Since 2012/13 local governments have been required to measure and report four financial and three asset ratios in their annual financial reports, to indicate their financial and asset management sustainability.
The relevant ratios are:
This is a modified commercial ratio measuring the liquidity position of a local government that has arisen from past year’s transactions, excluding restricted assets.
Debt Service Cover Ratio
Measures a local government’s ability to repay its debt including lease payments.
Own Source Revenue Coverage Ratio
Measures a local government’s ability to cover its costs through its own revenue efforts.
Operating Surplus Ratio
This is a key indicator of a local government’s financial sustainability. It measures a local government’s ability to cover its operational costs and have revenues available for capital funding or other purposes.
Asset Consumption Ratio
Measures the extent to which depreciable assets have been consumed by comparing their written-down value to their replacement cost.
Asset Sustainability Ratio
Indicates whether a local government is replacing or renewing existing assets at the same rate that its overall stock of assets is wearing out
Asset Renewal Funding Ratio
Measures the ability of a local government to fund its projected asset renewal / replacement in the future.
As with all ratios, their interpretation is improved if the trends are calculated as an average over time. For financial ratios trends over a minimum five year and 10 years for asset ratios provides a more reliable indication of a local government’s financial situation.
ratio information published is drawn from local governments’ audited annual financial reports for the two years 2012/13 and 2013/14.
Two particular areas of concern across the sector are the results for the Operating Surplus Ratio and Asset Sustainability Ratio with a number of local governments below the benchmarks and the trend is declining.
Changes in the calculation of depreciation from assets valued at historical cost to fair value has affected both ratios. The Operating Surplus Ratio was also affected by the Commonwealth Governments’ cessation of the 6-month prepayment of Federal Assistance Grants in June 2013. Prepayment was reinstated in June 2015 and may favourably impact 2014/15 results.