Council attributes the loss to lower than usual cash inflows, with delayed water usage billing and COVID-19 impacts on cash receipts, unbudgeted 2019/20 expenditure on natural disasters and tree removal on private property as well as the growth in employment costs.

Council's external and internal reserve balances were expected to be $29.506 million as of June, 30 2020 but instead fell three million short, coming in at $26.158 million.

Also the Water Fund reserve has a deficit of $1.937 million, due to delayed water usage billing and extended payment terms, but Council believe the deficit will be addressed as water accounts are paid.

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"The amount of the shortfall in reserves only became apparent recently, as part of the end of financial year work, to finalise actual transfers to and from reserves in the 2019/20 year," Lithgow City Council's chief financial officer Ross Gurney said.

Mr Gurney proposed the following options which Council unanimously agreed to, to address the shortfall in internally restricted reserves:

- Remove the gas works remediation reserve provision of $860,052. Council has approved the construction of a new inventory Store on a section of the gas works site at the Lithgow Depot. The site was externally assessed as safe to build upon. Any minor remediation costs will be funded as part of the Store construction project and there is no need to retain a remediation provision.

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- Reduce the Employee Leave Entitlements reserve by $139,948 to $753,606. The reserve is held to assist with covering the cost of leave entitlements when long-term employee's leave Council's employment.

- Defer a number of 2020/21 capital works projects with the budget savings to be transferred to rebuild internal reserves. This will reduce cash needs by $837,172 for the 2020/21 year.

These projects include:

The total value of projects to be deferred is $837,172. The deferred projects will be considered for inclusion in the 2021/22 capital works program.

Council also suggested that the internal reserves deficit of $2,510,330 be treated as an internal borrowing to be repaid over time (expected three years) as cash inflows improve.

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Water mains renewal follows the road renewal program. Water mains renewal projects would also be deferred which would assist with reducing cash outflows from the water fund.

"Analysis of rates and water balances owing indicates that $1.8M less cash has been received for the year to 30 September 2020 compared with same period last year," Mr Gurney said.

"The cashflow situation is being actively monitored and further interventions may be required in the current financial year."