Consultation Submission - NPSP Budget 2024-25 and LTFP 2024-2034

Introduction

My family and I have lived and owned property in Norwood for 42 years.

I have qualifications in Economics and Accounting, and worked for decades in Executive Management at a large metropolitan Council with broad responsibilities including Finance and Governance matters. In my role I contributed in a modest way to the reforms of local government finance and asset management.

I also currently serve on the Audit Committees of 5 Councils.

I remain very concerned not only about the proposed future rate increases and high debt levels, but also the resulting long term constraints on Council’s ability to respond to other community priorities and its capacity to respond to adverse events without even further pressure on rates and debt levels.

Concerns regarding the 2024-25 Budget and Long Term Financial Plan

1. General

Council’s Budget and financial forecasts going beyond 10 years is dominated by the $60m investment in the Redevelopment of the Payneham Swimming Centre which is financed by rate increases above inflation and significant borrowings.

The cost increase is now nearly 3 times the estimate advised during last years’ public consultation. Cost is a significant component of the community’s consideration.

Q: Why was there no further broader community consultation before a decision was made and the contract let, given the material change in circumstances?

I don’t doubt the Payneham Pool requires renewal but the scale of the proposal is excessive and, I believe, a distortion of ratepayer priorities. The pool is situated in the north east corner of the city and will be used by residents of Campbelltown, Port Adelaide Enfield, and Walkerville in addition to NPSP.

A regional approach and shared funding may be viable but for Norwood alone it will be crippling.

2. Rate Revenue Increases

The following table represents the current proposed rate revenue increases over the next 10 years:

This follow an increase in rate revenue of 8.5% in the current 2023-24 year (Source: Annual Business Plan 2023-24).

Over the next 5 years rates are planned to increase by 36%, double the inflation rate!

These are not normal increases and represent an avoidable ‘shock’ to ratepayers, many of whom are struggling with multiple cost pressures.

I recognise there is some development ‘growth’ in these figures but it does little to change the impact on existing ratepayers.

The Annual Plan does not properly convey the long term impact of Council’s decisions.

Pensioners, retirees, mortgage stressed homeowners, and others on relatively fixed incomes will be the hardest hit by these ‘above inflation’ rate increases.

It is well understood that individual household standard of living has declined over the last 2 years, but it has been disguised at the macro economy wide level as a result of high migration levels.

3. Net Financial Liabilities Ratio (Local government’s financial indicator for indebtedness)

Local Government guidelines suggest an upper limit for the ratio of 100% to keep debt manageable, adhered to by most councils. Above this level puts stress on council finances.

The following table sets out the forecasts within NPSP’s LTFP, even with the rate increases noted above used to help pay down the debt:

This level of indebtedness is extreme in the local government environment and will place a very significant constraint on the capacity of NPSP Council to respond to the needs of its community for over 10 years.

Future generations of elected members may be frustrated by the decisions of the current Council.

To illustrate how NPSP’s debt/Net Fin. Liability Ratio compares with other metropolitan Councils the following table shows a comparison for the 2023-24 year:

Source: Council Annual Business Plans for 2023-24

Conclusion: NPSP’s future level of debt is exceptionally high for local government and remains at elevated levels for the entire 10 year forecast and beyond, despite punishing rate revenue increases in the next few years.

Q: What strategy did Council consider to manage its debt levels before it decided to proceed with its major projects?

4. Operating Surplus Ratio

Councils need to have a positive Operating Surplus Ratio to ensure they are financially sustainable and ensure they are not passing on deficits to future generations of ratepayers (intergenerational equity). It means current ratepayers pay for the services they are consuming.

NPSP’s OSR is positive over the 10 year LTFP period, increasing from 0.3% in year 1 to 5.3% ($5m surplus) in Year 10. This is positive but 10 year forecasts are very unreliable (and generally optimistic) the further they go out.

The surpluses are incorporated into the debt reduction process. Without them debt levels will be higher than the LTFP forecasts.

5. Risks

There are clearly a number of risks to the assumptions behind the projections and the extent to which they can be managed is unclear:

1. Inflation may be higher than assumed for wages, materials and contractors (3% to 3.5% used in the projections). This will create pressure for higher rate increases.
2. Inflation for asset construction and renewal is currently very high (as is demonstrated in the cost of the Payneham Pool Redevelopment). The forecast has used around 3%. There is a very real possibility this is significantly understated which will have two impacts:
   • Future cost of new capital works and asset renewal will be much higher than planned;
   • The valuation of council’s existing assets roads, drainage, buildings etc may well be undervalued at the moment and when they are revalued it will have a major impact on depreciation which of course is an operating expense that must be covered by rate revenue. The impact could be very significant.
3. Interest rate exposure
   It is not clear how council will manage its exposure to adverse movements in interest rates. Rates are expected to remain higher for longer (and may increase) in the short term. There is an assumption that rates will then decline – but it is not a certainty, and wars, geo-political factors, climate change impacts and so on may cause such assumptions to be revised. This highlights the need to be prudent and leave some capacity in the budget forecasts for the uncertainty that exists.
4. The Pool project cost may blow out further before it is complete.
5. As the realisation sets in that Council is overcommitted and has little room to move its only options will be to increase rates even further, reduce maintenance and services, or sell assets (eg. Norwood pool, libraries, open space?).

Q: Has Council considered how it will manage these significant risks?

6. Governance Issues

Local Government Guidelines, noting there are transitional provisions, suggest a Council’s Audit and Risk Committee may have 3 – 5 members of which the majority should be Independent with relevant skills in finance and risk management. The Committee should be Chaired by one of the Independent members.
The purpose is to provide independent and professional advice on financial and risk matters to the Council. Most metropolitan Councils have adopted this ‘good governance’ practice, and have been doing so for multiple years.

NPSP Audit and Risk Committee has a majority of Elected Members (3) and two Independent members. The Mayor Chairs the Committee. This is not best practice and to some extent one could argue it has had an impact on the way decisions have been made on this issue.

I thank Council for the opportunity to comment on its plans.

Peter Fairlie-Jones
Norwood