Creative accounting for a better bottom line

How Blue Mountains Council put UP depreciation by $11 million and it got them a permanent rates rise variation approved in 2013…..
And then put it back DOWN again afterwards by $12 million to get “Fit for the Future”.

Depreciation is the yearly amount that you claim as an expense to replace an asset that will last more than a year. For example if you have a $10,000 car that will last 10 years, your depreciation expense is $1,000 per year.  A well managed organisation will put away the $1,000 each year so there is money to replace the car when it wears out. BMCC  has put away almost nothing and has an unfunded depreciation amount of  $412 million. Basically they are stealing your children’s future by having nothing put aside to replace major assets as they wear out.

"Other Structures" depreciation at BMCCThis story is about how BMCC accounted for a group of assets called “Other Structures”… fences, earthworks, street signs etc. The depreciation at BMCC for “Other Structures” went for a roller coaster ride as it suited their needs.

Back in 2010 BMCC applied to the Independent Pricing and Regulatory Tribunal (IPART) for a 4.4% rates rise. They wanted it to be permanent but only got it for 3 years. Prior to the temporary rise expiring in 2013, BMCC needed to apply again to IPART to make it permanent.
BMCC were desperate for the additional income. They had massive debts and had borrowed up to the maximum allowed by the NSW State Government.
In December 2011, the NSW Treasury Corporation (TCorp) commenced a financial assessment of BMCC. TCorp subsequently put BMCC on notice that they were in danger of not being able to make their debt repayments if the Special Rates Variation (SRV) increase was not approved on a permanent basis by IPART.
This is the warning on page 32 of the TCorp report from that time…

TCorp BMCC Blue Mountains Council financial assessment.

By hook or by crook BMCC had to get that permanent rates increase approved so they embarked on a path of very creative accounting.
Here’s how they did it…..

In the financial year 2011, the assets category “Other Structures” was contributing a depreciation expense of only $0.86 million per annum.

2011 other structures depreciation

But whoops! The temporary rates rise that BMCC so desperately needed to be made permanent was slated to renew infrastructure. They needed to have a good high depreciation figure to justify a permanent slug on ratepayers. Easily fixed! Let’s hike up “Other Structures” depreciation so that it looks like BMCC needs lots more money for asset renewal.
The depreciation for “Other Structures” suddenly went through the roof from $0.8 million in 2011 to the tune of $11.2 million in 2012.

2012 Other Structures Depreciation at Blue Mountains City Council Other-structures

New NSW Government legislation had required the revaluation of these assets at “Fair Value” and the accounts were very complicated in this year. It was a great opportunity to get creative without much scrutiny! They had done some of the revaluations but this didn’t make the significant difference to the numbers. What made the big difference was the inclusion for the first time of $40 million of Fire Trails and and Tracks which were then depreciated at the absurdly high figure of 20%. This doubled the value of “Other Structures” but the depreciation figure sky-rocketed by 1400%! Fire Trails are largely maintained with Government Grants by the Rural Fire Service (RFS). Their sudden inclusion as a depreciation expense in “Other Structures” was an easy way for BMCC to convince IPART that a permanent rates rise was essential to renew infrastructure without there really being any extra infrastructure to actually renew!

BMCC made the new high and fictitious depreciation expense the main justification in their 2013 IPART application for the permanent rates rise. Here are their own words on page 19 of their application.
distro-artwork-BMCC-application-reasons

It worked! Blue Mountains Council convinced IPART that their high depreciation expenses meant that rate payers needed to cough up more rates to pay for the depreciating assets. A permanent rates rise was approved by IPART based on this “obvious” need to renew infrastructure.
There were, however some black clouds on the horizon for BMCC…. In March 2012 the then Minister for Local Government, Don Page MP, appointed the Independent Local Government Review Panel. This was the pre runner to what we have now …. The State Government’s “Fit for the future” program. In 2012 and 2013 “amalgamation” ripples started going through NSW and Councils had to prove they were “Fit for the Future”. The Office of Local Government was now saying that a well run, “Fit for the Future” council should be spending more on asset renewal than their depreciation expenses.

distro-artwork-olg-renewals-depreciation

Yikes! BMCC had just hiked up depreciation to convince IPART that they needed a rates rise but the game had changed and “high depreciation” was now a dirty word. A hefty depreciation expense was no longer a passport to rates rises…. it now meant trouble.
Now, to be “Fit for the Future”, BMCC needed nice low depreciation figures to be convincing the State Government that the newly implemented “Assets Renewal Ratio” was under control.

Easy Done! BMCC in 2013 just reduced the depreciation of “Other Structures” down again by $10 million back to $1.8 million to convince everyone that they were “Fit for the Future”.

Depreciation BMC Other Structures 2013r-structures-2013

BMCC instantaneously reduced their need to renew aging infrastructure with some very creative accounting. They extended the effective lives of many assets to ridiculously long time spans. Some roads and buildings they now claim will last 200 years. An excessive lifespan means the amount that is put away each year for renewal (ie depreciation) is very much lower. The average depreciation rates of “Other Structures” plummeted from 11.8% to 1.3%.
But there was still a problem. The OLG “Fit for the Future” criteria was now recommending 3 year averaging for the “Assets Renewal Ratio”. The very high depreciation figure from 2012 was about to come back and bite them. So, what did BMCC do? They backdated a $12.6 million “correction” to reduce the high depreciation in the 2012 accounts. It was done very quietly on page 79 of the 2013 financial accounts. The correction created a “Building and Infrastructure Renewal Ratio” which would be acceptable for the team at the “Fit for the Future” office. The extremely high depreciation figure of 2012 did it’s job admirably and got BMCC a permanent rates rise but was no longer needed or wanted. Now it was like it never existed. It has cost the Blue Mountains’ ratepayers dearly and the rest is, as they say, history!

Corrections to accounts- Depreciation at BMCCx-to-accounts-2013

I have challenged Mayor Mark Greenhill for a debate on this subject but he has not responded. Details of my debate challenge is here

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