Auditor-General's overview

Long-term planning is not new for local authorities. They have been required to prepare long-term financial strategies since 1996, and they are now required to prepare Long-Term Council Community Plans (LTCCPs) under the Local Government Act 2002 (the Act).

The emphasis on long-term planning in the Act¹ reflects the concerns of Parliament and the public that the governing and accountability framework for local government should give it incentives to plan for sustainable long-term service delivery, informed by an understanding of community needs and views.

I am required to audit the LTCCPs under sections 84(4) and 94(1) of the Act. While other countries have adopted long-term planning requirements for local government, auditing the reasonableness of the LTCCP and issuing an audit opinion is unique to New Zealand.

This report outlines the results of, and matters arising from, our audits of Long-Term Council Community Plans (LTCCPs). This includes specific stages of the LTCCP development process, including the LTCCP Statement of Proposal and its Summary (which is used for community consultation) and the final LTCCP adopted by the local authority. My auditors issue audit opinions on the LTCCP Statement of Proposal as well as the final LTCCP.

As preparation of LTCCPs is a relatively new and complex process, there is room for improvement. My report is intended to assist with improvements for the next round of LTCCPs for 2009-19.

I also commissioned an external review by four experts² in four areas that are central to preparing an LTCCP - sustainable development, performance information, asset management information, and financial management and strategies.

I considered that this external review would help to stimulate debate in the local government sector about the effect of the requirements to prepare LTCCPs and about the direction of future change to address the requirements and intentions of the legislation relating to LTCCPs.

Planning, preparation, and auditing of LTCCPs

The results of this external review show that, overall, the 2006-16 LTCCPs have improved compared to the 2004-14 LTCCPs.

After the 2006-16 LTCCP audits, my auditors assessed asset management planning against benchmark information collected in 2003. The results show an improvement in the quality of asset management planning.

These results from the external review and our audits show that local authorities are making progress in addressing the intentions as well as the specific content and process requirements of the LTCCP.

Despite these improvements, the expert reviewers concluded that LTCCPs have a significant way to go to become strategic and user-centric planning documents that are a strong expression of the purpose of local government.³

My auditors’ observations support this view of the expert reviewers that there is still a need for improvement. Indeed, a frequent observation made during our audit work was that, while an LTCCP may contain the required statutory content, information was not integrated in a way that gave a clear indication of important issues or the local authority’s strategic direction for these issues.

Communicating the "right debate" and the LTCCP Summary

A particular concern was that many LTCCP Statements of Proposal did not appear to encapsulate the "right debate" - they did not focus on the crucial issues facing each local authority and how the authority was addressing these issues.

Further, one of the disappointing features of the 2006-16 LTCCPs was the low priority given to preparing the LTCCP Summary. The Act states that the purpose of the LTCCP Summary is to serve as a basis for general consultation.⁴

I am aware that the size of an LTCCP and the complexity of the information it covers were the main reasons Parliament provided for the LTCCPs to be audited. The intention was that an audit would provide assurance of the quality of the underlying information and assumptions in the LTCCP, and that the processes for preparing an LTCCP had been complied with. This assurance would, in turn, allow communities to focus on the major matters and choices required - both in the LTCCP Statement of Proposal and its related LTCCP Summary.

Despite this, I note that many LTCCP Summaries were prepared late, almost as an afterthought, and without a focus on the important issues that needed to be addressed - a consequence of not having identified the "right debate" in the first instance

I am reminded of the comment by a senior manager of one of the local authorities that prepared an LTCCP early in 2003 that, if he had had another month to spend on improving the LTCCP, he would have spent it on the LTCCP Summary.⁵ Improving the preparation and presentation of the LTCCP Summary is an important way in which the LTCCP can become more user-centric.

The role of the LTCCP and areas for improvement

I am aware from anecdotal reports that some local authorities perceive a contradiction between the potential roles of an LTCCP as:

• a high-level articulation of strategy; and
• a document to record detailed management intentions.

They view one role as resulting in a strategic plan that would omit the more detailed LTCCP content required by Schedule 10 of the Act, and the other as being simply a work plan that would not need the same amount of community engagement and audit.

My own observation, as a result of conducting the 2006-16 LTCCP audits, is that there is a middle ground between these views. This would be where the LTCCP articulates a local authority’s strategy (informed by both community desires and the reality of the community’s circumstances) and also provides an integrated view of the policies and actions required to support the strategy.

Using this approach, the LTCCP is a process that bridges high-level strategic planning and detailed work planning. Although there were few LTCCPs that ultimately received a qualified audit opinion for being fundamentally unfit for their intended purpose,⁶ there are differences in the usability of LTCCPs and the extent to which the “right debate” has been encapsulated (see the Appendix for a summary of our non-standard audit opinions).

My auditors have advised me that more usable LTCCPs tended to result where local authorities embedded the preparation of the LTCCP as a process, rather than treating the LTCCP as a document that was prepared as a one-off compliance exercise.

This is also a view that was reached by our expert reviewers. Their report notes that it generally appeared:

… that councils focused on complying with the requirements of the Act, and have improved the quality of the underlying information to ensure that they meet audit expectations, but are still at an early stage in effectively using the integrated information to enhance their own decision-making processes and the quality of the planning process for all stakeholders.

The importance of project management and the sequence for developing information

Local authorities need to better understand the sequence for obtaining and developing information from different parts of the organisation, and the relationship between sets of information. They also need to better understand how to integrate this information through good project management disciplines.

When my auditors began to ask local authorities in mid-2005 about their project management intentions for preparing their LTCCPs, most local authorities had started updating asset management plans. However, my auditors were surprised to find that many had not prepared much of the underlying information on which future planning for asset management is based. This included not identifying and reviewing their relevant policy and strategic objectives, and not reviewing current and intended levels of service.

This concern was confirmed in the period of audit work carried out before the issuing of audit opinions on the LTCCP Statements of Proposal. During this work, my auditors frequently observed that changes to capital expenditure budgets did not result in changes to forecast levels of service, suggesting weak relationships between financial and service performance forecasts for infrastructure assets. In my view, clear understanding is vital in this area of local authority activity.

Many local authorities were therefore preparing asset management forecasts without having formed deliberate objectives in terms of the nature and condition of assets required to deliver the intended services.

In saying this, I am not suggesting that the LTCCP needs to be prepared entirely from a zero base every three years. Rather, what I had expected was that, before starting asset management planning and making financial estimates, local authorities would have completed the community outcomes process and confirmed that their existing information continued to be relevant.

This would have included identifying gaps and areas to update in:

• crucial local authority service strategies and policies;
• revenue, financing, and treasury management policies; and
• current and desired levels of service.

Performance frameworks and financial management strategy need improvement

The development of performance frameworks also clearly needs further work. Indeed, despite the expert reviewers reporting that the performance framework area showed the strongest improvement from the 2004-14 to the 2006-16 LTCCPs, it is also where the reviewers and my auditors reported the greatest deficiencies in 2006-16 LTCCP Statements of Proposal.

The LTCCP should reflect a local authority’s synthesis of its community feedback and of its policies and strategies, including its financial management strategies, culminating in the prospective financial statements. Through the LTCCP process, financial estimates and implications become the main ingredients to inform decision-making.

Local authorities appear to be more experienced at assembling financial statements than other sets of LTCCP information. However, as is common with the other review areas, there is a range of financial management areas, primarily relating to financial strategy at both a whole-of-council level and at a service level, that we consider requires further development.

In particular, I would emphasise the importance of a local authority explaining the financial prudence of its annual forecast surplus or deficit position in the light of its future service intentions and the funding of these.

This report also provides an analysis of, and comments on, the major financial trends among local authorities. Overall, although the trends highlight an increased use of debt and other revenue as funding sources, rates continue to increase and are forecast to be proportionately higher as a source of funding in 2016 than in 2006.

Long-term management of local authority finances remains a crucial issue. The changes between the draft LTCCP Statements of Proposal and the final adopted LTCCPs pushed rates increases out beyond 2006/07. This indicated that local authorities had a shorter-term focus in financial planning.

The quality of the financial forecasts for the earlier years of the 2006-16 LTCCPs appears to have improved compared to the 2004-14 LTCCPs. However, financial forecasts in the later years of the 2006-16 LTCCPs again show similar weaknesses to the 2004-14 LTCCPs. Investment and cash balances significantly increase in later years, while capital expenditure substantially reduces. This suggests that capital expenditure forecasts may not be complete, and that local authorities need to reconsider whether their current approaches to capital planning remain appropriate.

Information management must continue to improve

It is unsurprising that so many in the sector found preparing the 2006-16 LTCCP, including the audit, a challenge. Identifying community outcomes and preparing an LTCCP require cost and effort. However, I have been surprised at the extent of the difficulty reported to me by local government representatives. I have asked why it is so difficult to pull together information that should already exist to support good future planning and management of a local authority’s services. I have been troubled to be frequently told that the information did not exist before a local authority was required to produce the 2006-16 LTCCP.

There is no question that, in the future, there will be changes to local government legislation and to the structure and environment of local government. However, I cannot emphasise enough to those who are the guardians of important resources and services - the management of our waste, water, roading, and community service infrastructure, and our precious environmental resources - how important it is to ensure that they get and maintain quality information so they can perform the role entrusted to them by communities.

My focus for 2009

The combination of project management and sequencing issues, information gaps, and the still developing familiarity of many in the sector with the requirements of the Act produced a result for my auditors that I had not wanted.

In my 2003/04 report to Parliament on the results of local government audits, I reported that the audit of the 2006-16 LTCCPs would focus on systems.⁷ Initially, we looked at the following systems and controls, to assess whether they produced reasonable information that served the intentions and requirements of the Act, ensured that that information was integrated, and ensured that it was reflected in the LTCCP:

• community outcomes and decision-making processes;
• performance measures and monitoring procedures;
• determining and measuring levels of service;
• identifying and applying assumptions;
• asset management plans;
• information systems and related business processes (in particular, the financial planning processes and financial modelling systems);
• funding and financing policies and accounting policies; and
• project management and monitoring controls over preparing the LTCCP.

However, in many instances, the absence or weaknesses of systems and controls forced my auditors into what I would describe as a "compliance mode".

By this, I mean that we were obliged to give greater emphasis to successive drafts of LTCCP documents (with my auditors on some occasions seeing as many as 10 drafts) and checking the reasonableness of figures and that content requirements had been addressed. This style of working created high costs for local authorities and auditors but, more critically, meant that our own work could not always focus as much as I would have wanted on whether the “right debate” had been conducted.

We are carrying out internal work to review our LTCCP audit methodology and will be working with the sector in the lead-up to the 2009-19 LTCCPs to try to help address the issues identified in this report. I would emphasise again that, for our audit work to be more effective, local authorities will need to become more practised at managing the preparation of LTCCPs in the areas I have outlined.

My intention is to revise and re-issue our LTCCP audit methodology, building on our 2006 experience, to enhance our contribution to the preparation of LTCCPs that plan for sustainable long-term service delivery, informed by community needs and views.

Kevin Brady
Controller and Auditor-General

22 June 2007

1: Section 93(7) of the Act requires an LTCCP to be adopted for a period of not less than 10 consecutive years. In one instance, Kapiti Coast District Council adopted an LTCCP covering 20 years.

2: The reviewers were selected for their knowledge in their specific field of review and of the local government sector.

3: Section 10 of the Act.

4: Section 89(c) of the Act.

5: Graham Spargo, Dunedin City Council, addressing the 2003 Community Planners Conference.

6: Section 93(6) of the Act.

7: Local Government - Results of the 2003-04 Audits, parliamentary paper B.29[05b], paragraph 3.207.