Big property write-downs but Town Hall’s finances remain strong

By Stephen Mayne

As the City of Melbourne (CoM) finally gets cracking with its biggest ever investment in the Queen Victoria Market (QVM), the capital city council has just announced an accounting loss for the 2018-19 year of $181 million.

But, don’t worry, the financials at Town Hall remain in rude health because this nominal loss is only due to non-cash write-downs of $233 million across some of the council’s biggest property holdings.

Royal Park is council’s biggest asset on the books but the city valuators slashed its nominal value by $39.4 million to $324.76 million, as of June 30, 2019.

 The biggest single site hit was suffered by Fawkner Park in South Yarra with the valuation slashed by $61.8 million, or 24 per cent, to $195.2 million. But this just brings it back to near the $193.7 million it was valued at three years ago. What has previously gone up, has now gone down.

At the end of the day, when it comes to the financials CoM remains arguably Australia’s second strongest council in the country after City of Sydney, which has an investment portfolio exceeding $500 million.

CoM’s cash reserves in the books finished the year at $128 million, helped along by the $62.7 million which was received from the state government in 2017-18 for the sale of City Square as part of Metro Rail project.

However, the council has both rights and aspirations to buy the above-ground assets of City Square back when the project is finished and currently has $37 million set aside in a reserve to do just that.

One of the reasons the council’s cash position remains strong is that Town Hall continues the long-term trend of under-spending its promised capital budget, which is not a welcome trend.

Only $140.7 million was expended on capital works in 2018-19, against a budget of $172.2 million. The underspend has been attributed by council officers to “delays due to issues with service agencies and changes to scope experienced by QVM, Lady Huntingfield Children’s Centre in North Melbourne, Southbank Boulevard, Lincoln Square and Enterprize Park”.

Asset sales are also helping the council with the Boyd School development site in Southbank recently sold to developer PDG for $16 million and a further $9 million expected in 2019-20 from the sale of various laneways.

Under the stable leadership of chairman John Brumby and CEO Chris Campbell, Citywide also appears to be performing well. This is a strategic operating asset with a service footprint across Victoria, NSW and Queensland which could easily be sold for more than $100 million if the council ever needed to raise some funds.

CoM did choose to exit its investment in the Sustainable Melbourne Fund (SMF) last year and this has proved to be a great success after council recovered its $10 million loan, along with $5.6 million worth of units in the SMF Trust.

Deputy Lord Mayor Arron Wood explained that free of council constraints, the financier of energy-efficient building upgrades had flourished with finance now provided by Bank Australia.

“Council divested as it was strategically important for both SMF and the CoM,” Cr Wood said. “Divestment has allowed the fund to grow to $200 million and expand its operations beyond the initial intent of SMF. The Sustainable Australia Fund is a very good news story in terms of CoM efforts to seed a new market.”

On the debt front, the CoM has not needed to draw down on a $75 million loan facility with ANZ and may choose to go debt-free by paying back a $28.5 million loan from the federal government’s Clean Energy Finance Corporation (CEFC).

This fall is due in late 2020 but a council spokesperson said they would “consider early repayment of the CEFC loan in the first quarter of 2020”. With net assets of $4.45 billion, even after the property write-downs, council’s balance sheet remains strong and returning to a formal debt-free position would reinforce that point.

On the spending front, there are still some big lumpy items. For instance, a hefty $15.1 million was spent on computers and telecommunication in 2018-19, which is only just below the total budget for roads, bridges, footpaths and cycleways.

This was defended on the grounds of investment in “business change” and “mobile solutions” for staff to keep them in the field for longer.

That hasn’t been evident on the parking front given that fines revenue tumbled from $44.3 million to $38.5 million, partly due to officers now working in pairs to improve safety outcomes in the face of angry motorists contesting tickets. Increased compliance courtesy of the use of apps such as PayStay is another factor in falling parking ticket revenue.

Thankfully for council’s finance department, the recent increase in parking fees propelled parking fee revenue from $46.6 million in 2017-18 to a record $54.5 million in 2018-19, more than offsetting the $5.8 million drop in parking fines revenue.

There’s even been some good news for ratepayers on the executive pay front. In 2017-18, the three highest paid executives received approximately $435,000, $455,000 and $515,000, but this dropped in 2018-19 when the highest paid executive collected $415,000.

The 2017-18 payments were impacted by some “termination payments”, presumably including to former CEO Ben Rimmer. The new CEO, Justin Hanney, was only on board for about half of the 2018-19 financial year.

Stephen Mayne is a journalist and former councillor, who chaired the City of Melbourne finance committee from 2012-16.

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