The Letter to the Editor 'Concern over deficits and depreciation' (Armidale Express, October 3) raises some important points about local government budgets. In particular, it turns the spotlight on the issue of depreciation, which is an area which is generally not so well understood by the general public.
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There are a number of key points that should be raised to complement and further clarify the matters touched upon in the earlier letter.
Most people would understand what is meant by a budget deficit - when council's revenues do not cover its operational costs - and a budget surplus - when council's revenue is more than its operational costs.
What is generally less clear to the community is that those operations costs must include depreciation, which is an allowance for the fact council's assets have a finite lifespan and, in most cases, will need to be replaced at some point.
Councils are responsible for providing a wide range of assets and services. Armidale Regional Council manages over $1 billion in assets, including roads, footpaths, bridges, storm water drainage, water supply and sewer networks, community buildings and parks and gardens.
This is a significant responsibility because these assets not only need to be maintained for the benefit of the community today but also for future generations. Many of council's assets are expected to last for a very long time, with some assets predicted to last up to 100 years.
It is not the same as buying a skateboard or some other personal items which is just expected to serve a purpose for its lifespan. Council-owned assets must be maintained to a certain standard to ensure the safety and quality of life for community members or to enable the community to function effectively. This demands ongoing maintenance and, at some point, replacement.
Incurring a consistent budget deficit is problematic due to the need to allow for depreciation and the long lifespan of many assets. A deficit indicates a council is not expecting to be able to generate sufficient revenue to cover operating expenses and fund the replacement of assets, as measured by depreciation.
Consistently running operating deficits is not desirable. We must all live within our means. We must also account for depreciation as all assets need to be replaced.
Far from being an unnecessary and onerous requirement, it is simply wise financial management. There is increasing emphasis, including guidance from State Government, for councils to undertake long-term and strategic planning and financial management to achieve sustainability and ongoing quality of service to their communities.
Local governments in NZ are required to take it a step further and ensure they have cash set aside to match their calculated amount of depreciation, to guarantee those funds are on hand.
That could be a worthwhile step to take in NSW, where councils now are at least required to formally acknowledge the extent of their depreciation levels so they can plan to cover that long-term cost.
Armidale Regional Council is only two years into its financial sustainability journey but it is committed to addressing the budget deficit. It is working on a range of strategies to improve its financial position and achieve a consistent budget surplus position in future financial years.
