Fremantle council ‘massages’ the books
A CITY without a mayor or CEO. Increased rates, deteriorating assets and a $32 million loss the City of Fremantle wants to conceal after nearly 10 years of financial mismanagement under a Greens-led council. Freo is not shipshape.
The latest audit of council’s finances was presented to the City audit and risk management committee on April 21 when South Ward Councillor Marija Vujcic questioned the transparency of the financial statements and asked why the loss was recorded as a profit of $4.7 million for the 2020 financial year? The discrepancy is in the detail.
The council reports a loss of $32,886,286 (opposite) on page 3 under audited financial statements – ‘Statement of Comprehensive Income’. Yet, it describes the 2020 loss as ‘income’. Typo?
City business director Glen Dougall said while it recorded an $8.48 million ‘book loss’, “due to an adjustment in asset values and demolished or removed assets”, a cash surplus of $3.56 million was, “a strong indication of the responsible financial management which steered the City safely through the COVID-19 pandemic”.
Cash surplus? Sure, if you borrow $20 million to build a new administration building in Kings Square. But it won’t last long, no matter whether council slots it in the ‘income’ or ‘debt’ columns.
Cr Vujcic said the City has massaged the finance figures to soften the $32 million hit in 2020. The debt didn’t occur overnight, but over many years in which local residents’ groups and financial experts accused council of having ‘hidden’ the implications of its failing finances, particularly after having committed the City to the $270 million Kings Square project.
With ratepayers facing a 3.2 per cent rate increase or up to $100 extra this year (after a 10 per cent rate increase last year), fixing the finances will be a tough sell for elected members and candidates in the October local government elections.
Former mayor Brad Pettitt has said the COVID-19 pandemic had a significant impact on City finances: “We estimate we will lose about $4 million in revenue in 2020-2021 from things like parking and commercial rents.”
The City recorded a net loss of $8,483,120 in 2020 compared to $2,800,465 in 2019. Land and buildings were devalued by $24,403,166, then added to the net loss to get to $32,886,286.
“What has triggered the devaluations from 2019 to 2020 to have such a net adjustment of $24 million?” Cr Vujcic asked the audit committee, referring members to page 37 of the financial report, ‘Revaluation Surplus’ (opposite). No one could oblige.
She added: “There is a land devaluation of $59,526,111, giving the City a balance of $83,244,847 as at 30 June 2020 compared to 30 June 2019 of $142,772,958. A $59.5 million devaluation (of land) is not a small figure. Why have we lost 42 per cent in our land valuation when the market is robust? For me, there is a lack of transparency in the figures which has a bearing on my decision making. As an elected member who has a duty of oversight on behalf of the ratepayers and residents this situation is not appreciated.”
StreetWise has contacted Local Government Minister John Carey for a comment.
Generational debt
Cr Vujcic, who joined the audit committee late last year, said the City has downplayed the poor financial ratios by imputing $13.2 million as one-off non-cash operating expenditure (page 6 Agenda). The $13.2 million consists of the loss on the sale and demolition of assets of $6.8 million, shown in the ‘Asset Description’, and fair value adjustments in investment property of $6.4 million (opposite).
“The City has then deducted the $8.5 million net loss for 2020 and imputed a net profit of $4,751,771. The loss of $8.5 million has now been massaged into a profit by simply making a one-off adjustment. No explanation on the $6.4 million, no formulas. Just a better result.”
Cr Vujcic said if the City continued these one-off paper adjustments, it will over time be forced to sell more assets to cover debt: “This type of accounting passes the debt onto the next generation. The CEO takes responsibility for the administration of the City and takes responsibility for the City’s financial situation,” Cr Vujcic said. “The City made a net $8.5 million loss and yet this news is airbrushed into a positive by manipulating one-off adjustments without any sensible explanation. My confidence in the City’s CEO handling of the City’s finances for the financial Year 2020 is shaken and it needs to be restored by coming clean with the true nature of our financial position.”
Council meets on April 28, by which time ratepayers can expect a response to questions raised by Cr Vujcic at the audit meeting not attended by CEO Philip St John, who resigned a couple of weeks ago.
“The loss was primarily caused by an adjustment in the value of investment properties from the most recent 2020 valuation compared to the previous 2017 valuation,” Mr Dougall said. “But while this does affect the overall bottom line, the reality is these assets are always going to be subject to fluctuations in the property cycle. A normal market cycle has boom and bust periods; valuations rise and fall as part of that process. In 2017 we received higher valuations across the board than we received in the most recent valuation. Now that the market is rising again we can probably expect a new cycle of growth to occur in future valuations.
“We did lose revenue but we also did everything we could to help our community through hard times. It’s been a tough year but we have managed our way through and are now in a good position to capitalise on the emerging growth and confidence in Fremantle.”
‘Significant adverse trends’
A former financial expert of 30 years told StreetWise the City’s $32 million debt will grow unless the State Government throws it a life line: “The City can look forward to less revenue, less staff and less services. It does not have enough funds to maintain the asset base and take care of properties in Fremantle. Ultimately, ratepayers will underwrite the City’s bad finances. Rates will increase by three, four, five per cent each year and there will be cost cutting. And it still has to repay borrowings on $20 million.”
He said the council provided no information on the $59 million property devaluations, “which is really odd. Land hasn’t devalued by such an extent. It’s extraordinary a $59 million devaluation of land can go unnoticed”.
Cr Vujcic said audit committee members were surprised when she presented the alternative figures: “They didn’t realise we had made a loss.”
The financial expert said the City’s monthly accounts, “don’t actually show the true financial picture for the previous financial year which in my view is misleading and clearly done to avoid bad news. It is not prudent financial management or good transparency”.
He said the auditor, under “significant adverse trends”, found the debt service and operating surplus ratios have been below local government standard for the past three years. Also highlighted is the council’s lack of investment in better IT and financial controls, “which has significant weaknesses which expose and heighten the risk of fraud”.
The outstanding debtors bill, as at March 31, 2021, is $1,057,628. The unrecovered amount for 90 days plus is $588,672 or 56 per cent (opposite). Write-offs and waivers, primarily from commercially leased properties, total nearly $500,000. Debtors include Fremantle Markets ($76,435); Clancy’s Fish Pub ($20,608); Gino’s Cafe ($51,750); Dome Fremantle ($65,969); Bakpak Freo ($56,542); Port Jarrah Furniture ($20,765); and Moore & Moore ($6226).
The expert said it was odd the narrative of the agenda for the audit committee last week did not mention what the actual result was for the financial year. It just refers to a ‘surplus’.
He said the council simply changed the debt service ratio used by the auditor to maintain the ‘illusion’ of having its books in order: “The auditor put in his figure, then council added back non-cash items worth $8.5 million and added two items of $12 million to massage a new profit figure of $4.7 million.
“My feeling is everyone is in this for the short term and they won’t do things for the longer term. They’ll just try and keep ratepayers happy in the short term. I’m interested to see whether the narrative will be changed before the next council meeting.”
Full council meets Wednesday.
