1400 words (reading time 11 minutes) by Lancing Farrell
The focus of local governments has been on employee protection, service continuity, managing disruptions to cash flow and supply chains, and trying to understand the new risks emerging with Coronavirus. It is a whole new operating environment. This post explores some of the financial and operational impacts of the Coronavirus.
Physical distancing has reduced the capacity of facilities by half or more, making appointments and providing concierges has increased staffing requirements at facilities, and there is demand to retain new services like ‘click and collect’ and tele-services introduced in response to the Coronavirus, at the same time as regular services resume.
This is all happening as revenue is impacted by loss of fees and charges, additional expenses in relief packages offered to businesses, and citizens seeking deferral of rates because of financial hardship. Some councils are planning not to index their rates, which is a revenue reduction next financial year and every year thereafter.
At the same time, councils in Victoria are expected to maintain the employment of all staff without financial support from the Federal or State government. Councils adding to unemployment will not help and they need to work out how to live within their means.
What have councils been doing and what do they need to consider doing?
A Cash Management Plan is required to ensure the organisation remains solvent and capable of meeting its commitments in delivering services to the community during and after the crisis. This Plan should be clear and what is to be achieved, the assumptions being made, and the actions to be taken.
The assumptions that should be stated include:
- How long the crisis will last.
- What impact the crisis will have on the economy nationally and locally.
- How the restrictions on the economy will be removed and community behaviour when it happens.
- How long the economy will take to rebound to pre-Coronavirus conditions.
- What impact there will be on the council budget and services.
- What funds we be needed to rebound after the crisis and support recovery in the community.
The most significant impacts on local government revenues are likely to be interruption (i.e. rates deferral) and/or reduction (i.e. less fines issued, loss of fees and charges, rate rebates or no rate indexation). Revenue interruptions can be overcome using debt to fund cash flow. Depending on the availability of cash reserves and the longevity/severity of the interruption, the impact will just be the additional interest on debt, which should not be a problem with low interest rates.
Reductions in revenue from reduced fees and charges or fines, or a rate rebate are ‘one-off’ and short term. They can be overcome in the same way as a revenue interruption.
The impact from a reduction in revenue because rates are not indexed is more of a problem because it is compounding and will have an impact over the long term. Borrowing will not overcome the problem and expenses will need to be reduced.
Revenue protection in this situation requires:
- Knowing how much cash will be needed and for how long (i.e. what is the weekly cash requirement to fund the business throughout the crisis).
- Preservation of working capital.
- Managing risks in citizen/customer capacity to pay (e.g. deferred payment, bad debts).
- Focusing on the cash-to-cash cycle (i.e. reduce time for receivables and increase time for payables).
Most councils have continued to employ all staff throughout the crisis (so far at least), even if the services they normally provide have been stopped because the State has ordered the closure of facilities. This has happened even though councils have been ineligible for financial support offered to other employers by the Federal government. Council expenses have not reduced significantly and there have been some significant new expenses.
It is also likely that costs have increased for capital works (less competition and lots of government stimulus expenditure nationally and within Victoria), materials and equipment (especially if imported), and contractors and consultants (more expensive inputs/reduced efficiency and less competition).
The top four expenses for councils are capital, labour, materials and services, depreciation. They typically make up 90% of expenses, with capital and labour costs about 50% more than materials and services, and depreciation.
The capital program needs to be reviewed to ensure there is sufficient cash to meet obligations with projects underway, and to ensure new projects are not commenced unless funds are going to be available and that the project remains a priority in the new Coronavirus environment.
All capital projects should be re-prioritised on the following basis:
- Project is committed and must be continued to avoid damages claims and/or protect reputation (e.g. contracted projects, projects with partners).
- Project is currently supporting economic activity and jobs during the Coronavirus crisis (e.g. a local contractor building a kindergarten).
- Project will protect asset value and avoid significant risks or much larger future costs (e.g. stitch in time road renewal, building repairs).
- Project will provide assets required for future services for which demand continues to grow through the Coronavirus crisis (e.g. maternal child health, kindergartens).
- Project is important to implement a key council priority that cannot be delayed without significant and demonstrable reputational damage (e.g. a major regional sports facility).
- Project doesn’t meet any of the above criteria but will make a valuable contribution to economic stimulus post-Coronavirus (e.g. local business will be employed, the work is labour intensive).
- Projects that are one-off opportunities to implement strategic objectives that may not exist post-Coronavirus (e.g. land acquisition from a financially distressed vendor).
- Projects that have strategic merit but do not have to be carried out now or in the foreseeable future and can be removed from the program.
Services will need also to be prioritised and service delivery examined to ensure services are effective in providing value to customers (and that they are efficient). The resources available for the keys roles of local government (i.e. providing local democracy and governance, community building, advocacy, planning, and delivering services) need to be reviewed.
Not everything will be able to be done as well as was before the Coronavirus.
Services can be prioritised on criteria such as:
- Council is required by legislation to provide the service (e.g. local enforcement of State legislation).
- Council is the only provider and the service is needed by the community (e.g. local laws, local roads, councillor support).
- Council is the best provider and the service is needed by the community (e.g. libraries, pools, waste collection).
- Council is one of several service providers or potential service providers (e.g. kindergartens, child care, aged care).
Another approach is to study citizen demands and understand which services are most valued and used by residents. This can be determined using service delivery data and by analysing service requests. Services could then be prioritised depending on whether:
- All residents directly receive the service (e.g., street trees, waste collection, roads).
- All residents could receive the service (e.g. open space, libraries, shopping centres).
- Only some residents receive the service (e.g. MCH, aged care, youth services).
- Residents only get the service if they choose to pay for it (e.g. events, gym, animal registration).
Criteria could be combined for legislated responsibilities and those with evidence of demand and value. Once services have been prioritised, further work can be done to reduce expenses for the less valued services.
Labour costs are the main area for service expense reduction. Only cutting ‘materials and services’ expenditure will impact on labour productivity. Workers need materials, plant and equipment to do their work. Conversely, reducing labour costs will reduce materials and services expenditure. Any reduction in labour costs or ‘materials and services’ needs to be made with consideration for the impact on valued services.
Typically, expenditure reduction in these situations focuses on:
- Reviewing variable costs and reducing them wherever possible (e.g. reduce use of casual and contract staff, consultants).
- Convert fixed costs to variable wherever possible (e.g. fill vacancies with casual and temporary staff, use agency staff and consultants instead of permanent employees).
Reducing labour costs, other than letting temporary or casual employees go, is going to take time and will have associated expenses, such as redundancy payments, which may exceed savings in the short-term. Reducing expenditure on permanent employees is a long-term cost reduction measure and needs to be a planned and coordinated process across the organisation.
Actions to reduce labour expenses (in the order they should be implemented) include:
- Develop a policy for the Establishment of New Positions that is linked to redeployment of staff and focused on the prioritised services.
- Develop an effective Redeployment Process for staff made available from changes to less valued services.
- De-establish all vacancies across the organisation.
- Any positions that are required must be assessed for redeployment in requesting that they be re-established under the Establishment of New Positions policy.
- Accelerate the release of temporary and casual staff.
- Review all agency staff for the potential to redeploy permanent staff into the role.
This is a rather long and detailed post but it is an important topic. Councils need to protect revenues and reduce expenses, whilst maintaining services. This will require re-assessment of priorities in the new Coronavirus environment and thinking ahead to what will be needed, and possible, when the Coronavirus crisis ends.