Case study 4.6

Asset management for public entities: Learning from local government examples.

Organisation F – Not striking the right balance between affordability and investing for the future can lead to financial risk

This organisation's past financial strategy had been based on keeping rates increases as low as possible. However, because of the capital works needed in the future, the debt levels in its financial forecasts breached its own treasury policy. The organisation’s plans were not financially prudent.

The organisation faced a fundamental issue – its inability to fund its forecast expenditure. It had not struck the right balance between delivering services over the long term (taking into account the anticipated level of growth), and funding this growth in a financially prudent manner.

The organisation initially decided that reducing forecast expenditure to within prudent borrowing levels would not be delivering responsible outcomes to the community, and would merely result in making a known fiscal issue worse if deferred. However, to be financially prudent and sustainable, the organisation had only three broad options – to:

further reduce the capital expenditure programme to bring debt down;
increase the revenue base to fund and/or retire debt; or
reduce operating levels of service.

After consultation, some non-urgent capital projects were delayed, while some other projects were brought forward. This was a more prudent financial strategy.