ry Cee ead OFFICE OF LOCAL GOVERNMENT Options Analysis Local Government Reform MODEL DESIGN METHODOLOGY PAPER Verna Tam) Cerrar}OFFICE O= LOCAL GOVERNME . OPTIONS awwnLysis be DRAFT CABINET - IN - CONFIDENCE VOT FOR CIRCULATION” ENT | LOCAL GOVERNMENT REFORM > page | 7 L vESiCiN SLAGy PAPER | July 2048 MODEL DESIGN METHODOLOGY PAPER The contacts at KPMG in connection with this Engagement are: GRAHAM BROOKE Engagement Partner Tel: +6129455 9091 100ke1@komg.com.au STEVEN CASEY Engagement Director Te + 6129455 9470 ‘stevencasey@kpma.com.au NICK BLONG Engagement Manager (Workstream 1) T: +612:9486 9730 nblong@kprng.com.au NICOLE LOCKWOOD Engagement Manager (Workstream 2) T: +10)477757491 nlockwood1 @kpma.com.au Dvehas estan Posteo huane KPMG aa KPMG Eg TABLE OF CONTENTS 1. Background 2 2. Merger options 5 3. Model design 9 4. Indicators & analysis 15 5. Next steps 25 Appendix A - Data Sources 27 Appendix B - Assumptions & Calculations. 29 Disclaimer ‘This resentation provides @ summary of KPMG's findings during the course ofthe work undertaken forthe Office of Local ‘Government (OLG) under the terms ofthe contract dated 29 June 2015. The contents of this presentation do nat represent our “conclusive findings, which will only be contained in our final vtiten report No reliange should be placed by OLG on additional oral remarks provided curing the presentation, unless these are confirmed in wating by KPMG. ‘The presentation and the accompanying aide pack ore provided sally for the benefit ofthe parties identified inthe contact and ace ‘at to be copied, quoted or referred 0 in whole or in part without KPMG's prior writen consent. KPMG accepts no responsibilty ‘© anyone other than the parties idemtified in the contvact fr the information contained in this presentation. PG caw of onsen: ere aaa wh KPLG niemone: Comat KPMG intraoral» Sus ery se epates tadarans ove reamcra LaDiey rtes ty 3 seseres pop nes woe Srgessanel Sandys LoUaTOFBELLO CLULA | Model Design Objectives & oo Purpose . KPMG cers erat cematentyRi! OFFICE OF LOCAL GOVERNMENT | LOCAL GOVERNMENT REFORM be BACKGROUND OBJECTIVES & PURPOSE Project Objectives OLG has commissioned KPMG to support development of a robust evidence base 10 support the NSW Government's Fit for the Future reform agenda, The purpose of the evidence base is two-fold Givon the scale of the structural change facing the sector in NSW, this evidence base will be critical decisior-to0l for the NSW Government and needs to consider the fullrange af potential financial, economic, social and community implications of the reforms. This decision-tool will be developed 2s a fitfor-purpose Microsoft Excel mode! that is designed with the necessary functionality and relevant outputs {0 inform the NSW Government of the implications of each reform option under ‘consideration. Specifically, the model will need to support analysis of + financial impacts associated with specific merger options, including net savings and costs associated with the merger and the implications of each counc!’s Fit for the Future performance benchmarks; ‘economic, social and demograshic impacts to compare and contrast the broader profile of the communities and regions affected by reform options, including assessment of councils rates, local representation and capacity 10 deliver better services and better infrastructure for local residents and businesses; and + strategic insights relating to the broader NSW Government's policy agenda, including in relation 10 economic growth, red-tape reduction, planning and infrastructure delivery. Peas rarer o ean memos te OPTIONS ANALYSIS | MODEL DESIGN METHODOLOGY PAPER | 8 July 2 Ingo oo vader: oF PMO Bono “aay ya see red nce. Patera SarONs Mapa [DRAFT CABINET — IN - CONFIDENCE NOT FOR ClRCULATION" ane | 5 Purpose - Model Design ‘This Model Design Methodology Paper seeks to define the key parameters of the decision too! that will underpin the evidence base and inform the NSW. Government's consideration of potential local government merger options ltis important the decision tool that underpins the evidence base effects the ature, scope and scale of available date and information to support analysis and consideration of reform options. To achieve this, the purpose of this Paper is to confirm: + priority council dusters to be modelled for metropolitan and regional NSW; + preferred model outputs to underpin the decision tool and communications planning on local government reform; + an agreed list of data sources linked to preferred mode! outputs, + confirmation from OLG that relevant data is available and accessible in a collated and usable format; + mutual understanding of the assumptions and analysis underpinning model outputs, and relevant limitations associeted with this analysis; and + presentation of model results, key indicators and visualisation (including relationship with the communications proforma thatis being developed concurrently in Workstream 2) KPMG ‘ting rng complet‘OFFICE OF LOCAL GOVERNMENT | LOGAL GOVERNMENT REFORM DRAFT CABINET - IN - CONFIDENCE NOT FOR CIRCULATION RY orric page | 4 YSIS | MODEL DESIGN METHODOLOGY P be BACKGROUND STRUCTURE OF THIS PAPER Structure of is Paper This Mode! Design Methodology Paper is structured as follows: + Section 2 sets out the basis for council mergers in metropolitan Sydney and regional NSW and the priority clusters that have been confirmed by OLG; + Section 3 provides an overview of the approach to building the model to ensure its effectiveness as a robust decision tool and also introduces the mode! outputs that provide the necessary quartitative and qualitative insights on the financial, sorvice, infrastructure, neighbourhood and rates impacts of each merger option; + Section 4 provides a detailed account of the required model inputs, data sources, methodologies and underlying assumptions that will underpin the decision tool; + Section § provides 2 brief outiine of next steps in the model design and development of the decision tool; and + Asset of appendices to provide further background and detail on the basis for the: assumptions underpinning the financial analysis as well as a summary of data sources that will be drawn in building the model. 162015 «PMG. on Ausvalan suman end membe mole XPM ratore Fens mate ald wets KPRS ran reer (CPG Imaal 9 Sas ont SESE. Sitedn ist ke ona he KP ngs repred fovercs oF PUG migratory umtesby 3 aero sapewes nae Presse anew gaMerger Options Merger ClustersOF LOCAL GOVERNMENT | LOCAL GOVERNMENT REFORM R om MERGER OPTIONS INTRODUCTION Building the case for change Building on extensive consultations over a number of years, the Independent Local Government Review Panel (the Review Pane!) provided a series of recommendations and options to the NSW Government on structural reform to the local government ‘sector ~ including improved governance arrangements, council mergers and boundary adjustments. The rationale for reform was founded on coneems regarding + the sector's financial sustainability; + the ability of councils abilty to effectively and adequately deliver services and infrastructure to local communities; + the large number of council administrations and excessive layers of red-wape and ‘regulation (perticularly in metropolitan Sydney) + the state of council managed assets and infrastructure backlogs across NSW; + the limited capacity for couneils to better represent and serve local communities 'on major projects and be rus partners of State and Federat agencies; + the need to establish 2 more equitable pattem of focal government across the metropolitan area, taking into account planned development; and + support Sydney's status 2s a global city Ivis in this context the NSW Government's Fit for the Future reform agenda has ‘placed the onus on local councis to demonstrate how they can achieve appropriate scale and capacity and meer the key performance benchmarks in regards to financial sustainability, effective service and infrastructure Gelivery, and operating efficiency, Requirements, The Independent Pricing and Regulatory Tribunal (IPART) has been tasked with assessing each counci's Fit for the Future submission and report to the Minister for Local Government and the Premier in October 2015, 192015 KPMG, on Ausalen sammeehe ance morte frm of he KFMG newer cence rer Singhs saved esa Rusa AMG nd he KANG lage master OPTIONS ANALYSIS | MODEL DESIGN METHODOLOGY PAPER | July 2015 DRAFT CABINET — IN CONFIDENCE NOT FOR CIRCULATION > page | 6 Developing merger options In preparing respective Fit for the Future submissions, each council is required to. respond to the Review Panel's recommendetions regarding council mergers in metropolzan Sydney and regional NSW. Set ana t including Ore ee ent eee eee Cr eed Ben Or Pen enc Too Cn ene ne ee need Coe B ‘The Review Panels priority merger recommendations drive our approach to building the evidence base and decision tool for this model. Drawing on the Review Panel's recommendations, the Office of Local Government (OLG) has provided KPMG with a priority lst of merger clusters — groups of councils that will be subjected to merger impact analysis through this model. The following pages provide a reference map and guide to the merger clusters OLG has prioritised for metropolitan Sydney and regional NSW. Merger variations While on the whole most merger clusters rely on existing LGA boundaries, the Review Panel did propose partial mergers for a small number of metropolitan areas that require boundary adjustments. Further, OLG nas indicated that not all merger clusters are confirmed and the model will need to offer the required flexbility to accommodate subsequent inclusions and exclusions from merger dusters as well as ‘the ability to split councils on pre-defined lines. ‘Where boundary adjustments are proposed, the model inputs and assumptions wil bbe required with the relevant financial, service, infrastructure, neighbourhood anc {ates impacts considered on 2 case by-case basis, KPMG ‘iting Dough comply Cecoran CAPS tomato, 8 Se ety nbs rosea Sarat LapaLOCAL GOVERNMENT REFORM exh METANOY PB auly 206 MERGER CLUSTERS METROPOLITAN PRIORITIES Metropolitan Clusters Group 1-Northern Beaches Group 2-North Shore Group 3 -taer North ‘The maps presented here ivstate te eight) Prwete, Waringeh, Many Horny, Kofing-Gal_ Maan, Nor Syerey metropolitan clusters and zssocted LGA bourdaies hat eae ye have been prontised inthe cesign and development ofthis decsion too. Paral mergers ae marked with an Coup 9-iner west Group 8-SyineyCRD RE mt Group 7—nner South Cade Stated, ‘yay Weslona,Wovet,, —Car‘tuy, Rocke uwoot Ash Ponds, Botany Boy Tog Hse source 016 Letts Marre (© 18 SENG an Asian panne aida merge em of the VS now of naigeneent Teer ates ei AC wanen Co pean KPAG natant Seas one ‘Sovayirtcad te scheme wht war essen Sanaa Lape DHAFI CAINE - IN - CONFIDENCE Group 4~ Parramatta CAD. Hokoyd, Parramatt, ‘Auburn, The Hills" Ryde" Group 8- South West Fairfield, LiverpoatDRAFT CABINET - IN - CONFIDENCE NOT FOR CIRCULATION £6 ss MERGER CLUSTERS REGIONAL PRIORITIES Regional Clusters The boxes presented here define the seventeen (17) regional clusters and associated LGA boundaries that have been prioritised by OLG in the design and ear corres development of this decision tool. Councils marked with an (*) indicate uncertainty as eae ire 10 whether a council is included / excluded from a cluster and reflects the need for the model to offer the flexibility to subsequently re-define merger clusters. ere) err aC Pacey en Ne Tra Pm rer) cet ae eins ea ereecigal (erty swan EEG sete UG ogowe opts oserare of ONE Dtanatony uastn cnet ase wooed ca reese Seneots Cagaatch KPMGModel Design Overview of Approach Key OutputsMODEL DESIGN OVERVIEW OF APPROACH Model Design: Approach To shape and inform 12 NSW Government's decision-making on local government | LOCAL GOVERNMENT REFORM R OFFICE OF LOCAL GOKERN ; COP TONS ANALYSIS) MODEL DESIG MtHCOULOGY MAPLE I Ey 20" PHASE ONE: Confirmation of agreed model outputs and indicators Untimately, the evidence base developed for this analysis of locsl government reform and support the communication ot reform impacts to stakeholders, a fit-for «eform options in NSW will need to form a robust and informative decision-tool purpose and user-friendly Microsoft Excel-based model will be designed and developed for the OLG, The model will provide the greatest possible extent of ‘Therefore, in order the build the model its first necessary to confirm the key results and impacts that need to be assessed and oresenited to decision-makers. ‘merger impact analysis to inform the NSW Government’s dacisions, given the sven decisions cogaring local + reform wil ged to daw on franca constraints of data availablity and strict timelines for delivery. Figure 1 provides an aiken Yossie regereis es OCONEE eee erence ence outline of the key phases of designing a fitfor-purpose model Figure 1: Key phases of model design economic and social factors itis important to identity the key measurements that will provide the sufficient leve! of analytical detail and insights on each merger ‘option. In this contexc, five broad categories of indicators are proposed (see below) with specific indicators illustrated in Figure 2 over page. BRIAR | Francis incicotor wl be crown on to compare the pre-and post- = reform performance of councils in each merger option. | Selected measurements relating to service efficiency, aove ———— impacts of each merger option. SO Comparative araysis of infrastructure indicators will provide insights ETS ESRg | into tho effectiveness of merger options in supporting broader asset ‘maintenance @s well as state and regional planning priorities “Each merger option will provide a indication of the local context in Cer etteEs | which local government reform options are being considered, including shored communities of interest and regional evonomis profiles. “The impact of merger options on residential, commercial and farmland. cre ‘ates willbe tested across three scons to offer strategic options. on how rate impacts can be managed in the reform context i KPMG. ‘iting tog complet, that 2905 Ine PRG menor) 9 Se “gta atatyrntee oy sere gemeed on’ Pecorsuns Snead LaR ee JCA. GOVERNMENT | LOCAL GOVERNMENT REFORM DECISION TOOL MAP OF KEY INDICATORS Figure 3: Proposed map of merger indicators + [/_Morgorimpsct on Council Finances een ad ne ‘Not Savings to Matarials & Contracts DRAFT CABINET — IN - CONFIDENCE S07 "0° CR --- Infrastructure & Major Projects ‘Operating Expenditure (por capita) Peat Net Change to Infrastructure Backlog Ratio Net Savings to Wages Expenditure DA Determination (no. of days) Net Change to infrastructure Backlog Measuring Costs of Counc Mergors fl Not Costs from ICT Consolidation Governance & Administration Expensos [Not Costs from Mergor Transition ‘Net Chango to Assot Renewal & Maintenance Peers H Population Growth & Housing Supply Net Costs from Staff Redundancies | Measuring Not Financial impacts Not Chango in Operating Rosuits ‘Not Present Valuo (NPV) of Morgor Impacts |; eee iting [Net change to Operating Performance | ‘New Capital Expenditure (per capita) | ‘State & Regional Planning Priorities ‘Commercial Density i ‘Scenario 1: Ratos Harmonisation ‘Not Change to Council Revenue Sources ‘Scenario 2:'No advantage’ ‘Not Change to Debt Service Ratio ‘Scenario’: Rata IncreasesOCAL GOVERNMENT | LOCAL GOVERNMENT REFORM ANALY MODEL DESIGN OVERVIEW OF APPROACH (Cont'd) PHASE TWO: Data collection and formatting There are 2 number of key sources of data to underpin the anaiysis of merger options on a state-wide, regional and councilby-counel basis. These are: + Council Long Term Financial Plans (LTFPs) ~ As part of the Integrated Ptanning and Reporting Framework, councils must grepare a ten year financial strategy that links to their workforce and asset management strategies. This information is seif-eported by councis and provides the basis for estimating forwardlJooking projections on merger impacts It will be necessary to rely on, published LTFPs (typically released in 2013-14) noting that these may differ from the more up-to-date unpublished LTFPs that councils have used to prepare. respective Fit for the Future submissions. + OLG Annual Data Return - OLG collects 3 detailed data return from ali council's on an annual basis. This deta is selfeported by individual councils and using an LG template. This provides 2 comprehensive and relatively up-to-date source ‘on the size and scale of council operations at a current point in time. + NSW Department of Planning — State planning data and reports will provide 3 mix of quantitative and quelitative information on forecast housing supply requirements and population growth estimates on 2 LGA-basis. In addition, regional planning strategies will be drawn on to determine key planning, infrastruczure and urban growth priotities on a LGAbasis + Australian Bureau of Statistics (ABS) ~ Census data will provide key soc ‘economic insights on a LGA-basis to establish and enable comparison of neighbourhood profiles. + NSW Government Priorities ~ Adcitional quailtative insights drawn from the State Government's broader economic and strategic plans (as detailed in NSW 2021) and links with individual local councils will also be identified and collated in the model outputs. {© 2015 KPMG an staan om SIS | MODEL DESIGN WETHOUOLULY PAPER 28 Juy 2015 DRAFT CABINET - IN - CONFIDENCE NO" 08 CRC.) Ay CNW > page | ‘The data to be collated from each of these sources is summarised in Appendix A Following collation, data formatting will be undertaken to ensure data integrity and Consistency across sources in the format required for inclusion in the model PHASE THREE: Development of assumptions To enable robust assessment of potential merger impacts, itis important to dcew (on a set of agreed assumptions to underpin the analysis. This is particularly important for assessing the financial impacts of merger options as assumptions will dotermine what costs and benefits are generated from merging each council. Given the different nature of council operations and local challenges of service and infrastructure delivery in across NSW its appropriate that a separate set of ‘assumptions tailored for metropolitan and regional councils is adopted for this ‘model. In regards to developing assumptions to underpin the financial impacts of merger options its to consider: published LTFPs for each council wil form the "base case’ (or status quo) for comparing the net impact of each merger option on council operations; + merger benefits are calculated based on reductions in key expenditure areas, including employes, meterials and contracts and other expenditures; and + merger costs are calculated based on initia! costs associated with ICT and faclity consolidation, staff redundancy and other costs such as staff retraining, These cost and benefit impacts will draw heavily on case study research and experiences of other jurisdictions (in Australia and overseas! In addition, ‘comparative analysis of non-financial data and qualitative information on merger impacts will be conducted for each merger option. For more information on sources and calculation of assumptions, please see Appendix B. rt Coeneve "KPMG patna) 3 Sess eo ‘tas tech complertyGOVERNMENT | LOCAL GOVERNMENT REFORM R! OFFICEOF LOCAL OPTIONS ANALYSIS | MODEL DESIGN METHODOLOGY PAPER | Jy 20'S ‘MODEL DESIGN OVERVIEW OF APPROACH PHASE FOUR : Model build and integrity check This phase of the model design requires each of the model components to be formulated in a functional and integrated Microsoft Excel workbook. In addition, this requires all the data inputs for undertaking the anaiysis of financial, service, infrastructure, community and rates impacts to be populated in the model and then linked to the agreed assumptions and calculations to generate the required model outputs, Given the volume of the data sets and large number of merger cluster options to be tested, itis important a model integrity check is undertaken at this time - that is, prior to roll-out of all merger option results. ‘A mage! integity check will provide the confidence that the model builds robust ‘and model outputs are crawing on the correct model inputs with corresponding ‘assumptions and caleviations applied, ‘The completion of the model build phase will enable the production of modet cutouts for each merger option prioritised by OLG to proceed. PHASE FIVE: Collating and presenting model outputs In light of the model's role as a decision tool for the NSW Government itis, important model outguts are presented in an informative manner with whole-of- reform impacts visible for decision-makers. The presentation of model results will therefore ental a layored approach: + Whole-of-State Impacts - providing an assessment of the collective impact the merger options may offer, including in relation to net financial benefits to the State and other agaregated financial indicators, + Regional Impacts - providing a regioraHievel impact (such as metro-vide) will bbe important to illustrating how the proposed merger aptians will change the regionsl landscape of council operations. Wa go ester erste oF ANS ans Lye DHAPI CAINE! — IN ~ CONFIDENCE NOT FOR CISCULATION, + Cluster / Council Impacts ~ this LGAJevel analysis willbe critical t understanding the local impacts and potential benefits of each merger option. This will also require the sufficient level of detail to support informed merger Gecisions on 2 councit-by-council basis. For each cluster of councils were the impacts of a merger are tested in the model, 2 dashboard of quantitative and qualitative impacts wilt be populated with detailed cashboard below). ‘opportunity for OLG to confirm functionality of results as an effective and results. The dashboard will provide @ one-stop-shop for all key indicators to be Figure 2: Sample dashboard of mode! sults Following the modal build phase a sample dashboard will be prepared for OLG information decision tool for the NSW Government. presented with 3 comparison of pre- and post-merger impacts (see example of bbased on 2 metropolitan cluster (e.g. Northern Beaches). This will provide an ‘The dashboard wil also include regional and sub-regional analysis, including mapping of state-wide and regional results as well as counci-specific merger impacts grouped into the five broad catagories of financial, infrastructure, service, ‘community and rates analysis, See ee anata is o KPMGDRAFT CABINET-—IN- CONFIDENCE NOT FOR CIRCULATION R VENT LOGAL GOVERNMENT REFORM be MODEL OUTPUTS MODEL FUNCTIONALITY Model Functionality cunt) Itis a recognised that the modet will be multi-purpose and therefore needs to offer aes M the required functionality thet is suitable for each purpose. As the model will be a Microsoft Excel-based tool designed to offer a clear and robust evidence base on possible merger impacts a key requirement of the model willbe to enable direct comparison of merger impacts across each option, Other aspects of mode! functionality that are important include: + consistent, comparable analysis across each merger options; + offering both quantitative and qualitative insights on merger impacts: + providing anaiysis and insights at LGA, metro, regional and state-wide levels 10 ‘enable a holistic view of the merger impacts and reform outcomes; + soenatio testing to enable impacts of changes in underiying assumptions on overall outcomes of each merger option; + informative and easy-to-understand economic, social and demographic results for each merger option: + links to the broader strategic policy objectives of the NSW Government, including in relation to economic growth, red-tape reduction, improved planning ‘outcomes and infrastructure and service delivery: + transferability end portability of model results and outcomes to other documentation, including communication proformas and internal riefirg material prepared by OLG and DPC; + enable peer review consistent with best practice modelling, with the inclusion ‘of user guidelines to ensure ongoing use of the model as 2 decision tocl; and + other data visualisation components agreed with OLG to enable the model to generate fit for purpose outputs as an informative decision-making tool (©2015 KPMG, an Assan eemnechin ana mer em ol pe KPLG rene Sigpte woowed Paced masta Grane MC egoee ogists = be fs sisted vain KPMG renee Coe os rae Sse KPMG.Model Design “Indicators & AnalysisICE OF LOCAL GOVERNME! f | LOCAL GOVERNMENT REFORM bee MODEL DESIGN INDICATORS & ANALYSIS Building model inputs, methodologies and outputs This section provides a detailed account of the required model inputs, data sources, ‘methodologies and an overview of the assumptions that will underpin the decision tool, Further details regarding the underlying assumptions ~ including the basis of the assumptions for the financial analysis of merger impacts — are avaible in Appendix B. ett nn ey {inked to the required model outputs, The tables are structured on the basis, of the following questions: Peace Coen ecto tna DRAFT CABINET — IN - CONFIDENCE NO" ION Underlying Assumptions In develosing a series of methodologies to formulate the required indicators of merger impacts there is a need to confirm with OLG the underlying assumptions to ‘ensure the scope and parameters of the decision tool are agreed prior to finalising ‘the model build. ‘There are a number of underlying broad assumptions and data availability issues ‘that underpin the analysis and model outputs. These are summarised below. + Each council's LTFP provides the basis for examining the financial impact of ‘each merger option. There is @ need to rely on each council's published LTFP only ~collating data from individual councils is beyond the scope an timeframes of this Engagement, + Significantly, this may mean thet a council's LETP used in developing this decision tool may not be as up-to-date as the LTFP each council has used in prepa'ed respective Fit for the Future submissions to IPART. + Identiving merger impacts will be conducted using the priosity merger clusters that have been provided by OLG + Detaied merger anaiys's requires extensive data collation from individual councils given the need to incorporate unpublished data and understand the assumptions underpinning each councils LTEP. For the purposes of this Engagement, there is 3 need to rely on published data oniy for each council A summary of the raw data sources drawn to populate the model inputs Underpinning the financial, servic, infrastructure, neighbourhood and rates assessments of each merger option are summarised in Appendix A. Detailed ‘assumptons underpinning the financial analysis is also available for review at Appendix B. ‘iting Mec celerya DRAFT CABINET IN - CONFIDENCE OCA\ GOVERNMENT | LOCAL GOVERNMENT REFORM. MODEL INPUTS FINANCIALINDICATORS Od errr) Data sources and inputs Council Long Term Financial Plans Expense line iterns ~ + Motoriala ond ‘contracts + Other + Employee benefits and on costs Time period: 10 years OLG Local Government Time Series Data + FTEs per council Time period: Current tho ‘There will be two main components of financial savings attributed to council mergers, including expenciture efficiencies achieved through enhanced scale of purchasing and operational efficiencies (overhead) and staffing reductions and their associated cost savings. Expenditure Efficiencies - Calculations & Assumptions ‘We will apply an annual percentage cost saving to long term financial plan expenditure line ites a) Materials and contracts; and ») Other To reflect differences in econornies of scale in regional and metropolitan councils two separate assumptions will be applied: ‘@) 3 per cent annual saving for Metropolitan councils; and. b) 1.6 per cent annual saving for Regional councils Staffing Efficiencies ~ Calculations & Assumptions ‘We will apply an annual percentage saving on employee expenditures. This annual saving will be scaled according to the differences in council FTEs and the number of councils participating in the merger. itis important to note reductions will be phased in over three years to reflect the three year moratorium on forced redundancies. Given we will not have access to @ detailed breakdown of staffing levels by position, function or grade we will assume an average staffing efficiency from merging councils in both Metro and Regional areas. The assumptions are based on a number of sources (detailed in Appendix B) however the model will provide the ability to adjust as needed: + Range of 4.5 per cent to @ suggested maximum of 16 per cent reductions for Metro council ‘+ Range of 3 per cent to a suggested maximum of 6 per cent reductions for Regional councils, nd + Support OLG and the NSW Government in understanding the financial implications of each merger option. + Provide a point of teference to consider ‘and prioritise the range of merger options, KPMG eng Hugh compeneyDRAFT CABINET - IN - CONFIDENCE NO" FO C o. ENT | LOCAL GOVERNMENT REFORM oer Teer Cee Methodology’ ‘Support OLG and the There will be three main components of costs calculated for council mergers, including staff redundancy NSW Government in payments, consolidation of ICT systems and other estimated merger transition costs (including facility ‘understanding the consolidation, staff retraining, etc). These costs are estimated based on average cost as a proportion financial implications Data sources and inputs operating expenditure. Operating expenditure serves as a proxy for council siz. of each merger Staff Redundancy Payments ~ Calculations & Assumptions option. Council Long Term Recognising the three year moratorium on forced redundancies, the phased reductions in council staff would Financial Plans result in corresponding one-off redundency payments. n past merger business case exercises, ernployee + Provide a point of + Operating details with avorage tenure, accrued benefits end leave balances was used to estimate redundancy costs. In reference to expenditure the absence of detailed employee date for each council, we propose to generate an average salary, average consider additional Time period: Projected tenure and average accumulated leave to estimate redundancy packages. financial assistance ICT Costs — Calculations & Assumptions required by councils. LG Local Government The costs associated with ICT and systems implementation are considered high risk. This reflects anecdotal Time Series Data evidence in the sector, varying degrees of sophistication in IT end project management skils and + FTEs per council acknowledgement of ICT cost overruns following councils mergers in both New Zealand and Queensland. + Average employee Due to the timalines ofthis exercise, its not possible to assess each merger options relative risk or salaries and benefits compatibility with regard to ICT consolidation. Past experiences and studies in other jurisdictions suggest ‘that intial ICT consolidation costs ranged from 30 per cent to 45 per cent of total uptront merger costs. The Time period: Current initial cost over two years is estimated at 1.6 per cent to 2.5 per cent of operating expenditure. The following (2013-14) three years include implementation costs of 2.8 per cent of operating costs annually. Other Transition Costs ~ Calculations & Assumptions Additional one-off costs, including facility consolidation, staff training and general transition-related expenditures have also been calculated as a percentage of operating expenditure based on case study examples from regional and metropolitan amalgamations. These transition costs include (as a proportion of ‘otal council operating expenditure): ‘) Facility consolidation - 1.4 per cent (metro) to 0.5 per cent (regional); b) Staif retraining and chenge management 0.1 per cent; and ) Transition-elated costs such as signage, communications, etc. - 0.5 per cent (metro) to 7.0 per cent (regional).‘The net financial the merger (NPV) Data sources nd inputs Council Long Term Financial Pans + Base case operating results Time period: 2014-2023 ‘Savings and cost calculations + Incremental net benefit/cost Time period: Projected ‘The financial sustainability of councils pre- and post- merger Data sources and inputs Council Long Term Financial Plans + Operating performance ratio + Own source operating revenue ratio + Debt service ratio + Components of revenue, expenditure and total operating result + Total debt and assets (debt to asset ratio} Time period: 2014-2023 DRAFT CARINET —IN. CONFIDENCE ERNMENT | LOCAL GOVERNMENT REFORM ‘Net Financial Impacts of meraer - Calculati mot A net present value (NPV) analysis requires both a base case (no rerger scencrio) and the caloulation of savings and costs as a result of each merger option. This permits a greater understanding of whether each merger results in a net aenefit or cost to the Councils and the State. NPVs will bo calculated over a ten year period (2014 - 2023) ard draw on NSW Treasury Guidelines in assuming a real discount rate of 7 per cent (or 8.5 per cent with inflation), Financial Sustainability ~ Calculations & Assumptions The analysis will present the standalone and merged council financial viability through @ range of indicators including the calculation of Fit for the Future financial sustainability ratios (operating performance ratio, own source operating revenue ratio) as well as improvements (or deterioration) in net operating result, debt to asset ratio, proportion of non-fate revenue and reliance on grants and contributions. Each of the above listed indicators willbe calculated and compared to an appropriate ‘benchmark or regional average. Due to the reliance on published long term financial plans as a data source, itis expected that councils will have submitted different financial projections to IPART to demonstrate their ability to stand alone. Ths limitation cannot be overcome without having access to every couneil’s unpublished financial projections, era + Support OLG and the NSW Government in understanding the financial implications of each merger option. + Provide headline net financial impacts for each merger option, to facilitate comparison of merger ‘options and inform the ‘communications proforma (Workstream 2). + Support OLG and Cabinet in understanding the impact of the merger on each council's financial sustainability. + Ensure that council mergers ‘support the achievernent of strategic capacity, including: ~ Robust revenue base and increased discretionary spending ~ Resources to cope with complex and unexpected change KPMG ‘ari gh complentyICE OF LOCAL GOVERNMENT | LOCAL GOVERNMENT REFORM OPTIONS ANALYSIS! MODEL DESIGN METHODOLOGY PAPER /8 July 2015 MODEL INPUTS EFFICIENCY & SERVICE INDICATORS Councils’ ability to efficiently provide services Data sources and inputs Council Long Term Financial Plans + Real operating expenditure ratio Time period: 2014-2023 cet Methodology: To exarnine council efficiency and its impact on sorvices, performance indicators focused on overall trends in operating expenditure, governance ‘and administration expenditure and performance benchmarks of typical ‘council duties will be presented. Additionally, information on the number of ‘councillors per resident and average annual payments will be provided. xpenditure Ratios ~ Calculat DRAFT CABINET IN ~ CONFIDENCE NOT FOR CIRCULATION > page | 20 | Project outcome + Provide OLG and the NSW Government with a summary of council service ‘expenditure and efficiency across the local government sector. + Assist OLG and the NSW Government in reviewing councilor per resident ratios and average pay packages. Long term financial plans and OLG time series data will provide both @ ‘ OLG Local Government Data current and forward view of service expenditure trends, per capita Governance and administration _©XPenditure and how they are allocated. It will be important to consider SE actoN Citotal ‘these values in comparison to what a current council, who is of the same Scere scale proposed by the merger, generally spends on these items and in the Pyne + Govctnange and administration °OMtext ofthe local economny and demographic and social analysis a3 ‘expenditure per capita cart cece et z ’ ee Speaiste here he ‘200885 to OLG data, it may be possible to provide more detail as to . a ; ‘what functional areas of the council generate the greatest employee Development Application (DA) 9 penditures (gaveance, community services, etc). Given known data Getermination ‘quality issues and the likelihood that regional employees perform multiple +, Nubero elected counclows foes anys rayon be appeble hs matropoitan contort + Average paym councillor Be rcs on council responsibilities: Time period: Current (2013-14) Days for DA determinations and recycling rate wil also be included as found in OLG's Local Government Time Series Data. ‘Councilor representation and remuneration: Councillor pay and expenses as reported by councils will be used to provide 2 point of comparison to councillor remuneration averages in larger councils 622018 «ow an staan somasho and vert fst he KPA newt neeencet am ts are eh KA ersins Craeivo CREM Mena. Sw ry KPMG. Singns cones Prete Resto RPUG and PMG ogo gst vader PNG minanDe aoulimes bs SETS Sas ae sess Sanne Copaeon ‘ein gh complentyRoy LOCAL GOVERNMENT REFORM MODEL INPUTS NEIGHBOURHOOD INDICATORS Local economy and shared ‘communities of interest” ‘Data sources and inputs LG Local Government Data and Australian Bureau of Statistics Business to resident ratio Top 3 industries of employment Residential property density Method of transport (%) SEIFA index (n0.) Population density Language other than English (%) Time period: Current (2013-14) or Census (2011) lathodol Using a variety of ABS and OLG data sources on Local Government Areas, this phase of the analysis serves to highlight the similarities and differences across the proposed merger ‘grouping and region. This analysis of the local economy and shared communities of interest for each merger option will provide informative and comparative data to support consideration of the overall focal context in which local government reforms are being considered, DRAFT CARINET - IN CONFIDENCE \U7 FUR CIRCLE + Support OLG and the NSW Governmentin understanding the local context in which the merger is taking place. + Allow OLG and the NSW Government to ‘compare the social and economic compatibility of various merger options.DRAFT CABINET iby 2 MODEL INPUTS INFRASTRUCTURE INDICATORS Cinna Councils’ ability to manage infrastructure and major projects Data sources and inputs Council Long Term Financial Plans + Building and infrastructure asset renewal ratio + Infrastructure backlog ratio + Asset maintenance ratio + New capital expenditure per resident Time period: Projected Australian Bureau of Statistics + Dwelling and population growth, Time period: Historical NSW Department of Planning + Dwelling (required) and poputation growth + A Plan for Growing Sydney + Regional Planning Strategies Time period: Projected OLG Local Government Time Series Data + Proportion of assets that are maintained at Class 1 and 2 levels + Open public space tha) per resident + Total road length tkmn) Time period: Current (2013-14) Methodology. To explore the capacity of councils to maintain and manage future infrastructure needs, the analysis will calculate @ set of infrastructure-related ratios and performance indicators, analyse historical and projected housing supply (as measured by dwelling and population growth) and review state "metropolitan and regional planning documents to provide further context for ‘major projects, regional collaboration and partnering between State and Local Governments. Infrastructure indicators — Calculations & Assumptions Ratios and indicators sourced from long term financial plans and OLG timo. series data will provide both a current and forward view of asset quality, asset renewal, infrastructure backlogs and maintenance levels. Long range forecasts for infrastructure renewal and maintenance spending are not always detailed within LTFPs and may require estimates based on growth in capital expenditure and historical maintenance levels. Housing Supply ~ Analysis Council effectiveness in planning for growth will be assessed based on local government area historical dwelling growth and historical population growth. In addition, projections from NSW Dept. of Planning for population and required dwelling growth will be calculated to provide a forward indicator of the required planning effort State & Regional Plenning Priorities - Analysis. ‘The above analysis will be overiaid with insights from State and Regional Plans to ensure the depth and breadth of planning initiatives and major infrastructure projects are provided as context to the data, IN CONFIDENCE page Grpotincr) + Provide OLG and the NSW Goverment with a summary of infrastructure and planning performance and challenges across the local government sector. + Provide an indication of the infrastructure backlog + Ensure that council mergers support the achievernent of strategic capacity, including: ~ Undertaking new functions and. major projects; ~ Advancing skils in strategic planning and policy development; ~ Collaborating and advocating at 2 regional level; and — Partnering effectively with State and federal agencies. tn rag companyRi OFFICE OF LOCAL Gove! OPTIONS ANALYSIS MODEL DRAFT CABINET IN - CONFIDENCE RNMENT | LOCAL GOVERNMENT REFORM ion AUDOLD (MODEL INPUTS RATES ASSESSMENTS ee aces cre ‘The impact to rates from @ merger r \d inputs O1G Local Government Tima. Series Data Rates income (residential) *+ Rates income (business) + Rates income (farmiand) + Assessed properties (residential) + Assessed properties (business) Assess properties (farmiand) “Time period: Curent (2073-18) Council Long Term Financial Plans + Projected three year rates revenue Time period: Projected Secs Rates Assessments — Calculations & Assumptions : We will complete a rates analysis to assess the potential impacts of merger options on residential, business and farmiand rates. Three scenarios will be developed to provide a snapshot of the range of policy options available to the NSW Government. + Scenario 1 — Harmonise rates to the mean rate level across all councils in each ‘merger cluster. In a rates harmonisation scenario some ratepayers will face increased rates, while others will benefit from reduced rates. Our analysis will shaw a breakdown of the ratepayers and councils facing increased / decreased rates. Scenario 2 = Council rates are held at a fixed level for a three year period with all residential, business and farmland rates shifting to the lowest rate currently applied in the selected merger cluster. This ‘no disadvantage’ scenario will require cross-subsidisation by the NSW Government to cover any shartfall in rates revenue. Our analysis will provide an outline of expected rates outcomes for ratepayers as well as the cost to the NSW Government. + Scenario 3 ~ Councits rates are increased to the highest council rate currently -2pplied in each merger cluster. Our analysis will provide an outline of the additional revenue that will be generated from residential, business and farmland ratepayers. iy age Inform OLG and the NSW Government's understanding of the costs associated with, changing rates and potentiat options available, ening ough corpentyModel Design Next StepsBa: OFFICE OF LOCAL GOVERNMENT | LOCAL GOVERNMENT REFORM NEXT STEPS Given the very tight timeframes to deliver the project itis important the model build can commence immediately. To facilitate this: + Feedback from OLG on this Draft Model Design Methodology Brief is needed prior to finalisation. This will provide the required confirmation of the model ‘scope, parameters and methodology that will enable the model build to ‘+ We have commenced LTFP data collation and conversion into 3 usable and consistent format for the model. + OLG is provicing additional coated data in an Excel format from annual data returns. + Anumber of other data sources, such as partial OLG Time Series Data and ABS. (and other external data) is already available to KPMG and we have commenced data aggregation enc formatting to allow immediate transfer to the model + Review of other state-wide and regional planning, infrastructure, demographic and economic analysis is being undertaken by KPMG to assess suitability for induusion in the mode! as qualitative data, + Inegards to testing model results we will fst conduct merger analysis on the Northern Beaches cluster given KPMG's familiarity with the region and ability to ‘draw on our previous work to provide a ‘sense test’ and point of reference for the model results, + Demonstrarion of the model ‘dashboard’ will be required eztly next week to ‘confirm model functionality meets OLG's expectations and the requirements of a ‘obust user friendly decision tool sraahip ead aber hn fhe KFMG awa aaron meme aio wih KG rman DRAFT CABINET — IW - CONFIDENCE NOT FOR CIRCULATION > page | 2 ‘eg deh compAppendices "Ampere Data Sonrens| a Appendix B — Financial Assumptions & Calculations ‘ering hough camperee APPENDIX A SUMMARY OF DATA SOURCES erie’ Inputs ney Council Long Term Financial Plans + Components of revenue, expenditure and total operating result + Dats is pulled from council Time period: Projected + Total debt and assets (debt to asset ratio) websites and may not reflect + Materialsand contracts expenses updated assumptions from Fit for KPMG will collate this data + Other expenses the Future submissions + Employee benefits and on costs + Operating expenditure + Difficulty projecting revenue / + TFit for tne Future financial sustainability metrics expenditure associated with. + Base case operating results potential boundary adjustments + Incremertal net benefit/cost (e.g. The Hills, Ryde, Warringah) + Projectec three year rates revenue + New capital expenditure per resident OLG Local Government Data + FTEs per council Time period: Current (2013-14) + Average employee salaries and benofits + Rates income (residential) LG will collate this data and provide + Rates income (business) it to KPMG in Excel format + Rates income (farmland) + Assessed properties (residential) + Assessed properties (business) + Assess properties (farmland) + Proportion of assets maintained above stendard (Class 1 and Class 2) + Open pualc space (hal per resident + Tota! road length tk) + Governance and administration as a proportion of total expenditure + Governance and administration expenditure per capita + Mean gross days for Development Application (DA) determination + Number of elected councillors + Average payment per councillorRi OFFICE OF LOCAL GOM : Coron ANALYSIS | MODEL VESIGe WL ALVELN ME NT | LOCAL GOVERNMENT REFORM Pak |e ay 20" APPENDIX A SUMMARY OF DATA SOURCES Sum ae Australian Bureau of Statistics Time perioa: Historical (Census) KPMG will collate this data NSW Department of Planning Time period: Projected KPMG will collate this data Infrastructure NSW. Time period: 2014 & Projections KPMG will collate this data Dwelling and population growth Top 3 industries of employment Residential property density Method of transport (%) SEIFA index (no) Population density Language other than English (%6) Dwellings (required) and population growth A Plan for Growing Sydney Regional Panning Strategies State Infrastructure Strategy DRAFT GAMINET — IN ~ CONFIDENCE NU! +5 C1 Projections are based on general assumptions by Department cf Panning end may take into account specific local context. tng Hr camperRG) Feit oF 108 ee -ANMENT DRAFT CABINET — IN - CONFINENCE N01 HO CIRCULATION LOCAL GOVERNMENT REFORM APPENDIX A ASSUMPTIONS AND CALCULATIONS Assumption Expenditure Efficiencies + 3 per centannual saving for Metropolitan councits; and ‘+ 1.5 per cent annual saving for Regional councils. Staffing Efficiencies Adjustable within the model + Range of 4.5 to a suggested maximum of 16 per cent reductions for Metro councils; and + Range of 3 per cent toa suggested maximum of 6 per cent reductions for Regional councils. ‘We will apply an annual percentage cost saving to long term financial plan ‘expenditure line items: ‘a) Materials and contracts; and b) Other To reflect differences in economies of scale in regional and metropolitan, councils two separate assumptions will be applied. ‘We will apply an annual percentage saving on employee expenditures. It is important to note reductions will be phased in over three years to reflect the three year moratorium on forced redundancies. Given we will not have access to 2 datailed breakdown of staffing levels by position, function or grade we will assume an average staffing efficiency {rom amalgamation, Metro and regional councils have varied assumptions for average and maximum staffing efficiencies due to the particular sensitivity to jab losses in regional NSW. KPMG experience working with councis suggests that 2 merger of metro councils resuits in approximately 5 10 9 per cent reduction in employee costs. KPMG has. encountered high resistance to reductions in staff in regional areas. ‘Morrison Low analysis of the potentiat Inner West amalgamation suagested 215 per cent reduction in management (below executives and directors) and 45 per cent reduction in frontline services rea woe Professional Pearce uate ‘Auckland Regional Councit ‘amalgamation (2009) resuited efficency saving of 3 per cent on Materials and Contracts: ‘and Other expenses. an Controller ard Auditor General of New Zealand (2012), Auckland Council: Transition and emerging challenges ‘Auckland Regional Counc! amalgamation (2009) resuited in a 16 ‘per cent reduction in council staff The Toronto Council amalgamation (1998) resuted in the following reductions: 14 par cant reduction in edminisirtion and corporate support functions; 34 per cent reduction in management posivions; and 60 per cent reduction in executive management positions, KPMG curt ugh compentyDRAFT CABINET ~ IN ~ CONFIDENGE NC | LOCAL GOVERNMENT REFORM APPENDIX B FINANCIAL INDICATORS - ASSUMPTIONS & CALCULATIONS rent Steff Redundancy Payments + Average salary and average ‘employee entitlements (as calculated 2013-14) + Median staff tumover rate of © 10.7 por cent + Weeks of redundancy payment (NSW Feir Work Commission, Redundancy pay and entitlements schedule) ICT Costs Proportion of operating expenditure (Year 1 ~ Year 2) + 1.6 per cent (metro) + 25 per cent (regional) Proportion of operating expenditure (Year 3 - Year 5) + 28 percent eco Recognising the three year moratorium on forced redundancies, the phased reductions in council staff would result in corresponding one-off redundancy payments. In the absence of detailed employee accumulated entitioment data for each council, we propose to generate: + an average salary and average accumulated leave to estimate redundancy packages (based on OL.G 2013-14 data returns for each council) + average tenure (based on median turnover resuits from the joint PwC / LG Professionals Operational and Management Effectiveness Survey 2013-14) Additionally, the estimated wooks of redundancy pay are calculated using the Redundancy pay and entitlements schedule for NSW public sector employees. Due to the timelines of this exercise, itis not possible to assess each merger options relatve risk or compatibility with regard to ICT consolidation. Past experiences and studies in other jurisdictions suggest that intial \CT consolidation costs ranged from 30 per cent to 45 per cent of total upfront merger costs during amalgamations, The initial cost over two years is estimated at 1.6 per cent to 2.5 per cent of operating expenditure (based on analysis conducted in Wellington, New Zealand ‘and Queensland. The following three years include implementation costs of 2.8 per cent of aperating costs annually (based on a top down costing method). FOR CIRCULATION, 30 OLG Council Data PwC/ LG Professionals (2014) Operational and Management Effectiveness Survey 2013-14 NSW Fair Work Ombudsman (2014), Redundancy pay and entitlements schedule Queensland Treasury Corporation (2008), Review of Loca! Government Amalgamation Costs Funding ‘Submissions Final Summary Report Deloitte (2014), Weilington Local Government Reorganisation Options: Transition Costs and Benefits for Technology Changes KPMG tg Hergh onyDRAFT CABINET. IN CONFIDENCE NT £0" ¢ APPENDIX B ASSUMPTIONS AND CALCULATIONS Other Transition Costs Additional one-off costs, including facility consolidation, staff training and general The total upfront costs (including ICT) of ‘transition-related expenditures have also been calculated as @ percentage of the Toronto Council amalgamation ‘Transition costs include (as a ‘operating expenditure based on case study exemples from regional and (1998) represented 4.7 per cent of Proportion of total council operating metropolitan amalgamations. operating expenditure. expenditure) Queensland Treasury Corporation + Facility consolidation (2008), Review of Local Govemment © 1.4 per cent (metro) Amalgamation Costs Funding © 0.5 per cent (regional) Submissions - Final Summary Report + Staff retraining and change ‘management © 0.1 per cent; and + Transitionelated costs such as signage, communications, ete. © 0.5 per cent (metro) © 1.0 per cent (regional).Paarl reseed COE GOs icone is ‘a member firm of the KPMG network of ceca me koa! ROM emer aa International”), a Swiss ertity. All rights ere ances ‘cutting through comp exity” are registered eee rns Cae MC cue! ‘approved under Professionai Standards ese