Peter Bernard is a man of figures. He is also a man who pays particular attention to Council’s finance reports and has often presented to Councillors via the Public Forum. Any conversation with Peter starts with the era of the Global Financial Crisis and CDO’s or Collateral Debt Obligations. In a nutshell the world was attracted to invest in CDOs because they gave a good return. Driven by greed and by an assurity that CDOs were a safe investment Eurobodalla Council also invested. Unfortunately CDOs were less than safe and were actually quite dodgy – and they collapsed bringing down the world economy with a Global Financial Crisis. Eurobodalla Council was left with egg on its face and a ten year struggle to try to gain back the money it had potentially lost. In Council’s recent report on CDOs they offered that, while Council was embroiled in the CDO fiasco it could now report that no monies were lost and of the $20 million invested they had actually made $ $2,175,318 in interest. To the less fiscally capable this might seem a good windfall of 10% however Blind Freddy and others recognize it as 10% over 10 years and not 1 year. Fortunately however the ratepayers didn’t lose their investment as many around the world did. The May 9th, 2017 report states: The cumulative original purchase price of the CDO’s was $20.12M over the period on investment in CDOs, with approximately $17.0M principal returned in total and when total interest received, recoveries from legal action and costs of legal action are taken into account, there is an overall net favourable position of $2.17M
Of interest to Peter Barnard is the fact that Council decided to write a summarizing report on CDOs and call it the Collateralised Debt Obligation (CDO) Final Report as if to wipe their hands of it all and put the matter finally to bed. He notes that there was no request from the State to do so nor any request from auditors: so why was the report written? Peter tells of the time when the Government advised that there were problems with CDOs. The alarm went up and it all came to a grinding halt however…… Peter noted that a CDO was secured by Eurobodalla Council after the alarm date while the court cases were going on to sort out the mess. A CDO for $1 million with Structured Credit Resources. He was surprised to see it in a financial report as it appeared to go against Government advice and direction of the day. Mr Bernard questioned this in open Council meetings on numerous occasions and, while he specifically asked for an explanation, he has received no response. He and Joe Potts also formally asked the Audit Committee of the day about SCR and found that they were now listed SCR Australia Pty Ltd and the $1 million CDO remained. They asked “Are there any ongoing trailing commissions and exactly what has happened with SCR?” Mr Bernard advises that he has been sent letters that deny that Council ever transacted with SCR. It is easy enough for an independent auditor to establish and hopefully the truth of the matter will come out.
Council might well have written a Collateralised Debt Obligation (CDO) Final Report but to Peter Bernard CDOs are still unfinished business.
Peter’s second bug bear with Council and probably the one that has the most consequence is the issue of Sale Of Assets. At the time when Council was telling us that we MUST have a Special Variation Rate Rise they kept making references to their financials that showed how dire things were. The ESC publishes consolidated financial budgets as part of each operational plan. The consolidated financial budgets include both projected for current and following year financial statements as well as two prior year audited financial statements.
There has been some recent discussion and concern regarding the reporting of the Statement of Cash Flow figures for Proceeds from the Sale of Assets. These figures should directly represent the audited financial statements as per the footnote although there have been some changes between the 2013-14 Proceeds from sale of assets as can be seen in the Figures below which are direct excerpts from the published Operational Plans.
When asked by Mr Bernard about the discrepancy, the General Manager for the ESC provided the following response
Question by Mr Bernard - The $30,185,000 has been changed to $0.695M for proceeds from asset sales and purchase of assets changed from $64.4m to $26.44m. Madam General Manger, why is this so?
Council Response: Assets sales achieved for 2013-14 were $695,494 and purchase of assets totalled $27.1 million as per the Audited financial statements and in the report referred to above. A full copy of the Annual Financial Statement for 2013-14 was provided to you when you attended the Council offices on 1 July 2016. There is an error in the comparative figures in the Delivery Program 2013-17 Operational Plan 2015-16 for the comparative 2013/14 year only. The operational plan itself and all other comparatives were correct. It is noted this error was appropriately corrected in the comparative figures in Delivery Program 2013-17 Operational Plan 2016-17. Also the Delivery Program 2013-17 Operational Plan 2014-15 was correct at time of publication as it relied upon estimated results based on the March quarterly review balances as the financial year had not ended and the accounts had not been finalised.
To those knowledgeable in such matters, including Mr Bernard, the response provided did not clarify the position of the audited Financial Statements for the Statement of Cash Flows from Investing Activities. The discrepancy does not align with the position of the comparative 2014-15 figures and those of the prior 2012-13 Financial Year. Mr Bernard had justifiable questions around an error within the audited Financial Statements or the Operational Plan. Following a suite of letters to Council they finally acknowledged that the proceeds of Asset Sales and the purchase of asset figures were reported incorrectly in a letter dated 12th July 2016 as acknowledged by the Minister of Local Government at the time, The Hon Paul Toole. Though Council admitted the errors the figures continued to irk Mr Bernard because he wanted to find out if Council provided those very same figures to Independent Pricing and Regulatory Tribunal (IPART) when it applied for a Special Rate Variation. Mr Bernard wrote to Andrew Constance, Member for Bega: “I have no knowledge of what was actually sent to IPART by the council but I am aware that a number of documents were displayed to the public during the community engagement period. One of these related to the "Delivery Program 2013-17 and Operational Plan &Budget 2015-16 ". Sets of figures displayed in those documents concerned me greatly. These figures were detailed in the Consolidated financial budgets for the (base) and (SR V case) under "Investing "
Proceeds from asset sales $30,185,000 Repayment from deferred debtors ($23,000) Purchase of assets $64,000,000 I addressed the council in October 2015 and on several other occasions during 2016 the last being on Tuesday 28 June 2016 and did not receive a reply concerning those figures until 12 July 2016 - after the final approval for the rate rise was approved by the council and Government and decision that the Eurobodalla council was Fit for the Future. The General Managers letter of the 12th July stated that there was an error in the comparative figures in the delivery 2013-17 0perational Plan for the comparative year 2013/14. These had been changed as follows:
Proceeds from asset sales 695, 494($) Repayment of deferred debtors no figures stated Purchase of Assets $26.44 Million It is imperative that the validity of figures stated in the GM's letter are verified by independent forensic auditors or commissioned by the Auditors General Department, in accordance with recent changes to the Local Government Act. If this has not been enacted the normal process will suffice. It is felt that this is an immediate requirement. Examination of other documents displayed to the public during the "Fit for the Future " period and application for special rate variation revealed other anomalies. A few are shown in the attached documents as follows.
It is also noted that the figure of $535,200 "Proceeds from Sale of assets "seems to have replaced many other figures in similar projections for the four year periods displayed to the public. It is difficult to state when these documents were published and when historical changes were made. The ESC does not appear to have adhered to a policy of registering historical changes and reasoning behind these changes. The response for the "error "provided by the General Managed does not clarify the position of the audited financial statements for the Statement of cash flows from investing activities. The misrepresentation is either within the audited financial statements or the operational plan. No explanation has been given with regards the reasoning behind the multitude of changes between figures shown in other documents displayed to the public during the periods of exhibition Some of these are of the order of millions of dollars. The nonchalant way of brushing aside an" error "of millions of dollars is unacceptable without a satisfactory explanation. Letters to the editor and multiple representations failed to attract a response from council until after a permanent compounding rate increases were approved by the government. This imposition by council attracted a petition of over 10, 800 persons which was handed to our local member, Andrew Constance. It would be a shame if the political stability of the Eurobodalla electorate was compromised by this issue- bearing in mind other financial issues were raised by many of the 500 persons who voiced their opinion at a public meeting at Batemans Bay. Following continued complaints from ratepayers that the figures being given by Council staff at town presentations regarding the Special Rate Variation a Code of Conduct was raised against Council staff for quoting the same false balance sheet figure (of approximately $11 million dollars) at two separate public “information” meetings on the SRV when the true balance was around $26 million.
There was a denial that this happened despite numerous public witnesses. The first time that the figure of $26 million arrived in the public arena was via an article in the Bay Post on November 14th, 2014
It was also noted by observers including Mr Bernard that other figures were also changed as the meetings went on, such as a $70 million total changing to $75 million by the third meeting, and several substantial changes to the costing of councils wish list. Even though there were creditable witnesses (not liars) at these public meetings (including the media) who heard the “controversial” figures being delivered the following is the official finding of a Code of Conduct that was raised against Council staff for allegedly giving false information. I have determined that it is appropriate in all the circumstances to take no action pursuant to clause 6.10 (a) of the Procedures. I have reached this conclusion primarily because the complaint is misconceived and lacking in substance and does not disclose prima facie evidence of a breach of the Model Code of Conduct. In particular, please note as follows:
· The allegations by Mr #### that he and other members of the community were misled by the 6 Respondents in relation to the amount of working capital required to be held by Council for day-to-day operating expenses in order to support a proposed rate increase is not substantiated by the evidence gathered throughout the preliminary assessment process.
· The available evidence shows that at the November community workshops Mr O’Reilly and Dr Dale provided a detailed explanation of the working capital figure was calculated, together with the reasoning behind why it was considered prudent for Council to keep additional funds in reserve (ie. in addition to those funds shown on the balance sheets). I do not consider that the explanation given was misleading, and rather, it would appear that Mr ##### has misinterpreted or misunderstood the information provided to him.
· As I have concluded that there is no prima facie evidence to support the finding that Mr O’Reilly and Dr Dale misled Mr ##### and members of the community; it follows that the allegations against Councillor Lindsay Brown (Mayor), Councillor Gabby Harding, Mr Lindsay Usher and Mr Warren Sharpe (that they failed to intervene) also cannot be sustained on the evidence.
Further, in order to assist you understanding of the explanation that I am satisfied was provided at the workshops, what follows is an extract (below) from Mr O’Reilly’s written statement, obtained during the preliminary assessment process:
“As discussed I am pleased to respond to your enquiry regarding what working capital (ie: cash available) is appropriate to hold for Council use in day-to-day operations. This question is best answered from both a legal accounting standard view as well as my professional judgement.
· At the time of the sessions Council’s annual accounts showed a total cash balance of $75M (Note 6c).
· The accounts also declared a total restricted balance of $49M (Note 6c). This is money that is restricted to a fund (eg: water/sewer) or other council restricted activity (eg: infrastructure replacement) · It is my professional opinion, coming from a private sector background, that any business should prudently have 2 ½ times wages in reserve. This is approximately $7.5M - $8M.
· We had some $31M in current liabilities (Note 10a).
· The Office of Local Government (and the NSW Treasury Corporation) benchmark for the Unrestricted Current Ratio (unrestricted current assets/ unrestricted current liabilities) is 1.5 (Note 13a (ii)) – this means we should have $24M available in cash. Again, using my professional judgement, this ratio only allows for externally restricted amounts (both assets and liabilities), whereas Council has resolved in open council to ‘set aside’ internally restricted amounts for necessary activities. Recalculating this ratio yields we have $16.5M available. Taking into account my wages consideration (which is an expense not a current liability) the balance is therefore approximately $9M (that is, $8M to $11M available for discretionary spend). Given we have an asset base of some $1.87B (or $1.29B written down). (Note 9a), this is not in any way a material amount in my professional opinion given we have both an infrastructure and renewal backlog.
I note in presenting to the audience I emphasised the total cash ($75M) less restrictions ($49M) less wages ($7.5M to $8M) less current liabilities need ($7.5M to $8M) giving, in my opinion, $9M to $11M. I used my discretion and used $11M in open forum as it was consistent with my earlier conservative discussions with the General Manager who also used $11M. I did not overly emphasise the detailed calculations I have noted above” It is important to know that the above comment was made AFTER the public meetings that raised the Codes of Conduct. It is also important to know that the above statement from Anthony O’Reilly to the Code of Conduct assessor nor her observations and findings is not allowed to be discussed by anyone WITHIN COUNCIL however as the complainant is outside of Council the above can be openly discussed. Therefore the above might be of interest to Beagle readers.
So irrespective as to whether the Hon Paul Toole has advised that there is no indication that the ratios assessed by IPART relied on ACTUAL 2013 – 2014 figures which were incorrectly reported in Council’s Operational Plan and Budget for 2015 – 2016 there remains several major questions that require the attention of an independent auditor (NO - NOT AN INTERNAL AUDIT by staff or the Audit Committee - as those, in the day, failed to detect to the anomalies). Councillors may well roll their eyes when Mr Bernard speaks at Public Forums. They might offer questions that show their disrespect for the presentation style of Mr Bernard and they might dismiss him for just being a “Usual Suspect” but they need to know that Mr Bernard will not go away, that he has a wealth of knowledge and that the “possible massaging” of Council figures for the SRV and Fit for the Future have been noted and might just the catalyst to bring the whole House of Cards tumbling down.