How to analyse your Council’s Budget?

When you review your Councils next year’s budget, you need to understand what are your goals first. This will help sharpen the purpose of your review and also lead to meaningful review outcomes.

For example, Monash Ratepayers Inc  (MRI) ‘s organisational objective is to cap rate rises to CPI level. This objective underpins the purpose and scope of our review, and helps us to look for financial indicators to see if rates can be lowered.

Understanding your Council’s financial health is useful to determine whether it can afford to reduce rates and/or spend on non mandatory items. Affordability is about:

  1. The ability to pay bills when they fall due
  2. The extra unrestricted cash a Council have.

In financial management, we can use 2 concepts:

  • Working capital ratio is a liquidity risk measure, which indicates Council’s capacity to pay bills when they fall due – 150% is a acceptable good practice target that most Council aims for.
  • Unrestricted cash surplus means free cash not tied to meet any internal and external restrictions. Concerns like provision for future defined superannuation liability payout, debt repayments should be and are usually covered as part of restricted surplus cash. When compared with current liabilities, the ratio shows the percentage of excess cash against bills to be paid.

You then examine these financial measures for each year, including the current budget period plus the next four years. It is legislative requirements that all Councils must report these 2 financial performance measures. They should be found in the Strategic Resource Plan (SRP) estimates eg

Some Councils will also disclose the unrestricted cash amounts for each year. Some don’t. If your Council does not provide the unrestricted cash amounts, you can calculate it by multiplying each year’s “unrestricted cash / Current Liabilities ratio” by the current liability estimate (which must be shown in the budget plan). For example, we had to calculate the unrestricted cash for Knox City, as shown below:

Examine the 4-5 years’ estimates of working capital ratio and unrestricted cash levels. If you find that:

  • The working capital ratios are excessively above 150%;
  • The unrestricted cash amounts are excessively high

then  it is likely that when your Council is over gearing itself cover its bill payments and saving too much, and there are some implicit underlying reasons. The Knox example shows Knox’s financial health recovers from 2015/16 (when its working capital reaches 162.33%) and is in pretty good shape by 2018/19. So a question may be, what is the Council planning to use future unrestricted cash reserves for?

Second example: the Monash Budget review findings showed:

2013/14

2014/15

2015/16

2065/17

2017/18

Working Capital Ratio

159%

167%

174%

173%

205%

Unrestricted cash

$23,434

$27,629

$28,312

$27,676

$44,546

 The example shows the draft budget is excessively healthy. So the question of inquiry, can Monash Council afford rate reduction?

So a sensitivity analysis was put to test  to see if the Council can absorb 3%, 6% and even 10% reduction in the proposed current asset without negatively affecting its financial health. The answer is YES.

With your local knowledge of what is happening in your Council, it is relatively easy to infer the reasons why a Council is not in favour of reducing rate, even if has the capacity to do so for several years, as shown in the example. If you think your Councillors are fair dinkum, you can perhaps share your analysis findings and convince them to lower rates or whatever is the purpose of your analysis.

The analysis also flushes up transparency issues, like why is a Council not telling the community what they are going to do with the excessive cash on hand. Your local knowledge plus the findings of the sensitivity analysis will give you  better evidence based grounds to ask your Councillors good and hard questions.

For your convenience, you can download a pdf copy of this Budget Analysis guide. If you have questions using the guide, contact RPV for assistance.