An independent baseline audit of council's finances from 2015/16 to 2018/19 has found gaps in reporting procedures and has recommended a number of improvements take place in council's accounting practises.
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The need for an audit, which was prepared by Morrison Low, was hotly debated in council and strongly advocated for by Crs Mitchell Nadin and Robyn Bain.
In the executive summary the report said while there had been improvements in reporting more recently there were gaps identified, particularly around quarterly budget reviews (QBR) and cash reserves.
In March 2019, the QBR disclosed a transfer from reserve for the amount of $6,252,000, for which there was no commentary indicating which works/projects or reserves and respective amounts the total related to. There weren't any proposed transfers to/from reserves in the December 2018 QBR whilst the September 2018 was not prepared and presented to council.
In a somewhat telling comment the Morrison Low report recommends that "any externally restricted reserve currently held by council, or intended to be set-up in the future, is subject to external restrictions in their purpose".
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The report reminds council that the reserve is subject to legal requirements that govern the use of the funds. It also states that transfer of funds are restricted by the individual funding agreements and that council must authorise transfers by council resolution.
This is something that did not happen in the case of the $6.25m in the March 2019 QBR as the report finds no information regarding this transfer.
The report also reminds council that reserve funds that have not been utilised for the purpose for which they were received carry an obligation or requirement to return funds to the contributor and in addition all reserves must be fully cash backed.
Ups and downs over the four years reviewed
The review looks at the entire four-year period and finds that income received (rates, fees and charges) was up on the budgeted amount by 4.37 per cent.
Operating grants used to run services were 33.6 per cent above the budget expectation.
However, over the four-year review period total expenses were up by 8.89 per cent.
But the really big items were materials and contracts expenses which were well above the budget amount by approximately $22m or 24.36 per cent.
Drilling down: materials and contracts blow out by 60 per cent
The report is blunt in its assessment of the materials and contracts expenses in 2018/19 which blew out by 60 per cent.
"Drilling further down, material and contracts expenses in 2018/19 far exceeded original budget expectations - $35,359,000 against $22,052,000 or 60.34 per cent," the Morrison Low report states.
And if council's figures are correct the report points to the huge variation in the final quarter equating to a spend of $21,736,000 being expended in materials and contracts in the June 2019 quarter.
Comparisons with other group 4 councils
The report compares Bega Valley Shire Council with other similar group 4 councils in 2018/19 finding that in many categories council performed well below the average.
Of the 26 councils in the group Bega Valley was:
21 out of 26 for operating result from continuing operations - $7,990 million
23 out of 26 with regards to the operating result before capital grants and contributions - ($8,920 million)
25 out of 26 with regards to total internal restricted reserves amount held - $3,243 million
10 out of 26 with regards to total external restricted reserves amount held - $79,644 million
23 out of 26 with regards to unrestricted cash amount held - nil
15 out of 26 with regards to total cash and investments held - $82,887 million
25 out of 26 with regards to the operating performance ratio - (9.93%)
17 out of 26 with regards to the own source operating revenue ratio - 66.08%
26 out of 26 with regards to the unrestricted current ratio - 0.64
22 out of 26 with regards to the debt service cover ratio - 2.75
11 out of 26 with regards to the rates, annual charges, interest and extra charges outstanding ratio - 4.68%
11 out of 26 with regards to the infrastructure renewals ratio - 94.91%
Morrison Low said the level of the leave entitlement reserve (21.64 per cent of the liability) "may not be adequate".
What the Morrison Low report recommends
The report says: "From our analysis we strongly encourage the implementation of the following 11 recommendations contained in the report."
1. It is recommended that QBRs detail works and/or projects affected by transfers to/from reserves and the individual reserve affected is identified.
2. It is recommended that a report containing a full list of reserves detailing the opening balance as at 1 July, original budgeted transfer amount, updated budgeted transfer amount, actual transferred amount, and closing balance as at 30 June, is provided to Council on a monthly basis with the Investment and Bank Reconciliation Report.
3. It is recommended that a full list of projects that have funding sources consisting of reserves, grants, loans or a combination of the same detail budget, funding source, funding source amount used/drawn down to date, expenditure to date, expected expenditure to completion and expected completion date of the project be reported to Council on a quarterly basis.
4. It is recommended that works be identified for funds held in each reserve. Where excess unrestricted funds are held these be transferred to the employees' leave entitlement reserve. (This reserve has 21.64% of the liability covered, which may not be adequate.)
5. It is recommended that the amount of the employees' leave entitlement reserve is based on a formula calculated by reference to age brackets and total leave accruals with each fund (General, Water, Sewer and Waste) contributing to employees of that fund.
6. It is recommended that any externally restricted reserve currently held by Council, or intended to be set-up in the future, is subject to external restrictions in their purpose. These reserves are cash backed, with the following criteria applying to externally restricted reserves:
a. The reserve is subject to legal requirements that govern the use of the funds.
b. A reserve will be established for any value if there is a legal requirement or a requirement under Australian Accounting Standards.
c. Transfer of funds are restricted by the individual funding agreements. Council must authorise transfers by Council resolution.
d. The reserve includes funds that have not been utilised for the purpose for which they were received, and an obligation or requirement to return funds to the contributor exist.
e. All reserves must be fully cash backed.
7. It is recommended that any internally restricted reserve currently held by Council, or intended to be set-up in the future, is established by a Council resolution to ensure that sufficient funds are available when required for a specific purpose. These reserves are cash backed with the following criteria applying to internally restricted reserves:
a. The reserve is not subject to legal requirements that govern the use of the funds.
b. The establishment of a new reserve must be for a specific internal purpose authorised by a Council resolution and shall not be established for an amount less than $50,000.
c. Transfer of funds are restricted by the internal purpose of the reserve. All transfers must be authorised by Council resolution.
d. The reserve has been established for a specific internal purpose, however, if that purpose does not eventuate or Council changes its priorities the funding can be diverted to other purposes, by Council resolution.
e. All reserves must be fully cash backed.
8. It is recommended that existing internally restricted reserves be discontinued or amalgamated into those contained in Table 3.
9. It is recommended that consideration be given to including the 15 dot points contained in section 8 'Grant Procedure Review' in Council's Grants Management Processes and Procedures document.
10. It is recommended that monthly accruals of financial transactions, within four business days of months end, be implemented for interest on investments, administration overheads, on-costs, depreciation, capitalisation of assets purchased/sold, plant income/expenses and reserve movements.
11. It is recommended that monthly financial reporting be implemented at the income statement level.
