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Taxpayer bailout looms as council's debt becomes "unsustainable"

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A South Australian taxpayer bail-out of an outback council has been raised as a possibility after the council racked up more than $6 million in debt, with little prospect of being able to pay it back and its capacity to provide essential services in doubt.

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Auditor-General Andrew Richardson has conducted an extensive review into the financial management of the Coober Pedy Council, finding “it would be unreasonable to expect the council to meet its current financial obligations”.

The report on the council’s accounts from 2011/12 to 2016/17, tabled in Parliament yesterday, finds multiple breaches of the council’s obligations under the Local Government Act.

The council told the Auditor-General it supported his general findings about the state of its finances.

“The Council’s financial position, and particularly its current level of indebtedness, is unsustainable,” the report finds. “The Council cannot meet its operational cash flows and has no realistic prospect of repaying its indebtedness from its own resources.”

The report raises doubts about the ability of the council to continue to provide essential services to the community.

The previous State Government actively encouraged the off-grid council to sign a 20-year electricity deal worth nearly $200 million. The deal, effectively underwritten by the taxpayer via electricity subsidies, was the subject of a scathing Ombudsman’s report earlier this year, which found the council had committed serious maladministration.

The Ombudsman recommended that the Local Government Minister Stephan Knoll consider replacing the council’s elected members with an administrator.

Knoll held off on that decision until after the recent council elections, but he has now given the newly-constituted council just over a week to present its view on the matter.

“The Auditor-General’s Report raises serious issues and has highlighted the unsustainable financial position of the Coober Pedy council,” Knoll said in a statement.

“The new Coober Pedy council has until 13 December to provide me with any further submissions for consideration before I make any decision.

“Any decision to recommend that a council be declared defaulting and that an administrator be appointed is a very serious one. It is therefore critical that my decision-making process is fair and ensures that all relevant information and views are properly considered.”

He did not answer InDaily’s questions about the prospect of a Government bail-out, but the council’s current administration believes that is the only option if stringent financial measures and asset sales can’t be achieved.

The Auditor-General’s report, ordered by the previous Labor Government, finds multiple failings in the council’s financial performance, including unbudgeted losses in four consecutive financial years.

“There is no evidence the Council considered the impact of these losses until it was in financial crisis,” the report finds. “The Council has, from time to time, developed planned responses which were, in my opinion, reasonable but it has not demonstrated an ability to implement the required actions.

“The Council’s accounting systems and records are significantly deficient and unable to support effective financial management of the Council’s operations. I further concluded the Council failed to comply with key aspects of the strategic and financial management requirements of the LG Act during the period 1 July 2014 to 30 June 2017.

“In my opinion, Council will only successfully respond to its current financial position if it is able to recruit and retain a chief executive and finance manager who are appropriately qualified and experienced.”

The report says the frequent turnover of key senior personnel appears to have contributed to a breakdown in the council’s leadership and management.

The report lays bare the risks carried by the council as a provider of basic services including electricity and water and concludes “it is unreasonable to expect the Council to meet its current obligations and continue to provide essential services with its existing governance and financial arrangements”.

Unlike other councils in South Australia, the tiny outback town’s administration is effectively an electricity retailer. The 20-year power deal, with company EDL, replaced the off-grid town’s diesel generators with a hybrid renewable system. While it appears to have been successful in making the town’s electricity generation clean and green, it remains a controversial project, with the previous council warned by its energy consultant that it was paying too much because it did not subject the deal to a tender process.

The Auditor-General finds that the council is struggling with unpaid debt from the opal-mining community’s shrinking ratepayer base.

He found that 65 per cent of the council’s receivables were outstanding for more than 90 days, with 85 per cent of those receivables for electricity user charges.

He also found the council failed to properly control the funding it receives under the Remote Areas Energy Supplies scheme – a subsidy provided by the State Government to keep electricity charges in check.

“In summary, the Council failed to comply with the reporting regime established by the RAES agreement that was designed to protect the Council from excessive over/underpayments and avoid significant impacts on its cash flows,” the Auditor-General found.

At the end of the 2017/18 financial year, the council had debts of $6.7 million, “mainly incurred to fund past operating deficits”.

“This level of indebtedness imposes a significant debt servicing load on a small council with a prior record of reporting operating deficits and difficulty generating cash to repay the loan principal,” the Auditor finds.

Underpinning the council’s problems were a lack of financial systems and an audit committee that either met sporadically, or not at all, for long periods, and failed to perform its legislative functions.

“Council staff do not appear to have provided elected members with regular and/or proper reports to understand and monitor the Council’s financial performance and respond strategically to emerging financial risks.”

The Auditor’s report also finds irregularities in the employment of an interim CEO in 2015/16.

As reported by InDaily previously, that CEO – Tony Renshaw – was in place when the then council approved, in principle, the controversial deal with EDL at a contentious meeting in January 2016.

The Auditor’s investigations indicate Renshaw did not have an employment contract and his salary was paid to “an entity associated with him”.

“I asked Council staff to provide me with the interim CEO’s employment contract to understand the terms and conditions of his employment,” the Auditor’s report says. “A copy was unable to be provided.

“An email dated 8 September 2015 between the then-Mayor and the then interim CEO recorded that the interim CEO was to draft a formal agreement for the Council to consider and adopt. Council meeting minutes and agenda papers do not record that the Council ever received and considered this formal agreement. In the course of the examination the then-Mayor confirmed that there was no employment contract. I found that the interim CEO’s remuneration payments were made to an entity associated with him named Cerca Trova on receipt of tax invoices that attracted GST.”

The council’s parlous financial position has been well-known for years, including by the previous Labor State Government.

The report says that the council advised that, in 2015/16, some councillors raised concerns with the State Government about the council’s financial administration over a number of years. Previous acting mayor Paul Athanasiadis had raised concerns at council meetings in 2015 and 2016.

The council’s acting CEO, Colin Pitman, told InDaily today that unless the council could enact a “very strict program” of financial action, a State Government bail-out would be required.

“The draft long-term financial plan shows we can get our financial position into positive territory by 2021/22 with a very strict program of rate growth and a strong focus on essential asset renewals,” he said. “But the fundamental underlying debt from the community in many cases is unresolvable.”

He said selling off assets was could be one way to put the council’s position into surplus.

“The power distribution network, for example, has been sold in every other part of the state by the State Government,” he said. “Coober Pedy remains as a sole trader with an asset in power and water distribution. The alternative is a bail-out…”

The previously elected council had invited Knoll to replace them with an administrator, due to financial hardship and internal divisions.

The Local Government Association refused to comment.

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