Kangaroo Island, 2014.07.07

Third interview of Kangaroo Island councillor Graham Walkom

by Dr Gabriel Bittar

Kangaroo Island Council dire financial situation, part 2

– During the previous interview, after we discussed the meaning of the administrative and legal onslaught that Kangaroo Island Council has brought on you, it came clear that the main reason for the persecution you’re going through is your pointed questioning of this Council’s administration and spending priorities. And in general your concerns with regards to the council’s financial situation. Can you expand on that please?

– When I was sworn in as a councillor, I undertook, in accordance with the Local Government Act (s. 59), “to keep the council’s objectives and policies under review to ensure that they are appropriate and effective; and to keep the council’s resource allocation, expenditure and activities and the efficiency and effectiveness of its service delivery, under review.”

This is a very very clear stipulation of what is required of a councillor and people know that I speak up when this is not happening; which has been the case for all of this council’s term. I have made many references about the very poor financial state of this council.

The attacks on me are little more than an obvious effort to silence me speaking up on financial and maladministration matters. In other words, these unending legal and ad hominem attacks on me are the means used to shoot the messenger. I mention ad hominem attacks, because The Islander itself, which enjoys monopoly of the press on the island, has indulged in many personal attacks on me, either through mischievous editorials, misrepresenting stories and so-called “letters”. So it’s a steep uphill struggle, but appears to go with the job of a councillor if one does the role in a council such as ours where we have such a deteriorating financial situation over the full term of this council.

 

– At the conclusion of our last discussion about council’s finances, I pointed out that the picture you painted appeared at odds with this council winning the national council’s award for good financial management. I also pointed out that this would make your assessment on council’s finances doubtful to many people.

– It certainly appears to be at odds so who is right? Looking at the submission Kangaroo Island Council (KIC) made to win this award, back in 2011, it laboured that the 2005 State inquiry into council viability determined that KIC was financially unsustainable primarily due to its large land area, extensive road network, low population and high tourism visitation. It recommended KIC prepares Asset Management Plans (AMPs) and Long Term Financial Plans (LTFPs). Here was an opportunity. Heck, let’s put in for an award on the basis simply of this recommendation. So we did. In our submission we claimed as established fact we had a valid 10-year plan that demonstrated this council would be financially viable by 2021 and that we had introduced and would be basing our budgets on professionally developed Asset Management Plans.

Obviously, to the National Awards of Excellence mob this was impressive stuff and the award was ours for the taking: we walked away with the trophy – KIC received the national award for Asset and Financial management. Mayor Jayne Bates announced on 27th June 2011: “Kangaroo Island Community can be proud that it’s council is now recognised as the leading small council in asset and financial management in Australia”.

Having won gold, we had to deal with a few minor post-event adjustments: we had only embryonic asset plans that had been rushed through council just in time to win the award. I recall well the concern in council at that time that they were not of an acceptable standard: the ‘solution’ was to approve them as “working documents” which meant we didn’t even know when they would be fully serviceable. It also became apparent to the keen eye that the crucial 10-year plans had been ‘adjusted’ to show a phantom cash income of $2 million per annum, year on year, without which our plan had no chance of balancing the books by the target date of 10 years.

Alas, the balloon deflated soon after the media hype about us being financial wizzards here on KI, when our consultant financial adviser ‘clarified’ that the 10-year plans were ‘invalid’ because we never ever had that $2 million per annum cash available to us. We were presented with revised 10-year plans that showed that, to get anywhere near balancing the books over the next 10 years, we needed to raise rates by 10% year on year… for the next 10 years, meaning a 2.5 times increase!

 

– You mention a phantom cash income of $2 million per annum year on year. Has that something to do with the $2 million Kangaroo Island is supposed to get from the State for its rural roads?

– No. After we adjusted the LTFP, the State decided to contribute 2 million $ per year directly and only to upgrading our rural roads. This was the outcome of us pleading with them that we were broke and couldn’t reduce expenditure enough to survive. We don’t actually get this $2 million a year into our budget, as was stated for the April 2011 LTFP ! Council hopes to see a lessening in our road maintenance expenditure in due course, but that is not apparent yet and with the extra tourists probably we won’t.

 

– Hmmm. For the casual observer, it’s all a bit messy, you know. Whatever… What happened to these “essentials” with indigestible acronyms you mentioned – the AMPs and LTFPs – that were such a high priority back in 2011?

– Each year we are ritually presented with a new LTFP that promises to have balanced the books in ten years… but as soon as the year rolls on the promises cannot be met so a new LTFP is developed to facilitate the preparation of the next budget: this means the target is extended each and every year by another year. It’s like the misleading advert “Free pie tomorrow”… of course every day is today, never tomorrow.

To quote the draft 2014/2015 business plan “overall this is a budget aimed at continuing the process of working toward financial sustainability within 10 years – this is council’s stated goal.” Indeed it is. It has been council’s stated goal each year for several years now, and just like the free pie tomorrow you never get it — the goal keeps shifting. The last 10-year plan that council adopted was october 2013 and that required the administration to reduce expenditure by $127,000 over 2014/2015. “The overall Annual Budget target for the 2014/15 financial year is to make an improvement of $127,000 over the 2013/14 budget framework. That was one of very few specific directions on the administration to tighten the belt.

 

– At least council was having some good intentions… Have these intentions morphed to real stuff — I mean more money available for tangible and useful council activities — following your continued demands for financial responsibility ?

– That would be great, but the savings in expenses are adjustments to the depreciation schedule, not more available cash.

About two years ago council significantly reduced the depreciation values on our books by removing all assets that it says will not be replaced (e.g., they have an old shed in a paddock, they just decide not to maintain it any more, so it goes out of the books as an asset). This procedure, applied to all council assets, reduced council expenses by about $1m each year.

Council is so pleased with that reduction because it can now say look at how we have lowered our deficit.

But let’s be very careful here. In total, council has a large amount of assets and by necessity has a large depreciation cost on these. Now, this is an expense on an operational basis. So there is no doubt that this large depreciation cost increases council total operational expenses significantly. But it does so for a reason – it tells us that we are not maintaining our assets because we are not funding (with cash) their maintenance and renewal.

We then go chasing more pseudo financial benefits from that same non-cash bucket: our apparently improved performance is from the non-cash bucket while our cash expenditure continues unabated: such as council employees cost up a further $200,000 for the 2014/15 year; I stress that this in addition to our extraordinarily increased employee costs in the past two years ! What adds insult to injury is that we need to spend significant cash to achieve these so-called depreciation expense reductions ! Considerable staff resources have to be allocated to adjusting the books (while employees are paid salary, which is cash, to do that, they can’t be used on more productive tasks !) – and let us not forget the further cash needed to pay for consultants on this matter !

 

– I can see the manufactured aspect of this creative management of the books. Are you saying this is not good accounting practice (though it’s probably legal)?

– No, I’m not saying that. These accounting processes can be useful when applied properly. In fact there are other “best-practice” accounting methods that we have adopted recently, to also make our books look better; such as allocating some salaries to our capital works so they do not appear as expenses. These are also of no cash benefit to the council, but can have their use. I am saying in a cash-strapped organisation like ours, this kind of accounting changes should be a low priority, because it does not produce any tangible benefit to the community. I am damn sure the community of say Saphiretown with its lack of roads and extreme bushfire risk would rather the cash be spent in their yard. Indeed a casual council observer might say it was cooking the books and morally corrupt to place a higher priority to spend cash on such council deficit adjustments rather than providing basic and essential community services, like repairing roads and fire prevention.

Another major concern is that these recent adjustments to the accounts distort comparisons with previous years.

 

– Right, I start understanding a bit more what is undeniably a complex and fascinating matter. Could you please complete your earlier comments on the LTFPs and AMPs (Long Term Financial Plans and Asset Management Plans) – I think I interrupted you because I needed to better understand the financial context.

– O.K., the free pie always promised tomorrow. Last year council adopted the LTFP and budget requirements that would form the basis for the next ten years and the 2014/15 Business Plan.

Only last week we are advised this appears to be yoghurt already. In reporting on the following strategic financial requirement: “Council has a long term financial plan which underpins the development of the annual budget and aligns with council’s strategic management plans.”, the following is advised: “Council does have a LTFP which has been adopted and then used as the basis for developing the 2014/15 annual budget. The LTFP does however make assumptions which have not been realised consequently it will need to be revisited.”.

 

– So I understand from what you are saying that there seems to be little soundness to these administrative and accounting plans. They seem to be used more to win awards and develop nice-looking pretense budgets; indeed they help council develop its whole budget on fudge, rather than having any connection to the real needs of balancing the books and providing essential services to the community. Speaking of this current budget, in the last council meeting you moved a pretty interesting motion to address council finances. What was it ?

– The motion I moved was pretty much an executive summary of our dreadful financial situation and the administration’s indifference to move to deal with it. There was some interesting discussion in council resulting from it…

During my reading of this motion I was interrupted by the mayor stating that my figures were incorrect. I stated they were from the only Business Plan council had been presented with : the one formally received in the May meeting. The mayor insisted I should be using the information in the revised Business Plan in today’s agenda. After some argument it was agreed and council was advised that there was neither a Business Plan nor a Budget in the meeting agenda.

Despite this information, council nevertheless passed both the Business Plan (Item 11.4 “That pursuant to Section 123(8) of the Local Government Act 1999, the “Annual Business Plan 2014–15” is adopted with minor changes as required.”)… and the Annual Budget (Item 11.5 “That pursuant to Section 123(7)(b) and (8) of the Local Government Act 1999, and Regulation 5B of the Local Government (Financial Management) Regulations 1999, the Annual Budget for the 2014/15 financial year showing a projected budget deficit of $3,502,010 based upon the estimated incomes and expenditures for the various functional operations of the Council as set out therein, be adopted and include any minor amendments.”).

There being no actual Business Plan in the agenda nor an Annual Budget, begs the question: just what is council working with, now that we have rolled into the new financial year – is it the May 2014 edition that was formally received by council? Is it something else… or even nothing at all, considering that nothing really was materially approved? An extraordinary situation!

 

– It seems like this administrative fiasco may well sum up the disfunctioning of the present council. But please, considering the importance of the matter, could you dwell a bit more on this strange budgetary situation, including the legalities?

– Well clearly council has not been provided with a proper budget and plan, according to Regulation 7 of the Local Government (Financial Management) Regulations 2011, because Regulation 7 requires:

Budgets:
Pursuant to section 123(10)(b) of the Act, each budget of a council under the Act must —
(a) include budgeted financial statements, which must be presented, other than notes and other explanatory documentation, in a manner consistent with the Model Financial Statements; and
(b) state whether projected operating income is sufficient to meet projected operating expenses for the relevant financial year; and
(c) include a summary of operating and capital investment activities presented in a manner consistent with the note in the Model Financial Statements entitled Uniform Presentation of Finances; and
(d) include estimates with respect to the council’s operating surplus ratio, net financial liabilities ratio and asset sustainability ratio presented in a manner consistent with the note in the Model Financial Statements entitled Financial Indicators.

None of that appears to have been done so the Auditor General should have a comment or two about that situation. Clearly ratepayers are not yet able to know just what council is doing this year. It is incredible that council voted to pass “The Business Plan” and “The Budget” while there was neither document included in the agenda.

 

– As a Kangaroo Island ratepayer, like everyone I have noticed for a number of years now a steep and unrelenting increase in obligatory payments to the local administration, and don’t see much in return. What is the present financial situation for Kangaroo Island council?

– Ratepayers will always grizzle about the payments they have to make so what if we look at few key indicators since 2009/10 ? What they had to absorb in cents in the dollar rates over the five years since june 2010: residential up 54%, farmland up 63% and vacant land up 50%, to the start of this new financial year.

With that, keep in mind the horror story of council shortfall (deficit) each year, happening despite these massive rates hikes, which I covered in our first interview. This year the operational deficit appears to have stopped increasing but is still forecast to be $4.2 million – on a equivalent basis back in 2009/10 it was only $1.1 million (to understand this notion, don’t forget the impact of the depreciation game that I mentioned earlier in the present interview).

To sum it up: the reality is that we have probably passed the point of any budget recovery — I mean, doing it in real terms, not doing it with smoke and mirrors.

 

– Is there any sort of financial “achievement” that the current Kangaroo Island council may claim ? Looking at those records you refer to from 2009/10, I see there was $4.1 million budgeted for the Penneshaw CWMS (the very controversial planned sewerage system). Where did this allocated money go ? Because there’s certainly not a CWMS system in this town, not even works beginning.

– This amount has come back to about nothing in the 2014/15 budget so there is little expected this year except more huff and puff.

 

– You are saying then, that there was $4.1 million programmed for the Penneshaw CWMS in 2009/10 and since then, through to this year 2014/15, there is no provision for council to spend on this project? What happened to the allocated money?

– The money was for capital works – ie getting on with constructing the project. It is no longer budgeted for due to continuing delays. The money allocation has gone to other requirements.

It is worth noting that the $4.1 million was council’s part of the cost to do the whole town and council had decided to allocate the resources back then to do this. We are now expecting to provide a CWMS for only some 40% of Penneshaw, for council’s cost of about $1.3 million, but have lost the subsidy for the remaining 60% of the town. On this matter, there has been considerable expenditure of resources to do a lot of preliminaries but essentially we are at the same point as back in 2009/10.

There is always the need to adjust both maintenance and capital programs but running significant deficits always results in the need to cut back more heavily: both capital works and operational programs are pushed into the future and the total works done in each year becomes less – this shows up in the poor state of renewal of our assets which is sliding downhill and which means we are currently fixing our infrastructure at only one third of what is required. A council cannot spend the taxes it raises twice – for both significantly increased staffing costs and on renewals and maintenance.

 

– I would like to ask you what other key problems are significantly affecting the performance of this council, but if you agree that might be for the fourth interview of you on Kangaroo Island Council matters. Would you agree to that if we close this one now?

– Yes, that will be possible. I need to emphasise again that these views are my own and not necessarily those of council or any other councillor.

 

– I understand your usual caveat, you have enough “code of conduct” complaints lodged against you by those who feel ruffled by you. Thank you for your time and explanations, councillor Walkom.

Related posts:

Kangaroo Island Council not functioning properly — interview of Cr Walkom, 2014.07.11

How to undermine a conscientious councillor — Interview of Cr Walkom, 2014.07.04

Why is Council in financial and management trouble ? — Short interview of Cr Walkom, 2013.09.29