Local Government Finances

Office of State/Local Government Relations

LOCAL GOVERNMENT FINANCES

Background

Both the Office for State/Local Government Relations (OSLGR) and the Local Government Association (LGA) are keen to ensure that there is an understanding of the financial performance and position of Local Government in South Australia and trends in its finances over time. As a contribution to this objective, and with the assistance of the Department of Treasury and Finance, OSLGR in recent years has drawn together financial data from all Councils (see below) and provided an analysis of the sector's overall financial performance and position. The assistance of the Local Government Grants Commission in providing data for this purpose is acknowledged and appreciated.

As new data becomes available, it is intended to progressively update this webpage. The material provided below also describes the financial relationships Local Government has with both the Commonwealth and State Government as well as describing recent developments in Local Government financial governance. In addition, the LGA now assembles, for each Annual General Meeting, an update report providing the latest values, history and comparisons of key financial indicators for the Local Government sector as a whole - Financial Indicators Report 2012.

In the past, there has been a lack of consistent and comparable reporting by individual Councils. Financial reporting by Councils has been considerably improved since the introduction and mandating in 2007 of the South Australian Model Financial Statements. Apart from assisting Councils to comply with Australian Accounting Standards, the Model Financial Statements have resulted in material improvements in the reliability, consistency and comparability of information made publicly available on Council finances in their annual financial statements. A copy of the Model Financial Statements is available from the LGA's website - Model Financial Statements 2012.

A recommendation of the LGA's independent Financial Sustainability Inquiry in 2005 was that the LGA develop and publish a uniform financial reporting framework broadly equivalent to the uniform and consistent approach implemented Australia-wide at the State Government level. A simplified Australian Bureau of Statistics Government Finance Statistics (GFS) framework was developed and sector-wide agreement reached on its use. This has ensured that summary information on both operating and capital investment activities is made available on a consistent basis and enables more meaningful comparisons of each Council's finances. Importantly, it also focuses attention on a Council's operating surplus/(deficit), being the key measure of financial performance. An explanation of terms in the simplified framework is shown in this link - Uniform Presentation of Finances.

The Local Government (Financial Management) Regulations 2011 require that Council budgets, long-term financial plans, annual financial statements and mid-year budget reviews must include summary financial information using the uniform approach.

Financial Performance and Position

The centrepiece of this webpage is a high level summary and analysis of the financial performance and position of the Local Government sector over recent years - Financial Performance and Position of the Local Government Sector.

Financial Institutions and Initiatives

With assistance in various ways from the State Government, the LGA has created a number of financial institutions to manage, on behalf of Councils, a range of commercial arrangements. These include the Local Government Finance Authority, the LGA Mutual Liability Scheme, the Local Government Superannuation Scheme, and the LGA Workers Compensation Scheme. These institutions deliver efficient and effective shared service arrangements for Local Government and have received strong support from individual Councils. At 30 June 2010, the institutions were managing assets valued at $1921 million and had a combined net worth of $93 million. These amounts are not included in Table B (i.e. Local Government Balance Sheet) of the above link. In addition, the State Government and the LGA have established arrangements for the joint tendering and contracting of electricity for those Councils on the national electricity grid, resulting in efficiencies and cost savings to Councils.

An independent inquiry initiated by the LGA in 2005 into the financial sustainability of Local Government in South Australia made significant recommendations regarding the need for Local Government to improve its financial governance. In particular, it expressed concern at the lack of long-term financial and asset management planning. While the inquiry acknowledged an increasing level of capital investment on renewal and replacement of existing assets, it highlighted that such expenditure remained significantly less than that needed to minimise whole-of-life-cycle costs of assets.

The LGA, with the support of Councils, subsequently embarked on a comprehensive Financial Sustainability Program to implement the inquiry's recommendations and support improved Council performance. The State Government is providing practical help in various ways to support the LGA's program.

In 2006, the LGA initiated a statewide project to help Councils develop strategies, policies and tools to achieve sustainable asset management. Councils are custodians of roundly $19 billion of infrastructure and other assets on behalf of their communities. The LGA entered into an alliance with the Institute of Public Works Engineering Australia to adopt an internationally recognised approach for preparing asset management policies and plans. This initative is likely to be the most important outcome of the LGA's Financial Sustainability Program.

Associated projects are being implemented by the LGA to improve Councils' financial governance and include development of rigorous long-term financial plans, improvement of external financial reporting and strengthening the internal and external audit regime. The LGA's webpage covering its Financial Sustainability Program is provided via the following link - LGA's Financial Sustainability Program.

During 2007, an implementation framework for additional shared service arrangements in Local Government was developed by the LGA. Following endorsement of the framework by Councils, the LGA embarked on an ambitious program of pilot projects to explore a wide range of opportunities for increased resource sharing between Councils. Progress on most pilot projects has been slower than anticipated.

Financial Relationships with the Commonwealth Government and the State Government.

Commonwealth Government

The Commonwealth provides both general and specific purpose payments to Local Government in South Australia.

The general purpose payments are made to the State and on-passed to Councils on the recommendations of the South Australian Local Government Grants Commission. Arrangements for the payment of these untied financial assistance grants to Councils are embodied in the Commonwealth's Local Government (Financial Assistance) Act 1995. The financial assistance is provided in two parts - general purpose grants and untied local roads grants. General purpose grants initially allocated by the Commonwealth are not subject to horizontal fiscal equalisation (HFE) as they are distributed to States on an equal per capita basis.

For South Australia, financial assistance grants of $145.8 million are expected in 2011-12, consisting of $109.5 million in general purpose funding and $36.3 million in untied local road funding.

The Commonwealth legislation provides for the allocation of financial assistance grants to Councils within the State on the basis of HFE principles, subject however to a minimum grant provision. This provision requires that each Council receive, as a minimum, its per capita share of 30 per cent of the general purpose pool of grants. The minimum grant requirement, together with the initial per capita distribution of general purpose grants between States, means that fiscal equalisation in Local Government in Australia is not truly comprehensive. This situation exists despite fiscal equalisation being the cornerstone of principles espoused by the Commonwealth for distribution of financial assistance to Local Government. Comprehensive fiscal equalisation is crucial if equity is to be achieved in the future for all Councils, regardless of their demographic, economic or geographic circumstances.

Commonwealth payments for specific purposes were received by South Australian Councils under a variety of programs in 2010-11. Estimates of grants include:

$31.5 million under the Roads to Recovery component of the National Partnership (NP) on the Nation Building Program;
$9.6 million under the National Water Security for Cities and Towns Program component of the NP on Water for the Future;
$3.1 million for Community Wastewater Management Systems under the NP on Water for the Future;
$15.3 million for community infrastructure projects under the Regional and Local Community Infrastructure Program; and
an extra allocation of $15.5 million for local road funding. The supplementary local road funding of $15.5 million was a continuation of arrangements that recognise the current inequitable share of untied local road grants being received by South Australia under the Local Government (Financial Assistance) Act 1995.

In addition, depending on the success of applications under a nationally competitive process, South Australian Councils are expected to have received grant funding in 2010-11 under the NP on the Natural Disaster Resilience Program, the Jobs Fund covering infrastructure employment projects, the Healthy Communities Program, the National Affordable Housing specific purpose payment and the NP on the Local Government Reform Fund Program. The Reform Fund Program was established to accelerate the implementation of Local Government and Planning Ministers' Council agreed asset and financial management frameworks, build capacity and resilience in Local Government and increase collaboration between Councils in planning and service delivery. In 2010-11, grant funding of $1.65 million was allocated for a joint OSLGR/LGA project under the Reform Fund Program.

State Government

In 2004, a State-Local Government Relations Agreement was established to improve consultation arrangements and communication practices and to build more productive and collaborative working relationships between State and Local Government. The Agreement is between the State Government and the LGA and is signed by the Premier and the President of the LGA. A Schedule of Priorities for joint action is agreed on an annual basis. The Agreement was revised in 2006 to reflect the national tripartite Intergovernmental Agreement on Local Government Matters signed in April 2006. The State Government and the LGA undertook a further review of the Agreement during 2012 to ensure that it remained contemporary. An updated Agreement was signed in May 2012.

In 2007, amendments to the Local Government Act 1999 were brought into effect. Amending provisions aimed at improving the accountability of Councils as well as strengthening their financial governance, asset management, rating practices and auditing arrangements.

The changes included the requirement for Councils to:

prepare and adopt long-term financial plans;
prepare and adopt long-term infrastructure and asset management plans;
establish audit committees;
adopt several measures to strengthen the independence of external auditors; and
adopt a consistent and improved reporting format for annual financial statements.

These legislative reforms were supported by the LGA and are consistent with the recommendations of the LGA's independent inquiry into financial sustainability of Local Government. The reforms support the directions of the LGA's Financial Sustainability Program, which is helping Councils to meet these requirements. Additional legislative amendments occurred in 2009 to further improve the legislative framework for internal and external review of Council administration and financial management. During 2011, the Local Government (Financial Management) Regulations were completely remade. The revised Regulations simplified and rationalised some requirements on Councils.

Appendix 1 summarises arrangements by program or purpose under which the State provides grants and subsidies to Councils (including for State programs) or payments to Councils for Local Government or joint State-Local Government programs. Amounts included in the table do not include funding that is provided by the Commonwealth to the State and on-passed to Local Government or contract payments to Councils for the provision of services on behalf of State agencies.

Care needs to be taken in any comparison of the level of State Government financial support to Councils provided in different State jurisdictions. Significant definitional differences exist between the States and the level of information captured within each varies. In addition, certain funding in some States relates to functions that in general are not performed by South Australian Councils.

Appendix 2 provides detailed information on each program or purpose included in Table C above. Additional information also is provided in Appendix 2 on some State Government programs which have indirect impacts on Councils, or are likely to be of particular interest to Councils. These programs are shown in the table with a reference #.

Other information on Local Government Finances

Apart from the information on Local Government finances included as the centrepiece of this webpage - Financial Performance and Position of the Local Government Sector as well as the information on the LGA's webpage covering its Financial Sustainability Program, significant material also is included on the website of the SA Local Government Financial Management Group (SALGFMG).

The SALGFMG material includes a Financial Management Framework which provides access to a wide range of documents supporting contemporary financial management in Councils.