Inspire : Public Works May Jun 2013
45 WHY IS AN EFFECTIVE LONG TERM FINANCIAL PLAN SO IMPORTANT TO LOCAL GOVERNMENT? Because most ser vices are generated from long-lived assets, in other words, assets that last a long time, but not forever. In some years they may require little or no maintenance, but in other years they might incur costly repair or renewal. So a long term fnancial plan (LTFP) lets an entity accommodate that “lumpiness” of funding needs. Essentially, it’s a roadmap that may not pinpoint each bump or twist along the way, but which gets you there in the end – provided that ser vice levels are affordable over the life of the asset. CAN YOU EXPAND ON THAT LINK BETWEEN ASSETS AND SERVICE LEVEL AFFORDABILITY? It means forecasting what has to be spent on assets to provide a level of service, and then checking if funds will be accessible over time. But affordability is not the same as available cash, as a council may need to borrow funds at peak renewal times and repay the loan in a trough. So it has to ensure it can generate revenue in an equitable way from ratepayers, and that it has the capacity to fnance those peaks. If it can’t, then current or proposed levels of ser vice from assets may not be affordable and may have to be reduced. For instance, plans to build a second swimming centre may have to be shelved, or the re-sealing of a rural road network scaled back or delayed. HOW DO YOU DETERMINE THOSE FACTORS? The long answer is in IPWEA’s LTFP Practice Note 6 (http://w w w.ipwea.org.au/LTFP)! But in summary: First the asset manager determines the level of service to be provided and what assets will cost to operate and maintain to provide that ser vice level, and when they need to be renewed to minimise whole of life asset management costs. Then the fnancial experts examine how the funds are to be raised over time. It needs smoothing out, because equitably, ratepayers should pay a relatively consistent amount, regardless of whether asset related outlays cost $10m one year or $1m the next. Budgeting based on accrual accounting enables this. If an asset is deemed to have a 50-year life, the share of the cost of the consumption of its ser vice potential each year needs to be recognised as an annual expense. That's depreciation. So the fnancial people factor it in and calculate likely borrowing needs and the capacity to repay debt. HOW HARD IS IT TO CALCULATE THE FUNDING? It’s certainly not simple, but you shouldn’t get too bogged down in trying to forecast the uncertain or unknowable. For instance, it's now mandatory in most states for local gover nments to prepare 10-year asset management and long term fnancial plans. That’s good, because a 10-year plan focuses the attention on determining affordable, prefer red ser vice levels and assessing capacity to bor row funds when necessary. It also generates appropriate regard to intergenerational equity in revenue raising and ser vice level decisions. HOW OFTEN SHOULD YOU REVIEW A LTFP? It shouldn’t need amendment too often – an annual review at the time of developing the annual budget should suffce. This should be completed by a more thorough review at the time of reviewing major strategic plans, say every three to fve years. The amendments are usually driven by things like ser vice level preferences, new technology or radical cost changes. For instance, social change might mean adding a skateboard rink to a park, or climate change might mean switching to an alternate source of power for the provision of lighting in a facility. WHAT'S THE NEXUS BETWEEN ASSET MANAGERS AND THEIR FINANCIAL COUNTERPARTS? Well, provided both do their tasks effciently they don’t have to constantly compare notes. But they can’t afford to remain in isolation either – and there is sometimes a tendency to do that. Essentially they are both on the same team with similar broad objectives, so there needs to be fairly regular interchange and review meetings. I must say, that in running the IPWEA’s current LTFP workshops, I was pleasantly surprised at how much both sets of managers have come to appreciate each others’ challenges. WHAT ELSE EMERGED FROM THE WORKSHOPS? Many councils were already using the practice note to guide development of a LTFP and had used the Excel model we developed. The model has shown users they have more capacity to address perceived asset management backlogs than they thought. By looking longer term, they see the merit of using debt as warranted and the impact of adjusting long-r un ser vice levels and revenue-raising decisions. ••• A long term nancial plan allows an entity to accommodate that lumpiness of renewal funding needs. CONTINUE THE CONVERSATION Have your say on this story. Go to http://goo. gl/VJ5xV to comment on this article.
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