Gawler 2012-13 Annual Report - page 20

Town of Gawler Annual Report 2012/13
Page 20
introduction •
summary
• strategic directions • statutory information • index
Further to this, Council also introduced residual values (below which an asset is not depreciated) for road pavement assets in
the 2012/2013 financial year – with a 50% residual value applied for sealed road pavements and a 33% residual applied for
unsealed road pavements. These residual percentages have been applied on the basis that when roads are reconstructed at
the end of their useful lives that not all of the pavement asset material is replaced.
2. Net financial liabilities ratio
– 53% (66% 2011/2012)
The Net Financial Liabilities Ratio expresses Council’s net financial liabilities (i.e. total liabilities less financial assets) as a
percentage of the total operating revenue (excluding State Government NRM levy), with Council policy being that the ratio
result not exceed 100%.
In relatively recent times (until 30 June 2011) the ratio result was markedly increasing towards the policy threshold position
of 100%, with the increase being predominantly driven by Council’s annual approach of undertaking fixed long term loans of
$3m to part fund the delivery of its annual capital works program. In this context, it is important to note that, due to the high
operating deficits of the time, Council was considerably reliant on external loan borrowings to fund its capital works programs.
A dramatic change in Council’s treasury management approach during the 2011/12 financial year has since been the major
catalyst behind a marked reduction in the ratio result, from a peak of 86% (as at June 2011) to the ratio result of 53% (as at
30 June 2013) - albeit, it should be noted that unspent capital works funding of $2.6m (as at 30 June 2013) has somewhat
favourably distorted the 2012/2013 result, without which the ratio result would have remained unchanged at 65%.
The fundamental changes in Council’s treasury management approach, instigated during the 2011/12 financial year, have
been:
(a) Only drawing down on external loan funds as and when they are required - i.e. Council should utilise its own financial
resources first (at a considerably cheaper internal interest rate) prior to drawing down any external loan funds (which
attract a substantially higher external interest rate);
(b) Not borrowing external loan funds via fixed long-term Debenture Loans (which incorporate fixed principal/interest
repayments over the life of the loan – generally 15 years), but rather accessing loan funding (only as cashflow requires)
from the Cash Advance Debenture facility available from the Local Government Finance Authority;
(c) Restricting the level of capital works to an amount which is financially sustainable, and with the focus of such works being
targeted towards the replacement/renewal of existing assets as distinct from the purchase or construction of new assets
(as the latter gives rise to new on-going maintenance and depreciation expenses).
The key benefit from such an approach is that the Cash Advance Debenture facility effectively acts as a bank overdraft,
whereby it can be repaid at any time as cashflow permits, thereby delivering substantial future interest expense savings for the
Council.
Based on favourable cashflows, the Cash Advance Debenture facility was not required at all during the 2011/12 financial
year and was only required for a short period (August-September) during the 2012/2013 financial year. The 2011/12 result
subsequently meant that this was the first time since 1986/87 that Council had not utilised any external loan funds and was
also the first occasion since 2005/06 that Council had reduced its long term debt.
This revised loan funding strategy has been the catalyst behind a substantial reduction in Council’s financing costs – from
$971,000 (2011/12) to $901,000 (2012/13) (a 7% reduction), with a further $79,000 (9%) reduction forecast to occur during
the 2013/14 financial year. This reduction has subsequently facilitated an improvement in the overall operating result of the
Council.
From an overall balance sheet perspective, other key outcomes for the 2012/2013 financial year included:
(a) An increase of $1.276m in Cash and Investments – albeit it is important to note that this was only achieved due to a
$730k advance payment of Financial Assistance / Local Roads Grant and unspent various capital works programs (in this
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