Debt and deficit don’t ‘fuss’ risk committee members

Central Coast Council’s Gosford Chambers

Two independent professional members of Central Coast Council’s Audit, Risk and Improvement Committee (ARIC) said they were comfortable with Council’s level of debt before the financial crisis.

Both said they were not alarmed by the deficit budgets.

Independent ARIC member, Carl Millington, said he would probably have said he was comfortable with the deficit budgets Council ran and its level of debt if he had been asked at the time.

Independent member, John Gordon, said two or three years of deficits did not fuss him.

Speaking at the Public Inquiry into the council Millington said his review of the financials each year always indicated the Council had an operating surplus before the capital grants were taken out.

He said the consolidated set of accounts each year appeared okay.

“There was ample cash, there were assets, there were liabilities, all the normal things,’’ he said.

“The ratios seemed okay. There was nothing in those first few years that would sort of suggest to you, hey, we need to look a bit deeper here,” he said.

He said if he had been asked about deficit budgets at the time, he probably would have not been overly concerned on a short-term basis, because “at times when you’re trying to rebuild, or if you’re trying to do things, sometimes you have to go into deficit.

“The issue with Central Coast Council also that you can’t overlook is it’s a very big, sophisticated, complex entity,” he said.

When asked about the debt he said he deemed that neither Wyong nor Gosford carried excessive amounts of debt.

“When you bring together a $10B organisation, you cannot reasonably expect there would be no debt,” he said.

“There would be very few councils in NSW who have no debt. It’s just a fact of life.

“Every presentation I have ever done to a council, when they say to me, ‘We are aiming to be debt free’, I think that’s admirable, however, if I ran my personal finances that way, I would live in a tent because I can’t afford to pay cash for the house I live in, I have to borrow the money,” he said.

“You’ve really got to balance out what the expectations of the community are with your capability to service the debt.

“My personal opinion is the amount of debt brought forward wasn’t that significant. The cost of servicing it was not that significant.

“And in the first few years of Council’s existence, my recollection is they were reducing the debt each year.

“To me, the debt wasn’t the problem.”

He was asked if he knew prior to 2020 that restricted funds were being used for non-restricted purposes?

He said no and talked about the different ways the financial reports were presented.

“The problem is where restrictions come into play and that, to me, is where the confusion is and that’s where there is the lack of understanding and there’s the inconsistency between two entities, being the Council and the water supply authority, and the treatment of certain things, which causes confusion,” he said.

“I would seriously believe it is difficult for anybody who is not trained in the accounting concepts to grasp all of those things,” he said.

When asked if the community had suffered as a result of the measures made to rectify the financial crisis, he said he only had secondhand knowledge.

He said he had people say to him ‘how can they lose that sort of money?’.

“I don’t know that they have lost that much money because every year that I have looked at, if I take depreciation out or if I take written-down assets, if I take out just normal things that one would take out when you are doing a financial analysis, they have generated surplus cash every year,’’ he said.

Another independent member of the ARIC, John Gordon, followed Millington to give evidence.

He mentioned there were 120-150 Local Government Act requirements that related to local government operations and part of ARIC’s role was to be comfortable that there was a framework to manage all compliance and sustainability risks associated with Council.

He too said two or three years of deficit budgets would not “fuss me”.

“The first year we looked at was ‘17,” he said.

“That was a $65M profit before capital amounts.

“That’s quite a strong result.

“The second year was a loss of -$22M, not significant in an organisation with about $700M  turnover.

“If you looked at that, within the $22M was a write-off of property.

“Land was overvalued somewhere at $33M or $35M.

“So if you added that land adjustment back – it’s got nothing to do with cash, it’s just an academic accounting adjustment – we actually made a surplus for 2018 as well, and 2019 was a $5M loss.

“So I’m saying, as an independent person looking at it, I’m not alarmed by the losses.”

He said he was not concerned with the $317M debt brought in when the Council was formed in 2016 from the two former councils.

“I’ve had a lot of familiarity with councils and debt is not uncommon, particularly a council with water and sewer and drainage assets.

“They are what we call in the industry long-lived assets – they’re network assets. You build a dam that has a life of 100 years.”

He said intergenerational debt was discussed at conferences.

“If an asset lasts 100 years, why should it be the current generation drains all their cash, and then can’t have their parks, gardens, childcare centres and roads, to pay for an asset that future generations are going to get the benefit of free of charge,” he said.

“What is a concern, though, is that the administrator has had to go cap in hand to banks to borrow $150M to bail us out in day-to-day cash so that we can leave and preserve the restricted assets that should be there. That is a concern,” he said.

The full transcripts of both testimonies from October 12 are on the Office of Local Government website, Central Coast Public Inquiry page.

Merilyn Vale