Port Macquarie-Hastings Council
Key Findings from an Independent Review of Financial Reserves
What are financial reserves and why do we need them?
• In order to adequately provide infrastructure to support development activity in the
community, Council identifies infrastructure priorities and puts money aside in
“reserve”.
• This is kept aside (held in reserve) until the money is required for the major
infrastructure projects that have been prioritised in the Capital Works programme
– which is a list of projects, such as new infrastructure works, which are
programmed for upcoming construction. Such new works could include
construction of Council buildings, roads and bridges, or other Council-managed
installations. In particular, the most common use of this money at Port Macquarie-
Hastings Council is for building new roads, community facilities, and water and
sewer systems.
• By saving this money in “reserve”, Council can use these funds as either an
alternative, or in addition, to borrowing money to provide these assets.
UTS CRICOS PROVIDER CODE 00099F
• It is generally preferable to use savings rather than borrow because a reliance on
borrowings could result in the burden of excessive interest costs, which can have
an adverse impact on Council’s financial sustainability. In addition, when
infrastructure is funded through savings rather than borrowing, the money that is
held in reserve can earn some interest income for Council.
o As a result, when infrastructure is provided using reserve funds, there is
both an interest saving (compared to if Council borrowed money instead of
saving) and an interest earning (from the income earned by Council when
this money is held in its savings fund). This means that there is less
pressure on future rate increases for residents and on other user fees to
recover infrastructure delivery costs.
What are current reserves being used for?
• Most of the funds which are saved in reserve have external restrictions. This
means that Council can only use them for specific purposes and cannot be used
by Council to fund general operations. This restriction on the usage of these funds
is imposed externally by State government legislation which councils in New
South Wales must comply with. Funds which carry external restrictions make up
around 72 per cent of all reserve funds of Council.
o An example of externally restricted funds are the contributions received by
property developers in the form of levies (developer contributions). This
makes up around 44 per cent of externally restricted reserves. This money
UTS CRICOS PROVIDER CODE 00099F
is saved in reserve and can only be spent on infrastructure delivery
associated with development activity (that is, on infrastructure related to
growth and cannot be used for existing assets such as repairing existing
roads). Developer contributions that are held in reserve are broadly split
into the following categories:
▪ a water and sewer fund (called Section 64 reserve funds), or
▪ a set of funds for roads, traffic, open space, and community facilities
(called Section 94 reserve funds).
▪ These developer levies are charged differently and the funds are
separately managed. This is so that there is no conflict of priorities
between Section 64 and Section 94 infrastructure projects.
o In addition to developer contributions, money is also set aside amongst
other external reserves for other purposes in order to ensure sufficient
maintenance of assets is undertaken. This is mostly saved so that water,
sewerage, and waste management facilities, for example, are maintained
and quality services can be delivered to the community.
• There are also some funds set aside for other priority infrastructure as deemed
by Council and Councillors. These are known as internally restricted reserves
because they have been set aside for a particular purpose that has been
UTS CRICOS PROVIDER CODE 00099F
determined internally by Council and so the money can only be used for this
specified purpose. This makes up around 28 per cent of all reserve funds.
o The internal reserves have largely been set aside for commitments such
as employee leave entitlements, plant replacement, playing fields, airport
and transport infrastructure renewal.
• The composition of reserve funds into usage categories (expenditures) as at end
of the 2016-17 financial year has been summarised in Figure 1 below.
o The pie chart on the left of the Figure splits the internal and external
reserves of Council for 2016-17.
o The pie chart on the right of the Figure splits the components of the external
reserves of Council for 2016-17.
• The composition of reserve funds into major asset categories (holdings) as at end
of the 2016-17 financial year has been summarised in Figure 2 below.
o The pie chart on the left of the Figure splits the internal and external
reserves of Council for 2016-17.
o The pie chart on the right of the Figure splits the components of the external
reserves of Council for 2016-17.
UTS CRICOS PROVIDER CODE 00099F
Figure 1. Composition of reserves by category.
26% 24%
28% 72% 18% 17%
10% 6%
Internal External s94 Developer s64 Developer Water Sewerage Waste Mgt Other
Figure 2. Composition of reserves by major asset class.
31% 17% 28% 72%
24%
Internal External Water Sewer General/Waste
UTS CRICOS PROVIDER CODE 00099F
What is an appropriate level of financial reserves to set aside?
• It is difficult to determine precisely the right mix of money to set aside in reserve
for future infrastructure and money to use today for current infrastructure.
• Councils who are good financial managers strive to have sufficient money put
aside to ensure that priority projects can be delivered to the community in a timely
and cost-effective manner. Just like household savings, this can mean that some
current income is saved rather than spent, in order to provide for the future. In
particular, sometimes current minor renewal projects may need to be deferred in
order to ensure that sufficient savings are being put aside in reserve for major
future projects.
• If councils have not allowed enough funds in reserve for infrastructure projects,
they need to either borrow, sacrifice some spending, or increase rates bills.
Conversely, if councils have set aside too many funds rather than put into use for
infrastructure projects, this can contribute to a backlog in infrastructure delivery.
• The challenge for Council is to balance these interests to ensure that an
appropriate level of reserves is held, in consideration of developments within the
council area, as well as the state of, and demand for infrastructure.
• Among the main factors that may weigh on Council’s determination of the
appropriate level of reserves is the level and nature of development activity within
the council area.
UTS CRICOS PROVIDER CODE 00099F
o This is because councils experiencing a high level of development activity
(such as Port Macquarie-Hastings Council, see Figure 3) require relatively
high levels of reserves in order to adequately cope with the required levels
of infrastructure spending.
o In addition to requiring relatively higher levels of reserves in areas of high
development activity, these councils are also required to accumulate these
funds relatively quickly – because it is likely that major infrastructure
commitments also may fall due sooner than in other areas.
Figure 3. Number of Lots Created (Land Subdivisions).
1250
1000 large increase in new lots created in PMHC from 2014-15 750 compared to peers
500
250
0 08-09 09-10 10-11 11-12 12-13 13-14 14-15 15-16 16-17 Port Macquarie - Hastings Tweed Ballina Coffs Harbour Kempsey Midcoast
UTS CRICOS PROVIDER CODE 00099F
• In light of the pressures placed upon Port Macquarie-Hastings Councils’ asset
and financial management as a result of development growth (see Figure 3), the
water and sewer capital works programme, in particular, has recently undergone
a major revision.
o This includes ensuring all projects are named in a consistent and clear
manner. The projects have also been split into preconstruction and
construction phases, with the aim of clearly defining the phase of the
project and improving planning and budget estimates for the construction
phase.
• Because different councils have different experiences of development activity,
infrastructure needs, varying size and capacity to raise funds, and so on, this
means that making comparisons between councils’ reserve balances for the
purposes of benchmarking is difficult. In particular, straight comparisons between
two neighbouring councils may result in misleading conclusions about respective
performance of councils.
What is the assessment of the current reserves level?
• The University of Technology Sydney, Centre for Local Government (UTS:CLG)
was engaged by Council to conduct an independent analysis of the
appropriateness of Council’s reserve levels.
UTS CRICOS PROVIDER CODE 00099F
• UTS:CLG identified that Council has projected relatively fast development growth
into the medium term. This means that Council may be required to fund
infrastructure going forward relatively quickly and to a relatively larger scale
compared to some of its peer councils – which may be reflected in relatively high
levels of reserves compared to some neighbouring councils.
• Overall, UTS:CLG found Council’s reserve levels to be broadly appropriate and
reasonable in light of Council’s circumstances. In particular, it is UTS:CLG’s
assessment that Council has successfully maintained a prudent buffer to prepare
against potential financial risks associated with the predicted high development
activity.
• In particular, UTS:CLG determined that:
o Compared to councils experiencing similar development activity and
demand, Port Macquarie-Hastings Council’s Section 94 reserve funds sit
at an appropriate level.
o Compared to councils experiencing similar development activity and
demand, Port Macquarie-Hastings Council’s Section 64 reserve funds are
currently higher than some of its peer levels. As at 30 June 2017 Section
64 reserve funds were at just over $71m.
▪ This is relatively high, in part, because the provision of Water and
Sewerage infrastructure can be relatively expensive in Port
UTS CRICOS PROVIDER CODE 00099F
Macquarie-Hastings Council to construct, as a result of Council’s
particular features. For example, the size of the local government
area, the topography of the land, as well as the pace and nature
(such as location of growth corridors) of development growth all
place additional pressure on infrastructure costs – and, as a result,
on the required balances of funds held in reserve for infrastructure
provision.
• Funds have been built up in this reserve fund in order to support upcoming
significant expenditures expected in the coming years. For instance, Council is
currently planning upgrades to water and sewer infrastructure. This includes an
investment of around $120,000,000 to deliver a planned Water Treatment facility.
In addition, other upcoming projects under Council’s consideration to take place
in the coming years include the following:
Area 13 (Thrumster) Sewerage Treatment Plant $38,000,000 Southern Arm trunk main Pacific Highway to Bonny Hills $13,700,000 Southern Arm Trunk Main Cowarra balance tank to Pacific Hwy $ 5,000,000 Thrumster Reclaimed Reservoir $ 3,985,000 New Inlet trunk Main to Cowarra Dam from King Creek $12,000,000 Trunk Main Bonny Hills to Kew Reservoir $ 6,200,000 Area 15 Reservoir $ 5,350,000 $84,235,000
▪ Together, this expected investment of around $200 million in water
and sewer infrastructure upgrades means the current level of funds
held in reserve is expected to not only be exhausted but possibly
require additional accumulation of reserves, in order to avoid
UTS CRICOS PROVIDER CODE 00099F
requiring substantial borrowing to fund this infrastructure. This
means that it is necessary for Section 64 reserves to remain
relatively high for the time being, in preparation for this.
o In particular, new water service reservoirs and water transfer capacities
have been prioritized as a result of development growth. This is necessary
in order to prevent potential future water service shortages or outages.
o Similarly, priority sewerage services projects currently being saved for
include new sewerage pumping stations and a sewerage treatment plant.
This will ensure sewerage services can continue to be delivered at a high
standard for all residents, as well as assisting in the prevention of potential
sewerage discharge.
• In sum, and with Council’s expected medium-term level of development activity in
mind, it would be broadly necessary for Port Macquarie-Hastings Council to
maintain its reserve levels consistent with its current practice.
UTS CRICOS PROVIDER CODE 00099F