Saturday, November 12, 2011

Financial Sustainability Report

The Financial Stability Review is an assessment of Cairns Regional Council’s capacity to meet its financial commitments by Queensland Treasury Corporation. It's part of the process for the business case for the proposed Entertainment Precinct.

The parrot cage commentariat has gone off in response. The QTC report has done what Treasury reports should do in challenging assumptions and highlighting risks. While there is, I think, still a business case to come it is difficult to see a political way forward for the project in current format.

The report is of interest in itself and worth a look so I will resist any comment on the project, and cultural industries which should be a comparatvive advantage for Cairns, until a later post. The position of CRC is rated as sound, with a strong balance sheet and low debt, but with a negative outlook which is related to broader economic conditions and risks. Most of the noise is around the operating cost of the project and the sustainability of rate increases in a weak economy. In that context it was employee costs which caught my attention in the review.

There is a reference in the opening summary to a risk that "if the next EBA outcome results in greater than
4 per cent growth, a possibility in light of the economic conditions in the region". This struck me as a bit odd? The reference here is to basic wage price growth and not employee numbers. Employee costs are covered in more detail later in the review.

Employee benefit costs are 33% of Council operating expenses. Employee costs have increased by 8.5% p.a. over the past 5 years. This is not attributable to growth in employee numbers but rather a 7.7% p.a. growth rate in FTE (full time equivalent) salaries. Average salary per FTE increased from $63,344 in 2009 to $73,438 in FY 2011. That is clearly not sustainable. The current EBA was struck in 2009 and expires next year:

Under the current EBA, annual wage increases are the greater of 4.0 per cent per
annum or the Australian Bureau of Statistics Wage Price Index (Public Sector)
Catalogue number 6345 which has averaged 3.8 per cent over the last two years.

CRC has advised that factors leading to employee expenses increases greater than 4
per cent include increases in employee overhead costs (i.e workers compensation),
employee classification increments and the payment of overtime.
The 7.7% seems a large increase above the base EBA rate regardless of the explanation. Why the base rate increase should be above the relevant index anyway also deserves query? There has been a trend for some years of public sector wages increasing at a faster rate than private. This graph below of the relevant wage price index from ABS shows how public sector wages have risen past private sector since 1997. 

I would have thought the employment profile of Council quite broad, ranging from professionals to labourers, and not unrepresentative of the broader labour market? Once upon a time there was an expectation of lower public sector wages as a consequence of job security.

The review notes that employees have been granted job security guarantees beyond any amalgamation requirements. The employee costs in the review are based on lower than historical increases in total employee costs of 5.4% but with similar EBA agreement:
Employee wage price increases are forecast at 4.0 per cent for the full forecast period
FY2012 to FY2021, which is in line with the current Enterprise Bargaining
Agreement. This agreement expires in 2012, however negotiations are expected to
result in at least a similar annual increase in light of the high unemployment and poor
economic conditions in the region.
I can't get my head around this rationale that weak economic conditions should equate to relatively high public sector wage outcomes?  It all sounds Greek to me!

Note: The NSW and Vistorian Guvmint policy is to restrict public sector wage rises to 2.5% without explicit productivity tradeoffs. Perhaps QTC should do a scenario of what infrastructure could be afforded with that outcome? The Australian has previously editorialised on this:
Wage costs need to be held to the inflation rate, currently 2.9 per cent, or less if budget deficits are to be reduced and funds freed up for infrastructure

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