Published on Monday, 31 January 2022 at 10:58:04 AM
An excerpt of this article was published in the February 2022 Preston Press. This is the extended version.
Why Asset Management is a Council Priority and How it Impacts the Annual Budget and Rates
By Shire President Cr Leanne Wringe
One of the most important roles for any Council is to consider the Annual Budget. An essential aspect of this process is to define the strategic priorities and goals that the Budget aims to achieve. These priorities shape the lens through which the Council makes budgetary decisions, which can have a direct impact on Shire rates.
Asset management was a key priority that guided the Council’s 21/22 robust Annual Budget decision-making process, which included briefing sessions, countless document reviews and in-depth debate. It was the Council’s decision to address an historic under-investment in the Shire’s asset management - not other projects such as the development of VC Mitchell Park precinct - that largely contributed to the 21/22 General Rate increase of 8.6%
In the interest of transparency, let’s define what asset management is and why the Council has increased the priority of effective asset management.
Asset management primarily consists of the maintenance and renewal works of the Shire’s assets. As the custodian of ~$250M worth of community assets, sustainably managing these assets is one of the biggest challenges the Shire of Donnybrook Balingup faces.
Over the last 30+ years, rate rises have not been consistently applied to meet levels of service (including asset management), and in some cases were set below government indexation. Whilst perhaps a favourable approach for the ratepaying community of that time, this Council felt this was not sustainable going forward for reasons outlined below, and subsequently made the difficult decision to raise the rates in the 21/22 financial year.
Avoiding a rise in rates would have been particularly detrimental in the 21/22 financial year as recent documents, including an Asset Management Plan and Long-Term Financial Plan, identified an escalating gap between service levels and funding availability with the Shire’s aging asset base. In other words, as our assets are getting older, they now require more funding to maintain, if not replace.
Given we have over 140 Shire buildings in our district – most of them built between 1960 and 1990 (30-60 years old) – this is no small obstacle. Not to mention our road network (~750km sealed/unsealed), curbing, footpaths, lighting, bridges, drains, plant, equipment, recreational parks, ovals, reserves and much, much more, all of which require ongoing maintenance, repairs, upgrades, and renewal.
Before shifting our priority toward asset management, the Shire underwent a thorough asset assessment. Identifying what assets we have, where they are at in terms of their life cycle and how long they will be effective for is essential for effective asset management. This information assessment allowed us to make strategic decisions and create planning documents to achieve these goals.
After an assessment of every asset, an Asset Management Plan is developed. These plans estimate what maintenance and renewal works are required to sustain the current level of service to our community over the next 15 years. This was the process the Shire of Donnybrook Balingup went through to determine our asset management strategy and its funding requirements.
When developing Asset Management Plans, one of the major factors to consider is the effective life of each asset. All assets have an effective life which vary considerably from, for example, IT equipment to buildings to roads. Depreciation rates are set based on an asset’s effective life. For example, buildings are depreciated at 2% per annum (an effective life of 40-60 years), while computer equipment maybe up to 50% per annum (2-3 years).
The effective life of an asset may be shortened where, for example, the asset no longer meets the needs of the community, has experienced excessive use or demand, is underutilised or no longer meets compliance with various legislation, codes and/or regulations.
Like humans, assets have a life cycle where repairs, maintenance (and renewal) costs vary depending on what age we are and where we are in our life cycle. It doesn’t matter if the asset is a building, playground equipment or a road, all have a life cycle which require repairs, maintenance, renewals and possibly upgrades throughout their effective life.
When an asset is new, these costs are minimal. Towards the latter part of an asset’s life, these costs increase exponentially with the likelihood of capital renewals, upgrades and/or disposal. The point in time an asset is in this cycle is important for planning, in terms of funding requirements and scheduling of appropriate works. A significant number of the Shire’s assets are now in or entering the latter part of their effective life cycles.
Of course, one option to help address this escalating asset management challenge is to ‘dispose’ of (i.e. sell, demolish, give away) assets like old buildings. Some Shires have tackled this widely unpopular challenge, to varying degrees of success. After careful consideration, our Council, however, determined that disposing of assets was not the appropriate way to move forward, and instead agreed that raising rates to meet service levels was the right course of action.
With many of our Shire’s assets in their latter part of their life cycle and accelerated costs expected over the next few years until renewal works have been completed, the Shire is currently in a ‘catch up’ mode until services are at a sustainable level, hence the need for a General Rate increase.
So now we’ve defined why we prioritised asset management and how it resulted in increased rates, let us clarify how we got to an 8.6 per cent General Rate increase.
Firstly, it’s important to note that although the General Rate increased by 8.6%, not every Rate Notice increased by that exact amount. In fact, a flat rate increase of 8.6% across all ratepayers is not possible. This is due to the complex nature of the Local Government rating system, which is significantly impacted by changing valuations of land (by the State Valuer General) and Waste Levy adjustments determined by other authorities. Ultimately this means many ratepayers saw lower increases, whilst only a small number of ratepayers had their rates increase by 8.6% or above.
For example, if a ratepayer has mostly rural and farming land it is likely to be classified as an Unimproved Value (UV) property. These property types are re-valued by the State Valuer General every year, with valuations often varying considerably from one locality to the next.
If, however, a rate payer owns property that is residential, commercial, industrial and the like, it typically falls under a different classification called a Gross Rental Value (GRV) property. Unlike UV properties, these are presently re-valued by the State Valuer General every 3 years and based on the estimated rental value rather than land value. GRV properties generally see a modest increase (due to overall market increases in property) in rental value, and specifically where improvements, major renovations or extensions to the building/s occur.
Once both a UV or GRV valuation is determined, they are applied to the ‘rate in the dollar’ which is set by the Council. Hence, depending on each ratepayer’s specific property type and valuation, the General Rates shown on their 21/22 Rates Notice may have been higher or lower than the 8.6% set by Council.
Due to the lack of previous rate rises, we understand this rate increase may seem like a Shire cash-grab to some ratepayers. Therefore, it’s relevant to understand how the Shire of Donnybrook Balingup rates base influences our overall revenue compared to other Shires. Typically, the rates base for larger regional and metropolitan local governments are in the ballpark of 50% - 80% of all revenue. This means small percentage rates increases for them yields a much larger gross figure.
The Shire of Donnybrook Balingup’s rates base for 2021-22 however is only 22% of its overall revenue. This means that out of every dollar spent by the Shire, only 22 cents come from the ratepayer. Unlike other Shires, the majority of our Shire’s revenue comes from the State and Federal Government (via the taxpayer, obviously), which is why we have worked so hard in recent years to develop strong relationships with government – Federal, State, Labor, Liberal, National, Green and other. It is through these relationships that we fund the majority of Shire works and special projects, not our rates.
In summary, the Shire increased it’s General Rates by 8.6% in the 21/22 Annual Budget to sustainably maintain and replace our aging assets, as per our Asset Management Plans. The 8.6% increase in the General Rate does not apply to all ratepayers as a flat rate, with each ratepayers Rate Notice calculated largely based on their property type and valuation as determined by the State Valuer General. Thereby, the Shire can confirm that the General Rate increase was not related to other Shire projects such as the Donnybrook Community, Sporting, Recreation and Entertainment Hub (VC Mitchell Park precinct), but rather driven by a much overdue reprioritisation of asset management.
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