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Financial Sustainability for local government - the Victorian Context
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Financial Sustainability for local government - the Victorian Context

Local government in Victoria has undergone a continual process of structural and efficiency reforms for over a decade. Following amalgamations from 210 to 79 councils in 1994, the MAV implemented two key initiatives to monitor, assess and improve the financial sustainability of the sector.

A detailed understanding of the challenges facing councils dates back to 1997-98 when the MAV began analyzing financial data. The MAV's initiatives are based on the view that a council's financial health is strongly linked to its ability to maintain and renew its infrastructure.

In Victoria, the cumulative underspend on assets was exacerbated by the Kennett Government's 20 per cent rate cut in 1994 and rate capping in place until the late 1990's. In 1997 the Victorian Government undertook a landmark study into the state of local government infrastructure which provided the impetus for improved alignment of financial and asset management practices.

In 2002 the MAV introduced the Step Asset Management Program to further improve the sector's infrastructure knowledge and management. The program has identified funding liabilities for all asset classes in all Victorian councils for the first time, thus enabling the development of detailed asset management plans to inform budget processes and more rigorous and independent assessments of asset management capabilities.

More strategic and sustainable programs being adopted by Victorian councils include decisions to extend the life of assets by optimising maintenance practices; identifying at risk assets and rehabilitating them before large-scale renewal is required; and achieving gains in productivity, service delivery and operational effectiveness. Asset rationalisation to reduce the liability placed on councils is also taking place, primarily driven through community planning models adopted by councils and assisted by the MAV through the 'Lighthouse' capacity building program.

Despite the ongoing improvement in councils' asset management practices, the most recent data from the Advanced Step Program has calculated an annual infrastructure spending shortfall of $280 million over the next five years unless more financial assistance is provided to the sector.

The benefits of the MAV Step program have been recognised by the Victorian Government, the Federal Government and in the recent PricewaterhouseCoopers report; with similar models being adopted in other Australian states to improve the sector's asset management practices.

Alongside the Step program, the MAV Viability Index provides a comprehensive picture of the financial health of Victorian councils. Unlike other methodologies, the MAV's analysis sets itself apart by assessing each council's shortfall in capital spending, long-term debt and relative rate effort to identify those facing financial distress. This is overlaid with a council's operating surplus or deficit, local population trends and median taxable earnings to further measure the extent of the problem.

The MAV Viability Index has found the characteristics of councils most financially at risk are those with an ongoing operating deficit, relatively high rate effort, high debt commitment and declining population. Councils that fall into this category are predominately located in rural areas, have extensive road networks, serve large geographic areas and have small populations.

Using this methodology, the MAV has assessed 13 councils as financially at risk, with 12 being in Exceptional Circumstances declared areas where drought conditions are further magnifying financial challenges in those communities. Councils at the lower end of the MAV Viability Index are also financially distressed largely due to their past and current inability to fund capital spending necessary to maintain ageing infrastructure, as well as debts inherited through council amalgamations.

As a result of the MAV's ongoing research and analysis into financial sustainability, all Victorian councils have strategies in place to improve their financial position and determine the best course of action to achieve long-term financial sustainability.

There is strong commitment within the sector to demonstrate improved council financial and asset management capabilities, as well as the pursuit of reforms to enhance efficiency, performance and accountability. However, this work must be matched with reforms to intergovernmental funding arrangements that ensure the sustainable future of local government.