scenario analysis: options for oberon lga

SCENARIO ANALYSIS: OPTIONS FOR OBERON LGA

AN ASSESSMENT OF POTENTIAL STRUCTURAL REFORM OPTIONSPUBLIC MEETING: 9 NOVEMBER 2015

Nicole Campbell, Program Manager UTS:CLG

WHAT THIS PRESENTATION COVERS

Local Government in NSW Overview of Local Government Reform

– Destination 2036– TCorp assessment of councils’ financial sustainability– Independent Local Government Review Panel (ILGRP)– Local Government Act Review Taskforce

Government response to review processes – Fit for the Future (FFF) Independent Pricing and Regulatory Tribunal (IPART) assessment of FFF proposals

– Process– Summary of assessment process

IPART Assessment of Oberon Potential options – scenario analysis (modelling scale and efficiency)

– Oberon “stand-alone” – member of Central West Joint Organisation– Oberon merge with Bathurst Regional Council– Oberon merge with Upper Lachlan Shire Council– Oberon merge with Lithgow Council

Other considerations: Financial Assistance Grants; Governance; Caveats

LOCAL GOVERNMENT IN NSW

In NSW there are over 1500 Councillors in 152 Councils

Local Government in NSW employs over 50,000 people, has an asset and infrastructure base of $89b and spends more than $9.4 billion/year

Council services include: town planning, waste management, community development, environmental protection, economic development and much more…

Councils are elected for fixed 4 year terms – the next LG election in NSW is scheduled for September 2016

2011-2012: Destinations 2036

2011-2013: TCorp Assessment

2012-2013: LG Act Taskforce

RECENT REFORM PROCESSES IN NSW LOCAL GOVERNMENT

2012-2013 ILGRP: FINAL REPORTFinal Report: 65 recommendations:

http://www.localgovernmentreview.nsw.gov.au/documents/LGR/Revitalising%20Local%20Government%20-%20ILGRP%20Final%20Report%20-%20October%202013.pdf

ILGRP: ESSENTIAL ELEMENTS OF AN EFFECTIVE SYSTEM OF LOCAL GOVERNMENT

Councils with the scale, resources and ‘strategic capacity’ to govern effectively and to provide a strong voice for their communities

Maintenance of a strong sense of local identity and place

Councils with an adequate revenue base (own source or grants) relative to their functions, healthy balance sheets, and sound financial management

Councils renowned for their efficiency and focus on outcomes, based on the Integrated Planning and Reporting framework

Regional groupings of councils that share resources on a large scale and jointly plan and advocate for their regions

Councils that have highly skilled mayors, councillors and executive teams; and are respected by the State government and community alike

Mayors who are recognised leaders both within the council and throughout the local community, and enjoy a positive reputation for that leadership.

(Source: ‘Final Report’ ILGRP, Box 7, p. 31)

ILGRP: ESSENTIAL ELEMENTS OF AN EFFECTIVE SYSTEM OF LOCAL GOVERNMENT

An electoral system designed to ensure that as far as possible councils are representative of the make-up and varied interests of their communities

A Local Government Act that minimises prescription and provides a range of options for the way councils and regional bodies are structured

Effective mechanisms for State-local consultation, joint planning, policy development and operational partnerships

A local government association that is focused on strategy; a well-informed, dynamic advocate; a leader in reform; and a troubleshooter

A constructive relationship between employers, employees and employee organisations, focused on improving productivity, performance and rewards.

(Source: Final Report ILGRP, Box 7, pg 31)

ILGRP: DEFINING “STRATEGIC CAPACITY”

1. More robust revenue base and increased discretionary spending 2. Scope to undertake new functions and major projects 3. Ability to employ wider range of skilled staff 4. Knowledge, creativity and innovation 5. Advanced skills in strategic planning and policy development 6. Effective regional collaboration 7. Credibility for more effective advocacy 8. Capable partner for State and federal agencies 9. Resources to cope with complex and unexpected change 10. High quality political and managerial leadership.

(Source: ILGRP, Box 8, pg 32)

ILGRP RECOMMENDATIONS 65 recommendations covering:

– Fiscal responsibility– Strengthening the revenue base– Meeting infrastructure needs– Reform of Grants – provided on the basis of greatest need (Federal legislative change

needed)– Improvement, productivity and accountability– Political leadership and good governance– Advance structural reform– Regional Joint Organisations– Rural Councils and Community Boards– Progressive referral of non-metropolitan councils to reconstituted Boundaries Commission

(for merger and boundary changes)– State-Local Government Relations

ILGRP recommendation for Oberon: Council in Central West Joint Organisation or merge with Bathurst Regional Council (Source: Final Report ILGRP, p. 116).

FIT FOR THE FUTURE NSW Government response to ILGRP and LG Act Taskforce released 24 September 2014 – ‘Fit for the Future’ (FFF)

“A Fit for the Future council is one that is: Sustainable; Efficient; Effectively manages infrastructure and

delivers services for communities; Has the scale and capacity to engage

effectively across community, industry and government.”

(Source: FFF, pg6, September 2014) http://www.fitforthefuture.nsw.gov.au/sites/fftf/files/NSW-Government-Response-Panel-and-Taskforce-recommendations.pdf

TIMELINE: FFF ASSESSMENTS

Independent Pricing + Regulatory Tribunal (IPART) appointed by NSW Government in April 2015 to assess FFF proposals.

IPART sought public feedback on the proposed methodology on 27 April 2015.

IPART methodology released on 5 June 2015 http://www.ipart.nsw.gov.au/Home/Industries/Local_Govt/Fit_for_the_Future

NSW councils required to submit FFF proposals to NSW Govt by 30 June 2015

IPART conduct FFF assessment of councils – provision of report to NSW Government on 16 October 2015 http://www.ipart.nsw.gov.au/Home/Industries/Local_Govt/Fit_for_the_Future

IPART FFF METHODOLOGY

IPART applied criteria established by the NSW Government via the ILGRP to assess a council as being ‘Fit for the Future’

Scale and capacity to engage effectively across community, industry and governments – threshold criterion – based on projected 2031 populations.

Financial sustainability – assessed on:– Sustainability– Effectively managing infrastructure and delivering services

for communities– Efficiency*

SUMMARY: IPART “FFF” ASSESSMENT

139 proposals received from 144 councils including– 4 merger proposals (involving nine councils)– 115 Council Improvement Proposals– 20 Rural Council proposals

IPART Assessment: 87 proposals assessed as “Not Fit” (63% of proposals)

– 60 demonstrated financial sustainability but not ‘sufficient scale and capacity’

– 18 demonstrated sufficient ‘scale and capacity’ but not financial sustainability

– 9 councils did not demonstrate either financial sustainability or scale and capacity

52 proposals assessed as “Fit for the Future” (37% of proposals)– All four merger proposals assessed as “Fit”

IPART ASSESSMENT: NON-METRO

IPART ASSESSMENT OF OBERONParameter Current Projected

Area (km2) 3,594 3,594

Population 5,200 (2011) 4,950 (2031)

Operating revenue $12.0M

TCorp assessment Sound Negative outlook

Scale and capacity Does not satisfy on population projections

Financial criteria• Sustainability• Infrastructure and

service management• Efficiency

Satisfies overallSatisfiesSatisfies

SatisfiesWater and sewage Meets NSW Govt best practice requirements

Social and community context

Closer links with Blue Mountains than other western towns

Community consultation Undertaken in April 2015: support for stand alone council

Submissions received 7: Six opposing merger; one neutral

NSW GOVT RESPONSE TO IPART REPORT

Released on 20 October 2015 http://www.fitforthefuture.nsw.gov.au/whats-on-offer-for-councils

Councils given until 18 November 2015 to respond to the assessment of their council and identify merger preferences

Stronger Communities Fund and Merger Implementation Grant:

*Includes Newcastle, Wollongong and surrounds

NSW Government decision on local government reforms expected before the end of 2015.

Fund Metro Sydney* Regional

Stronger Communities Fund (community infrastructure for merged entities)

$10 millionor$15 million if three or more councils merging

$5 millionor $10 million if three or more councils merging

Merger Implementation Grant

$10 million $5 million

TCorp Low Interest Loans Oberon has taken advantage of $5m in last 2 years

2015: GPSC #6: UPPER HOUSE INQUIRY INTO LOCAL GOVERNMENT

http://www.parliament.nsw.gov.au/prod/parlment/committee.nsf/0/B0C026787382E495CA257EEC007FFECA?open&refnavid=CO3_1

POTENTIAL MERGER OPTIONS: OBERON

Oberon as a ‘stand alone’ council – part of Central West Joint Organisation

Oberon merging with Bathurst Regional Council

Oberon merging with Upper Lachlan Shire Council

Oberon merging with Lithgow Council

MODELLING SCALE AND EFFICIENCY

The following slides provide estimates of the relative efficiency and scale projections for various merger scenarios which may be considered by Oberon Council.

UTS:CLG stresses this modelling is not a substitute for due diligence – which will be required if a potential merger option is progressed.

The modelling deals principally with the matters of relative efficiency and scale and is an empirical response to IPART assessment of Oberon.

MODELLING SCALE AND EFFICIENCY

‘Scale and capacity’ was the threshold criterion for the IPART assessment

‘Scale’ appears to have been the dominant consideration in the FFF assessments by IPART – (remember ‘strategic capacity’ as defined by the ILGRP had 10 specific elements that could also be considered).

‘Economies of scale’ is a term used to describe a decrease in average total cost as output increases (based on a proxy for size, generally population*).

Just as councils can be ‘under-scaled’, it is important to note that councils can also be ‘over-scaled’ and thus exhibit diseconomies of scale: that is, increasing total average costs related to size.

SIZE DOESN’T EQUAL ‘EFFICIENCY’

DEA results employ a far more accurate suite of proxies for output than the IPART assessment or the ILGRP (which rely solely on assumptions based on population size).

Population size is inadequate as a measure of efficiency as it implicitly assumes that councils have no expenditure associated with providing services to businesses or for maintaining council transport infrastructure. It also erroneously assumes that the cost of servicing a person that lives on a farm is the same as the cost of living a person living in town.

For example, there is a negative correlation between population size and length of council maintained roads.

Just using population as a measure of efficiency will most likely to disadvantage rural shires with lots of council transport infrastructure but relatively small populations.

SCALE AND EFFICIENCY: NSW LGA (2014)

Amalgamation status

Scale Number Mean scale Stand. Dev. Min. Max.

Entire State OS 12 1 0 1 1

IRS 72 0.93758 0.080932 0.664797 0.999984

DRS 68 0.924319 0.090352 0.580372 0.999587

Amalgamation status

Efficiency Measure

Number Mean CRS Efficiency

Stand. Dev.

Min. Max.

Entire State OS 12 1 0 1 1

IRS 72 0.676465 0.149675 0.328472 0.99997

DRS 68 0.701715 0.156546 0.3776 0.999002

Efficiency Results (CRS) for New South Wales Councils – Pre Amalgamation 2014

Scale Results for New South Wales Councils – Pre Amalgamation 2014Notes: OS = optimal scale; IRS = increasing returns to scale; DRS = decreasing returns to scale.

OPTION 1: OBERON AS ‘STAND ALONE’ (PART OF CW JO)

CHARACTERISTICS OF OBERON LGAVISION: A prosperous town, villages and rural communities set amongst the rolling hills,

rivers, forests, mountains and caves of the Great Divide. A breath of fresh air in a landscape of light, colour and seasonal beauty. Life as it should be!

CSP themes: Healthy & Active; Basic Services; Economic Prosperity; Responsive & Caring; Open Community; Natural environment

Strategic Alliances CENTROC; Water Utilities Alliance

Representation 9 Councillors (1:560)

Revenue SRV approved (1st of 5 yrs) and LIRS to fund roads infrastructure improvements; seeking more RMS contracts; potential urban residential expansion (250 new lots); potential mining

Demographics Population: 5040 (2011), growing aged population (median age 41); 5.2% unemployment*

Key industries Manufacturing, Agriculture, Forestry, Mining

Locational advantages

Tablelands Way; close to large regional centres; Jenolan Caves and Mayfield Gardens; close links to villages of Black Springs, Burraga and O’Connell

Challenges Road network; unreliable internet; need for more independent living facilities and youth services; constrained rate revenue due to large areas of unrateable land (National Parks and State Forests)

Community spirit Proud and engaged local community, strong rural connection

IPART ASSESSMENT OF OBERONParameter Current Projected

Area (km2) 3,594 3,594

Population 5,200 (2011) 4,950 (2031)


TCorp assessment Sound Negative outlook

Scale and capacity Does not satisfy on population projections

Financial criteria• Sustainability• Infrastructure and service

management• Efficiency

Satisfies overallSatisfiesSatisfies

Satisfies

Water and sewage Meets NSW Govt best practice requirements

Social and community context Closer links with Blue Mountains than other western towns

Community consultation Undertaken in April 2015: support for stand alone council

Submissions received 7: Six opposing merger; one neutral

EXISTING SCALE AND EFFFICIENCY OF OBERON COUNCIL

Amalgamation status

RelativeTechnical Efficiency (CRS)

Scale Returns to Scale

Oberon 0.700512 0.979445 IRS

OPTION 2: OBERON MERGE WITH BATHURST REGIONAL COUNCIL

CHARACTERISTICS OF BATHURSTVISION: Vibrant regional centre, rural lifestyle, inclusive community

CSP themes: Economic Prosperity; Environmental Sustainability; Liveable Communities, Sound Leadership – underpinned by: good custodianship; enhancing prosperity; conserving our place; valuing diversity; empowering people and shared responsibility

Strategic Alliances Bathurst-Orange-Dubbo Alliance; CENTROC

Representation 9 Councillors (1:4,439); merged with part of Evans in 2004

Revenue Building growth (projected until 2031) 1.3%; future educational and research opportunities; Budget ~$180M/year

Demographics Population growth 1.25%; growing aged population; unemployment rate 4.8%;

Key industries Health, Education, Manufacturing, Retail, Agriculture, Tourism (including the Bathurst 1000), food and wine

Locational advantages Vibrant city, country lifestyle; natural resources, secure water supply and heritage qualities highly valued, University campus, regional airport

Challenges Road and rail connections between Sydney and CW region; asset and infrastructure maintenance backlog

Community spirit Australia’s oldest inland settlement; strong sense of place

IPART ASSESSMENT OF BATHURSTParameter Current Projected

Area (km2) 3,819

Population 39,950 (2011) 51,550 (2031)


TCorp assessment Moderate FSR Negative outlook

Scale and capacity Satisfies – on population projections

Financial criteria• Sustainability• Infrastructure and


Satisfies overall• Satisfies• Satisifies

• SatisfiesWater and sewage Meet NSW Govt best practice management requirements

Social and community context

No details provided in Council Improvement Plan

Community consultation No details provided in Council Improvement Plan

Submissions received Nil

EFFICIENCY AND SCALE:OBERON COMPARED WITH BATHURST

Amalgamation status



Oberon 0.700512 0.979445 IRS

Bathurst 0.560041 0.96007 DRS

OPTION 3: OBERON MERGE WITH UPPER LACHLAN SHIRE COUNCIL

CHARACTERISTICS OF UPPER LACHLAN

VISION: To be a diverse local government area that provides various lifestyle, business enterprise, leisure and recreation alternatives, whilst ensuring environmental sustainability, preservation of our history and a sense of belonging in our community.

CSP themes: Healthy and natural environment; healthy, resilient, connected and active community; prosperous economy; built environment that reflects lifestyle; responsible resource use; good governance

Strategic Alliances CENTROC; CRJO; Sthn T/lands Library Cooperative; regional collaboration in transport infrastructure projects

Representation 9 Councillors (1:799)

Revenue Private capital works and RMS contracts

Demographics Pop: 7193 (2011), highest pop growth in SE & T/lands (2.1%); ageing population (median age 46); predominately Caucasian;

Key industries Rural production (41%), Health (9%), Retail (7%), Education (7%), Accommodation and food (6%), public service (5%)

Locational advantages Strong rural character; previously merged 2004

Challenges Infrastructure backlog

Community spirit Proud and engaged local community, strong rural connection

IPART ASSESSMENT OF UPPER LACHLANParameter Current ProjectedArea (km2) 6,829Population 7,400 (2011) 7,500 (2031)Operating revenue $21.2MTCorp assessment Sound Neutral outlookScale and capacity Does not satisfy – on population projectionsFinancial criteria• Sustainability• Infrastructure and


Satisfies overall• Satisfies• Satisfies

• SatisfiesWater and sewage 89% sewer compliance; 90% water supply

complianceSocial and community context

Agriculture, tourism and retail – main economic drivers

Community consultation Undertaken March and May 2015. Strong support to stand alone

Submissions received 6: Five opposing mergers; one re boundary adjustm.

EFFICIENCY AND SCALE:OBERON COMPARED WITH UPPER LACHLAN

Amalgamation status



Oberon 0.700512 0.979445 IRS

Upper Lachlan 0.866975 0.866975 DRS

OPTION 4: OBERON MERGE WITH LITHGOW COUNCIL

CHARACTERISTICS OF LITHGOW

VISION OUR PLACE – OUR FUTURECSP themes: Caring for our community; strengthening our economy,

developing our built environment; enhancing our natural environment; responsible governance and leadership

Strategic Alliances CENTROCRepresentation 9 Councillors (1:2,240)Revenue Mining, power, agriculture, correctional centreDemographics Population: 20,160 (2011), growing aged population (median

age 42); 7.2% unemployment*, predominately Caucasian; higher proportion of lone households

Key industries Mining (12.4%), Health (11%), Retail (10%), Admin (8.5%)Locational advantages

2 university campuses; one large urban centre and two rural townships;

Challenges Asset and maintenance – water and sewerageCommunity spirit Strong community spirit

IPART ASSESSMENT OF LITHGOWParameter Current ProjectedArea (km2) 4,464 Population 20,850 (2011) 20,600Operating revenue $22.1MTCorp assessment Sound FSR Negative outlookScale and capacity Satisfies – on population projectionsFinancial criteria• Sustainability• Infrastructure and


Does not satisfy overall• Does not satisfy• Satisfies

• Does not satisfyWater and sewage Does not meet NSW Govt best practice

management requirements ($24.1M to meet std)Social and community context

Bulk purchasing and other cost saving measures discussed with adjoining LGA’s

Community consultation No details providedSubmissions received One – concerns about accounting treatment of

assets and financial information in FFF submission

EFFICIENCY AND SCALE:OBERON COMPARED WITH LITHGOW

Amalgamation status Relative TechnicalEfficiency(CRS)


Oberon 0.700512 0.979445 IRS

Lithgow 0.774982 0.991214 DRS

DATA ENVELOPMENT ANALYSIS (DEA)

Data Envelopment Analysis (DEA) is an empirical analysis that enables a more ‘fine-grained’ estimation of relative municipal scale and efficiency.

DEA does not require prior specification of functional form.

DEA is able to consider multiple inputs and multiple outputs, and the model provides specific point estimates for each council or amalgamated entity.

Technical efficiency (TE) is assessed in terms of the ability of a council to convert inputs (staff and capital) into a set of outputs (number of residential assessments, number of farm assessments, number of business assessments and total length of municipal roads)

TE is calculated relative to the 151 NSW municipal peers.

(Drew, Kortt and Dollery (2015a).

HUH? WHAT DOES THAT ALL MEAN?

The model includes two specifications:

The CRS (Constant Returns to Scale) specification evaluates inefficient councils against any peer on the frontier – irrespective of size.

The VRS (Variable Returns to Scale) algorithm ensures that inefficient councils are only evaluated against municipalities of a similar size*.

Under both estimates efficient councils are given a score of 1 and inefficient councils assigned a score between 0 and 1.

Thus a council with an efficiency score of 0.9 is far more technically efficient than a council with a score of 0.6.

MODELLING SCALE AND EFFICIENCY COMPARISON FOUR POTENTIAL OPTIONS

Best scale is Oberon to remain as stand-alone Mergers are not optimal for any of these councils given that Oberon, Bathurst and

Lithgow are already over-scaled – which is reflected in the lower technical efficiency scores (CRS values) and indicated by the Decreasing Returns to Scale result

Best efficiency is Oberon-Upper Lachlan despite the fact that scale has an adverse impact on efficiency of about 20%.

Amalgamation status Relative Technical Efficiency (CRS)


Oberon Stand-alone 0.700512 0.979445 IRS

Oberon - Bathurst 0.578503 0.812421 DRS

Oberon – Upper Lachlan 0.80243 0.80243 DRS

Oberon - Lithgow 0.748396 0.892154 DRS

IMPLICIT AND EXPLICIT LIABILITIES - 1

Council No. Assessments

Borrowings (Current and Non-Current)

Other Liabilities (excluding borrowings)

Estimated Cost to Bring Assets to a Satisfactory Standard

Total Explicit and Implicit Liabilities

Oberon 3,550 1,568(0.442)

2,370(0.668)

7,680(2.163)

11,618(3.273)

Bathurst 18,120 21,826(1.205)

18,694(1.032)

50,108(2.765)

90.628(5.002)

Upper Lachlan

5,875 2,585(0.44)

6,231(1.061)

3,121(0.531)

11.937(2.032)

Lithgow 11,121 21,335(1.920)

17,255(1.552)

36,551(3.287)

75,141(6.757)

Implicit and Explicit Liabilities upon Merger (per Assessment Share in Parentheses) $’000Source: Number of assessments from OLG (2015); Financial data from audited financial statements 2014-15.

[1] We note that the Estimated Cost to Bring Assets up to a Satisfactory Standard estimate for the 2014 f/yr was $72,336, (000). [2] We note that Upper Lachlan’s Estimated Cost for the 2014f/yr was 8,958.[3] Lithgow cost to bring assets up to a satisfactory standard estimate is based on 2013/14 data as Lithgow still has not produced the 2014/15 Special Schedules.

IMPLICIT AND EXPLICIT LIABILITIES - 2

Council No. Assessments

Borrowings (Current and Non-Current)

Other Liabilities (excluding borrowings)

Estimated Cost to Bring Assets to a Satisfactory Standard

Total Explicit and Implicit Liabilities

Oberon-Bathurst

21,670 23,394(1.080)

21,064(0.972)

57,788(2.667)

102,246(4.718)

Oberon-Upper Lachlan

9,425 4,153(0.441)

8,601(0.913)

10,801(1.146)

23,555(2.499)

Oberon-Lithgow

14,671 22,903(1.561)

19,625(1.338)

44,231(3.015)

86,759(5.914)

Implicit and Explicit Liabilities upon Merger (per Assessment Share in Parentheses) $’000Source: Number of assessments from OLG (2015); Financial data from audited financial statements 2014-15.

[1] We note that the Estimated Cost to Bring Assets up to a Satisfactory Standard estimate for the 2014 f/yr was $72,336, (000). [2] We note that Upper Lachlan’s Estimated Cost for the 2014f/yr was 8,958.[3] Lithgow cost to bring assets up to a satisfactory standard estimate is based on 2013/14 data as Lithgow still has not produced the 2014/15 Special Schedules.

NEED FOR ALIGNMENT OF EXISTING RATES AND CHARGES

Council Average Residential Rate

Average Farm Rate

Average Business Rate

Typical Water and Sewer

Average Domestic Waste Charge

Oberon 649.08 1,351.97 755.56 982 93.58

Bathurst 877.99 1,381.28 4,132.09 959 200.64

Upper Lachlan

449.16 1,614.18 887.22 1,427 304.32

Lithgow 644.56 1,130.83 3,726.38 1,498 398.07

Source: OLG (2015) Financial Data from 2014/15 Audited Financial Statements.

GOVERNANCE CONSIDATIONS

Political Representation Number of Councillors (Per Capita)

Oberon 9 (1:560)Bathurst 9 (1:4,439)Upper Lachlan 9 (1:799)Lithgow 9 (1:2,240)

• Oberon’s Council Improvement Program suggested potential reduction of 9 to 7

• What kind of Ward structure would the merged entity have?• One scenario: Establish an equal number of representatives for two

Wards of the merged entity• Move to an undivided structure into the future• Challenge: balanced representation – a merger, not a take-over

FINANCIAL ASSISTANCE GRANTS

Financial Assistance Grants (FAGs) – FAGS indexation freeze is not the primary issue facing rural councils

The main issue is the inequitable formula used to allocate FAGS distribution.

Mergers will not fix this. Federal legislation needed.

CAVEAT FOR MERGERS

Any decision to progress a merger option should include a caveat that states progressing to a voluntary merger arrangement is subject to full due diligence investigations –which will take several months

Full costs of amalgamation need to be covered

Clarification about the level of financial support to be provided by the NSW Government

Clarification regarding what happens in the event a de-amalgamation is required in the future (who will pay?)

BACK TO OBERON’S MAYOR, KATHY SAJOWITZ

scenario analysis: options for oberon lga

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