Port Macquarie-Hastings Reserves Review - Institute for Public Policy and Governance Centre for Local Government
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Port Macquarie-
Hastings Reserves
Review
Institute for Public Policy and Governance
Centre for Local Government
UTS CRICOS PROVIDER CODE 00099F© University of Technology Sydney: Institute for Public Policy and Governance, 2017 UTS CRICOS Provider Code: 00099F
Contents
Executive Summary .............................................................................................................. 3
1 Reserves Overview ......................................................................................................... 8
1.1 Purpose and usage of financial reserves ................................................................... 8
1.2 Examination of PMHC’s financial reserves balances ............................................... 11
1.3 Benchmarking councils for comparative purposes ................................................... 13
1.4 Comparing PMHC’s reserves to its peers ................................................................ 15
1.5 Comparing PMHC’s reserves to its peers over time................................................. 17
2 Empirical Analysis ......................................................................................................... 20
2.1 Expected Reserves ................................................................................................. 22
2.1.1 PMHC’s expected level of reserves compared to peers ..................................... 22
2.1.2 Predicting PMHC’s expected level of reserves over medium term ..................... 23
2.2 Development and Reserves .................................................................................... 26
2.3 Development and Capital Expenditure..................................................................... 28
2.4 Development and Operational Expenditure ............................................................. 30
3 Developer Levies: Comparison to Peers ....................................................................... 32
3.1 Port Macquarie-Hastings Council’s development overview ...................................... 34
3.1.1 Comparing developer contributions to reserve holdings ..................................... 34
3.1.2 Comparing the allocation of developer contributions .......................................... 34
3.1.3 Comparison of development applications .......................................................... 35
3.1.4 Comparing section 94 developer contributions and expenditures ...................... 38
3.2 Examining section 94 developer contributions ......................................................... 40
3.2.1 Comparison of scheduled developer contributions ............................................. 40
3.2.2 Comparison of received and expended developer contributions per development
40
3.2.3 Comparison of average projected costs and contributions from developments .. 44
3.2.4 Comparing contributions and expenditures to reserve holdings ......................... 46
3.3 Examining Section 64 contributions ......................................................................... 48
3.3.1 Comparing section 64 contributions and expenditures ....................................... 48
3.3.2 Comparing contributions and expenditures to holdings of reserves ................... 49
4 Reserves: Risks, Opportunities and Adequacy .............................................................. 53TABLES Table 1. Prediction Based on Seven Year Panel of Data, Derived Econometrically (2009-10 to 2015-16). Table 2. Prediction Based on 2016 Data, Derived Econometrically. Table 3. Council Supplied Data. Table 3.1 Predicting Expected Future Reserves (Total; $’000), Based on Council Supplied Projections, 2018-2022. Table 4. Association Between Variables and Level of Reserves for Peer Group (2009-10 to 2015-16). Table 5. Determinants of Capital Expenditure Per Assessment (2010-11 to 2015-16). Table 6. Determinants of Operational Expenditure Per Assessment (2010-11 to 2015-16). Table 7. Comparison of median contributions by selected item, per current contributions plans. Table 8. Comparison of s94 contribution received and expenditures per net new assessment by major components, average 2009-10 to 2015-16 ($). Table 9. Average projected costs and contributions, 2009-10 to 2015-16. Table 10. Average projected costs and contributions for Port Macquarie-Hastings council, broken down by key components, 2009-10 to 2015-16. Table 11. Average projected costs and contributions for Port Macquarie-Hastings council, broken down by key components, per Net new assessment, 2009-10 to 2015-16. FIGURES Figure 1. Port Macquarie-Hastings Council, Reserve Components (2015-16). Figure 2. Port Macquarie-Hastings Council, Disaggregated Reserves (2009-10 to 2015-16). Figure 3. Port Macquarie-Hastings Peer Group (2015-16). Figure 4. Port Macquarie-Hasting vs Peer Group, Disaggregated Reserves (2009-10 to 2015-16). Figure 5. Average section 94 developer contributions (000s) and section 94 reserves holdings PMHC vs peers, 2009-10 to 2015-16. Figure 6. Breakdown of section 64/94 developer contributions received by major category, PMHC, Average 2009-10-2015-16, (% total contributions received). Figure 7. Comparison of $ value per DA approved, Average 2009-10 to 2014-15. Figure 8. Breakdown of approved development applications, by type. Figure 9. Comparison of total s94 contributions received and expenditures, average 2009- 10-2015-16 ($000). Figure 10. Comparison of total s94 contributions received and expenditures per net new assessment, average 2009-10 to 2015-16 ($000). Figure 11. Ratio of average reserve holdings for Section 94 purposes per net new assessment to average contributions per net new assessment, 2009-10 to 2015-16. Figure 12. Ratio of average reserve holdings for Section 94 purposes per net new assessment to average expenditures per net new assessment, 2009-10 to 2015-16. Figure 13. Comparing average section 64 contributions and expenditures 2009-10 to 2015- 16 ($000). Figure 14. Comparing average section 64 contributions and expenditures 2009-10 to 2015- 16, in net new assessment terms ($000). Figure 15. Ratio of average reserve holdings for Section 64 purposes per net new assessment to average contributions per net new assessment, 2009-10 to 2015-16. Figure 16. The ratio of average expenditures to holdings of reserves assigned to Section 64, 2009-10 to 2015-16. Figure 17. The ratio of average expenditures per net new assessments to holdings of reserves per net new assessments assigned to Section 64, 2009-10 to 2015-16.
Executive Summary
UTS:IPPG has been engaged to conduct an external independent review of Port Macquarie-
Hastings council’s internal and external financial reserves, in response to Council’s
Resolution 09.05 from its Ordinary Council Meeting held on 19 April 2017.
The objectives that Councillors have set from this Resolution are as follows:
To review the extent to which Council’s reserve balances are appropriate in
consideration of the size and breadth of the organisation (including benchmarking to
similar sized Councils) and various legislation and Council resolutions that apply.
In consideration of the externally restricted reserves provide comment on the
following:
o Whether the Section 64/94 Development Contributions Plans are up to date.
o Whether the charges in the Plans are adequate to fund the infrastructure
identified.
o Whether the Council is maximising its use of development contributions
revenue in funding the forward works program.
Determine whether further opportunities exist to use reserve balances as a means of
funding (including opportunities for borrowing against these reserves and the impact
of such a strategy) for other projects not currently funded in the works program.
Request the General Manager provide updates on the progress of the financial
reserves review to the Finance, Corporate Services and Information Technology
Portfolio and to all Councillors via appropriate briefings, prior to a final report being
tabled at a future meeting of Council.
Undertake public education that explains why the financial reserves have been
established, how they receive income and how they relate to Council’s longer-term
plans, including future projects that the reserves are likely to be allocated towards.
In addition to the objectives set by Council Resolution 09.05, UTS:IPPG was also engaged
to examine the financial implications (namely with respect to financial reserve requirements
and holdings, as well as to operational and capital expenditures) related to growth in
development, with a view to aid in Council’s long term planning and general financial
sustainability.
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Port Macquarie-Hastings Reserves ReviewIn order to address the objectives of Councillors and request for analysis, UTS:IPPG set the
following aims in preparing this report:
To advise Council of its legislative and reporting requirements and opportunities with
respect to its usage of its financial reserves.
To test the adequacy of Council’s current level of financial reserves and to project
Council’s required level of financial reserves over the medium term.
To examine the association between growth in development and the level of actual
and required financial reserves.
To examine the association between growth in development and the level of
expenditures.
To determine the adequacy of Council’s developer contributions.
In preparing this report, UTS:IPPG has consulted the financial statements of Port Macquarie-
Hastings Council and its peers for the period 2009-10 to 2015-16 relating to the level of
financial reserves held, and the records of revenues and expenditures relating to developer
contributions. In undertaking this analysis, we also examined the Developer Contributions
Plans for Council and its peers, as well as being provided access to various Council-supplied
resources.
UTS:IPPG performed empirical analysis from the financial reserves, expenditure and
developer contributions data, as well as employing an econometric model which has
generated estimates and informed our determinations, among other things, with respect to
adequacy of Council’s financial reserves.
The key findings resulting from the analysis conducted by UTS:IPPG are as follows:
With respect to the adequacy of reserves:
• Our model predicts that at present the current aggregate level of financial
reserves held by Port Macquarie-Hastings Council are greater than the expected
level with respect to its peers1.
• Our model predicts that the current levels of total reserves are broadly in line with
the expected future requirements for Port Macquarie-Hastings Council, according
to Council supplied data up to 20222.
• Our model predicts that additional development, in the form of growth in
assessable properties, results in higher expected levels of reserves:
o a one tenth percentage point increase to the growth rate of assessable
properties is associated with an increase to the aggregate level of reserves by
around $36.50 per assessment.
1
Note that there is an implicit assumption that peers carry adequate reserves and that Council has a lower proportion of internally
restricted reserves than its peers
2
Readers, however, should be mindful of the standard error and the need for capital spending over this period
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Port Macquarie-Hastings Reserves ReviewWith respect to expenditure:
• Growth in development is associated with an increase in per assessment capital
expenditure.
o Namely, a one-tenth percentage increase in the growth rate of assessable
properties is associated with a 1.01 per cent increase in per assessment
capital expenditure, other things being equal.
• Growth in development is associated with a decrease in per assessment
operating expenditure.
o Namely, a one-tenth percentage increase in growth rate of assessable
properties is associated with a 0.5 per cent decrease in operating expenditure
per assessment, other things being equal.
• For any given increase in development, the expected increase in per assessment
capital expenditure is around twice the magnitude of the expected decrease in
per assessment operating expenditure.
With respect to the adequacy of Council’s developer contributions:
• Compared to similar peers, Port Macquarie-Hastings Council is charging broadly
consistent Section 94 developer levies for roughly equivalent properties overall,
despite some variation between charges based on categories.
o Some relatively minor potential opportunities for review may be for Port
Macquarie-Hastings Council to consider if contributions for parking and ‘other’
Section 94 purposes may be revised slightly upwards in order to reflect
similar expenditure-determined levies comparable to its peers.
o Port Macquarie-Hastings Council does not currently levy charges for drainage
works and may wish to review if it may be appropriate, in line with its peers
that do levy for this purpose.
• We have found that Port Macquarie-Hastings Council has regularly projected that
Section 94 projects were underfunded, particularly with respect to roads and
traffic, and open space works.
o It would appear that this is being addressed, as contributions with respect to
roads and traffic, and open space works, exceed expenditures on average.
• Compared to similar peers and its expenditures, Port Macquarie-Hastings
Council is charging relatively high Section 64 developer levies.
• With respect to its infrastructure commitments, and the share of all development
expenditures, Section 64 contributions are relatively low, compared to its peers.
Based on our analysis, this report indicates that Council’s reserves balances are currently
adequate, however it is the view of UTS:IPPG that there is little room for complacency with
these balances. We provide estimates in Section 2 of the minimum required level of reserves
for the medium term and encourage Council to ensure that it maintains its healthy balance of
reserves, informed by these estimates, going forward.
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Port Macquarie-Hastings Reserves ReviewSummary of Response to Council Resolution 09.05
Council Resolution Findings References
Review the extent to which
Council’s reserve balances Compared to its peers, and accounting for
are appropriate in relevant council characteristics, Port
see Section
consideration of the size Macquarie-Hastings Council currently
2.1
and breadth of the holds a reserve balance that is greater
organisation, compared to than the expected level.
its peers.
In consideration of the
externally restricted
reserves provide comment
on the following:
Contributions Plans are considered to be up
to date if there is evidence of maximum
reasonable derivation of contributions, rather
than necessarily basing this assessment on
specific date that Plans are originated from.
Compared to its peers, Port Macquarie-
Hastings Council appears to be charging
relatively high Section 94 contributions and see Section
Section 94 contributions exceed associated 3.1.1, Section
Section 94 expenditures, on average. On the 3.1.4
o Whether the Section basis of this, we deem Section 94
64/94 Development Contributions Plans to be broadly up to
Contributions Plans are up date (even though the Contributions Plan
to date. has not been updated as recent as its
peers).
Compared to its peers, Port Macquarie-
Hastings Council appears to be charging
relatively high Section 64 contributions with
respect to associated Section 64 see Section
expenditures. On this basis, we deem 3.2.1
Section 64 Contributions Plans to be
broadly up to date (even though the
Contributions Plan has not been updated as
recent as its peers).
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Port Macquarie-Hastings Reserves ReviewCompared to its peers, Section 94 yearly
contributions are relatively high with
respect to Port Macquarie-Hastings
Council's infrastructure commitments. Port
see Section
Macquarie-Hastings Council has, however,
3.2.4, Section
projected that its Section 94
3.2.3
commitments are underfunded with
respect to its projections of future
o Whether the charges in
contributions and expected cost of work
the Plans are adequate to
outstanding, particularly related to roads and
fund the infrastructure
traffic, and open space works.
identified.
Compared to its peers, Section 64 yearly
contributions are relatively low with
see Section
respect to Port Macquarie-Hastings
3.3.2
Council's infrastructure commitments. This
may imply that there is scope to raise
Section 64 contributions to ensure adequacy
going forward.
Compared to its peers, Port Macquarie-
Hastings Council would appear to be
o Whether the Council is
charging broadly comparable or higher see Section
maximising its use of
levies than its peers (both Section 94 and 3.2.2, Section
development contributions
Section 64). We have identified some 3.3.1
revenue in funding the
potential minor opportunities for Section 94
forward works program.
levies to be reviewed, which could maximise
contributions further.
The usage of financial reserves varies
according to the class of reserve. Restricted
reserves may only be employed for their
designated purposes and there are limited
see Section
investment opportunities to accrue
1.1
income from funds whilst held in reserve.
Determine whether further Unrestricted reserves may be employed for
opportunities exist to use general purposes (including investment
reserve balances as a purposes), or for funding additional unfunded
means of funding for other projects.
projects not currently
funded in the works
program.
There may be some opportunity to utilise
debt in bringing forward infrastructure
see Section 4
spending, however sophisticated debt
capacity modelling should be conducted
before undertaking such a strategy for
funding forward works program.
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Port Macquarie-Hastings Reserves Review1 Reserves Overview
In this Section, we provide a cursory outline of the purpose of financial reserves for local
governments in New South Wales. We then discuss the required reporting, usage,
opportunities and risks pertaining to financial reserves of Council. Next, we compare the
quantum of reserves currently held, and over recent years, by PMHC to its peers (as well as
discussing the selection of peers in Section 1.3), which provides a foundation for the
empirical analysis that is featured, in particular, in Section 2.
1.1 Purpose and usage of financial reserves
First, we provide a discussion of the purpose of financial reserves, which are made up of the
following:
Externally restricted
Mostly monies raised to fund infrastructure
reserves
Internally restricted Funds approved by council resolutions for non-recurrent (largely
reserves discretionary) expenditures
Unrestricted reserves Monies that can be used for general or capital expenditure
Councils are required under the Office of Local Government Code of Accounting Practice to
report reserves balances in the Annual Financial Statements (principally in Note 6c). In this
Note, the details of the changes in balances are reported – namely, the total of transfers to
and from respective classes of reserves balances.
A particularly large category of externally restricted reserves (making up around half of this
balance) is that held for unexpended developer contributions, intended for the provision of
services and amenities in accordance with Contributions Plans. With this in mind, we discuss
the adequacy of developer contributions specifically in Section 3. In the remainder of Section
1 and in Section 2, we discuss generally with respect to the total balances of reserves. In
part, this is motivated by an understanding that internally restricted and unrestricted reserves
may be allocated to fund shortfalls in externally restricted reserves if necessary (though not
vice versa).
Given that external reserves are accumulated primarily for the purpose of funding
infrastructure requirements, Council has limited discretionary use of such funds, however it
may manage the level of external reserves on hand by balancing its needs prudently (and
adjusting, for instance, its developer contributions accordingly) and ensuring that the timing
of expenditures are matched with an adequate balance or incoming funds. Holding an
adequate supply of externally restricted reserves is necessary in order to ensure coverage of
funds for infrastructure commitments when these fall due (however shortfalls may generally
be funded by other reserves classes or from recurrent expenditure). For this reason, Council
should ensure that at least the minimum quantum of required reserves are held, taking into
account the relevant characteristics of Council – estimates for which we generate for PMHC
in Section 2.
Internally restricted reserves may be related to discretionary undertakings as resolved by
Council. As a result, while these funds are ‘restricted’ for the purposes that have been
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Port Macquarie-Hastings Reserves Reviewdedicated, Council may, for instance, have the opportunity to defer or cancel projects if it
faces a shortfall in reserves (say, if costs of projects exceeds reserves held).
Unrestricted reserves are fully discretionary and may be deployed how Council sees fit
(except for purely investment purposes, as discussed below). Examples of the usage of
unrestricted reserves may be in response to operating position needs (such as for reduced
operating deficits) in addition to being a source of funds for unfunded infrastructure
commitments.
An excessive surplus of funds held in reserve may suggest that opportunity cost is incurred
(with respect to alternative uses of this funding). For instance, if reserves are held rather
than employed in infrastructure delivery for an extended period this would imply that there is
a loss in potential social benefits to the community. On the other hand, reserve balances do
not give rise to depreciation expense and because the receipt of some funds to these
reserve balances represent income on the income statement, it therefore enhances
Council’s operating position. Moreover, some reserve balances may earn interest and
investment returns, which, among other things, improves interest and investment income,
further improving its operating position. Inadequate reserves on hand, say, when
infrastructure commitments fall due, would result in potential financial risk to council –
because such expenditures may need to be funded from recurrent income, potentially
introducing liquidity constraints.
Because council must accumulate a substantial quantum of funds in order to adequately
cover its infrastructure commitments, in particular, it is necessary that Council effectively
manage its portfolio of reserve funds. While Council is restricted in its use of reserves for
investment purposes under regulations associated with the ‘investment order’ (Section 625)
of the Local Government Act 19933, receipts from projects may be invested and
subsequently drawn upon to meet construction costs when due. In particular, while the Act
ensures that council may ‘only invest money that is not required by council for any purpose
for the time being’, the source of investment in which council may invest has been regulated
somewhat following the GFC (Global Financial Crisis).
Since July 2008 the NSW Government has prevented investment in securities of prime, high
grade or upper-medium grade (Moodys, S&P, Fitch rating agencies) and is instead restricted
to the following:
• Any public funds or securities issued or guaranteed by any State/Territory or
Federal Government
• Debentures and securities issued by a council
• Mortgage of land (restricted to first mortgages over land with a Loan to Value
ratio of 60% or less)
• Interest-bearing deposits with, or any debentures or bonds issued by, an
authorised deposit-taking institution under the Commonwealth Banking Act 1959
(ie essentially banks and credit unions)
• Bills of exchange of under 200 day maturity
• Deposits with the Local Government Financial Services Pty Ltd
• Deposits with the NSW Treasury.
3
see Gazettes No 152 of 24.11.2000, p 12041; No 94 of 29.7.2005, p 3977; No 97 of 15.8.2008, p 7638 and No 160 of 24.12.2008, p
13140.
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Port Macquarie-Hastings Reserves ReviewPMHC may wish to review the returns earned on its current reserve holdings and allocate
funds accordingly, so long as it meets the legislative restrictions as noted above.
Nonetheless, these constraints mean that possible returns are somewhat limited, with
special permission required by the Minister for alternative investment purposes. However,
there is some provision for council to seek investment in alternative sources (for instance,
Manly, Mosman and Pittwater councils were approved to purchase shares in Kimbriki
Environmental Enterprises Pty Limited under Gazette no. 160 by then Minister for Local
Government in December 2008).
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Port Macquarie-Hastings Reserves Review1.2 Examination of PMHC’s financial reserves balances
To review the quantum of reserves held, we consulted PMHC’s 2015-16 financial statements
(Note 6(c)) and decomposed the reserve balances into the various categories – externally
restricted, internally restricted, and unrestricted reserves. In Figure 1 we present the
components of PMHC’s financial reserves for 2015-16, which indicates that over two-thirds
of this balance is made up of externally restricted reserves.
Figure 1. Port Macquarie-Hastings Council, Reserve Components (2015-16).
Unrestricted
Reserves
7%
Internally
Restricted
Reserves
28%
Externally
Restricted
Reserves
65%
Because the level and composition of reserves held is not constant and varies over time, we
depict in Figure 2 the change in composition of reserves over the period 2009-10 to 2015-16
for PMHC. This comparison of total reserves over time reveals a number of trends.
PMHC’s total reserves balance nearly doubled between 2009-10 and 2015-16.
The average yearly growth rate in reserves was 20 per cent between 2009-10 and
2015-16.
o The growth rate was fastest in 2012-13, 2014-15 and 2011-12 and slowest in
2013-14 and 2015-16.
Once the balance of reserves is disaggregated, this reveals that:
Externally restricted reserves have consistently grown, by an average of around 16
per cent each year.
Internally restricted reserves levels have been relatively volatile, including an 85 per
cent increase in 2012-13 and 53 per cent increase in 2014-15.
Unrestricted reserves were generally very low between 2009-10 and 2012-13 (as low
as $80,000).
In the most recent financial year (2015-16):
Externally restricted reserves increased by $21.5 million, or around 18 per cent,
which is slightly faster than between 2013-14 and 2014-15 (around 12 per cent).
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Port Macquarie-Hastings Reserves Review Internally restricted reserves decreased by around $5.8 million, or a 9 per cent
decrease.
Unrestricted reserves rose sharply, by around $10.5 million, or a 389 per cent
increase.
Figure 2. Port Macquarie-Hastings Council, Disaggregated Reserves (2009-10 to 2015-
16).
250000
200000
Reserves ($'000)
150000
100000
50000
0
2010 2011 2012 2013 2014 2015 2016
Total Reserves Externally Restricted Reserves
Internally Restricted Reserves Unrestricted Reserves
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Port Macquarie-Hastings Reserves Review1.3 Benchmarking councils for comparative purposes
In order to gain insight as to the relative quantum of reserves held by PMHC, we have made
comparisons to a relevant peer group of councils (and we continue to employ this peer group
throughout this report). This grouping is motivated by selecting similarly classified councils
under the Australian Classification of Local Governments, based on socioeconomic
characteristics and capacity to deliver a range of services to their communities. With this in
mind, the peer group we selected is made up of the following DLG 5 and DLG 4 councils:
DLG 5 DLG 4
Coffs Harbour Albury
Lake Macquarie Ballina
Maitland Byron
Newcastle Dubbo
Port Macquarie-Hastings Lismore
Shoalhaven Port Stephens
Tweed Shire Shellharbour
Wollongong Tamworth
Wagga Wagga
An additional consideration in identifying comparable peers comes from varied local water
utilities responsibilities. This not only contributes to differentiation in general functional
expenditures (see Fahey et al. 2016), but also to the necessary quantum of financial
reserves (as a result of additional infrastructure demands pertaining to these utilities). With
this in mind, among the DLG 5 councils, PMHC might consider councils such as Coffs
Harbour, Shoalhaven and Tweed Shire as being of particular interest given that they
possess similar water utilities responsibilities.
This should not be taken, however, to suggest that PMHC should be solely compared to
water providing councils, as this is only one determining factor of expected reserve
balances, and PMHC will be more alike other of its peers in some respects and more like
this subset of councils in others. Moreover, substantial variation still exists between PMHC
and the subset of comparable DLG 5 councils too (as well as amongst DLG 4 councils with
similar water utilities responsibilities). For instance, with respect to: the number of rateable
properties with Shoalhaven (around two-thirds higher than PMHC), the length of road with
Coffs Harbour (around 40 per cent less than PMHC), the population densities in Coffs
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Port Macquarie-Hastings Reserves ReviewHarbour (nearly three times higher than PMHC) and Tweed Shire (well over three times
higher than PMHC). Moreover, councils invariably possess diverse infrastructure demands
(nature, scale and timing), infrastructure backlogs, and development activity which cannot
necessarily be captured in a single comparison measure.
In short, no two councils are identical for the purpose of comparison of reserves. As a result,
attempting to benchmark financial reserves to one specific council is inadvisable. Instead, it
is our view that comparisons should generally be made across the peer group (rather than
one particular council), and where necessary, employing suitable controls for water utilities
councils, as we do in our econometric methods employed in Section 2.
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Port Macquarie-Hastings Reserves Review1.4 Comparing PMHC’s reserves to its peers
In Figure 3 we display the decomposition of the balances of financial reserves based on the
average balance across the peer group for 2015-16. Combining Figure 1 and Figure 2 it is
evident that the composition of reserves at PMHC differs somewhat to its peers, to which we
discuss in Sections 1.4 and 1.5. In particular, PMHC has a higher proportion of externally
restricted reserves and a lower proportion of internally restricted reserves, relative to its
peers. This implies that, despite its relatively high level of reserves, there may be relatively
limited discretion in deployment of its reserves (as discussed in Section 1.1).
Figure 3. Port Macquarie-Hastings Peer Group (2015-16).
Unrestricted
Reserves
6%
Internally
Restricted
Reserves
37% Externally
Restricted
Reserves
57%
In order to examine the differences in reserve balances between councils that have similar
water utilities responsibility and those that do not, we briefly stratify these and interpret this.
Surprisingly, councils with water utilities possess on average 10 per cent lower reserves
balances than those that do not. This, however, may be misleading as it would appear that
this could be explained, in part, by non-water provision councils being around 87 per cent
larger, in terms of number of assessments, on average, than those with water utilities
responsibility (also note that PMHC is 23 per cent larger than its peers of this group, in terms
of number of assessments).
In order to partially account for the differences in size, we compare reserves balances
between the water utilities-providing councils and those that are not, in per assessment
terms. This indicated that non-water utilities councils hold on average 73 per cent higher
reserves, per assessment, than do those councils that do not provide water utilities (also
note that PMHC holds on average around 5 per cent higher reserves than the average
across the water utilities providers).
In addition to examining differences in the quantum of reserves between water utilities-
providing and those that do not, we also stratified accordingly in consideration of the
differences in the composition of their reserves balance. This revealed that externally
restricted reserves make up a relatively larger proportion of the reserves balance for water
utilities-providing councils (66 per cent on average compared to 54 per cent on average),
with the proportion higher for PMHC than its water utilities-providing peers (72 per cent on
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Port Macquarie-Hastings Reserves Reviewaverage compared to 66 per cent on average). Conversely, the proportion of internally
restricted reserves makes up a relatively larger proportion of the reserves balance for
councils that do not provide water utilities (38 per cent on average compared to 28 per cent
on average), with PMHC’s proportion of its reserves balance in internally restricted reserves
lower than its water utilities-providing peers (26 per cent on average compared to 28 per
cent on average). The residual proportion made up of unrestricted reserves is similar on
average between the water utilities providers and those that do not (6 per cent on average
compared to 7 per cent on average), though the proportion of unrestricted reserves held by
PMHC is lower than the water utilities providers group (3 per cent on average compared to 6
per cent).
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Port Macquarie-Hastings Reserves Review1.5 Comparing PMHC’s reserves to its peers over time
We next compare how the change in level and composition of reserves over time (2009-10
to 2015-16) for PMHC compares to its peers. In Figure 4 we display the average of reserves
balance across the peer group and compare this to PMHC. This shows that, in common with
PMHC, the externally restricted reserves balances amongst peers has maintained consistent
growth (though the growth is faster for PMHC). In contrast to PMHC, however, Figure 4
shows that in the most recent financial year the peer group has increased its balance of
internally restricted reserves.
Compared to the peer group average of the total reserves balance, PMHC held 9 per cent
fewer reserves in 2009-10 and held 53 per cent greater in 2015-16. This is principally
attributable to the growth in externally restricted reserves compared to the peer group –
PMHC held 7 per cent higher externally restricted reserves in 2009-10 and 75 per cent
higher in 2015.16. At the same time, internally restricted reserves have been relatively
volatile with reference to the peer group average. At its peak in 2014-15, PMHC held 60 per
cent higher internally restricted reserves than the average across the peer group. In 2015-16
the balance of internally restricted was 18 per cent higher the peer group average.
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Port Macquarie-Hastings Reserves ReviewFigure 4. Port Macquarie-Hasting vs Peer Group, Disaggregated Reserves (2009-10 to 2015-16).
250000
200000
Reserves ($'000)
150000
100000
50000
0
2010 2011 2012 2013 2014 2015 2016
Total Reserves Externally Restricted Reserves Internally Restricted Reserves Unrestricted Reserves
PMHC Total PMHC External PMHC Internal PMHC Unrestricted
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Port Macquarie-Hastings Reserves ReviewWhile Section 1 has provided an indication of the quantum of reserves for PMHC with
respect to its peers, in order to determine adequacy more generally we must econometrically
model the expected reserve balances against the observed levels. With this in mind, in
Section 2 we more fully evaluate the adequacy of reserves and perform this empirical
analysis. Moreover, an implicit limitation of the analyses in Section 1.2 to Section 1.5 is that
we cannot fully examine PMHC’s reserves balance with respect to its peers here since we
cannot simultaneously account for multiple explanatory factors using the simple methods we
have employed here. For this reason, the econometric method we employ in Section 2
addresses this limitation.
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Port Macquarie-Hastings Reserves Review2 Empirical Analysis
In order to construct the econometric models for this report, we collected data from three
sources: (i) audited financial statements of the seventeen relevant peers (as set out in
Section 1.2) over seven years (2009-10 to 2015-2016 financial years inclusive), (ii) Office of
Local Government Time Series Data, and (iii) Australian Bureau of Statistics Data by
Region.
The objective of this task was to answer four important questions as identified in the project
aims (p i):
• How does the quantum of reserves compare with relevant peers? (see Section 2.1)
• How does the association between growth in development and growth in reserves
compare with peers? (see Section 2.2)
• How does capital expenditure per assessment respond to key council characteristics
across peer group? (see Section 2.3)
• How does operational expenditure per assessment respond to key council
characteristics across peer group? (see Section 2.4)
In order to provide answers to these questions we set out to produce econometric estimates
to inform each of the above. To ensure robustness in our modelling specification, and to take
account of the various explanatory factors that may be relevant to the reserves levels for
councils, we included variables that we consider to be key characteristics of local
government. This includes: size of council (number of residential, business and farm
assessments), length of roads, population density, growth rate in assessments (which is
associated with the realisation of development approvals4), and stock of infrastructure,
property, plant and equipment. The specification of model parameters we employed is
consistent with the explanatory factors that are generally employed for size sensitive models
in local government econometric studies (see, for instance, Drew et al. 2015; Drew and
Dollery, 2015).
In Sections 2.1 to 2.4, we outline the results arising from a number of econometric analyses.
Throughout, we provide our results as well as brief discussions as to the implications of
these results for PMHC, particularly based on its growth rate assumptions presented in the
Resourcing Strategy. While each of these Sections addresses particular questions, we
stress that viewed together they offer a more full interpretation for PMHC’s finances.
This is because we first establish the adequacy of PMHC’s reserve balances with respect to
the peer group. This informs predictions of the minimum reserve balances that PMHC may
wish to carry over the medium term to account for its projected growth rates (other things
being equal). While Section 2.1, then, is focused on providing predictions relating to PMHC,
in Section 2.2 we explain which variables tend to influence on the expected reserve levels
across the peer group. Because we would expect growth in assessments (that is, the
realisation of development activity) to influence on Council finances, we next examine how
capital and operational expenditures are impacted in Sections 2.3 and 2.4.
4
Clearly there are some development approvals that don’t result in a new assessable property – hence our assertion of an association
rather than a direct relationship.
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Port Macquarie-Hastings Reserves ReviewWhile interpreting the respective results that we present in this Section, we make reference
throughout to, in particular, the level of ‘expected’ reserves rather than explicitly nominating
this as ‘required’ reserves per se. This is because our model design allows us to statistically
predict what the expected value of reserves may be, given a set of characteristics, based on
the observations of the peer group.
Loosely speaking, this relates to the level that we would deem to be required, or adequate, if
all potential explanatory factors could be accounted for and a sufficiently large repeated
sample was captured. Because our model is statistically driven, we attempt to make
inferences from the sample we have selected. We then interpret the conditional average of
reserves from the model to imply the required level of reserves, given a set of factors and all
else being equal. Importantly, to this point, there is an implicit assumption with respect to the
behaviour of the peer group – namely that across the peer group, at least some councils
carry adequate reserves in the first place if we are to fully interpret expected reserves to be
equivalent to ‘required’ reserves. That is, if most or all councils carried insufficient or
excessive reserves then our ‘expected’ reserves from the model would be biased
accordingly. Similarly, because we have employed a fixed-effects panel model specification,
we implicitly make an assumption that council behaviour is constant over time.
Second, all econometric estimations are associated with potential standard error and
therefore we report this alongside each of our estimates. This is to reiterate that in the
process of producing estimations with statistical models of this nature, invariably our results
are subject to a degree of variation with probabilistic bands of likely values. In essence, this
suggests some caution may need to be exercised when decision making is based upon a
single point estimate, without consideration of the associated standard error.
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Port Macquarie-Hastings Reserves Review2.1 Expected Reserves
In order to review the quantum of reserves held by PMHC compared to its peers, in Section
2.1.1 we compare PMHC’s actual reserves held to the level predicted by our model for the
years 2009-10 to 2015-16. In Section 2.1.2 we predict what expected reserves levels may be
in the years 2017-18 to 2021-22 and compare this to PMHC’s current level of reserves.
2.1.1 PMHC’s expected level of reserves compared to peers
Table 1 presents actual reserves, expected reserves and deviation from expectation for
PHMC, based on the seven year panel. Any deviation between expected and actual
reserves implies a surplus or deficit from what is statistically determined as the average level
of reserves held by the entire peer group, other things being equal.
The results are presented in Table 1 on a per assessment basis and in thousands of dollars.
For the three years 2010 to 2012 PMHC carried less reserves per assessment than might be
expected with reference to its peers. Since 2013 PMHC has improved the reserves position
and reserves now exceed predicted (expected) levels by around $1,670 per assessment
according to our model.
Table 1. Prediction Based on Seven Year Panel of Data, Derived Econometrically
(2009-10 to 2015-16).
Expected Reserves
Actual Total Reserves Per Assessment Surplus (Deficit) Relative to
Year
Per Assessment ($’000) Predicted By Model Peers ($’000)
($’000)
2010 2.186 3.082 (0.896)
2011 2.546 3.11 (0.564)
2012 3.101 3.265 (0.164)
2013 4.170 3.593 0.577
2014 4.473 3.593 0.880
2015 5.483 4.066 1.417
2016 6.170 4.500 1.670
We tested whether our assumption of constant behaviour of councils held across the sample
period, and this revealed that behaviour had in fact shifted in the 2015 and 2016 financial
years. Namely, we observe statistically significant upward movements in reserves from the
2015 financial year onwards (this effect may be related to Fit for the Future – see also Figure
4 above). To account for the change in behaviour from the 2015 financial year onwards, we
re-estimated the expected reserves to reflect this behavioural assumption instead.
In turn, the re-cast values of expected reserves as estimated from this revised model,
derived from the most recent financial year of data (2016), are reported in Table 2. It is our
view that the specification employed in this model is a superior reflection of actual council
behaviour. In turn, we recommend that council places greater emphasis on Table 2 when
assessing how their quantum of reserves compares to the sixteen peers employed in our
modelling.
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Port Macquarie-Hastings Reserves ReviewAs a result of this alternative specification, the estimates of expected reserves shifted
upward (compared to those reported in Table 1), as might be anticipated given that the level
of reserves has increased significantly for most councils in the peer group since 2016. An
implication of this revised specification is that PMHC’s deficit from expected levels of
reserves in years 2010 to 2012 has increased in this second model, and the surplus relative
to expected levels for years 2014 to 2016 have decreased.
Table 2. Prediction Based on 2016 Data, Derived Econometrically.
Expected Reserves
Actual Total Reserves Per Assessment Surplus (Deficit) Relative to
Year
Per Assessment ($’000) Predicted By Model Peers ($’000)
($’000)
2010 2.186 4.466 (2.280)
2011 2.546 4.478 (1.932)
2012 3.101 4.798 (1.697)
2013 4.170 4.361 (0.191)
2014 4.473 3.930 0.543
2015 5.483 4.357 1.126
2016 6.170 5.099 1.071
2.1.2 Predicting PMHC’s expected level of reserves over medium term
We next estimate the expected reserves balances for future years by employing our
modelling specification from Section 2.1.1 based on PMHC’s projections of size parameters
and growth, which we derived from data supplied by PMHC. This data was provided to us to
for this particular exercise so that we might estimate the expected reserves balances that
are associated with a range of potential medium term scenarios that PMHC considers to be
likely growth paths over this period. In Table 3 we outline the specific details of the
projections data provided by PMHC and note that the only changes for scenario 2 and 3
relate to different assessments growth rate assumptions. We have estimated three scenarios
in order to demonstrate sensitivity to the assumptions made in these projections.
The 2016 model has been employed (see Table 2 and related discussion) to ensure
estimates that we derive reflect recent changes in council behaviour. It should be noted that
the estimates, however, are heavily dependent on the validity of the projection data supplied
by PMHC. That is, any deviation from these projected levels or unforeseen factors may
result in variation in the expected reserves.
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Port Macquarie-Hastings Reserves ReviewTable 3.0. Council Supplied Data.
Variable 2018 2019 2020 2021 2022
# residential
32,777 33,350 33,683 34,020 34,360
assessments
# business
2,079 2,115 2,136 2,157 2,179
assessments
# farm
1,217 1,238 1,250 1,263 1,275
assessments
Growth in
Assessments 1.75% 1.75% 1% 1% 1%
Scenario 1
Growth in
Assessments 1.5% 1.5% 0.75% 0.75% 0.75%
Scenario 2
Growth in
Assessments 1.75% 1.75% 1.75% 1.75% 1.75%
Scenario 3
18km (4km as
0.3% increase
through
4km (0.3% developer 4km (0.3% 4km (0.3% 4km (0.3%
increase contributed increase increase increase
Changes to through assets + through through through
road length developer 14km Old developer developer developer
contributed Pacific contributed contributed contributed
assets) Highway assets) assets) assets)
Handover + 7
Bridges/Major
Culverts)
In Table 3.1 we produce estimates for expected reserve balances over the medium term
based on the scenarios projected by PMHC (discussed above, and in Table 3.0). This shows
that PMHC’s existing reserves balances are broadly consistent with expected future total
reserve levels (predicted by our model based on PMHC projections) for the first two
scenarios. For Scenario 1, the relatively fast growth rate in assessments in the first two
years of the projection period results in expected reserves approaching the current level of
reserves, however as the growth rate in subsequent years is relatively lower, the expected
level of reserves is lower than the existing holdings of reserves. In Scenario 2, the slower
growth rate results in currently reserves levels exceeding the expected level of reserves. In
Scenario 3, the expected levels exceed current holdings for the last three years of the
sample period. This is because Scenario 3 assumes a faster growth in assessments, placing
upward pressure on the expected reserves level.
We note, however, that it is important to be mindful of the standard error when interpreting
the results, particularly in terms of making a point estimate for specific balance of reserves.
That is, as with statistical models of this nature invariably our results are subject to a degree
of variation with probabilistic bands of likely values.
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Port Macquarie-Hastings Reserves ReviewIn any case, given that existing reserves will clearly be drawn upon to fund capital
expenditure during the period of our modelling (and similarly additional revenues will be
transferred to reserves balances), this implies that the fact that current reserves presently
exceed expected future reserve levels should not be interpreted to imply that PMHC should
neglect this aspect of its finances.
Table 3.1. Predicting Expected Future Reserves (Total; $’000), Based on Council
Supplied Projections, 2018-2022 (standard errors of prediction in parentheses).
Year Scenario 1 Scenario 2 Scenario 3
Actual
214,293 214,293 214,293
2016
Expected 208,586 196,259 208,586
2018 (33,698) (30,486) (33,698)
212,723 200,180 212,723
2019
(34,613) (31,319) (34,613)
177,156 164,489 215,159
2020
(28,800) (29,289) (35,333)
179,240 166,446 217,623
2021
(29,452) (29,904) (36,075)
181,357 168,435 220,123
2022
(30,134) (30,549) (36,839)
Comparison of the three scenarios demonstrates that growth in assessments has a relatively
strong effect on the expected reserve levels (in combination with the other explanatory
factors in our model). It seems that PMHC is expecting strong growth (relative to the seven
year average growth rate of 0.87 per cent and Resourcing Strategy prediction of 1 per cent)
and this means that attention should be paid to ensuring that reserves levels respond
adequately to same.
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Port Macquarie-Hastings Reserves Review2.2 Development and Reserves
The model employed to answer Council’s first question can be used to identify which
determining factors are most important in driving the observed levels of reserves (over the
peer group for the seven years of data).
Table 4 details the coefficient of each variable of interest, the respective standard error and
the level of statistical significance. It might be noted that the model has very high explanatory
power (for a panel regression) as evidenced by the coefficient of determination.
Two variables are statistically significant: (i) number of residential assessments, and (ii)
growth in number assessments (in percentage terms).
The first result suggests that the average response of the peer group to a 1 per cent
increase in the number of residential assessments is a reduction in reserves of around
$31.72 per assessment. Otherwise stated, looking across the peer group, as councils
become larger they tend to carry less reserves. Thus, it would be reasonable for PMHC to
carry relatively less reserves (on a per assessment basis) than its smaller peers, if the only
concern was to ensure consistency with the peer group.
The second statistically significant result suggests that as the growth rate of assessments
increases, the average response of councils is to increase the level of reserves. Specifically,
a one tenth of a percentage point increase to growth rate is associated with an increase to
total reserves of around $36.50 per assessment5. Thus, if PMHC were to increase the
growth rate above historical levels to achieve the 1 per cent growth rate nominated in the
Resourcing Strategy document then it would need to increase reserves by around $47 per
assessment in order to ensure levels of reserves were consistent with the peer group.
It is best to refer to the Tables 1, 2, 3.1 when considering the cumulative effects of changes
to council size on expected reserve levels. Thus, Table 4 is provided purely for the purposes
of identifying which variables tend to influence on the expected reserve levels across the
peer group (and over the seven year panel).
5
Note that Port Macquarie-Hastings had an average growth rate of just 0.87% over the last seven years
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Port Macquarie-Hastings Reserves ReviewTable 4. Association Between Variables and Level of Reserves for Peer Group (2009-
10 to 2015-16).
Statistical
Variable Coefficient Standard Error
Significance
Number of
Significant at 1 %
Residential -3.172 0.705
level
Assessments (ln)
Number of Business
0.922 0.647 Not significant
Assessments (ln)
Number of Farm
-0.204 0.177 Not significant
Assessments (ln)
Growth in Number of
Significant at 10%
Assessments 0.365 0.194
level
(percentage)
Other Controls Included
N 119
Coefficient of
0.5195
Determination
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Port Macquarie-Hastings Reserves Review2.3 Development and Capital Expenditure
We have thus far predicted the expected level of reserves (according to peer group over
seven years, see Section 2.1) and also identified the main drivers of changes in expected
reserves (number of residential assessments and growth rate of assessments, see Section
2.2). We now turn to the other side of the ledger and examine the determinants of per
assessment capital expenditure.
Compared to its identified water utilities-providing peers, PMHC’s capital expenditure is on
average 20 per cent lower, in per assessment terms. Compared to the entire peer group,
PMHC’s capital expenditure is on average 3 per cent higher, in per assessment terms.
PMHC has experienced relatively significant increases in capital expenditure, in per
assessment terms, in recent years. Namely, in 2014-15 and 2015-16 capital expenditure per
assessment increased by an average of 61 per cent (compared to an average of 12.9 per
cent across the peer group over the same time period).
Table 5 presents results of a six year panel (ABS data was not available for some regressors
for 2010, and we thus had to truncate our panel by one year) for the seventeen councils. The
econometric model employed is consistent with models used to estimate the determinants of
expenditure in a number of scholarly publications (see for instance, Drew et al. 2014; Drew
et al. 2016; Drew and Dollery, 2014). Moreover, the model has very high explanatory power
as indicated by the coefficient of determination reported in Table 5.
The size of council (with respect to number of residential assessments) was not found to be
a statistically significant determinant of per assessment capital expenditure. However, the
number of business assessments is significant at the 1 per cent level (and is of a quadratic
nature). The turning point (a local minima) suggested by our results is at approximately
1,299 assessments. This means that per assessment capital expenditure tends to reduce as
the number of business assessments approaches the turning point, after which time
increases to per assessment capital expenditure might be expected.
PMHC had 2,071 business assessments in 2016 – which suggests that Council faces
relatively higher per assessment capital expenditure (for business) than its smaller peers.
The number of farm assessments is also statistically significant. Notably population density
is not statistically significant, suggesting that high density and in-fill development should not
be pursued on the basis that it might reduce overall capital costs for council, though there
may be alternate reasons for preferring this type of development.
Not surprisingly there is a statistically significant association between rate of growth in
assessments and per assessment capital expenditure. Our results suggest that a one-tenth
percentage increase in assessment growth rate is associated with a 1.01 per cent increase
in per assessment capital expenditure. Thus, the evidence suggests that if PMHC were to
accelerate the growth rate to the levels suggested in the Resourcing Strategy (which is 0.13
per cent above the seven year historical average) then it might expect a response in the
order of an additional $25 per assessment of capital expenditure (or around $868,000
gross), other things being equal.
The proportion of own source revenue derived from fees and the per assessment capital
expenditure is statistically significant at the 10% level. Our analysis suggests that a one per
cent increase in the proportion of revenue derived from fees is associated with a 1.3 per cent
decrease in capital expenditure per assessment, other things being equal. This suggests
that PMHC’s strategy (detailed in the Resourcing Strategy document) of placing greater
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