630 words (7 minutes reading time) by Lancing Farrell

Professor Joseph Drew has posted another of his valuable and prescient videos for local government leaders. His analysis of the financial sustainability of councils in NSW heralds a warning across Australia for councils experiencing rapid increases in expenditure that are not being matched by revenue increases – especially those subject to a rate capping regime. NSW councils are running out of cash to fund operations. The FinPro/Municipal Association of Victoria report in 2022 showed that all Victorian councils except those in metropolitan areas are experiencing underlying deficits and the problem is getting worse.

Professor Drew’s warnings should really be a headline on the agenda papers for every council meeting!

I think part of the challenge for councils in acting on his warnings and advice is the prevalent sense that there is nothing that can be done – councils are at the mercy of forces greater than any they could hope to overcome. In discussions with Professor Drew I have likened it to a movie where a meteorite is expected to hit Earth and no one thinks it can be stopped or deflected.  Half the population are resigned to their fate and having a party, and the other half are sitting in the dark with their fingers crossed hoping it will miss.

Maybe a better explanation is that hopelessness is the feeling that nothing can be done by anyone to make the situation better. People may accept that a threat is real, but that threat looms so large that they feel the situation is hopeless. Helplessness is the feeling that they have no power to improve the situation. I think councils have a strong sense of both.

Well, for those with greater confidence that something can be done (and should be done to protect community interests), here is a list based on the initial advice Professor Drew provides (he is prepared to offer more detailed and specific advice to councils that ask):

1. Review fees and charges and ensure that they are all equal to the Long Run Marginal Cost unless a subsidy is merited and the reasons for that subsidy are able to be articulated (so they can be tested and reviewed).

2. Develop the case to increase rates as soon as practical, either through an application for a higher rate cap or Council-approved increases at or above inflation.

3. Review spending to ensure necessities are identified, agreed by the community, and funded before spending occurs on discretionary items.

Professor Drew likens this to a household budget – if your income is not meeting your expenses long term you need to either increase your income and reduce your expenses (or do both).  We all seem to understand personal budgeting and few leaders in local government would think debt and high levels of credit is the way to run their personal lives. As Professor Drew shows very clearly, for some reason it seems to be acceptable and regarded as unavoidable for many councils.

Based on Professor Drew’s latest video, I would add that councils currently doing well in maintaining unrestricted cash levels need to be careful. The data suggests it is the classic ‘lid on the pot’ situation – every effort to keep the lid on is justified because the consequences of it coming off are irrecoverable. For me, this means no unplanned changes in senior leadership (if they are doing a good job, recognise it), and no major new high value capital projects (especially if it is funded by a capital only intergovernmental grant). These are the sort of disruptions that councils get drawn into like a moth to a flame.

As regular readers will know, I would also go further to look carefully at the services being provided to understand the value provided to the community, make sure there is community agreement that it is valuable, and then ensure that it is provided efficiently and in ways that meet community needs and expectations. It seems simple to only fund services regarded as necessities, presumably defined as the services state governments have legislated that councils must deliver, but we all know this means that many other services relied upon and valued by local communities will then be cut.

The real risk is that ‘doing wrong things righter‘ will be where councils put their effort in responding to cost pressures.