCCs narrowing revenue base, with the Rate Base
accounting for 64.8 % of Underlying Revenue by 2016/17, is
placing increased pressure upon the MRCC to maintain annual rate
levy increases of at least 5 %;
- The MRCC has a poor record of cost constraint. During 2007/08-
2016/17, actual and projected average annual growth in expenses
(3.7-4.1 %) exceeded the average annual growth in Underlying
Revenue of 2.6 % - this is an unsustainable scenario;
- Limited population growth and slowing development approvals is
inhibiting the growth rate in the MRCCs CIV base, which in turn
maintains pressure upon the MRCC to maintain annual rate levy
increases of at least 5 %;
- The capital growth of rateable properties within the MRCC
municipality is insufficient to create additional rate revenue to
allow for a reduction in the level of rates being applied.
171

22. Sector-wide
practices are
hampering the
potential
effectiveness of the
MRCCs annual
budget process as a
mechanism for
improving local
Council financial
performance
An organizations annual budgeting process plays a key
role in relation to (i) the implementation of the
organizations strategic plan, (ii) risk management, (iii)
performance evaluation and review, and (iv) fiscal
discipline.
However, normalized sector-wide practices and
discretionary decision-making by the MRCC appear to
have circumvented three (3) of these key budgetary
functions.
- There is a clear linkage between the MRCC Budget 2013/14 and
the MRCCs Strategic Plan and Strategic Resources Plan;
- The MRCCs Budget 2013/14 contains no serious consideration for
risk management;
- The MRCCs Budget 2013/14 contains no detailed performance
evaluation and review for 2012/13;
- There appears to have been a decoupling of the disciplinary
function of the budget from organizational practice.
23. The current rate
review which has
been commissioned
by the MRCC
appears to be
focussed upon the
wrong issues
The current rate review that was commissioned by the
MRCC does not include a brief to examine the MRCCs
key underlying financial problems, namely (i) Slowing
revenue growth; (ii) On-going growth in operating costs
in excess of the average annual growth rate in
Underlying Revenue; and (iii) Increasing indebtedness.
As such, it is difficult to see how this rate review is going
to provide any tangible solutions to these underlying
financial problems.
Key findings include:
- The consultants brief ignores a range of key underlying problems
being faced by the MRCC and therefore indicates a potential mis-
diagnosis of the underlying causes of the MRCCs financial
problems;
- It is plausible that the current rate review is an exercise in
placating community concerns about rates rather than dealing
with underlying substantive issues.

172

24. The MRCCs current
efforts focussed
upon internal
business review
and cost reduction
measures appear to
be limited in their
effectiveness
In order to be financially sustainable in the long-term, it
is necessary for an organization to ensure that its
operating expense growth is contained within the
parameters of Underlying Revenue growth. In the
context of local Councils, the containment of operating
expenses is also a significant pre-requisite for reducing
annual rate levy increases.
- The MRCCs operating expenses have been growing at an average
annual rate of between 1.1 1.4 % higher than the growth rate in
Underlying Revenue. This has added to the pressure to keep
increasing rates by an average of 5 % per annum over the past 5
years;
- Although there are disclosures in the MRCCs 2013/14 Budget that
indicate a reduction in the cost of Council service delivery for
2013/14 by 10.66 %, the reality is that the costs of Council service
delivery are projected to increase by 2.11 % during 2013/14;
- The MRCCs own budget projections in relation to service delivery
costs show an annual increase in costs of 3.48-3.50 % per annum
for 2014/15-2016/17, and an annual increase in employee-related
expenditures of 5.8 % - both significantly above the average
annual growth rate in Underlying Revenue of -1.0 % for the same
period.
25. There has been no
disclosure of the
existence of, nor
potential extent of,
cost-shifting of local
Council service
delivery costs into
external capital
grant funding
The MRCC has received significant capital grant funding
from both State and Federal governments during the
past 3 years. However, due to no requirement for local
Councils to disclose the rate at which they charge-out
costs into capital grants, there is no way to determine
the presence or extent of any potential cost shifting
behaviour by the MRCC. As such, the significant capital
grant funding that has been received by the MRCC over
the past 3 years inhibits attempts to assess the MRCCs
true underlying operational performance.
Key findings include:
- The influx of significant capital grant funding during the past 3
years has obscured the true underlying operational performance
of the MRCC during this period;
- There is no clear evidence that the MRCC has engaged in cost
shifting behaviour in relation to the capital grant funding that it
has received during the past 3 years speculation about the
endemic nature of such practices across the Local Government
sector cannot be accepted as evidence that it is actually
happening at the MRCC;
- On the contrary, there is evidence that the MRCC has actually
over-committed itself in relation to its capital works program over
the last 3 years relative to the capital grant funding received and
the capacity of the MRCC to fund its own contribution to the
program.
173

26. Local Government
sector accounting
practices raise a
range of concerns
There are a number of permissible accounting practices
in the Victorian Local Government sector which raise
concerns, not the least of which is the potential to
convey a mis-leading picture of the financial
performance of individual local Councils.
The primary concerns with Local Government sector accounting
practices include:
- The inclusion of capital grants, non-monetary and once-off items
in reported Net Surplus / (Deficit) results;
- Sub-optimal disclosure requirements in relation to the
effectiveness with which local Councils manage capital projects;
- The measurement of a local Councils indebtedness against Rate
Base instead of Underlying Revenue thereby obscuring the
impact of increasing Rate Base dependency upon reported
indebtedness;
- The inclusion of significant infrastructure assets in the Balance
Sheet when there is no associated income-generating capacity nor
any likely prospect that such assets will be sold at some point in
the future;
- Recognising external grant funding received in advance as
operating income rather than as prepaid income, which would be
a current liability disclosed in the Balance Sheet.
- Sub-optimal disclosure requirements in relation to debt policy,
debt repayment strategies, risk analysis, charge-out rates to
capital grants and the net cost of capital grant-funded projects to
a local Council.
27. The current
financial
sustainability
criteria used by the
Victorian Auditor
General are too
soft
The current financial sustainability criteria used by the
Victorian Auditor General result in alarm bells being
raised when a local Council is in financial distress, rather
than prior to such a situation unfolding.
- Current benchmarks for low, medium and high risk assessments
are too low in relation to (i) Underlying Results, (ii) Liquidity, and
(iii) Indebtedness;
- The definitions used for Underlying Result, Self-financing, and
Indebtedness are inappropriate;
- There needs to be an increase in the number of financial
sustainability indicators being used in order to provide a more
detailed assessment of a local Councils financial performance.

174

28. The MRCCs claims
about the nature
and purpose of a
General Purpose
Financial Statement
audit are
potentially mis-
leading
Upon receiving an unqualified audit from the Victorian
Auditor General in relation to the MRCCs financial
reports for the 2012/13 financial year, the MRCC issued
a media release claiming that the unqualified audit
report was further evidence that the municipalitys
finances are being carefully managed...
This claim is a mis-representation of the nature and
purpose of a General Purpose Financial Statement audit
and potentially distracts attention away from the
MRCCs underlying financial issues.
- The purpose of a General Purpose Financial Report audit is
primarily to check for compliance with an organizations applicable
accounting framework;
- An unqualified audit report indicates that the financial reports as
presented comply with the organizations applicable accounting
framework;
- An unqualified audit report is not a financial health check and
therefore cannot be used as a basis for claiming that an
organizations finances are being carefully managed;
- The MRCCs media release also contained mis-leading statements
about the MRCCs use of debt.

175

Summary of key findings Chapter 11: A review of the MRCCs rating
strategy with recommendations going forward

The key findings from the analysis conducted in this chapter are as follows:

1. The MRCCs rating strategy has been the source of significant concern across the
Mildura community particularly in relation to the general level of rates and the
decision by the MRCC during 2013 to combine the residential and farmland property
categories into one, a decision that resulted in a 12.70 % rate hike for farmland
properties across the municipality.

2. The two key variables that determine a local Councils rate revenue include (i) the total
Capital Improved Value (CIV) of rateable properties within a municipality; and (ii) the
rate levy applied to the CIV of rateable properties. All other things being equal, a lower
CIV base will inevitably result in a higher level of rates being imposed in order to
generate sufficient rate revenue to fund on-going Council operations.

3. There are a range of philosophical and pragmatic considerations relevant to a local
Councils rating strategy. Philosophical considerations include efficiency (a tax regime
should not adversely impact upon resource allocation decisions), income distribution or
equity issues balanced against the degree to which taxation should be levied on a user
pays basis. Pragmatic considerations include the need for a local Council to be
financially sustainable, determining a level of on-going service delivery that is
appropriate to meet the current and future needs of the local community, the
communitys capacity to pay for local Council service delivery, and the need to maintain
a municipalitys economic competitiveness.

176

4. Some of the key features of the MRCCs current rating strategy include:

It is a differential rating system and therefore is inherently inequitable (on the basis
that not all rateable property categories are treated equally);
The average level of rates applied across the MRCC municipality at 0.007304 cents
per $1 CIV - is 60.7 % higher than the average for the G18 peer group of local
Councils. This is not surprising given that the total CIV base across the municipality is
38.5 % below the G18 peer group of local Councils see Figure 11.C1;
The MRCC has increased rates by an average of 5.0 % per annum since 2007/08
this compares favourably with the G18 peer group of local Councils, but is consistent
with what has become normalized practice across the Victorian local government
sector;
Although rates were increased by 5.0 % for 2013/14, the compounding effect of
successive rate increases over time is the key consideration. Successive 5.0 %
increases in rates over a 5-year period result in a total increase in rates of 27.63 %;
The decision by the MRCC to combine the Residential and Farmland property
categories into one rateable property category is an anomaly all 17 other local
Councils within the G18 peer group have retained separate Residential, Farmland
and Commercial rateable property categories.

5. During 2012/13 consulting firm MacroPlanDimasi conducted the first stage of a review
of the MRCCs rating strategy. One of the recommendations to come out of this review
was the introduction of a farmland differential rate levy which is typically lower than
the rate levy applied to residential properties. The MRCC rejected this recommendation
and decided to combine the Residential and Farmland property categories into one and
extend the existing drainage differential rate (which had only previously applied to
approximately 79 % of properties within the municipality) to all properties in the newly
combined Residential + Farmland property category. This resulted in a once-off 12.70
% rate hike for Farmland properties. The MRCC provided at least four (4) reasons to
justify this action, including:

177

The introduction of a farmland differential rate would introduce inequity between
rateable property types;
Simplicity it was too complicated to distinguish between irrigated and dry-land
farming areas.
The drainage differential rate was not generating sufficient revenue to meet
drainage expenditures; and,
Drainage works were a core Council service and therefore all ratepayers should
contribute.
After assessing the four arguments advanced by the MRCC, only the latter two
reasons were found to be credible.
It is the authors view that based upon current and projected levels of service
delivery, the MRCC simply cannot afford to introduce a farmland differential rate.
The author estimates that the introduction of a farmland differential rate that was
equivalent to 70 % of the residential property rate would cost the MRCC an
estimated $3.004 million in forgone rate revenue on an annual basis.

6. The MRCCs Underlying Revenue composition is projected to change significantly over
the budget forecast period primarily due to the fact that 5 of the MRCCs 7 income
streams are projected to contract (grow at a negative rate), and the 6
th
revenue stream
(Operating Grants) is projected to stagnate see Figures 11.C2 and 11.C3. This is going
to result in the MRCCs Rate Base dependency the degree to which the MRCC is reliant
upon rate revenue as a major source of revenue increasing significantly over the
budget forecast period. The MRCCs Rate Base as a percentage of Underlying Revenue is
projected to increase from 50.9 % in 2012/13 to 64.8 % in 2016/17. The contracting
non-rate revenue streams is estimated to result in an effective reduction in the MRCCs
revenue base of $14.166 million over the budget forecast period (excluding non-
monetary other income items of $13.331 million). All other things being equal, the
MRCCs increasing Rate Base dependency is projected to translate into on-going annual
rate levy increases of at least 5.0-7.0 % into the foreseeable future.

178

7. An evaluation of the MRCCs CIV base revealed a number of significant findings,
including:
A significant decline in the CIV of farmland properties during the 2007/08-2012/13
period. Farmland properties accounted for 25.77 % of total CIV in 2007/08, and this
had fallen to an estimated 20.0 % by 2012/13;
The average annual growth rate in the CIV of business properties has only been 3.56
% for the 2007/08-2013/14 period, which has only been marginally above the
average annual inflation rate (CPI) of 2.83 % for the same period;
Total average annual growth rate of CIV for the MRCC municipality during the
2007/08-2013/14 period has only been 2.34 %, which has been 0.49 % below the
inflation rate (CPI) of 2.83 % for the same period. This means that in real (inflation-
adjusted) terms, the total CIV for the MRCC municipality during the 2007/08-
2013/14 period has actually contracted at an average annual rate of 0.49 % - see
Figure 11.C4; and,
Based upon actual data for the 2007/08-2013/14 period, the MRCCs CIV across the
municipality is not going to deliver any significant boost to rate revenue throughout
the budget forecast period. There are no immediate facts apparent at the time of
writing to suggest any change in this prognosis.

8. Based upon the MRCCs current budget projections and forecast levels of service
delivery, the MRCC cannot afford to introduce a differential rate for farmland,
residential, or business properties. The introduction of a differential rate for either
rateable property category will have a significant impact upon the MRCCs capacity to
generate operating or Net Cash Flow surpluses during the budget forecast period see
Table 11.A1 below.

For example, if the rate levy applied to farmland properties was decreased by 15 %, this
will result in the MRCCs rate revenue decreasing by approximately $1.38 million per
annum.

179

Table 11.A1 - Summary: Impact of reducing the rate levy applied to each rateable property
category upon the MRCCs annual rate revenue

Rateable property
category
Decrease in rate levy
10 % 15 % 20 % 25 % 30 %
Farmland $922166 $1383249 $1844332 $2305415 $2766498
Residential $2818872 $4228308 $5637745 $7047181 $8456617
Business $1073508 $1610262 $2147016 $2683770 $3220524
Cultural &
Recreational

$1745

$2618

$3491

$4364

$5236

Current Budget Projections 2013/14 2014/15 2015/16 2016/17
Annual Operating Result ($000) $-5722 $-333 $65 $448
Annual Net Cash Flow ($000) $-11 721 $350 $363 $379

It is clear that the introduction of a differential rate for one rateable property category
will require the MRCC to off-set foregone rate revenue by either or a combination of the
following actions:
- Increase the rate levy being applied to other rateable property categories;
- Increase the other charges component of annual rate assessment notices for all
rateable property categories;
- Increase the level of charges for other Council-provided services;
- Find real efficiency gains that result in a decreased expenditures equivalent to the
foregone rate revenue;
- Reduce the level of service delivery by a degree that will result in decreased
expenditures equivalent to the foregone rate revenue.

9. An analysis of the Mildura communitys capacity to pay for local Council service delivery
revealed a number of significant points:

(a) The Mildura communities capacity to pay for local Council service provision based
upon median household income, property valuations, and the SEIFA Index of Relative
Advantage and Disadvantage - is significantly lower than many other communities
within the G18 peer group of local Councils;

180

(b) The cost of the MRCCs service provision (in terms of Rates and Charges per rateable
property) as a percentage of median household income (4.07 %) is the second
highest within the G18 peer group of local Councils and 18.31 % higher than the G18
average of 3.44 %;

(c) The MRCCs potential revenue raising capacity over the next 3-4 years is lower
relative to the majority (11) of local Councils within the G18 peer group. This is
principally due to the fact that 5 of 6 non-rate sources of revenue are projected to
contract over the budget forecast period, and a range of indicators support the view
that the MRCCs municipality-wide CIV base is not going to grow at a rate sufficient
to support the MRCCs annual revenue growth needs without rates being increased
by at least 5.0 % per annum over the budget forecast period;

(d) The MRCC has no room to move on the municipality-wide 4.0 % of median
household income threshold for rates and charges (being already in breach at 4.07
%) and has a relatively low revenue raising potential through growth in the
municipalitys CIV base. As such, the MRCC is caught in a double bind the cost of
the MRCCs service delivery is already the 2
nd
highest in the G18 peer group, and the
MRCC has a relatively low CIV base growth potential in the next 3-4 years.
Combined with contracting non-rate revenue streams, this will mean that there will
be significant pressure on the MRCC to continue to increase rates by at least 5.0 %
into the foreseeable future. These factors will continue to exacerbate a major
underlying issue the high cost of local Council service delivery within the context of
a community with a relatively low capacity to pay.

(e) There are four (4) ways in which the prognosis summarised in point (d) (above) can
be at least partially resolved: (i) a significant boost in economic development across
the municipality; (ii) significant growth in non-rate revenue sources in particular,
increased user-based fees and charges for Council services; (iii) significant cuts in the
MRCCs annual expenditures through either real efficiency gains and/or a dis-
continuation of non-core service delivery areas; and/or (iv) a combination of
scenarios (i) to (iii).
181

10. Consistent with what appears to have become normalized behaviour across the
Victorian local government sector, the MRCC has consistently increased rates by an
average of 5.0 % per annum at least since 2007/08 a rate that has consistently been
approximately double the CPI growth rate for the same period see Figures 11.C9 and
11.2.C10. There are 10 factors which have contributed to this significant real growth in
the MRCCs tax impost upon the Mildura community:

(i) Expenditure growth which has consistently been in excess of the CPI growth rate
and/or Underlying Revenue growth rate;
(ii) Growth in a range of key input costs which has consistently exceeded the CPI
growth rate;
(iii) Increasing indebtedness see Figures 11.C11 11.C13;
(iv) Growth in capital expenditure programs in excess of the CPI and/or Underlying
Revenue growth rate see Figure 11.C14;
(v) A commitment to maintaining existing levels of service delivery at a time when
the MRCCs financial position has been deteriorating;
(vi) A flat-lining of the Underlying Revenue growth rate;
(vii) Low municipality-wide Capital Improved Value base and/or slow municipality-
wide Capital Improved Value base growth rate see Figure 11.C15;
(viii) A relatively high municipality cost structure;
(ix) Mixed indicators in relation to the MRCCs ability to achieve real and material
gains in productivity over time; and,
(x) Potential cost shifting from other spheres of government (State and/or Federal).

A summary of the findings of this analysis is presented in Table 11.A2.

Although it is acknowledged that the MRCC has no direct control over two key variables
the significant geographical dispersion of the MRCC municipality which contributes to
an increased cost per unit of local Council service delivery, and a very low municipality-
wide CIV base, the MRCC does have control over the third major variable the MRCCs
discretionary decision making in relation to levels of service delivery and capital works
182

programs. The MRCCs discretionary decision-making in relation to levels of service
delivery and capital works is contributing directly to annual growth in expenditure levels,
an evaporation of the MRCCs cash reserves, increasing indebtedness, and a resultant
need to increase rates by at least 5.0 % per annum in order to maintain at least a
semblance of a balanced budget.

183

Table 11.A2 10 factors contributing to MRCCs rate increases continually exceeding CPI
growth

Factor Evaluation of MRCCs performance
(i) Expenditure growth in
excess of the CPI
growth rate and/or
Underlying Revenue
growth rate
Average annual growth rate: 2007/08-2016/17:
Underlying Revenue 2.7 %
Total Expenses 3.7 %.
Projected average annual growth rate: 2012/13-2016/17:
Underlying Revenue 0.9 %
Total Expenses 2.0 %.
(ii) Underlying cost
pressures that exceed
the CPI growth rate
A range of underlying cost pressures have been growing at a
rate above CPI:
- Wages & Salaries (projected 2013/14-2016/17) 4.6-5.5 %
- Wages & Salaries (actual / projected expenditures
2013/14-2016/17) 5.81-5.83 %
- Engineering & Construction costs (budget projections
2011/12-2013/14) 2.4-5.0 %
- Non-residential Building Index (budget projections
2011/12-2013/14) 3.8-4.0 %
- MRCCs estimated Weighted Average Cost Index = 4.8 %
(iii) Increasing
indebtedness
Average annual growth rate 2013/14-2016/17:
- Actual debt 2.84 % (13.7 % absolute growth over
2013/14-2016/17);
- Debt servicing payments (Interest + Principal) projected to
increase by average annual rate of 7.76 % during 2011/12-
2016/17.
(iv) Growth in capital
expenditure programs
in excess of the CPI
and/or Underlying
Revenue growth rate
Average annual growth rate in capital expenditure during
2007/08-2012/13 = 16.52 %.
If budgeted capital expenditures for 2013/14 included = 13.82
%.
In both cases, significantly higher than annual average growth
rate in Underlying Revenue for same period.
(v) A commitment to
maintaining existing
levels of service
delivery at a time when
the MRCCs financial
position has been
deteriorating
MRCC has repeatedly committed itself to maintain service
delivery levels in spite of deteriorating financial position.
Commitment to maintain service delivery levels significantly
reduces potential opportunities to reduce discretionary
expenditure. Commitment to maintain EFT staff numbers
significantly reduces potential to reduce employee costs.

184

Table 11.A2 10 factors contributing to MRCCs rate increases continually exceeding CPI
growth (Cont)

Factor Evaluation of MRCCs performance
(vi) Flat-lining of
Underlying Revenue
growth rate
Underlying Revenue growth during 2012/13-2016/17
projected to be 0.9 % per annum. This creates pressure for
continual increases in rates to off-set stagnant / negative
growth in non-rate income.
(vii) Low municipality-wide
Capital Improved Value
base and/or slow
municipality-wide
Capital Improved Value
base growth rate
MRCCs Capital Improved Value (CIV) base equivalent to $6
591 million 38.5 % below average for G18 peer group of local
Councils.
(viii) A relatively high
municipality cost
structure
Largest municipality (22 087 square kilometres), below
average population and rateable property numbers result in
increased cost per unit of service delivery relative to other
Victorian local Councils.
(ix) Mixed indicators in
relation to the MRCCs
ability to achieve real
and material gains in
productivity
The MRCC has consistently made commitments to maintain
existing levels of service delivery; however there is no
evidence of any material reductions in resources used. Total
Expenses have been increasing at an average annual rate of
4.15 %, and Total Operating Expenditures have been increasing
at an average annual rate of 4.97 % during the 2010/11-
2016/17 actual and projected period. There is also no
evidence of any material reduction in equivalent full-time (EFT)
staffing levels during the budget forecast period even though
the MRCCs EFT staffing levels appear to be relatively high
compared to other regional local Councils.
(x) Cost shifting from
other spheres of
government (State
and/or Federal)
There is evidence of the practice of cost shifting from State
and/or Federal governments across the local government
sector. There is also anecdotal evidence which suggests that
some local Councils indulge in the practice of using capital
grants to subsidize operating expenditures through inflating
charge-out rates. The potential impact of cost-shifting from
other spheres of government must be acknowledged, however
the exact extent to which cost shifting may have contributed
to the MRCCs decision to increase rates in recent years is
unknown.

185

11. There are 10 key strategies that may be adopted by the MRCC in order to circumvent
continual increases in rates and charges well above CPI growth rates. The 10 strategies
include:

(i) Restricting expenditure growth to CPI growth rate and/or Underlying Revenue
growth rate projections. For example, the current annual growth rate in the
MRCCs operating expenditures is projected to be 3.83 % per annum over the
budget forecast period. If this were to be reduced to 2.5 %, this would result in
estimated savings of $10.29 million during 2014/15-2016/17, and savings of at
least $5.0 million per annum thereafter;

(ii) Reviewing options for reducing the growth in underlying cost pressures,
including:
Desisting with the current policy of minimizing contract labour;
Desisting with the current policy of maintaining consistent levels of equivalent
full-time (EFT) staff numbers;
Exploring options for outsourcing of service delivery;
Exploring options for leasing (as opposed to buying) assets; and,
Reviewing current materials and equipment supply arrangements.

(iii) Placing a moratorium on new borrowings so that indebtedness can be reduced
over time. The introduction of a moratorium on new borrowings and reducing
the current average debt portfolio term to 5-10 years will result in estimated
savings in interest costs between $17.764 - $21.90 million, and reduce debt
levels by up to 80 % by 2016/17 see Table 11.A3.

186

Table 11.A3 Significant savings to be made through introducing moratorium on new
borrowings and reducing debt portfolio term
Annual Debt
Servicing
Payments ($
million)
Estimated
Total Interest
Cost ($
million)
Projected
Outstanding
Debt 2016/17
($ million)
Existing MRCC strategy $3.171 $26.39 $26.304
Introduction of moratorium on new
borrowings from 2013/14, and:

A. Repayment of existing debt
over 10-year term
$3.176 $8.626 $15.509
B. Repayment of existing debt
over 7.5-year term
$3.953 $6.543 $12.099
C. Repayment of existing debt
over 5-year term
$5.525 $4.49 $5.201

(iv) Ensuring that capital expenditure programs do not increase at a rate that is
greater than the CPI and/or Underlying Revenue growth rate given current
budget projections, any increase in projected capital expenditures over the
budget forecast period is likely to result in further increases in indebtedness and
contribute to rate increases above 5.0 % per annum;

(v) Re-examining existing levels of service delivery and making adjustments in line
with a local Councils on-going financial position a commitment to maintain
existing levels of service delivery in spite of the MRCCs deteriorating financial
position significantly reduces the capacity of the MRCC to reduce expenditures to
sustainable levels;

(vi) Increasing non-rate sources of Underlying Revenue growth. 5 of 6 of the MRCCs
non-rate sources of income are projected to contract over the budget forecast
period. The MRCC must explore options for growing new sources of revenue
through entrepreneurial activities. In addition, the extent to which services
provided by the MRCC are delivered on a user pays or cost recovery basis must
be reviewed. The author is of the view that the amount of service delivery
187

provided on a user pays or cost recovery basis must be increased and this can
be achieved in two key ways:

Increasing user charges for a range of MRCCs assets / services by more than
the CPI rate; and,
If there is scope to do so, re-allocating areas of service delivery that are
currently funded by rate income to a user pays or cost recovery category.

(vii) Although the introduction of metered parking services across the Mildura CBD
and 15
th
Street retail precinct has the potential to be a significant revenue raising
mechanism and would yield potentially significant Net Operating Results for the
MRCC, it is fundamentally a very inefficient form of taxation given the size of the
associated dead weight loss associated with metered parking services. In effect,
the cost to the community would significantly outweigh the actual dollar benefits
generated by the MRCC in order to fund on-going service delivery. On this basis
alone the author is of the view that metered parking services not be introduced if
the express purpose behind such a move was to raise revenue.

(viii) Introduction of a target-costing approach with a built-in productivity dividend to
the annual operational budgeting process. A target-costing approach to the
annual operating budgeting process is the preferred means of ensuring fiscal
discipline as it forces a local Council to fit annual operations into pre-determined
financial parameters rate increases and new borrowings cannot be used as a
fall-back position to balance operating budgets.

(ix) Improving the low municipality-wide Capital Improved Value base and/or slow
municipality-wide Capital Improved Value base growth rate. This is a longer-
term challenge and can only be resolved through the promotion of a greater
level of economic development across the municipality; and,

188

(x) Exercising high levels of due diligence in relation to decisions to accept increased
service obligations and accompanying funding from other spheres of government
(State and/or Federal);

(xi) A combination of the preceding nine strategies.

12. A comparative evaluation of the MRCCs rates and charges against the G18 peer group
of local Councils found the following:

MRCC is at a significant disadvantage in terms of capacity to raise rate revenue due
to significantly lower total CIV base. A low CIV base is major reason for rate levies in
MRCC municipality being significantly higher than elsewhere. A lower CIV base also
means that increases in input costs that are beyond the control of the MRCC will
have a proportionately larger impact upon the MRCCs underlying input costs.
Hence the MRCC must be doubly diligent in ensuring that cost pressures are off-set
by productivity gains and/or adjustments to service delivery levels in order to control
on-going cost pressures and their resultant impact upon rate levels over time;

The major difference between the MRCC and the G18, RRC and SSC peer groups in
relation to the measures noted above is in relation to CIV per rateable property by
rateable property category. The capacity of the MRCC to generate rate revenue on a
CIV per rateable property basis is significantly less than other local Councils
indicating that in order for the MRCC to provide a level of service delivery that is
equivalent to that provided by other local Councils within the G18 peer group, the
MRCC is going to have to levy significantly higher levels of rates, and/or impose
higher user charges;

The data presented above indicates that the MRCC is an anomaly in relation to
Waste Management charges on rate assessment notices. A review needs to be
undertaken to ensure that the charge is sufficient to cover the actual cost of service
delivery in relation to waste management services;
189

The MRCCs CIV base is the Achilles Heel in-so-far as the MRCCs revenue raising
capacity is concerned. A low CIV base inevitably means a significantly higher level of
rates applied to rateable properties is required in order to raise enough rate revenue
to fund even the most basis level of local Council services.

The implications of this are many, and include a need for the MRCC to be doubly
diligent in relation to setting service delivery levels, management operating costs,
and relying on debt to help fund annual budgets. A lower capacity to raise rate
revenue also means a lower capacity to service on-going operating and financial
commitments relative to the MRCCs rate revenue generating capacity.

In relation to the level of indebtedness, the MRCC should not be adhering to a
margin of safety or low risk debt parameter equivalent to 40-45 % of the Councils
Rate Base due to the fact that the MRCCs capacity to generate increases in rate
revenue through increasing rate levies will result in a significantly higher tax impost
upon the local community relative to other local Council areas;

The MRCC community has a lower capacity to pay for local Council service delivery
compared to G18, RRC and SSC averages.

13. Four concerning trends that are evident in relation to the MRCC municipality were
identified. The four trends are:

A stagnating population growth at 1.126 % per annum;
A stagnating development approvals growth between 2001/02-2011/12
development approvals across the combined Mildura-Wentworth area only grew by
3.73 %;
Stagnating rateable properties growth at just under 1.0 % per annum; and,
Stagnating total capital improved value base growth at 2.24 % per annum.

190

Each of these four trends will have on-going ramifications for the MRCCs future revenue
raising capacity.

14. In September 2013 the MRCC commissioned the second stage of a rating strategy
review. The author is of the view that the brief given to the consulting firm conducting
the second stage of the MRCCs rate strategy review is too limited in scope in the light of
the underlying challenges being faced by the MRCC and the broader Mildura
community.

The underlying causes of the MRCCs current and projected financial challenges centre
around (i) slowing revenue growth - 5 of the MRCCs 7 sources of revenue are projected
to decline during the budget forecast period; (ii) continual growth in operating costs at a
rate that exceeds the average annual growth rate in Underlying Revenue less Capital
Grants; (iii) increasing indebtedness; (iv) deteriorating liquidity; and (v) a CIV base that is
significantly lower than the average for G18 Councils and growing at an average annual
rate of only 2.34 %.

15. An examination of the impact of changes in the capital improved values and the rate
levy applied to the capital improved values of each rateable property category found
that changes in the capital improved value or rate levy applied to capital improved value
of the Residential / Farmland properties will have a significantly larger proportionate
impact upon the MRCCs total rate revenue relative to other rateable property
categories.

16. A scenario analysis examining the impact of combined changes in the capital improved
value and rate levy growth over time found that:

The impact of rate levy increases, in terms of revenue raising capacity, will always be
greater as the annual average growth in the CIV of Rateable Properties is increased
(for example, at 2.5 % per annum compared to 1.5 % per annum) due to the
compounding effect of both increases in rate levies applied and growth in the CIV of
Rateable Properties;
191

The impact of a 1.0 % per annum increase in the CIV of Rateable Properties with no
change in rate levies will result in an estimated increase in total rate revenue of
$0.481 million in the first year, increasing to $2.454 million in year 5;

Thus, if the CIV of Rateable Properties was to increase by 2.0 % per annum, this will
result in an estimated increase in total rate revenue of $0.962 million in the first
year, increasing to $4.908 million in year 5;

Similarly, an increase in the rate levies applied by 1.0 % with no change in the CIV
value of Rateable Properties will result in an estimated increase in total rate revenue
of $0.481 million in the first year, increasing to $3.055 million in year 5;

Stimulating growth in the total CIV of Rateable Properties must be a priority: As
noted earlier in this chapter (Part 10), given the significant impact that growth in the
CIV of Rateable Properties has upon projected rate revenue, a local Council MUST
give at least as much energy to exploring ways of increasing the total CIV of Rateable
Properties within its LGA as it does to deliberations about the level of rate levy
increases to be imposed. To consider the latter without giving due consideration to
the former is tantamount to only looking at half of the potential solution to a
revenue / budget problem;

17. A scenario analysis examining the impact of alternative rate base growth rates upon the
MRCCs projected operating results found that all other things being equal, the MRCC
simply cannot afford an average annual increase in its Rate Base less than 4.0 %. An
average annual increase in the MRCCs Rate Base must be at least 5.5 % before the
Council begins to create an operating surplus that could be devoted to the repayment of
debt (that is, when Operating Results less Capital Grants are in perpetual surplus
throughout the 2013/14-2018/19 period).

192

18. A scenario analysis examining the impact of alternative operating expense growth rate
upon the MRCCs projected operating results found that by reducing the total operating
expense growth rate from its current projected rate of 3.83 % per annum to 2.5 % per
annum will result in significant improvements in the MRCCs operating surplus
commencing from an estimated $1.710 million in 2014/15, $3.367 million in 2015/16,
and $5.213 million in 2016/17.

19. The introduction of a flat (dollar-based) rate charge, a single municipality-wide rate levy,
or a flat (dollar-based) multi-tier rating system would result in a re-distribution of the
current rate burden to lower value residential properties and away from business /
commercial properties when compared to the existing CIV-base levy system currently
used by the MRCC. A rating strategy that is based upon a flat (dollar-based) rate charge,
a single municipality-wide rate levy, or a flat (dollar-based) multi-tier rating system
would be more in line with the promotion of long-term economic growth across the
municipality.

20. The author recommends that the MRCC allow the Mildura community to decide the
level of rates theyre prepared to accept by allowing the community to engage in a non-
compulsory vote on three alternative levels of rate increase: -2.5 %, 0.0 %, and 2.5 %,
with associated local Council service delivery levels. There is nothing in the Local
Government Act 1989 (Vic) preventing the MRCC from engaging in such an initiative and
it would be a significant exercise in genuine community engagement.

21. 20 recommendations have been made based upon the analysis presented in Parts 2-23
of the chapter see over-page.

193

20 Recommendations in relation to the MRCCs rating strategy

Based upon the analysis undertaken and presented in this chapter, there are 20
recommendations in relation to the MRCCs rating strategy:

1. Two key factors contribute to an inevitably higher level of rates in the MRCC
municipality: (i) a CIV base that is 38.5 % lower than the G18 average; and (ii) a higher
cost per unit of service delivery that can be attributed to the geographic dispersion of
the MRCC municipality. The MRCC must clearly articulate this message to the local
community in order to ensure that community expectations in relation to the MRCCs
capacity to deliver services are realistic.

2. The major factor contributing to on-going rate increases averaging 5.0 % per annum
over the past 5 years has been discretionary decision-making by the MRCC. As such,
elected Councillors must ensure the ramifications of their decisions in-so-far as
contributing pressure to increase rates in the future is clearly evaluated.

3. The existing rate structure see Table 11.B1 below is clearly an anomaly within the
G18 peer group of local Councils in relation to the combining of residential and farmland
properties into one single rateable property category.

Table 11.B1 MRCC rating structure for 2013/14

Source: MRCC Budget 2013/14, p.57.
194

However, the author is of the view that unless the MRCC is prepared to make the necessary
cuts to annual expenditures in order to off-set any decrease in the rate levy applied to
either or all rateable property categories, or unless the MRCC is prepared to adopt a flat
(dollar-based) uniform rate charge or a flat CIV-based multi-tier rating strategy, the existing
rating structure should be left intact. There are a number of reasons for this view:

(i) Although farming properties were subjected to a 12.7 % rate hike for the 2013/14
financial year, the overall distribution of the rate burden across the various rateable
property categories has not changed in any significant way indeed, it has remained
relatively constant throughout the 2007/08-2013/14 period see Figures 11.C16 and
11.C17.

(ii) Although properties outside of immediate built-up areas which are predominantly
farming properties may not receive the same degree of local Council service
delivery (for example, the provision of footpaths, connection to the sewerage
network, and so on), there are many other examples where owners of properties
within built-up areas do not receive the benefits of local Council service as well, only
it is in relation to other areas of local Council service delivery (for example, child and
maternal services, or the use of subsidized sporting or playground facilities).

(iii) It is the authors view that if the MRCC was to embark on a user pays approach to
the delivery of what may be regarded as core service deliver, then such a policy
must be consistently applied across all rateable property categories. The author is of
the view that such an approach introduces an administrative burden that will create
additional (and unnecessary) costs for the MRCC.

(iv) The introduction of a differential rate for farmland properties is only supported if it is
funded via equivalent expenditure cuts. Given the existing level of rates across all
rateable property categories, to fund a farmland differential rate through increasing
the rate levies applied to non-farmland property categories will result in a material
increase in the financial burden of non-farmland property ratepayers. The author
acknowledges the inherent bind that the MRCC municipality is in the rate burden
195

across the municipality is significant relative to median household incomes and
financial hardship is being experienced by a broad section of the Mildura community.

(v) The high rate levy that is currently being applied by the MRCC to business /
commercial (including farming) properties is an issue that must be attended to. It is
the authors view that a uniform flat (dollar-based) rate charge or a flat levy-based
multi-tier rating system may provide the answer to this challenge and reduce the
relative rate burden currently being shouldered by business / commercial (including
farming) properties see Key Finding No.10.

4. There are a range of views and philosophical arguments about where and to what
degree a local Councils rate burden should rest in relation to different rateable
property categories such arguments will always exist as long as there is a rate burden
to be shared. It is the authors view that the concerns raised in this report require the
immediate discussion to focus upon how the MRCCs rate burden can be contained in
the short, medium and longer-term. A discussion about how the MRCCs rate burden is
distributed across different categories of rateable properties is necessary, but only after
strategies for rate levy containment have been formulated and implemented. There are
a number of reasons for this view:

(i) The initial contributors to significantly higher-than-average rates include a low
municipality-wide CIV base combined with a geographic dispersion that
inevitably results in higher per unit costs for local Council service delivery. The
former will not change in any significant way in the short-term, and the latter will
remain as long as the current population distribution across the municipality
remains relatively unchanged (which is expected to be the case).

(ii) An annual rate increase of X % (that is, any amount) have a disproportionate
impact upon the level of rates being applied to rateable properties within the
MRCC municipality due to an already high starting point see Figure 11.C1.

196

(iii) Annual increases in rate levies above the CPI growth rate are eroding the
desirability of the MRCC municipality as a place to live due to a higher cost of
living, an erosion of the communitys capacity to pay for local Council service
delivery which is already being tested to a degree that is significantly above
other G18 communities; and an erosion in business competitiveness across the
municipality.

(iv) Annual increases in rate levies are largely a direct result of discretionary decision-
making by the MRCC in relation to the determination of local Council service
delivery levels (incorporating on-going operating and capital investment
programs). It is the MRCCs failure to contain expenditures within the
parameters of the CPI growth rate and/or the growth rate of the MRCCs
Underlying Revenue that is a major contributor to average rate increases of 5.0 %
per annum over the 2007/08-2013/14 period and the 2014/15-20161/7 period
(projected).

A discussion about how the MRCCs rate burden is distributed across different rateable
property groups is necessary. Such discussions must include consideration of an alternative
rating strategy based upon a flat (dollar-based) annual rate charge or the introduction of a
single municipality-wide rate levy see Recommendation 10 (below).

5. Given the MRCCs increasing Rate Base dependency over the budget forecast period
which is due primarily to the fact that 5 of the MRCCs 7 revenue streams are projected
to contract (grow at a negative rate), and the 6
th
revenue stream (Operating Grants) is
projected to stagnate (see Figure 11.C2) the MRCC must actively look for ways to grow
non-rate sources of revenue. This is particularly so given that the MRCCs CIV base has
only grown at an average annual rate of 2.34 % over the 2007/08-2013/14 period (below
the average annual CPI growth rate of 2.83 % for the same period) meaning that in real
terms, growth in the MRCCs CIV base has not contributed to the MRCCs revenue during
the 2007/08-2013/14 period. Any growth in the CIV base which will largely be due to
economic development across the municipality is projected to be over the medium
197

and longer-term. As such, growth in the CIV base should not be relied upon as a
generator of revenue (in real terms) in the short-term.

6. There are 10 key strategies that should be adopted by the MRCC in order to circumvent
continual increases in rates and charges well above the CPI growth rate. The 10
strategies include:

(i) Restricting expenditure growth to CPI growth rate and/or Underlying Revenue
growth rate projections. For example, the current annual growth rate in the
MRCCs operating expenditures is projected to be 3.83 % per annum over the
budget forecast period. If this were to be reduced to 2.5 %, this would result in
estimated savings of $10.29 million during 2014/15-2016/17, and savings of at
least $5.0 million per annum thereafter;

(ii) Reviewing options for reducing the growth in underlying cost pressures,
including:
Desisting with the current policy of minimizing contract labour;
Desisting with the current policy of maintaining consistent levels of equivalent
full-time (EFT) staff numbers;
Exploring options for outsourcing of service delivery;
Exploring options for leasing (as opposed to buying) assets; and,
Reviewing current materials and equipment supply arrangements.

(iii) Placing a moratorium on new borrowings so that indebtedness can be reduced
over time. The introduction of a moratorium on new borrowings and reducing
the current average debt portfolio term to 5-10 years will result in estimated
savings in interest costs between $17.764 - $21.90 million, and reduce debt
levels by up to 80 % by 2016/17 see Table 11.B2.

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Table 11.B2 Significant savings to be made through introducing moratorium on new
borrowings and reducing debt portfolio term

Annual Debt
Servicing
Payments ($
million)
Estimated
Total Interest
Cost ($
million)
Projected
Outstanding
Debt 2016/17
($ million)
Existing MRCC strategy $3.171 $26.39 $26.304
Introduction of moratorium on new
borrowings from 2013/14, and:

D. Repayment of existing debt
over 10-year term
$3.176 $8.626 $15.509
E. Repayment of existing debt
over 7.5-year term
$3.953 $6.543 $12.099
F. Repayment of existing debt
over 5-year term
$5.525 $4.49 $5.201

(iv) Ensuring that capital expenditure programs do not increase at a rate that is
greater than the CPI and/or Underlying Revenue growth rate given current
budget projections, any increase in projected capital expenditures over the
budget forecast period is likely to result in further increases in indebtedness and
contribute to rate increases above 5.0 % per annum;

(v) Re-examining existing levels of service delivery and making adjustments in line
with a local Councils on-going financial position a commitment to maintain
existing levels of service delivery in spite of the MRCCs deteriorating financial
position significantly reduces the capacity of the MRCC to reduce expenditures to
sustainable levels;

(vi) Increasing non-rate sources of Underlying Revenue growth. 5 of 6 of the MRCCs
non-rate sources of income are projected to contract over the budget forecast
period. The MRCC must explore options for growing new sources of revenue
through entrepreneurial activities. In addition, the extent to which services
provided by the MRCC are delivered on a user pays or cost recovery basis must
be reviewed.
199

The author is of the view that the amount of service delivery provided on a user
pays or cost recovery basis must be increased and this can be achieved in two
key ways:

Increasing user charges for a range of MRCCs assets / services by more than
the CPI rate; and,
If there is scope to do so, re-allocating areas of service delivery that are
currently funded by rate income to a user pays or cost recovery category.

(vii) Introduction of a target-costing approach with built-in productivity dividends to
the annual operational budgeting process. A target-costing approach to the
annual operating budgeting process is the preferred means of ensuring fiscal
discipline as it forces a local Council to fit annual operations into pre-determined
financial parameters rate increases and new borrowings cannot be used as a
fall-back position to balance operating budgets.

(viii) Improving the low municipality-wide Capital Improved Value (CIV) base and/or
slow municipality-wide CIV base growth rate. This is a longer-term challenge and
can only be resolved through the promotion of a greater level of economic
development across the municipality;

(ix) Exercising high levels of due diligence in relation to decisions to accept increased
service obligations and accompanying funding from other spheres of government
(State and/or Federal); and,

(x) A combination of the preceding nine strategies.

7. Stimulating economic development must remain a key priority of the MRCC. The MRCC
must learn to work with State and Federal governments of either political persuasion in
a collaborative manner to ensure that the interests of the Mildura community are not
jeopardised through the pursuit of local and parochial political agendas. On-going
200

economic development is the long-term solution to the four concerning trends of
stagnating growth in population, development approvals, rateable properties, and CIV
base across the MRCC municipality and broader Mildura-Wentworth region.

8. A scenario analysis examining the impact of alternative operating expense growth rate
upon the MRCCs projected operating results found that by reducing the total operating
expense growth rate from its current projected rate of 3.83 % per annum to 2.5 % per
annum will result in significant improvements in the MRCCs operating surplus
commencing from an estimated $1.710 million in 2014/15, $3.367 million in 2015/16,
and $5.213 million in 2016/17 see Figure 11.2.C18. Given that containment in annual
operating and capital expenditures is a necessary pre-curser to reducing annual rate levy
increases to 2.5 % or less, the containment in annual operating and capital expenditures
must be a key priority of the MRCC.

9. In order to ensure that annual operating and capital expenditures are contained to
sustainable levels within the parameters of an Underlying Revenue growth rate of 2.5 %
or less, the MRCC must introduce a target-costing based approach with a built-in annual
productivity dividend to the formulation of annual budgets.

10. The MRCC should give serious consideration to the potential of adopting a rating
strategy that is based upon a flat (dollar-based) annual rate charge, a single municipality-
wide rate levy, or a flat (dollar-based) multi-tiered rating system. Although such a rating
strategy will result in an initial re-distribution of the total rate burden toward lower
valued properties due to a flatter rating structure, there would be a significant
reduction in the rate burden shouldered by the business (including farming) community.
Such a policy would be more in line with promoting long-term economic development
across the municipality.

11. The MRCC must allow the Mildura community to decide the level of rates theyre
prepared to accept by allowing the community to engage in a non-compulsory vote on
three alternative levels of rate increase: -2.5 %, 0.0 %, and 2.5 %, with associated local
Council service delivery levels. There is nothing in the Local Government Act 1989 (Vic)
201

preventing the MRCC from engaging in such an initiative and it would be a significant
exercise in genuine community engagement.
202

203

Summary of key findings Chapter 12: Developing a long-term sustainable
budget strategy for the MRCC

The key findings arising from the analysis presented in this chapter is essentially a story
about two alternative financial plans that will lead the MRCC and Mildura community to two
distinctly different financial destinys, and the willingness of the MRCC to choose between
the two in the light of what is in the best long-term interests of the Mildura community.

In a nutshell, the financial plan proposed by the MRCCs Strategic Resource Plan 2013/14-
2016/17 and Budget 2013/14 documents will lead the MRCC, and therefore the Mildura
community, to a financial destination which is undesirable for a number of reasons.
Projected outcomes from the MRCCs current financial plan include:

- Continued growth in operating expenditures at a rate that exceeds the growth rate
in the MRCCs Underlying Revenue a scenario that is unsustainable;

- Continual annual rate levy increases of 5.0 % into the foreseeable future a scenario
that is untenable given the fact that, relative to median incomes, the cost of the
MRCCs service delivery (as measured by annual Rates and Charges) is already 57.04
% higher than the average for the G18 peer group of local Councils;

- There is no margin for error in the event of unforeseen circumstances based upon
the MRCC Budget 2013/14 projections, a reduction in projected revenues of only 1.0
% over the budget forecast period will be sufficient to tip the MRCC into continual
operating deficits;

- Increased indebtedness the MRCCs current debt (as at 30 June 2013) is expected
to increase from $23.133 million to $26.304 million in 2016/17, and modelling
presented in this chapter suggests that the MRCCs debt will grow to at least $29
million in 2019/20 with the potential for a greater level of indebtedness if capital
works program expenditures are not capped from 2016/17 onwards;

204

- There is very little likelihood of a restoration of the MRCCs financial assets over the
extended budget forecast period. During 2011/12-2013/14 there was a significant
liquidation of the MRCCs financial assets in order to fund on-going operations.
Projected successive Net Cash Flows of $-11.721 million, $350 000, $363 000, and
$379 000 during 2013/14-2016/17 will ensure that the MRCC remains in a
substantially weakened liquidity position throughout the budget forecast period;

- The MRCCs capacity to finance major capital projects has been substantially reduced
during 2011/12-2013/14. Indeed, based upon public comments by key
representatives of the MRCC in recent times, there is little chance of the MRCC
engaging in any significant capital projects without substantial external capital grant
funding or resorting to increased borrowings beyond the $10 million of new
borrowings already foreshadowed in the MRCCs Budget 2013/14 document. Based
upon the modelling presented in this chapter, there is very little likelihood of a
restoration of the MRCCs capacity to finance major capital projects throughout the
extended budget forecast period (2013/14-2019/20).

The purpose of this chapter is to proffer a different vision of what can be if a number of
clear and admittedly tough strategic budgetary decisions are taken. These budgetary
decisions include the following:

- The introduction of a target costing-based budgeting model;
- Imposing a moratorium on new borrowings from 2013/14 and throughout the
budget forecast period;
- Limiting annual rate levy increases to a maximum of 2.5 % per annum;
- Restoring annual depreciation allocations to 3.25 % - an amount sufficient to ensure
that the MRCC is able to finance the entirety of annual capital upgrade and renewal
program without having to resort to the use of debt throughout the budget forecast
period;
- Capping capital works program expenditures at an annual growth rate of 2.5 % per
annum;
205

- The introduction of an annual contingency fund allocation equivalent to 1.0 % of
total Operating Cash Inflows for the purposes meeting unforeseen expenses; and,
- The introduction of a minimum required operating surplus equivalent to 2.0 % of
total Operating Cash Inflows.

If the above measures are taken, then the MRCC will have a financial strategy that will
return the MRCC to a position of financial strength and deliver the following benefits for
the Mildura community over an extended budget forecast period (2013/14-2019/20):

- Expenditure growth will be contained within the parameters set by the annual
growth rate in total Operating Cash Inflows this will ensure that there will be no
on-going pressure upon the MRCC to increase rates beyond 2.5 % due to excessive
discretionary expenditure. As a result, the MRCCs currently unsustainable path
wherein annual expenditure growth is projected to exceed the annual growth rate in
Underlying Revenue will have been averted;

- Annual rate levy increases of no more than 2.5 % into the foreseeable future a
measure that will, over time, restore some normalcy back into the relative cost of
local Council service delivery across the MRCCs municipality relative to the G18 peer
group of local Councils;

- The establishment of a Contingency Fund equivalent to 1.0 % of total Operating Cash
Inflows, combined with a required minimum operating surplus equivalent to 2.0 % of
total Operating Cash Inflows will mean that the MRCC will be in a position to deal
with unforeseen circumstances in the future. The combined Contingency Fund and
accumulated Operating Surpluses will result in approximately $22.661 million being
allocated for future contingencies, including new capital projects such as the
proposed indoor sports facility which has been the subject of public discussion in
recent times;

- A significant reduction in indebtedness under the proposed remedial budget, the
MRCCs debt is projected to decrease to $1.889 million by 2019/20, which is $27.182
206

million less than the $29.071 million in debt that MRCC is projected to have in
2019/20 if there is no change in the MRCCs current financial strategy;

- The reduction in indebtedness noted in the previous point will result in projected
savings in interest costs in the order of $16.134 - $33.064 million accruing to the
MRCC;

- The MRCCs financial assets will be restored over the budget forecast period by
2019/20 the MRCCs financial assets are projected to be in the order of $31.543 -
$39.097 million, compared to $18.710 million if the MRCC pursues its current
financial strategy unabated;

- The MRCCs capacity to finance major capital projects will be substantially restored
over the extended budget forecast period with a significantly reduced need for
external capital grant funding, and no requirement to rely upon new borrowings;

- Achieving the above outcomes will require achieving combined savings and non-rate
revenue growth of $7.8 - $8.5 million during the first 4 years of the proposed
sustainable budget strategy, tapering to $5.3 and $0.411 million in years 5 and 6
respectively;

- The required combined savings and non-rate revenue growth targets noted in the
previous point can be achieved with minimal impact upon the MRCCs on-ground
service delivery.

Two plans, two destinies, and a local Council who has the capacity to choose between the
two.

A summary of the proposed sustainable budget strategy a preferred option and a fall-
back option that has been developed is presented on the following pages. This is followed
by a number of key graphs which highlight the fundamental differences in projected
207

outcomes between the financial plan that is currently being proposed by the MRCC, and the
proposed sustainable budget strategy being proposed in this chapter.

In terms of budget sensitivities and potential risk exposure, the analysis presented revealed
that the most sensitive variables in the budgeting model were (i) annual depreciation
allocations; (ii) the Rate Base growth rate; and (iii) the size of any imposed productivity
dividend, contingency fund contribution and/or minimum Operating Surplus requirement,
with a 1.0 % change resulting in an annual budgetary impact of $3.213 million, $2.297
million and $1.079 million respectively.

In terms of risk exposure, the MRCCs key risk exposures relate to:

1. Being able to reduce the debt term over which the MRCCs existing debt of $23.133
million (as at 30 June 2013) is repaid;
2. Being able to achieve an annual growth rate in non-Rate Base revenue of 7.5 %; and,
3. Being able to achieve identified capital grant income targets.

Of course, the MRCC overall risk profile, which was evaluated in detail in Chapter 9 of this
report, remains the same for the proposed sustainable budget strategy, with key risk
exposures being in relation to:

1. Changes in total revenue projections particularly in relation to non-Rate Base
revenue projections;
2. Whether or not capital grant income projections are realised; and,
3. Prior budget accuracy and the reliability of underlying budget relationships and the
implications of this for budget projections.

The remainder of this chapter consists of a detailed justification and explanation of why the
MRCC should adopt the proposed sustainable budget strategy as presented.

208

209

Proposed Sustainable Budget Strategy: Preferred Option ($000)

210


211


REMEDIAL BUDGET - PREFERRED SCENARIO
SCHEDULE 3 - COMPARISON OF KEY BUDGET ELEMENTS: MRCC BUDGET 2013/14 v PROPOSED REMEDIAL BUDGET
Average Annual
2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 Growth Rate
A. Annual debt servicing payments (Principal + Interest)
MRCC Budget 2013/14 3212 3050 3311 3109 3171 3171 3171 0.79%
Proposed remedial budget 3953 3953 3953 3953 3953 3953 3953 0.00%
Difference -741 -903 -642 -844 -782 -782 -782
B. Annual depreciation allocations
MRCC Budget 2013/14 15050 15644 15950 16262 16511 16763 17020 1.76%
Difference -4936 -4594 -4583 -4616 -4677 -4740 -4803
C. Projected new borrowings
MRCC Budget 2013/14 - Assumed no new borrowings post-2016/17 (unlikely scenario) 2000 1000 3000 4000 4000 1000 3000
Proposed remedial budget 0 0 0 0 0 0 0
Difference 2000 1000 3000 4000 4000 1000 3000
D. Projected annual capital works program expenditures
MRCC Budget 2013/14 38556 18874 20510 22351 22351 22351 22351 3.68%
Difference 0 0 1164 2522 2026 1518 997
E. Annual budget for on-going operating (non-capital works) activities
MRCC Budget 2013/14 72745 76243 79917 83770 87804 89883 89622 3.51%
Difference 8453 7859 7849 7819 7706 5371 411
F. Rate Base
MRCC Budget 2013/14 55640 58277 61752 65436 69276 73342 77646 6.65%
Difference 0 1246 3295 5518 7860 10390 13121
G. Non-Rate Base Income
MRCC Budget 2013/14 44472 38537 38623 39423 39940 40412 40834 1.19%
Difference 0 0 -2804 -5111 -7935 -11053 -14491
Notes to accompany Schedule 3:
Note 1 - All figures $'000.
Note 2 - Annual depreciation allocations for MRCC Budget 2013/14 for 2017/18-2019/20 based upon 2016/17 with annual growth at 1.53 % in line with annual IPPE growth rate.
Note 3 - Projected borrowings by MRCC during 2017/18-2019/20 highly likely to be minimum of $2.0 million per annum and potentially significantly more.
Note 4 - Capital works program expenditures for MRCC Budget 2013/14 for 2017/18-2019/20 based upon growth rate in capital works expenditures during 2014/15-2016/17.
Budget Forecast Period
212

213

Proposed Sustainable Budget Strategy: Fall-back Option ($000)

MRCC - Proposed Remedial Budget
CHANGES MADE IN THIS ITERATION:
REMEDIAL BUDGET - Fall-Back Scenario Annual Minimum Operating Surplus requirement of 2.0 % of Total Operating Cash Inflows
has been relaxed to 1.0 % of Total Operating Cash Inflows
SCHEDULE 1 - KEY VARIABLES AND JUSTIFICATION
Current Potential
Key Variables: Scenario Options Comments in relation to key variables (optimal targets)
Rate Base growth rate 2.50% 0.0 - 5.0 % 2.5 % is the mid-point of RBA's inflation (CPI) target.
Non-Rate Base revenue growth rate 7.50% 0.0 - 7.5 % Minimum annual growth target of 2.5 %
Annual productivity dividend 1.50% 0.0 - 2.5 % Negotiable - due to minimum operating surplus.
Annual contingency fund allocation 1.00% 0.0 - 1.5 % 1.0 % recommended as minimum annual allocation.
Annual depreciation allowance 3.25% 3.0 - 3.5 % 3.25 % sufficient to cover upgrade & renewal costs.
Annual minimum operating surplus (based upon cash inflows versus expenditures) 1.00% 0.0 - 2.5 % 2.5 % recommended minimum annual operating surplus.
Capital works program expenditure growth rate 2.50% 0.0 - 2.5 % Must be Underlying Revenue growth rate.
Debt-specific variables:
Outstanding debt portfolio as at 30 June 2013 -23133 Moratorium on new borrowings from 2013/14.
Weighted Average Interest Rate 6.22% 6.00 - 7.50 % Expected to increase during budget forecast period.
Term over which existing debt to be extinguished (years) 7.50 5.0 - 10.0 years 10 years is absolute maximum loan term.
Annual debt repayments (Principal + Interest) $3,953 Will vary depending upon debt strategy adopted.
NUTSHELL ANALYSIS:
Average Annual
Budget item: 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 Growth Rate
Projected Rate Base 55640 57031 58457 59918 61416 62952 64525 2.63%
Projected reduction in Rate Base 0 1246 3295 5518 7860 10390 13121
Projected Non-Rate Base Income 44472 38537 41427 44534 47874 51465 55325 8.71%
Projected Operating Cash Inflows 111833 95568 99884 104453 109291 114417 119850 5.08%
Projected capital works program expenditures 38556 18874 19346 19829 20325 20833 21354 2.63%
Projected maximum budget for on-going operating expenditures 65410 69353 73072 77000 81190 85649 90396 6.07%
Projected operating surplus 1118 968 1004 1049 1092 1138 1185
Projected new borrowings 0 0 0 0 0 0 0
Projected debt repayments 3953 3953 3953 3953 3953 3953 3953
Projected outstanding debt balance (at year end - 30 June) -20619 -17949 -15112 -12099 -8899 -5500 -1889 -17.90%
Projected annual savings required to meet budget objectives (A) -7335 -6890 -6845 -6770 -6614 -4234 774
Proportion of projected annual savings accounted for by reduction in projected Rate Base 0.0% 18.1% 48.1% 81.5% 118.8% 245.4% -1695.2%
Comparison of projected annual savings with PREFERRED OPTION (B) -8453 -7859 -7849 -7819 -7706 -5371 -411
Difference in projected annual savings requirements: (A) - (B) 1118 969 1004 1049 1092 1137 1185
214


REMEDIAL BUDGET - Fall-Back Scenario
SCHEDULE 2 - PROPOSED REMEDIAL BUDGET
Average Annual
Proposed Budget: 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 Growth Rate
Projected Total Cash Inflow 100112 96814 100375 104859 109216 113754 118480 4.48%
Adjustment for 2013/14 (projected $11.721 million NCF Deficit for 2013/14) -11721
Initial maximum budget parameter 111833 96814 100375 104859 109216 113754 118480 4.48%
Adjustment for reduced Rate Base income:
Projected Rate Base as per MRCC Budget 2013/14 (pp.52-54) (A) 55640 58277 61752 65436 69276 73342 77646 6.59%
Revised Rate Base based upon adjusted annual growth rate (B) 55640 57031 58457 59918 61416 62952 64525 2.66%
Difference (A) - (B) 0 1246 3295 5518 7860 10390 13121
Maximum budget parameter adjusted for reduction in Rate Base income 111833 95568 97080 99341 101356 103363 105359 2.05%
Adjustment for change in Non-Rate Base income:
Projected Non-Rate Base income as per MRCC Budget 2013/14 (pp.52-54) (C) 44472 38537 38623 39423 39940 40412 40834 1.19%
Revised Non-Rate Base based upon adjusted annual growth rate (D) 44472 38537 41427 44534 47874 51465 55325 8.71%
Difference (D) - (C) 0 0 2804 5111 7935 11053 14491
Maximum budget parameter adjusted for change in Non-Rate Base income 111833 95568 99884 104453 109291 114417 119850 5.08%
Less pre-service delivery commitments:
Annual productivity dividend 1677 1452 1506 1573 1638 1706 1777 0.99%
Annual contingency fund allocation 1118 968 1004 1049 1092 1138 1185 0.99%
Annual depreciation allowance 19986 20238 20533 20878 21188 21503 21823 1.53%
Annual minimum operating surplus 1118 968 1004 1049 1092 1138 1185 0.99%
Annual debt repayments (Principal + Interest) 3953 3953 3953 3953 3953 3953 3953 0.00%
Total pre-service delivery commitments 27853 27580 27999 28501 28964 29438 29923 1.24%
Maximum budget parameter after pre-service delivery commitments 83980 67988 71885 75952 80327 84979 89927 1.18%
Capital works program expenditures 38556 18874 19346 19829 20325 20833 21354 2.63%
Less Annual depreciation allowance 19986 20238 20533 20878 21188 21503 21823
Net capital works expenditure 18570 -1364 -1188 -1048 -863 -670 -469
Maximum budget parameter after capital works program commitments 65410 69353 73072 77000 81190 85649 90396 6.07%
New borrowings 0 0 0 0 0 0 0
Maximum budget parameter after proposed new borrowings (E) 65410 69353 73072 77000 81190 85649 90396 6.07%
CURRENT SCENARIO AS PER MRCC BUDGET 2013/14:
Projected Total Cash Inflow 100112 96814 100375 104859 109216 113754 118480 4.48%
Proposed new borrowings 2000 1000 3000 4000 4000 1000 3000
Proceeds from sale of assets 680 703 726 750 0 0 0
Projected cash available 102792 98517 104101 109609 113216 114754 121480 4.66%
Proposed Expenditures as per MRCC 2013/14 (pp.52-54) - to 2016/17 114513 98167 103738 109230 113326 115405 115144 3.46%
Less proposed capital expenditures - capped at 2016/17 level for 2017/18-2019/20 38556 18874 20510 22351 22351 22351 22351 3.68%
Less proposed debt servicing payments 3212 3050 3311 3109 3171 3171 3171 0.79%
Proposed Operating Expenditures (F) 72745 76243 79917 83770 87804 89883 89622 3.51%
Projected Operating Surplus / Deficit -11721 350 363 379 -110 -651 6336
Minimum savings required to be found in order to achieve budget objectives (E) less (F) -7335 -6890 -6845 -6770 -6614 -4234 774
Adjustment to MRCC Budget 2013/14 projections:
Initial projected capital works based upon annual average growth during 2014/15-2016/17 24410 26658 29114
215


REMEDIAL BUDGET - Fall-Back Scenario
SCHEDULE 3 - COMPARISON OF KEY BUDGET ELEMENTS: MRCC BUDGET 2013/14 v PROPOSED REMEDIAL BUDGET
Average Annual
2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 Growth Rate
A. Annual debt servicing payments (Principal + Interest)
MRCC Budget 2013/14 3212 3050 3311 3109 3171 3171 3171 0.79%
Difference -741 -903 -642 -844 -782 -782 -782
B. Annual depreciation allocations
MRCC Budget 2013/14 15050 15644 15950 16262 16511 16763 17020 1.76%
Difference -4936 -4594 -4583 -4616 -4677 -4740 -4803
C. Projected new borrowings
MRCC Budget 2013/14 - Assumed no new borrowings post-2016/17 (unlikely scenario) 2000 1000 3000 4000 4000 1000 3000
Proposed remedial budget 0 0 0 0 0 0 0
Difference 2000 1000 3000 4000 4000 1000 3000
D. Projected annual capital works program expenditures
MRCC Budget 2013/14 38556 18874 20510 22351 22351 22351 22351 3.68%
Difference 0 0 1164 2522 2026 1518 997
E. Annual budget for on-going operating (non-capital works) activities
MRCC Budget 2013/14 72745 76243 79917 83770 87804 89883 89622 3.51%
Difference 7335 6890 6845 6770 6614 4234 -774
F. Rate Base
MRCC Budget 2013/14 55640 58277 61752 65436 69276 73342 77646 6.65%
Difference 0 1246 3295 5518 7860 10390 13121
G. Non-Rate Base Income
MRCC Budget 2013/14 44472 38537 38623 39423 39940 40412 40834 1.19%
Difference 0 0 -2804 -5111 -7935 -11053 -14491
Notes to accompany Schedule 3:
Note 1 - All figures $'000.
Note 2 - Annual depreciation allocations for MRCC Budget 2013/14 for 2017/18-2019/20 based upon 2016/17 with annual growth at 1.53 % in line with annual IPPE growth rate.
Note 3 - Projected borrowings by MRCC during 2017/18-2019/20 highly likely to be minimum of $2.0 million per annum and potentially significantly more.
Note 4 - Capital works program expenditures for MRCC Budget 2013/14 for 2017/18-2019/20 based upon growth rate in capital works expenditures during 2014/15-2016/17.
216

217

Key comparative graphs: MRCC Budget 2013/14 versus Proposed
Sustainable Budget Strategy

218

219

Figure 12.1 - Key Comparison Variable: Projected Indebtedness ($000)

Commentary:
- Over the extended budget forecast period 2013/14-2019/20 there is a clear divergence of paths between the proposed alternative budget
strategy as opposed to the MRCCs current budget strategy. The MRCCs projected outstanding debt as at 30 June 2020 is $1.889 million,
$27.182 million less than the likely outcome if the MRCCs current budget strategy is followed without any substantive changes.

$23,333
$22,735
$23,884
$26,304
$28,474
$27,796
$29,071
$20,619
$17,949
$15,112
$12,099
$8,899
$5,500
$1,889
$-
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20
MRCC Budget
2013/14
Proposed
Sustainable
Budget Strategy
220

Figure 12.2 - Key Comparison Variable Projected Total Interest Costs ($000)

* 22 years is the projected weighted average debt portfolio term to 2016/17 based upon (i) projected borrowings during 2013/14-2016/17
budget forecast period; and (ii) stated MRCC policy indicating that new borrowings will be on a principal and interest basis over 20-30 years
(MRCC Budget 2013/14, p.22).

Commentary:
- Above analysis based upon interest rate of 6.25 % per annum. This is marginally higher than the MRCCs weighted average interest rate on
debt as at 30 June 2013 of 6.22 %, but lower than projected interest rates over budget forecast period (estimated to increase to 6.57.5 %).
- Over the extended budget forecast period 2013/14-2019/20 there is a clear divergence of paths between the proposed alternative budget
strategy as opposed to the MRCCs current budget strategy. Projected savings in interest costs accruing to the MRCC (and therefore to
the Mildura community) under proposed alternative budget range between $16.134 and $33.064 million.
- Projected interest costs for the extended MRCC Budget 2013/14 projections assume that there will be no further borrowings post-2019/20.
As such, the data represented above represents a conservative estimate of the MRCCs projected interest costs. The MRCCs track record
and current publicly stated views on debt indicate that a moratorium on debt post-2019/20 would be a highly unlikely scenario.

$22,681
$28,349
$34,438
$39,611
$46,078
$58,750
$6,547
$-
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
10 years 15 years 20 years 22 years* 25 years 30 years 7.5 years from
2013/14
MRCC Budget
2013/14
Proposed
Sustainable
Budget
Strategy
221

Figure 12.3 - Key Comparison Variable Rate Levy Increases: Projected Residential Rates

Commentary:
- Over time the divergence in projected residential rates grows significantly.
- MRCC Budget 2013/14 Rates projected to increase at 5.0 % per annum throughout budget forecast period of 2016/17. Given projected
revenue and expenditure growth rates, combined with the MRCCs repeated commitment to maintain existing levels of service delivery
and equivalent full time staff, it is highly likely that annual rate increases of 5.0 % per annum will continue at least through to 2019/20
unless there is a substantial change in the MRCCs underlying financial position.
- Proposed alternative remedial budget Rates projected to increase at a maximum of 2.5 % per annum, in line with the mid-point of the
Reserve Bank of Australias inflation target range of 2.0-3.0 %.

0.007035
0.007387
0.007756
0.008144
0.008551
0.008979
0.009428
0.007035
0.007211
0.007391
0.007576
0.007765
0.007959
0.008158
0.005000
0.005500
0.006000
0.006500
0.007000
0.007500
0.008000
0.008500
0.009000
0.009500
0.010000
2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20
MRCC Budget
2013/14
Proposed
Sustainable
Budget Strategy
No growth in Rate
Levies
222

Figure 12.4 - Key Comparison Variable Projected Annual Residential Rate Levy charges levied on residential properties

Commentary:
- Over time the divergence in projected residential rate charges grows significantly with accumulated savings to the owner of a residential
property with a CIV of $250 000 being $1046, and for the owner of a residential property with a CIV of $350 000 being $1464.

$1,759
$1,847
$1,939
$2,036
$2,138
$2,245
$2,357
$1,759
$1,803
$1,848
$1,894
$1,941
$1,990
$2,040
$-
$44
$135
$277
$474
$728
$1,046
$-
$500
$1,000
$1,500
$2,000
$2,500
$3,000
2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20
MRCC Budget
2013/14
Proposed
Sustainable
Budget Strategy
Cumulative Rate
Savings
CIV = $250 000
$2,462
$2,585
$2,715
$2,850
$2,993
$3,143 $3,300
$2,462
$2,524
$2,587
$2,652
$2,718
$2,786
$2,855
$-
$62
$189
$388
$663
$1,020
$1,464
$-
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20
MRCC Budget
2013/14
Proposed
Sustainable
Budget Strategy
Cumulative Rate
Savings
CIV = $350 000
223

Figure 12.5 - Key Comparison Variable Annual Depreciation Allocations ($000)

Commentary:
- Over time the divergence in projected residential rates grows significantly.
- Annual difference (ranging between $4.583 - $4.936 million) represents funds that can be applied to investment in capital works (renewal,
upgrade, expansion) without having to resort to debt financing.
- The restoration of the MRCCs annual depreciation allocations from the current rate of 2.5 % of Infrastructure, Property, Plant and
Equipment (IPPE) assets to 3.25 % of IPPE assets will ensure that the MRCCs Asset Renewal Gap ratio will remain above 1.0 (that is, in the
low risk category) throughout the extended budget forecast period of 2013/14-2019/20.

$15,050
$15,644
$15,950
$16,262
$16,511
$16,763
$17,020
$19,986
$20,238
$20,533
$20,878
$21,188
$21,503
$21,823
$4,936
$4,594 $4,583 $4,616 $4,677 $4,740 $4,803
$-
$5,000
$10,000
$15,000
$20,000
$25,000
2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20
MRCC Budget
2013/142
Proposed
Sustainable
Budget Strategy
Difference
224

Figure 12.6 - Key Comparison Variable: Contingency Fund Allocations ($000)

Commentary:
- By allocating 1.0 % of projected Total Operating Cash Inflows to a Contingency Fund, the MRCC will accumulate to a projected $7.554
million by 2019/20. Based upon an annual interest rate of 4.0 %, this will also result in the accumulation of an additional $1.183 million in
interest income over the extended budget forecast period assuming that no withdrawals a made from the fund during this time.
- The contingency fund will enable a significant restoration of the MRCCs cash reserves over the budget forecast period see Figure 12.6.9.

$1,118
$2,086
$3,090
$4,139
$5,231
$6,369
$7,554
$45
$128
$252
$417
$627
$881
$1,183
$-
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20
Annual
Contingency Fund
Projected
Additional Interest
Income (@ 4.0 %
p.a.)
225

Figure 12.7 - Key Comparison Variable: Accumulated operating surpluses over extended budget forecast period 2013/14-2019/20 ($000)

Commentary:
- By introducing a requirement for a minimum annual operating surplus equivalent to 2.0 % of projected Total Operating Cash Inflows, the
MRCC will accumulate additional operating cash surpluses of $15.107 million by 2019/20. Based upon an annual interest rate of 4.0 %, this
will also result in the accumulation of an additional $2.367 million in interest income over the extended budget forecast period assuming
that no withdrawals a made from the fund during this time.
- Accumulated operating surpluses combined with accumulated contingency funds will enable a significant restoration of the MRCCs cash
reserves over the budget forecast period see Figure 12.8.

$2,237
$4,173
$6,181
$8,278
$10,462
$12,737
$15,107
$89
$256
$504
$835
$1,253
$1,763
$2,367
$1,936 $2,008 $2,097 $2,184 $2,275 $2,370
$-
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20
Projected
Cumulative
Operating Surplus
Projected
Additional Interest
Income (@ 4.0 %
p.a.)
Projected Annual
Operating Surplus
226

Figure 12.8 - Key Comparison Variable: Restoration of the MRCCs financial assets over extended budget forecast period 2013/14-2019/20
($000)

Commentary:
- Note: During 2013/14-2016/17 the MRCCs financial assets are projected to grow at an average annual rate of 2.2147 % as per projections
in the MRCC Budget 2013/14 (p.53). It has been assumed that this average annual growth rate will continue through to 2019/20 there is
no data in the MRCC Budget 2013/14 document that indicates that this will or will not be the case.
- Under the proposed remedial budget, there will be a significant restoration of the MRCCs financial assets over the extended budget
forecast period as a result of annual contingency fund and minimum operating surplus requirements set at 1.0 % and 2.0 % of projected
total operating cash inflows respectively.

$16,436
$16,786
$17,149
$17,528
$17,916
$18,313
$18,719
$19,791
$22,695
$25,707
$28,853
$32,129
$35,542
$39,097
$-
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
$45,000
2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20
Projected financial
assets: MRCC
Budget 2013/14
Projected Financial
Assets: Proposed
Remedial Budget
227

Figure 12.9 - Key Comparison Variable: Accumulated operating surpluses over extended budget forecast period 2013/14-2019/20
Preferred Scenario (Minimum Operating Surplus requirement = 1.0 %) ($000)

Commentary:
- By reducing the minimum annual operating surplus requirement from 2.0 % to 1.0 % of projected Total Operating Cash Inflows, the MRCC
will accumulate additional operating cash surpluses of $7.554 million by 2019/20. Based upon an annual interest rate of 4.0 %, this will
also result in the accumulation of an additional $1.183 million in interest income over the extended budget forecast period assuming that
no withdrawals a made from the fund during this time.
- Accumulated operating surpluses combined with accumulated contingency funds will still enable a significant restoration of the MRCCs
cash reserves over the budget forecast period, although to a lesser degree than the preferred scenario (Minimum Operating Surplus
requirement of 2.0 %) see Figure 12.10.

$1,118
$2,086
$3,090
$4,139
$5,231
$6,369
$7,554
$45
$128
$252
$417
$627
$881
$1,183
$968 $1,004 $1,049 $1,092 $1,138 $1,185
$-
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20
Projected
Cumulative
Operating Surplus
Projected
Additional Interest
Income (@ 4.0 %
p.a.)
Projected Annual
Operating Surplus
228

Figure 12.10 - Key Comparison Variable: Restoration of the MRCCs financial assets over extended budget forecast period 2013/14-2019/20
(Minimum Operating Surplus requirement @ 1.0 %) ($000)

Commentary:
- Note: During 2013/14-2016/17 the MRCCs financial assets are projected to grow at an average annual rate of 2.2147 % as per projections
in the MRCC Budget 2013/14 (p.53). It has been assumed that this average annual growth rate will continue through to 2019/20 there is
no data in the MRCC Budget 2013/14 document that indicates that this will or will not be the case.
- Under the proposed remedial budget, there will be a significant restoration of the MRCCs financial assets over the extended budget
forecast period as a result of annual contingency fund and minimum operating surplus requirements set at 1.0 % and 2.0 % (or 1.0 % under
the proposed fall-back scenario) of projected total operating cash inflows respectively.

$16,436
$16,786
$17,149
$17,528
$17,916
$18,313
$18,719 $18,672
$20,608
$22,616
$24,714
$26,898
$29,174
$31,544
$-
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20
Projected financial
assets: MRCC
Budget 2013/14
Projected Financial
Assets: Proposed
Sustainable
Budget Strategy
(Fall-back
scenario)
229

Figure 12.11 Summary of Sensitivity Analysis: Impact of a 1.0 % change in Key Budget Variables upon projected operating result ($000)

Note:
* The impact of a 1.0 % change in annual depreciation allocations - for example, increasing the annual depreciation allocation from 2.5 % of IPPE Assets to 3.5 % of IPPE
Assets -
** The impact that a change in new borrowings will have upon annual operating results (and overall indebtedness) - $171 000 is based upon a change in initial
indebtedness by $1.0 million (as opposed to 1.0 %). The $171 000 is the projected change in annual debt servicing payments that will accompany a change in overall
indebtedness by $1.0 million (based upon a weighted average interest rate of 6.22 %).

The data presented in Figure 12.11 clearly highlights that the Rate Base growth rate and annual depreciation allocations are the two most
significant variables in-so-far as the impact of a 1.0 % change is projected to have upon projected annual operating results.

$2,297
$859
$1,079 $1,079
$3,213
$1,079
$438
$171
$777
$151
$-
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
Rate Base
growth rate
Non-Rate Base
revenue growth
rate
Productivity
dividend
Annual
contingency fund
allocation
Annual
depreciation
allocation*
Minimum
Operating
Surplus
requirement
Capital
expenditure
growth rate
New
borrowings**
Debt term
(increase from
7.5 to 10 years)
Weighted
average interest
rate on debt
230

Table 12.12 - Summary: Projected minimum savings required to achieve budget objectives ($000)

Scenario:
2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20
MRCC Budget 2013/14 - - - - - - -
Sustainable Budget Strategy Preferred Option 8453 7859 7849 7819 7706 5371 411
Sustainable Budget Strategy Fall-back Option 7335 6890 6845 6770 6614 4234 -774

Transitional Strategy 1 7335 6890 6845 6770 6614 4234 -774
1
A negative number indicates that the proposed remedial budget allows for a level of expenditure that is greater than the MRCCs current
budget projections.
2
RB Annual Rate Base growth rate; OS Minimum required Operating Surplus; Non-RB Annual Non-Rate Base growth rate.

How can these savings be achieved?

1. Introducing an organization-wide productivity dividend of 3.0 % combined with new non-rate revenue growth of $4.7 million see
Figures 12.13 12.15;
2. Reducing EFT staffing numbers by 7.0 % (35.28 EFT) combined with new non-rate revenue growth of $4.7 million see Figures 12.16
12.17;
3. A series of targeted cost reduction and revenue raising measures that will yield savings of $6.7 - $7.8 million see Figure 12.18;
4. A combination of strategies 1 3.

Significantly: All of the above cost-reduction and non-rate revenue raising strategies can be introduced with minimal impact upon the
MRCCs on-ground service delivery.
231

Table 12.13 Introducing an across-the-board / organization-wide budget cut ($000)

Size of uniform budget cut
Projected cost savings and/or revenue growth
2014/15 2015/16 2016/17
Total Operating Cash Inflows 95 568 99 884 104 453
1.0 % 956 1 000 1 045
2.0 % 1 912 2 000 2 090
3.0 % 2 868 3 000 3 135
4.0 % 3 824 4 000 4 180
5.0 % 4 780 5 000 5 225
6.0 % 5 736 6 000 6 270
7.0 % 6 692 7 000 7 315
8.0 % 7 648 8 000 8 360

NOTES:
Note 1 The uniform budget cut is based upon Total Operating Cash Inflows and allocated internal budgets on a cash basis. As such, non-
monetary (book entry) savings are excluded from the process.

Note 2 There is no prioritization of activity areas all activity areas are treated the same regardless of their current level of efficiency and/or
regardless of the value of the activity to the organization and/or community.

Note 3 In relation to individual internal departments or activities, department or activity managers may or may not receive directives or
guidelines in relation to any prioritization to be made for achieving identified savings requirements within each department or activity area.

Note 4 Allowing individual department or activity managers to exercise their own discretion in relation to how identified savings
requirements will be achieved may result in unintended or sub-optimal outcomes the authors preferred approach would be to at least have
minimum guidelines for individual department or activity managers to follow in relation to how identified savings requirements are to be
achieved.

232

Table 12.14 Increasing non-rate revenue streams ($000)

Size of uniform budget cut
2014/15 2015/16 2016/17
1. Capital grants Unknown 1 000 1 000 1 000
2. User Fees & Charges Average has been $6.033 million p.a. (2010/11-2012/13):
- 5.0 %
- 10.0 %
- 15.0 %
- 20.0 %
- 25.0 %
- See Note 1.

302
604
906
1 208
1 510

302
604
906
1 208
1 510

302
604
906
1 208
1 510
3. Disposal of excess assets
- Potential range
Average annual proceeds from disposal of assets during 2009/10-2012/13 - $993.

1 000 - 2 000

1 000 - 2 000

1 000 - 2 000
4. Community Futures investment levy see Note 2:
- $10
- $20
- $30
- $40
- $50
Projected revenue figures based upon 30 660 rateable properties across MRCC municipality.

307
613
920
1 226
1 533

307
613
920
1 226
1 533

307
613
920
1 226
1 533
Total potential non-rate revenue growth 4 741 4 741 4 741

NOTES:
Note 1 User Fees & Charges - Alternatively, a staged increase in User Fees & Charges could be introduced that is, instead of a 20 % increase in first
year, introduce a 7.5 % 12.5 % increase over 3 successive years. A range of options should be considered so as to balance need to increase non-rate
revenue against managing impact upon the community.

Note 2 Imposition of an annual $10 - $50 Community Futures investment levy for all rateable properties for a fixed 5-year term. Levy will not be subject
to CPI indexation for duration of the 5-year term and must be allocated to the funding of capital expansion initiatives only. The Community Futures
investment levy is to be reviewed at end of initial 5-year term with the view to discontinuation or potential continuation into the future.

233

Table 12.15 Netting off projected growth in non-rate revenue streams to determine minimum organization-wide budget cut ($000)

Projected minimum organization-wide budget cut
2014/15 2015/16 2016/17
Projected minimum required savings sustainable budget strategy (Part 10) 7 859 7 849 7 819
SCENARIO 1:
Projected non-rate revenue growth Table 12.14 4 741 4 741 4 741
Minimum organization-wide budget cut 3 118 3 108 3 078
Organization-wide budget cut 3.0 % - Table 12.13 2 868 3 000 3 135
Difference 250 108 57

SCENARIO 2:
Projected non-rate revenue growth Table 12.14 adjusted for $1 000 short-fall in
projected non-rate revenue growth each year:
4 741
(1 000)
3 741
4 741
(1 000)
3 741
4 741
(1 000)
3 741
Organization-wide budget cut 4.0 % - Table 12.13 3 824 4 000 4 180
Difference 294 108 102

The analysis presented in Table 12.12.3 reveals that:
(i) If projected non-rate revenue growth targets are realised, they would need to be accompanied by an organization-wide budget cut
of 3.0 % in order to achieve the minimum savings required under the proposed sustainable budget strategy;
(ii) If there was a $1 000 short-fall in projected non-rate revenue growth targets, they would need to be accompanied by an
organization-wide budget cut of 4.0 % in order to achieve the minimum savings required under the proposed sustainable budget

234

Table 12.16 Reducing EFT Staffing numbers ($000)

Size of reduction in EFT staff numbers
2014/15 2015/16 2016/17
Projected Employee Cost Expenditures
3
40 848 43 105 45 485
1.0 % (EFT 5.04) 408 431 455
2.0 % (EFT 10.08) 817 862 910
3.0 % (EFT 15.12) 1 225 1 293 1 365
4.0 % (EFT 20.16) 1 634 1 724 1 819
5.0 % (EFT 25.2) 2 042 2 155 2 274
6.0 % (EFT 30.24) 2 451 2 586 2 729
7.0 % (EFT 35.28) 2 859 3 017 3 184
8.0 % (EFT 40.32) 3 268 3 448 3 639
9.0 % (EFT 45.36) 3 676 3 879 4 094
10.0 % (EFT 50.4) 4 085 4 311 4 549
11.0 % (EFT 55.44) 4 493 4 742 5 003
12.0 % (EFT 60.48) 4 902 5 173 5 458

NOTES:
Note 1 There is no prioritization of activity areas all activity areas are treated the same regardless of their current level of staffing and/or regardless of
the value of the activity to the organization and/or community.
Note 2 In relation to individual internal departments or activities, department or activity managers may or may not receive directives or guidelines in
relation to any prioritization to be made for achieving identified labour cost savings requirements within each department or activity area.
Note 3 Allowing individual department or activity managers to exercise their own discretion in relation to how identified savings requirements will be
achieved may result in unintended or sub-optimal outcomes the authors preferred approach would be to at least have minimum guidelines for individual
department or activity managers to follow in relation to how identified savings requirements are to be achieved.

3
Based upon MRCCs projected cash expenditures on employee costs over budget forecast period (MRCC Budget 2013/14, p.52). Employee cost figures from projected
Income Statement for budget forecast period are (000): 2014/15 - $41 482; 2015/16 - $43 764l; and 2016/17 - $46 171 respectively (MRCC Budget 2013/14, p.54).
235

Table 12.17 Netting off projected growth in non-rate revenue streams to determine minimum EFT Staffing reduction ($000)

Projected minimum organization-wide budget cut
2014/15 2015/16 2016/17
Projected minimum required savings sustainable budget strategy (Part 10) 7 859 7 849 7 819
SCENARIO 1:
Projected non-rate revenue growth Table 12.12.5 4 741 4 741 4 741
Reduction in EFT staffing numbers 7.0 % - Table 12.12.4 2 859 3 017 3 184
Difference 259 91 -106

SCENARIO 2:
Projected non-rate revenue growth Table 12.12.5 adjusted for $1 000 short-fall in
projected non-rate revenue growth each year:
4 741
(1 000)
3 741
4 741
(1 000)
3 741
4 741
(1 000)
3 741
Organization-wide budget cut 10.0 % - Table 12.12.4 4 085 4 311 4 549
Difference -33 -203 -471
Note: Negative numbers indicate actual reduction in EFT staffing numbers would be slightly less than 8.0 % or 10.0 % (as the case may be for
Scenario 1 and Scenario 2 respectively).
The analysis presented in Table 12.12.3 reveals that:
(iii) If projected non-rate revenue growth targets are realised, they would need to be accompanied by an organization-wide budget cut
of 3.0 % in order to achieve the minimum savings required under the proposed sustainable budget strategy;
(iv) If there was a $1 000 short-fall in projected non-rate revenue growth targets, they would need to be accompanied by an
organization-wide budget cut of 4.0 % in order to achieve the minimum savings required under the proposed sustainable budget

236

Table 12.18 Summary of potential cost saving and revenue growth initiatives for the MRCC: First Iteration ($000)

Initiatives
2014/15 2015/16 2016/17
Employment initiatives introduction of job-flexibility arrangements with aim of
reducing annual employee costs by 1.0 % per annum

408

431

455
Employment initiatives Reduce employment numbers by minimum of 2.0 3.0 EFT:
- Reduction of staff numbers equivalent to 2.0 % EFT OR
- Reduction in staff numbers equivalent to 3.0 % EFT

817
1 225

862
1 293

910
1 365
Plant & Equipment acquisition / expenditures a range of initiatives aimed at
reducing annual Plant & Equipment expenditures by 30 % (A) (Refer to B below)

1 020

1 020

1 020
Disposal of land on corner of Deakin Avenue and 16
th
Street 1 000
Improvements in materials / equipment supply arrangements a range of initiatives
aimed at reducing annual materials / equipment supply expenditures by:
- 1.0 % OR
- 2.0 % - Preferred option OR
- 3.0 %

354
708
1 062

368
736
1 104

383
766
1 149
Increase User Fees & Charges by 20 % across the board 1 207 1 207 1 207
Reduction in MRCC vehicle fleet costs by 40 % - 50 % (B) (Refer to A above) 880 1 100 880 1 100 880 1 100
Return Mildura Arts Centre to breakeven operating performance 378 - -
Increase NET capital grants income by $1.0 million per annum 1 000 1 000 1 000
Annual productivity dividend to be imposed:
- 1.0 % OR
- 1.5 % - Preferred option
- Less (i) Savings from flexible employment initiatives
- Less (ii) Savings from 1.0 % reduction in materials / equipment supply

968
1 452
(408)
(354)
690

1 004
1 506
(431)
(368)
707

1 049
1 573
(455)
(383)
735
Introduction of a Community Investment Levy to be used to partially fund new capital
expansion programs levy to be in place for 5-year period:
- $50 per rateable property

1 533

1 533

1 533
Increased annual debt servicing payments (777) (777) (777)
Total $ 7 984 - $ 8 864 $ 6 719 - $ 7 599 $ 6 849 - $ 7 729
To avoid double counting
these savings
237

Table 12.19 An evaluation of the sustainable budget strategy for the MRCC against 12 key budget principles
Budget Principle Proposed Sustainable Budget Strategy for the MRCC
1. Extended budget forecast period of 7 years An extended 7-year budget forecast period is used (2013/14-2019/20)
2. Cash-based revenue and expenditure forecasts Sustainable budget strategy is based upon cash inflows and expenditures
3. Balanced budget after capital grants, non-monetary items and
adjustments, changes in depreciation allocation rates, new
borrowings and the liquidation of assets
Sustainable budget strategy adheres to annual balanced budgets on a cash
flow basis. There are no projected Net Cash Deficits in the extended budget
forecast period.
4. Risk management should be incorporated into the budget process Annual Contingency Fund allocations combined with annual Minimum
Operating Surplus requirement will position MRCC to respond to unforeseen
circumstances without having to resort to new borrowings.
A comprehensive sensitivity analysis has been provided as an
accompaniment to the proposed sustainable budget strategy.
5. Target Costing-based budgeting model should be used Sustainable budget strategy is based upon a Target Costing-based model.
6. Keeping a tight rein on expenditure growth Expenditure growth is capped at maximum annual budget parameters.
7. Keeping a tight rein on Interest Bearing Debt levels and terms MRCCs projected debt in 2019/20 will be $1.889 million, compared to a
projected $29.071 million under the MRCCs existing budget strategy. This
will result in net interest cost savings of $27.891 - $33.064 million.
8. Capital investment should be measured and kept within
parameters that do not necessitate excessive debt financing
Annual capital expenditure growth rate capped at 2.5 %.
9. Annual depreciation allocations must be fully funded and
sufficient to cover all capital renewal and upgrade expenditures
Annual depreciation allocations fully funded and set at 3.25 % of IPPE Assets
sufficient to fully fund all capital renewal and upgrade expenditures
throughout the budget forecast period without resorting to debt financing.
10. Annual rate levy increases should be capped at the lower of 2.5 %
per annum or the CPI growth rate
Sustainable budget strategy based upon annual rate levy increases being
capped at 2.5 %.
11. User fees and charges should reflect full-cost recovery User Fees & Charges will be initially increased by 20 % with the aim of better
reflecting a full-cost recovery model in accordance with Victorian Auditor
General guidelines.
12. Capital grants should not be accepted where there is tangible
evidence of cost-shifting by other spheres of government (State or
Federal)
Sustainable budget strategy advocates more stringent due diligence
processes to ensure that the MRCCs finances are not unduly affected by
costing shifting from State of Federal spheres of government.

238

239

14 Key (non-negotiable) Budget Principles for the MRCC

There are 14 key budget principles upon which the proposed sustainable budget strategy
presented in this chapter has been based. The 14 key budget principles have been designed
with a local Councils long-term financial sustainability in mind the extent to which the
following budget principles are compromised is the degree to which the long-term financial
sustainability of a local Council will be undermined.

The 14 key budget principles include:

a. A target-costing approach to budgeting must be adopted;
b. Expenditure growth must be kept within parameters of the Underlying Revenue
and/or Operating Cash Inflow and/or Net Operating Cash Inflows growth rate;
c. An annual productivity dividend equivalent to 1.0-2.5 % be introduced;
d. Depreciation allocations must be fully funded and restored to at least 3.25 % of
depreciable assets (in order to ensure that annual capital renewal / upgrade
expenditures are fully funded from operations) with the view to increasing this
allocation to 3.5 % in the medium-term if deemed necessary;
e. An annual contingency fund contribution equivalent to 1.0 % of annual Underlying
Revenue and/or Net Operating Cash Inflows to be made prior to capital works and
on-going operating budgets are determined;
f. The annual operating budget must be balanced after capital grants are taken into
account in the absence of new borrowings or liquidation of assets;
g. Capital grants should not be accepted where there is tangible evidence of cost-
shifting by other spheres of government (State or Federal);
h. A moratorium on new borrowings throughout the budget forecast period (2013/14-
2016/17) be introduced;
i. The MRCCs outstanding debt portfolio as at 30 June 2013 ($23.133 million) be re-
financed to a maximum of 7.5 - 10 year term;
j. The maximum loan term for any new borrowings be limited to 5 - 7.5 years;
240

k. Interest bearing debt levels to be kept below maximum threshold of 20 % of
Underlying Revenue less Capital Grants;
l. Rate increases must be restricted to a maximum of 0.0 - 2.5 % per annum in line with
the Reserve Bank of Australias (RBAs) inflation target;
4

m. The MRCC must move toward a full cost-recovery model for subsidized services; and,
n. The MRCC must look at ways of growing non-Rate Base revenue streams over the
budget forecast period by at least 2.5 7.5 % per annum.

4
The official inflation target for the RBA is to keep inflation within the 2.0-3.0 % range, with the mid-point of
2.5 % or less being the preferred outcome.
241

Summary of key findings Chapter 13: An evaluation of metered parking as a
non-rate revenue source

Based upon the analysis and discussion presented in this chapter, a number of key points
and/or recommendations need to be highlighted:

1. The introduction of metered parking within the core CBD area (bordered by Madden
Avenue, 7
th
Street, Lime Avenue and 9
th
or 10
th
Streets) would result in an increase in
parking occupancy turnover due to parking in the immediate surrounding CBD area
being non-metered;

2. The effectiveness of metered parking as a revenue raising mechanism will be dependent
upon a range of factors, four of which include (i) the price (per metered parking day or
part thereof); (ii) the number of metered parking bays and associated average
occupancy rate; (iii) the price sensitivity of motorists; and (iv) the availability and
proximity of viable non-metered parking options. Restricting the availability and/or
proximity of non-metered parking options is absolutely crucial if the purpose of
introducing metered parking is to raise revenue;

3. Four cities within the G18 peer group of local Councils have metered parking services in
place: the Cities of Ballarat, Bendigo, Geelong, and Shepparton revenue from Parking
Fees, Fines and Charges accounted for between 1.11 3.07 % of Total Operating Income
during 2011/12 and 2012/13;

4. For the City of Greater Shepparton, which has a resident population of approximately 60
000, metered parking revenue (from ticket machines and parking meters) for 2011/12
and 2012/13 financial years amounted to a combined $1.244 and $1.274 million
respectively (representing 1.11 % and 1.15 % of Operating Income for 2011/12 and
2012/13 respectively);

242

5. Based upon data sourced from the Cities of Geelong, Ballarat, Bendigo and Shepparton,
the Correlation Coefficient and R-Square values suggest a relatively strong relationship
exists between a local Councils revenue from parking fees, fines and charges and
resident population;

6. There are many issues that need to be considered before any decision to introduce
metered parking services could be made. These considerations include (but are not
limited to) the following:

a. The availability and proximity of non-metered parking options;
b. Whether or not there will be differential metered zones within designated metered
parking areas that is, will more centrally located metered parking bays attract a
higher per day (or part thereof) fee?;
c. Whether or not there will be designated free parking spaces within designated
metered parking areas for example, for disabled and/or elderly citizens, or for
gaining access to particular services (medical);
d. Whether or not there will be an allocated free time for example, the first 10
minutes for any parking customer and whether or not an allocated free time will
be specific to particular metered parking zones or bays or whether it would apply
across all metered parking zones;
e. The actual type and number of parking meters to be installed; and,
f. The pricing structure of metered parking services.

7. In order to minimize any disproportionate displacement effect between the Mildura CBD
and 15
th
Street retail precinct, and to significantly enhance the revenue raising potential
of metered parking services, metered parking services would need to be introduced
across both locations simultaneously;

8. There are a number of options available in relation to metered parking. Principally these
options vary in relation to two key factors:

243

The physical presence or distribution of metered parking machines ranging from
individual (one-on-one) meters for each metered parking bay, centralised metered
parking stations, or a wholly electronic portable system using mobile (dash-board)
parking sensors; and,

The means of payment for parking in a metered parking bay cash, EFT POS (Debit /
Credit / Other Card), wholly electronic (as per the technology used for toll roads for
example, Citi-link in Melbourne), or a combination of some or all of these options.

9. The installation of centralised metered parking stations with the option of both cash
and EFT POS payment methods appears to be the most appropriate metered parking
option available as it provides a parking customer with two payment options (even
though an EFT POS-only facility would have reduced annual revenue collection costs);

10. A number of parking studies commissioned by the MRCC in 1998 and 2005 indicated
average occupancy rates of between 68 72 % in the Mildura CBD area. These
occupancy rates were not too dissimilar to the findings of other CBD parking studies
conducted in Ballarat, Bendigo and Shepparton. Three key points need to be
highlighted:

Parking bay occupancy rates will vary according to location and time, with peak
occupancy rates likely to be located near highly frequented retail and non-retail
precincts;
Peak occupancy rates are likely to occur on Thursdays, Fridays and Saturday
mornings; and,
The introduction of metered parking services can be expected to result in a
reduction in the average daily occupancy rate the extent of this reduction is
unknown - although with non-metered occupancy rates at around 70 %, it would
be reasonable to assume that the average daily occupancy rate would be
retained above 40 % - 50 % upon the introduction of metered parking services
due to the relative inelasticity of demand for parking facilities.
244

11. In a study conducted for the City of Ballarat in 2011 where metered parking services
have been in place for many years, two distinct cohorts of parking customers were
identified:

(i) Customers involved in shopping and/or other activities which required a visit to
the CBD area the majority of these customers occupied parking bays for up to
one hour; and,
(ii) Customers who worked in the greater CBD area and who therefore utilized
parking bays where day-long metered parking was available.

These findings although based upon a parking survey study focussed upon the Ballarat
CBD do appear to be in line with what one would tend to expect to find in relation to
CBD parking behaviour: relatively shorter-term parking bay occupancy times for
customers involved in shopping or other shorter-term trips, and day-long parking bay
occupancy times for those who work in the CBD area.

12. The parking behaviour noted in Point 11 (above) suggests that metered parking revenue
will be optimised through:

- Restricting any free time to maximum of 10 minutes for only a limited number of
specified parking bays;
- The initial charge for first 30-60 minutes be substantially greater than 1/7
th
or 1/8
th

of daily rate;
- A progressive hourly charge beyond first hour should increase at a low incremental
rate;
- Discounted day-long parking rates (with weekly or monthly packages) will reduce
propensity for day-long customers to seek alternative means of transport and/or
search for alternative non-metered parking options.

245

13. The key to maximising revenue from metered parking is to match the pricing structure
with the demand patterns for parking bays in terms of location and average occupancy
times;

14. The recommended pricing strategy for metered parking services across the Mildura CBD
and 15
th
Street retail precincts should incorporate the following characteristics:

Any free time designation be limited to 10 minutes for a limited number of parking
bays for specific purpose;
A progressive rate to be biased such that the parking fee for the first 2 hours is
equivalent to 40 % of equivalent day-long charge; and,
Day-long users should be granted a discounted rate on a weekly or monthly basis.

15. Modelling of a range of scenarios suggests that a minimum daily charge for metered
parking services across the Mildura CBD and 15
th
Street retail precinct be in the range of
$3.75 - $6.25;

16. Not surprisingly, the financial returns generated from metered parking services across
the Mildura CBD and 15
th
Street retail precinct will depend upon a range of variables,
including (i) the daily parking charge; (ii) the average daily occupancy rate; (iii) the
number of parking bays subjected to metered parking; and (iv) the availability and
proximity of non-metered parking options. A summary of selected scenarios is
presented in Figures 1 - 3;

17. A sensitivity analysis of three key revenue variables (daily charge, average daily
occupancy rate, and the number of metered parking bays) found that the daily charge
and average daily occupancy rates were the two most sensitive variables in terms of
their potential impact upon projected financial results;

18. A sensitivity analysis of three key cost variables (cost of metered marking stations,
installation costs, and the relative dispersion of metered parking stations) found that the
246

relative dispersion of metered parking stations was a significant variable in terms of its
potential impact upon projected financial results;

19. The MRCC has the option of retaining responsibility for establishing and operating
metered parking services across the Mildura CBD and 15
th
Street retail precinct, or out-
sourcing metered parking services to a 3
rd
party specialist parking services provider.
Many local Councils across Australia have opted for the latter option;

20. Out-sourcing metered parking services will enable the MRCC to avoid initial capital
investment requirements needed to establish metered parking services across the
Mildura CBD and 15
th
Street retail precinct, but the overall returns to the MRCC over a
10-year term will lower compared to a scenario in which the MRCC retained
responsibility for establishing and operating metered parking services across the Mildura
CBD and 15
th
Street retail precinct it is ultimately a cost benefit decision that the MRCC
must make in the light of available evidence;

21. The projected revenue generating capacity of the MRCCs metered parking asset is likely
to be in the range of $1.087 (@ $3.75 per day) - $2.415 million (@ $6.25 per day)
depending upon the actual values of key variables a summary of selected scenarios is
presented in Figure 4;

22. The projected breakeven point in terms of average daily occupancy rate of the MRCCs
metered parking asset is likely to be in the range of 30 % (@ $3.75 per day) 17 % (@
$6.25 per day) depending upon the actual values of key variables a summary of
selected scenarios is presented in Figure 5;

23. The projected Net Operating Result of the MRCCs metered parking asset is likely to be
in the range of $116 572 (@ $3.75 per day) - $1.408 million (@ $6.25 per day)
depending upon the actual values of key variables a summary of selected scenarios is
presented in Figure 6;

247

24. The projected Return on Investment (ROI) of the MRCCs metered parking asset is likely
to be in the range of 3.42 % (@ $3.75 per day) 41.30 % (@ $6.25 per day) depending
upon the actual values of key variables a summary of selected scenarios is presented in
Figure 7;

25. The projected Payback Period of the MRCCs metered parking asset is likely to be in the
range of 29.24 years (@ $3.75 per day) 2.42 years (@ $6.25 per day) depending upon
the actual values of key variables a summary of selected scenarios is presented in
Figure 8;

26. The projected 10-year contract value of the MRCCs metered parking asset, based upon
a Required Rate of Return equivalent to 8.0 % per annum, is likely to be in the range of
$719 623 (@ $3.75 per day) - $8.690 million (@ $6.25 per day) depending upon the
actual values of key variables a summary of selected scenarios is presented in Figure 9;

27. From an investment / financial returns perspective, and based upon (i) a contractual
arrangement under which the MRCC was guaranteed an annual dividend equivalent to
8.0 % of Net Operating Results over a 10-year period; and (ii) both the 3
rd
party specialist
parking services provider and the MRCC having a minimum Required Rate of Return of
8.0 %, the MRCC would be indifferent to either retaining responsibility for the provision
of metered parking services or out-sourcing to a 3
rd
party. The analysis presented in
Table 10 supports this view with the Net Present Value (NPV) of each scenario being
the same;

28. The most significant point to note from the analysis presented in Table 10 is that the Net
Present Value (NPV) for metered parking services across the Mildura CBD and 15
th
Street
retail precinct is projected to be in the order of $5.507 - $6.295 million based upon
either (i) a daily charge of $3.75 and an average daily occupancy rate of 50 %; (ii) a daily
charge of $5.00 and an average daily occupancy rate of 40 %; or (iii) a daily charge of
$6.25 and an average daily occupancy rate of 30 % (see highlighted sections of Table 10);

248

29. It is acknowledged that the financial modelling presented throughout this chapter is
based upon a range of underlying assumptions as noted throughout any changes to
underlying assumptions will impact upon subsequent projections. However, the author
is of the view that these projected figures are significant enough to warrant further
detailed analysis / consideration. This is particularly so given the MRCCs current and
projected financial status.
5

30. The cost of metered parking services to individual parking customers will vary depending
upon the number and average length of parking occupancies. An analysis of three
typical scenarios suggests that the introduction of metered parking services across the
Mildura CBD and 15
th
Street retail precincts would cost approximately $3.00 - $6.00 per
week. For regular day-long users, the weekly cost would be in the range of $9.38 -
$12.50 depending upon the size of discount offered for a Weekly Pass see Figures 11
and 12;

31. If the MRCC was to proceed with the introduction of metered parking services across the
Mildura CBD and 15
th
Street retail precincts, it is recommended that a maximum cap be
placed on regular day-long users equivalent to $12.50 per week;

32. As can be expected, there are a number of non-financial pros and cons associated with
the MRCC out-sourcing metered parking services to a 3
rd
party specialist parking services
provider. A number of these considerations have been summarised in Table 13;

33. The introduction of metered parking across the Mildura CBD without a simultaneous
roll-out of metered parking across the 15
th
Street retail precinct would result in a
significant displacement effect as potential metered parking customers opt to undertake
their retail shopping at the 15
th
Street retail precinct. This will have a significant impact
upon retail trade across the Mildura CBD and lead to a reduction in the value of business
properties accordingly. A reduction in the value of business properties will have

5
Characterised by increasing indebtedness, a significant deterioration in solvency (and therefore a
deterioration in the capacity to service debt), expenditure growth that is projected to exceed Underlying
Revenue growth over the budget forecast period, and with 5 of 6 non-rate sources of income projected to
contract over the budget forecast period.
249

implications for the MRCCs rate base as the City Heart and Langtree Mall CIV base is
reduced. In essence, for every 5.0 % drop in City Heart / Langtree Mall business
property CIVs, the MRCCs rate income will be reduced by $109 000. Thus, a 20.0 %
drop in City Heart / Langtree Mall property CIVs will result in reduced annual rate
income for the MRCC equivalent to $436 213. This must be off-set against any net
revenue produced from the introduction of metered parking services by the MRCC;

34. Although the introduction of metered parking services across the Mildura CBD and 15
th

Street retail precinct has the potential to be a significant revenue raising mechanism and
would yield potentially significant Net Operating Results for the MRCC, it is
fundamentally a very inefficient form of taxation given the size of the associated dead
weight loss associated with metered parking services. In effect, the cost to the
community would significantly outweigh the actual dollar benefits generated by the
MRCC in order to fund on-going service delivery. On this basis alone the author is of the
view that metered parking services not be introduced if the express purpose behind
such a move was to raise revenue.

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