One particular report by the Auditor-General is required reading in election year, says Brookfields Lawyers partner Linda O’Reilly.
In this election year it is particularly interesting to reflect on the reported performance of local government. The Auditor-General does this every year and published her report, Local Government: Results of the 2014/15 Audits, in April.
Lyn Provost identifies a number of issues she considers important, including: under-investment in capital assets; use of annual general charges; internal borrowing; and governance and accountability.
She reports that next year her focus will be on investment and asset management, which is a topic arising out of the concern at the apparent under-investment by local authorities in capital assets.
The report focuses on the financial results of local authorities, and it is interesting to see that the effect of the Auckland Council is so overwhelming that it needs frequently to be excluded to gain a realistic picture of the performance of local authorities throughout the country.
The report notes increases in revenue, operational expenditure and debt compared with the 2013/14 financial year, but capital expenditure falls and comes in well under budget.
Provost warns: “This suggests that some local authorities are not carrying out enough capital work when it is needed. If the under-investment continues, the long-term ability to deliver services is called into question.”
And further, “The number of local authorities with renewals that were 40% or less of depreciation has more than doubled since 2013/14. This could indicate that future generations will inherit the cost of those deteriorating assets.”
Local authorities collected an estimated $5.1 billion in rates in 2014/15, up three percent on the previous year, and representing 57 percent of the total revenue base. Against this and other revenues was an operating expenditure of $8.45 billion, and capital expenditure of $2.2 billion.
The latter was down from $2.3 billion in the previous financial year, and down from a budgeted capital expenditure of $3.4 billion.
The report points out that this calls into account the accuracy of budgets set by local authorities.
Provost comments: “Our interest remains focused on the effective long-term delivery of essential services to the community. To achieve this, it is important that local authorities continue to focus on improving the accuracy of their forecasting of future physical infrastructure needs and the budgeting for delivering these services.
“With these fundamentals established, communities can be better assured of sustainable service delivery and that they are appropriately meeting the costs of these services through their rates.”
Despite commentary in the media, the news on local authority debt is reassuring. It stood at $12.3 billion at 30 June 2015, but as a proportion of total assets was low at five percent. This figure excludes internal borrowing where an entity sources funding, usually for a capital project, from internal investments or reserves. Local authorities are now required to disclose internal borrowing in their annual reports, and the report provides a useful guide to the considerations applicable to internal borrowing.
The report addresses what constitutes good governance and accountability, and in relation to council-controlled organisations reminds local authorities to be aware of the following principles: having a clear purpose; having effective accountability and monitoring mechanisms; appointing the right people; and establishing an effective working relationship.
The report also sets out criteria and principles for governance arrangements in arts, and cultural heritage sectors, and for co-governing natural resources.
In relation to the current election year, local authorities are advised to adopt a communication protocol to ensure that each local authority plays no role in inadvertently promoting sitting candidates.
The report also emphasises the importance of governance training for newly-elected members, and urges the post-election establishment of audit committees to assist in managing revenues, expenses, assets, liabilities, investments and general financial dealing prudently.
As always the report is a useful round up of current local government issues, and should be required reading for all those considering standing for local government in the coming elections.
This article was first published in the June 2016 issue of NZ Local Government Magazine.