The Victorian Auditor-General's Office Local Government Audit results for 2016-17 report outlines the financial position of the state’s 79 councils and the local government sector overall.

The report assessed councils on a range of financial sustainability risk indicators, including liquidity, internal financing, capital replacement, and renewal gaps. It also considered the short and long-term effects of rate capping.

The findings showed the sector overall had a relatively low financial sustainability risk in the short term.

However councils including Hindmarsh, Yarriambiack, West Wimmera, Northern Gramapians and Ararat were forecast to have significant capital replacement issues in the next three years.

Hindmarsh was forecast to be in the high-risk category for internal financing this financial year, meaning the council has limited cash generated from operations to fund new assets and asset renewal.

It was forecast to move into the medium risk category in the following two years.

Rural Councils Victoria chairman and Hindmarsh councillor Rob Gersch said the report was damning for the future of local government, particularly small rural shires.

“The bottom line is, the government has to acknowledge VAGOs report,” he said. 

“The VAGO analysis found that on average, councils are forecasting revenue to decrease by one per cent, while expenditure is set to increase by two per cent in same period.

“There's nine per cent over three years, and we're expected to do a four-year budget.

“This is a damning report, and it's done by the state government's own people.

“If the government doesn’t sit up and take notice of this, I don't know where they're going.

“For heaven's sake they have to take notice of this report.”

The Victorian Auditor-General's Office analysis found Hindmarsh, West Wimmera, Yarriambiack, Northern Grampians, and Ararat councils were forecast to have a net result that placed them in the medium risk category by 2019-20.

This means all are tipped to have operating deficits in 2019-20, and were subsequently identified as at risk of long-term run down to cash reserves, with an inability to fund asset renewals.

Yarriambiack mayor Graeme Massey said capital works were an ongoing battle for small rural councils.

The council was in the medium risk category for capital replacement in 2017-18, and in the high risk category for the two years thereafter.

“I think Yarriambiack, Hindmarsh, West Wimmera and Buloke shires are pretty much in the same position regarding the ability to finance infrastructure maintenance and replacement,” Cr Massey said.

“That's our hardest thing – having the savings each year to put away to do the work that needs to be done in coming years, especially in regards to roads, swimming pools and sporting grounds.

“We're not spending the money we should be on infrastructure.

“We would like some sort of consideration from the federal and state governments of the needs of rural areas such as ours. We haven't got the alternate capacity to raise income like some of the larger centres.”

Cr Massey said the council was part of the Rural Living Campaign, which Buloke Shire Council instigated to ensure rural people had access to a basic suite of services so communities could continue to survive.

“We're trying to be progressive, but we're hamstrung by finances,” he said.

The report stated the Victorian Auditor-General’s Office was pleased most councils had identified longer-term viability risks that could come from rate capping, but noted many councils did not yet understand how they could respond to that risk.

It stated councils needed to understand the effects of reduced revenue on their capital works programs, and recommended councils develop longer-term capital works programs focusing on covering 10 to 20 years, rather than adopting the normal four-year focus.

The state government announced last week its rate cap for 2018-19.

Councils will not be able to increase rates by more than 2.25 per cent.​