City of Wanneroo Financial Statement Analysis

Executive Summary

The City of Wanneroo continues to be one of the largest and fastest growing local government authorities in WA.  The rapid growth rate has a significant impact on the City’s finances and resources.  It is vital to plan for the future through long-term planning and robust asset management practices.  Processes should be in place to ensure the timely maintenance and upgrades of current assets and construction of new facilities for the fast-growing population. 

The City continues to illustrate a positive financial performance by managing the debt, controlling the expense and managing to keep the rates increase to a minimum.  The City has an operating surplus result that  increased with 37% over the past three years.  Due to the decline in State and Federal grants, the City has to seek alternative income sources to continue to be financially viable.  The City has an estimated replacement cost of $2.6 billion for depreciable assets.

Table of Contents

Executive Summary

Acronyms

Annexures

1. Introduction

2. Overall summary of the Financial Performance

3. Revenue: Where did the money come from?

4. Expenses: Where was the money spent?

5. Assets: What do we own?

6. Liabilities: What do we owe?

7. Capital Expenditure

8. Equity

9. Ratios

Liquidity

Asset Efficiency

Profitability

Financial Stability

10. Financial Health Indicator comparison

11. Conclusion

12. References

Acronyms

COJ	City of Joondalup
COW	City of Wanneroo
PPE	Property, Plant and Equipment

Annexures

2017/18 City of Wanneroo ratio calculations

2017/18 City of Wanneroo financial statement

2016/17 City of Wanneroo financial statement

2017/18 City of Joondalup financial statements

2016/17 City of Joondalup financial statements

1.   Introduction

The purpose of this report is to summarise the financial position and condition of the City of Wanneroo’s (COW) through analysing the annual financial statement described as one of the main financial reporting objectives (Rivenbark & Roenigk, 2011). 

This report includes horizontal and vertical analysis as well as trend analysis.  Golab & Vanderplank (2016, p.236) describes horizontal analysis as the comparison of previous years with current year performance and vertical analysis as each individual item in a financial statement expressed as a percentage of a specific base amount.

This report also includes benchmarking with the City of Joondalup (COJ) in regards to their financial results for 2017/18.

COW is the largest and one of the fastest growing local governments in Western Australia, with Perth’s next major Strategic Metropolitan Centre at Yanchep currently being developed.  The City’s economic growth for the future includes nine new major activity centres and an industrial area. The rapid residential growth provides various opportunities and a possible increase in new local businesses investing in the City can be expected.

The following table is a comparison of the two cities economic profiles:

The City has a population of 199,290 (Australian Bureau of Statistics and 2018 Forecast ID) with an average annual increase of more than 6% in population growth has occurred over the past decade. The population growth is expected to increase by 95% in 2041. 

COJ is also one of the largest local governments in WA with a population of 162,742 (Australian Bureau of Statistics and 2018 Forecast ID) but with a much lower average annual change of 0.49% and with an expected increase of 13% by 2041. 

COW has a workforce of 766 full-time equivalent (FTE) compared to COJ with a workforce of 630 FTEs. COW has a Gross Regional Product (GRP) is estimated at $6.96 billion and represents 2.8% of the Gross State Product (GSP) while COJ GRP is estimated at $6.48 billion and represents 2.6% of the GSP.

This report is divided into six sections:

1. Summary of financial performance: Revenue, Expenses, Assets, Liabilities, Capital Expenditure and Equity;
2. Analysis of the seven legislative, local government ratios;
3. Conclusion with
4. Recommendations
5. References
6. Annexures – Proof of evidence

2.   Overall summary of the Financial Performance

The table below is a summary of the overall financial performance for the past three years.

The result from operations increased over the past three years with 37% from 7.6 million in 2015/16 to 12.1 million operating surpluses in 2017/18. The operating revenue is 6.4% higher than the operating expenditure.  The main drivers for this positive result were the increase in income due to a growth in the number of rateable properties, additional grants and slightly higher interest earnings and a decrease in expenditure due to cost-saving initiatives such as the reduction in employee costs and depreciation.  This operating surplus can be applied towards future demand through the reserve provisions.

COJ had an operating deficit of $(3,2 million).  The deficit should be raised as a concern to the COJ and strategies must be put in place to generate more revenue to meet future financial obligations.  This deficit can lead to a reduction in the asset base, change in the standards of service and a loss in equity.  The deficit did, however, improve by 54% compared to the previous year of $(6,9 million).

The table below is a comparison of COW and COJ financial performance over the past two years.

3.   Revenue: Where did the money come from?

The City’s operating revenue has shown an upward trend of 1.9% over the last three years while COJ had an increase of 1.5%. Rates were the largest contribution to the operating revenue rates. 

Rates contributed 81% towards the operating revenue compared to the previous year of 77%.  COJ rates contributed 66% towards the operating revenue.  Rates revenue at COW has increased by 12% over the last three years due to an increase in the number of rateable properties due to population growth.  Revenue from Grants, Subsidies & Contribution decreased by 2% due to the ongoing decline in State and Federal grants.  The City should, therefore, focus on seeking alternative revenue sources.

4.   Expenses: Where was the money spent?

The City has spent $176.2 millioncompared to $163 million in the 2015/16 financial year.  This expenditure shows an increase in spending of $13.2 million (7%).

The City’s expenses remain below budget ($188.7 million) which is mainly due to the cost-saving initiatives.  The reduction in expenditure is primarily due to significant decreases within consultancy fees, decrease in Depreciation and lower refuse expenses.  Employee Costs also showed a decline due to the substantial reduction in workers compensation claims. 

The COJ also experienced a decrease in expenditure with Employee Costs and Materials & Contracts the two main reasons for the decline.

5.   Assets: What do we own?

The City’s total asset value has decreased from $2.9 billion to $2.7 billion as a result of the City’s Property, Plant and Equipment (PPE) assets revalued during the 2017/18 financial year with a reduction of 39% in value.  The $2.7 billion assets are made up of the total equity value of $2.6 billion and total liabilities of $110 million.

COJ total asset value has increased from $1.4 billion in 2015/16 to $1.5 billion in 2017/18.  The increase in PPE value was the main contributor.

6.   Liabilities: What do we owe?

The City has experienced a decrease of 2.7% in total liabilities in 2017/18 while in previous years there was a slight increase.  The total liabilities of $110 million contribute 4% towards the total assets of $2.7 billion while equity contributes 96% of the total assets.

The City’s balance sheet remains strong with an increase of $16.2 million (4.3%) in cash and investments, from $377.2 million to $393.5 million when compared with the previous year.

7.   Capital Expenditure

The City has only spent 41% ($53.1 million) of the capital budget and has been tracking under budget for the past few years.  The capital expenditure also decreased by 22% when comparing to last years capital expense.  This is an indication that the City should look at strategies to improve on implementing the capital works program and to deliver projects within the relevant timeframes and within budget.  This might also indicate that better project management is needed and the phasing of projects that are running over multiple years.  Additional assets of $21.4 million were received by developers as part of subdivisional development and assets handed over to the City.

COJ had a decrease of 25% in capital expenditure when comparing to the previous year’s expense which also indicates that the City had a significant amount of deferrals of multi-year projects. 

8.   Equity

COW has a cash reserve of $199.3 million and asset revaluation reserves of $1,064.3 billion which can be used to finance future expenditures.

The revaluation of the City’s PPE assets showed a reduction of 6.2% in equity while at the COJ had an increase in equity after the revaluation of PPE .  The difference is that assets value decreased by 22% whilst the assets increased by 13% in value at COJ.

9.   Ratios

The following section is an analysis summary of the seven ratios as per the Local Government Operational Guidelines, number 18,  June 2013.  All local governments are required by Regulation 50 of the Western Australia Local Government (Financial Management) to publish results in their annual financial report for seven financial indicators, for the current and preceding two years. 

Adedeji E (2014) describe ratio analysis as a management tool to base decisions on and to measure business performance as well as to determine the City’s profitability and efficiency in utilising of the resources.

The following section is based on the financial analysis of four building blocks described by Golab et al. (2016, p234).

Liquidity

a) Current ratio (Liquidity)

This ratio focuses on the City’s liquidity position, and it provides the City with information on how to meet its short-term financial obligations from current unrestricted assets.

The standard is not met if the result is lower than 1:1 (less than 100%)

Current ratio calculation:

City of Wanneroo calculations from the annual financial statement for the last three years:

Although the benchmark target of 100% has not been met, the City’s balance sheet remains healthy with a strong liquidity position with current assets of $396 million versus the total liabilities of $110 million and net assets of $2,622 billion as at end June 2018. Although current assets increased by 16.6% over the past three years, restricted cash has increased by 19%. The restriction of municipal funds relating to additional capital grants received is one of the main contributions of the result with a total of $363 million restricted cash.  Surplus funds are transferred to a special projects reserve at each annual financial closure and are excluded from this ratio. 

Comparison with Joondalup

COW has not met the benchmark standard for the past four financial years while the COJ has met the standard in the last five fiscal years except 2016/17.   

Asset Efficiency

b) Asset consumption ratio

This ratio measures the City’s physical assets aged condition. 

Benchmarking targets/standards for this ratio:

• Basic standard – 50% or greater (0.50 or >)
• Intermediate standard – between 60% and 74% (0.60 and 0.74)
• Advance standard – 75% and above (0.75).

Asset consumption ratio calculation:

City of Wanneroo calculations from the annual financial statement for the last three years:

The City’s assets are relatively new and in good condition and therefore the benchmark target has been met consistently has achieved the standard for the past five years.  The positive result is due to the lower Depreciated Replacement Cost compare to the Current Replacement Cost of Depreciable Assets.  The ratio has improved by 2% compared to the previous year.

Comparison with Joondalup

The graph below shows that both Cities have achieved benchmarking targets with COW producing a slightly higher result and shows an upward trend in the last three years.  This marginally higher result is because of COW  more new assets due to all the latest developments currently happening to serve the growing communities.

c) Asset renewal funding ratio;

This ratio measures the City’s financial capability to fund the City’s projected asset renewal/replacements and to be able to deliver current levels of services in the future. The City’s estimated replacement cost for depreciable assets is $2.6 million.

Benchmarking standards:

• Basic standard – 75% (0.75)
• Intermediate standard – 76%-95% (0.76-0.95)
• Advance standard – 96%-110% (0.96-1.10)

Asset renewal funding ratio calculation:

City of Wanneroo calculations from the annual financial statement for the last three years:

This ratio is based on a 1.5% discount rate of the Reserve Bank of Australia.

Due to the City’s growth in new areas, there is currently a more considerable amount of expenditure on new assets than renewal. 

Comparison with Joondalup

The graph below shows that COW has achieved the benchmarking standard (75%) over the past five years while COJ was under the standard average until 2017/18 where the ratio improved to 88% which is within the intermediate benchmark target range.  The asset renewal requirements for both cities in the next ten to twenty years are forecasting to increase drastically due to the relatively new assets.  A review of the Asset Renewal Reserve is recommended for both cities given that renewal expense is lower than charges in depreciation and in future years the cities might experience a significant increase in demand.

 

 

d) Asset sustainability ratio

This ratio indicates whether the City is spending enough money on their replacement program (renew existing assets when reaching the end of their service lives) compare to the depreciation of the assets. 

Benchmarking standards:

• Basic standard – 90% (0.90)
• Intermediate standard – 91%-109% (0.91-1.09)
• Advance standard – 110% and above (1.10)

Asset sustainability ratio calculation:

City of Wanneroo calculations from the annual financial statement for the last three years:

The benchmark target of 90% has not been met as 85% of the City’s assets are either in excellent condition or still new and less than 1% requiring immediate attention. This ratio reflects better in forward-looking (20-year Long Term Financial Plan) which includes the forecasts for future years where the demand for renewal will be higher.

Comparison with Joondalup

Both the Cities have not met the basic benchmark target of 90% for the past five years.  This is due to the young age profile of assets.  COJ is expected to reach the benchmark target in eight to ten years due to the stability in population growth while the COW will not meet this benchmark target in the next twenty years due to the rapidly growing population. This information is based on the respective 20-year Long Term Financial Plans.

Profitability

e) Debt service cover ratio

This ratio measures the City’s ability to repay its debt including lease payments.

This ratio has two targets/standards:

• Basic – the result is greater than or equal to 2
• Advanced – result is greater than 5

Debt service cover ratio calculation:

City of Wanneroo calculations from the annual financial statement for the last three years:

The City has met the advanced standard with a result of 14.92.  This is due to the City’s high net income result of $55 million and depreciation of $38,956 million with a low-interest expense of $4,389 million.  

Comparison with Joondalup

Both cities illustrate positive debt repayment ability as both are well above the advanced benchmark standard. COW shows a slight upward trend in the last three years whereas COJ has a slight decline in the past four years.

Financial Stability

f) Financial performance ratio (operating surplus ratio)

This is the most critical ratio as it measures the City’s financial performance.  The ratio illustrates the City’s ability to cover its operational costs and the availability of revenue for capital funding and other purposes.

This ratio has two targets/standards:

• Basic – between 1% and 15% (0.01 and 0.15)
• Advanced – > 15% (>0.15)

Operating surplus ratio calculation:

City of Wanneroo calculations from the annual financial statement for the last three years:

The City has exceeded the basic benchmark target of 1% and is just under the advance target of 15%.  This positive result is because of a high own source operating revenue to cover overall expenses (opex and capex).  The city has managed to obtain an operating surplus result with an increase of 35% over the past three years.  This positive result shows that the City is financially stable and able to maintain its services over the long-term. 

Comparison with Joondalup

COW has shown an upward trend in the past three years with a positive operating surplus result and well above the basic benchmarking target while COJ has been below the target for the last three years with a slight improvement in the previous year.  COJ operating expenses exceeded their operating revenue, and as a result, a deficit of $3 million has been identified which might be due to additional infrastructure projects undertaken.  COW has an operating surplus result of $12 million. 

g) Own source revenue coverage ratio

This ratio measures the City’s ability to cover its costs through its own revenue efforts.

This ratio has three targets/standards:

• Basic – between 40% and 60% (0.4 and 0.6)
• Intermediate – between 60% and 90% (0.6 and 0.9)
• Advanced – greater than 90% (>0.9)

Own source revenue coverage ratio calculation:

City of Wanneroo calculations from the annual financial statement for the last three years:

This positive result is because the City’s own source operating revenue of $188 million has exceeded the operating expenses of 176 million.  Rates income of 81% was the biggest contributor to the total operating revenue.  Capital program funding is in part drawn from the City’s own source revenue.  Income from grants has dropped significantly compared with the 2016/17 results although higher than in the 2015/16 financial year.

Comparison with Joondalup

Both cities have performed above the advanced benchmarking standard of 90%.  COW showed an upward trend with the Town Planning Scheme Income and Profit On Asset Disposals increased with 40% and 32%. The City’s own source operating revenue was higher than the operating expense, and therefore the result of over 100% while COJ had a higher operating expense versus own source operating revenue and therefore a slightly lower result.

10.         Financial Health Indicator comparison

The Financial Health Indicator (FHI) is used to measure the overall financial performance of local governments.  The FHI calculation is based on the seven legislative, local government ratios. A City with a result of 70 indicates strong financial health.

The diagram below compares the seven financial health ratios of the two cities.  Both cities performed poorly in the current ratio, and both had a slightly low asset renewal ratio performance.  Note that the results are based on the 2016/17 financial year.

Source: https://www.mycouncil.wa.gov.au/Council/CompareResult/131?compare=62&

The graph below compares the COW and COJ Financial Health Indicator with the WA state average.  The below graph illustrates an FHI of 50 for COJ and 69 for COW while the WA state average is 60. Note these results are based on 2016/17 financial year.

11.         Conclusion

In conclusion, the City’s financial statement illustrates a successful financial performance result for 2017/18; however, there are some areas that need attention to ensure long term financial sustainability.   Therefore, financial strategies and principles should be developed and review annually to ensure that economic and demographic changes are planned for. 

The City is responsible for over $2.6 billion worth of assets.  A robust Asset Management System is recommended, and asset management plans are crucial to managing financial and physical assets to ensure the provision of services for a future generation.

A review of the Asset Renewal Reserve is recommended to meet the future increase in demand. Regular transfers to the reserve funding over the next 20 years will enable the City to meet the expenditure requirements.

The City should seek alternative revenue sources other than relying on rates.  Initiatives such as advocating and lobbying to secure grant funding, review of all Fees and Charges aligned to service costs and the establishment of a Revenue Review Committee.

Finally, the implementation of quarterly monitoring and reporting on the ratios and additional financial and sustainability measures will enable the City to be proactive by implementing corrective measures where targets are not met.  Kluza K (2016, p1) identifies that this proposed approach is an alternative methodology to risk assessment.  This will allow the ranking of risks and the City’s ability to manage costs in the long-term.

12.         References

• Adedeji E A 2014, ‘A tool for measuring organisational performance using ratio analysis’, Research journal of finance and accounting, Vol 5, No. 19, p. 21-22
• Birt J, Chalmers K, Maloney S, Brooks A, Oliver J 2017, ‘Accounting business reporting for decision making’, 6th edition, Wiley
• Dlgsc.wa.gov.au. (2019). Local Government Operational Guidelines, Number 18, June 2013, Financial Ratios. [online] Available at: https://www.dlgsc.wa.gov.au/resources/publications/Publications/Local%20Government%20Operational%20Guidelines%20Number%2018%20-%20Financial%20Ratios/DLGC_LG_Operational_Guideline_18.pdf [Accessed 18 Feb. 2019].
• Golab A, Vanderplank K 2016, ‘Fundamentals of value creation in business’, Edith Cowan University, School of business and law, McGraw Hill Education, Australia
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• Joondalup.wa.gov.au. (2017). City of Joondalup Annual Report 2016/17. [online] Available at: https://www.joondalup.wa.gov.au/wp-content/uploads/2018/04/2016-17-Annual-Report.pdf [Accessed 15 Feb. 2019].
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• Joondalup.wa.gov.au. (2018). City of Joondalup Financial Ratios, Appendix 6, Attachment 1. [online] Available at: https://www.joondalup.wa.gov.au/files/committees/AURI/2018/Attach6agnAUDIT180807.pdf [Accessed 21 Feb. 2019].
• Kluza K 2016, ‘Risk assessment of the local government sector based on the ratio analysis and the DEA method.  Evidence from Poland’, Quantitative Economics Department, Warsaw School of Economics (SGH), Springer, p329
• Mycouncil.wa.gov.au. (2019). MyCouncil – Home Page. [online] Available at: https://www.mycouncil.wa.gov.au/ [Accessed 24 Feb. 2019].
• Rivenbark W.C, Roenigk D.J, ‘Implementation of financial condition analysis in local government’, University of North Carolina at Chapel Hill, Public Administration Quarterly, Vol. 35, No. 2, Summer 2011, pp. 241
• V3au.zone-secure.net. (2019). City of Wanneroo Annual Report 2017/18. [online] Available at: http://v3au.zone-secure.net/drive/3487/940526/#page=1 [Accessed 24 Feb. 2019].
• V3au.zone-secure.net. (2019). City of Wanneroo – Annual report 2016/17. [online] Available at: http://v3au.zone-secure.net/drive/3487/495510/#page=1 [Accessed 24 Feb. 2019].
• Walga.asn.au. (2019). Improving financial sustainability for local government. [online] Available at: https://walga.asn.au/getattachment/News,-Events-and-Publications/Publications/Local-Government-Economic-Briefing/WAL6893-LG-Finance-Ed-Papers-V3_WEB.pdf [Accessed 19 Feb. 2019].
• Wanneroo, C. (2018). Long Term Financial Plan 2017/18 – 2036/37 – City of Wanneroo. [online] Wanneroo.wa.gov.au. Available at: https://www.wanneroo.wa.gov.au/downloads/file/3250/long_term_financial_plan_201718_-_203637 [Accessed 24 Feb. 2019].
• Western Australia Treasury Corporation, Web based FHI-functional specification, department of local government and communities, February 2016