Part 6: Assumptions disclosed in the LTCCPs

Matters arising from the 2009-19 long-term council community plans.

In this Part, we discuss:

Summary of our findings

We found that local authorities disclosed a broader range of assumptions in their 2009-19 LTCCPs than in their 2006-16 LTCCPs. However, not all local authorities met legislative requirements for disclosing assumptions, particularly about the associated risks and uncertainties.

Requirements for local authorities to disclose assumptions in LTCCPs

As part of preparing its LTCCP, a local authority has to decide how it will approach the future and adopt positions on various issues. This involves making some assumptions about components of its decisions that, because the assumptions relate to the future, may or may not occur and are subject to a greater or lesser degree of certainty and control by the local authority.

Clause 11 of Schedule 10 of the Act requires a local authority to make some specific disclosures in its LTCCP about assumptions:

  • risks must be clearly identified – clause 11(a);
  • assumptions regarding the useful life of significant assets and sources of funds for the replacement of significant assets must be clearly identified and disclosed – clause 11(b); and
  • for significant assumptions where there is a high level of uncertainty, a local authority must disclose that there is uncertainty and the implications of the uncertainty for the financial estimates – clause 11(c).

Importantly, the assumptions must be applied to the financial and non-financial estimates in the LTCCP. For example, assumptions form the basis of asset management planning, which affects financial and non-financial aspects of the LTCCP.

Disclosing assumptions in the LTCCP allows the reader to make their own judgement about the quality and reliability of the assumptions.

Given the similarities of the environment and context for all local authorities, there are many assumptions common to all local authorities. However, as expected, the specific details of assumptions will differ.

Along with the Act's requirements, local authorities must also comply with the requirements of Financial Reporting Standard 42: Prospective Financial Statements (FRS-42). Paragraph 49 of FRS-42 requires that prospective financial statements contain the information necessary for the user to appreciate the degree of uncertainty and the effect of that uncertainty for all assumptions included in the prospective financial statements.

Therefore, the combined effect of clause 11(c) and FRS-42 requires local authorities to disclose the implications of the uncertainty for all assumptions.

Why is estimating the effect of uncertainty so important?

The importance of estimating uncertainty can be demonstrated by an example. Some local authorities have been significantly affected by leaky buildings. There remains a lot of uncertainty about the extent of future claims on local authorities. For the most affected local authorities, claims during the 2009-19 period could represent a significant liability that they will need to fund.

It is important that local authorities make clear disclosures about their assumptions in the financial forecasts within their LTCCP about the leaky buildings issue, because these costs may affect the ability of the local authorities to carry out other projects.

Our review of assumptions disclosed by local authorities

What we did

We reviewed the assumptions that each local authority had disclosed in the final LTCCPs for 2009-19. We identified the main types of assumptions that were disclosed throughout the sector and then analysed the prevalence of those assumptions.

What we expected to find

Through our audits of the 2006-16 LTCCPs, we noted that assumptions related mainly to the financial aspects of the information used to prepare an LTCCP.

After the 2006-16 LTCCPs, we emphasised to the sector, through newsletters and speaking engagements, the need for local authorities to broaden their consideration of assumptions. We also emphasised that all assumptions applied by local authorities needed to be clearly disclosed in the LTCCPs. The SOLGM good practice guidance54 also addressed the need for better communication about assumptions.

The intention was to improve transparency for the reader of the LTCCP. To achieve transparency, it is important to clearly state all the components that combine in building the LTCCP. This is particularly important when there are complex and strategic assumptions that a local authority needs to make about dealing with the uncertainties of future environmental, social, economic, and cultural changes.

Many of these more complex and strategic assumptions relate to issues or events that may arise well beyond the term of the LTCCP but for which preparatory steps may be needed in the current LTCCP time frame.

Forecast information – both financial and non-financial – can be fully understood by the reader only when it is supported by transparent assumptions that are clearly described.

What we found

Overall, we found a broader range of assumptions disclosed in the 2009-19 LTCCPs than was disclosed in the 2006-16 LTCCPs. The most commonly disclosed assumption was local authorities' approach to inflation, which was disclosed by all55 local authorities in the 2009-19 LTCCPs (compared with 95% of local authorities in the 2006-16 LTCCPs).

The second most common assumption related to population growth, which appeared in all but one of the 2009-19 LTCCPs (compared with 86% in the 2006-16 LTCCPs).

Figure 1 sets out the categories of assumptions that we identified,56 and the proportion of local authorities (by type) that disclosed assumptions in those categories.

Figure 1 Percentage of local authorities that made disclosures about various categories of assumptions, by type of local authority

Main category % of all local
% of district
% of city
% of regional
Inflation 100 100 100 100
Population growth 98 98 100 92
Assets 81 84 81 67
Asset useful life 84 81 88 92
Interest rates 95 96 100 83
Funding sources 95 96 100 83
Joint venture arrangements 16 16 0 42
Policy/approach of council 47 47 44 50
External factors 92 96 88 75
Natural disasters 73 79 69 50
Costs/subsidies 89 93 94 67
Governance 42 44 38 42
Resource consent renewals 56 61 75 8
Service levels 55 63 56 17

The most significant increases in disclosures of assumptions

There was a significant increase in the number of local authorities that disclosed assumptions about external factors and natural disasters in the 2009-19 LTCCPs compared with the 2006-16 LTCCPs.

External factors

In the 2006-16 LTCCPs, 31% of local authorities included an assumption about external factors or effects. These assumptions mainly focused on the possibility of legislative change and, in most instances, disclosed that the LTCCP was based on an assumption that no legislative change would occur. In the 2009-19 LTCCPs, 92% of local authorities included an assumption on external factors, but related the assumption to a broader range of external scenarios.

The main new matter covered within the details of the external factors assumption was an explanation of local authorities' approach to the economic recession. The recession was a very significant issue at the time of preparing the 2009-19 LTCCPs. Other matters that were included in the assumption about external factors were:

  • the effects of immigration patterns on social structure;
  • the effects of business growth; and
  • currency fluctuations.

Natural disasters

In the 2009-19 LTCCPs, 97% of local authorities included an assumption for this category (compared with 31% for the 2006-16 LTCCPs) and appeared to focus more on the climate change aspects covered in this category of assumption.

Added emphasis on climate change in the 2009-19 LTCCPs

For the 2009-19 LTCCPs, there was an increase in the number of local authorities that disclosed assumptions about natural disasters and the effects of climate change compared with the 2006-16 LTCCPs. This increase appears to align with the growing level of concern about climate change effects that has developed worldwide since the 2006-16 LTCCPs were prepared.

We consider that this change also shows that local authorities are responding to the need to be transparent about all the considerations that have been taken into account in preparing the LTCCP.

We also consider that increased transparency of assumptions about the natural disasters and the effects of climate change reflects local authorities' increasing recognition that section 14(1)(h) of the Act requires them to take a sustainable development approach.

In the 2009-19 LTCCPs, similar assumptions to those included in the 2006-16 LTCCPs were made about major natural disasters, such as earthquakes – that no natural event would occur during the period causing anything other than normal asset and facility maintenance to be required. However, for the 2009-19 LTCCPs, many more complex assumptions and a lot more information was provided about the longer-term effects of climate change.

Some local authorities noted that their asset management plans allowed for the effects of climate change – for example, more frequent flood events because of higher expected levels of rainfall, or an increased need for water storage because of more frequent drought conditions.

Many local authorities provided the reader of the LTCCP with information about climate change and what the local authority is doing to consider the effects on that local authority. However, most local authorities did not make any specific changes to their financial forecasts to allow for the effects of climate change because of the current uncertainty about the effects. Whether the effects of climate change are flawed in the financial forecasts or not, local authorities need to be clear through their assumption disclosures about their approach so that there is transparency for the reader about the possible implications of climate change on the local authorities' forecasts.

Only 50% of regional councils disclosed information about how they planned to deal with the expected effects of climate change, compared with 96% of district councils (see Figure 2). We consider that this may be a matter that regional councils need to consider and provide more transparent disclosure on in future LTCCPs. Disclosure of this assumption is particularly relevant to regional councils' responsibilities for coastal protection and to maintain flood protection schemes. It also relates to their role in developing other land use and environmental policy.

Assumptions about the Emissions Trading Scheme

The Emissions Trading Scheme was passed into law on 26 September 2008. The scheme has direct and indirect effects on the services that local authorities provide. Following the General Election in November 2008, the new Government announced a review of the scheme.

Despite the fact that this review was to be completed after the 2009-19 LTCCPs were adopted, we expected local authorities to make assumptions about the effects of the scheme on their activities during the next 10 years. It was clear that some form of emissions trading scheme would remain in place.

As a result of our review of all 2009-19 LTCCPs, we identified 53 local authorities (62%) that made specific reference to the Emissions Trading Scheme in their assumptions. Most of these local authorities stated that there was too much uncertainty about the final form of the scheme and therefore about the effects of the scheme. Because of these uncertainties, no effects had been built into their financial forecasts.

Despite the uncertainties about the exact form of the scheme, 18 local authorities did make some allowance for the Emissions Trading Scheme. For these local authorities, additional costs were reflected in the LTCCP forecasts. Most commonly, this was limited to applying the one-off 1.1% additional inflation adjustor recommended by Business and Economic Research Limited. This adjustor was intended to reflect the estimated general effect of the scheme on prices across the market. However, seven local authorities included specific quantified costs related to estimated carbon emissions, and/or quantified costs related to managing processes to reduce emissions.

Evaluating local authorities' compliance with the Act

The legislative basis

As noted in paragraph 6.4, the Act sets out some specific disclosure requirements for assumptions. As well as considering the types of assumptions applied by local authorities, we also reviewed how effectively local authorities addressed the related disclosures required by the Act.

What we did

For the final 2009-19 LTCCPs, we reviewed the disclosed assumptions of each local authority to consider what they had disclosed about risk and uncertainty and the specific assumptions required by clause 11 of Schedule 10 of the Act. Disclosing the risks and uncertainties associated with each assumption provides very important information to the reader of the LTCCP. This information provides context so that the reader can evaluate the reliability of the forecasts.

We identified whether the required disclosures had been made and also whether they were clear enough for the reader of the LTCCP to evaluate the reliability of the LTCCP forecasts.

What we found

Importantly, we found that, in the 2009-19 LTCCPs, 40 local authorities provided more comprehensive and clearly presented information about risks and uncertainties compared with what they had disclosed in their 2006-16 LTCCPs. In the 2006-16 LTCCPs, 65 local authorities (76%) included disclosures about risks and uncertainties. In the 2009-19 LTCCPs, this improved to 78 local authorities (92%). This means that an additional 13 local authorities complied with the legislative requirements.

One of the seven local authorities whose 2009-19 LTCCP did not meet the full requirements of the Act for disclosures presented better information about its assumptions compared with its 2006-16 LTCCP. The six other local authorities whose 2009-19 LTCCPs did not meet the disclosure requirements of the Act made few or no changes to their assumption disclosures between their 2006-16 and their 2009-19 LTCCPs.

In summary, our review identified variable performance in disclosures about risks and uncertainties. Where the approach to addressing the requirements of clause 11 of Schedule 10 of the Act was identified as being weak during the audit, this was raised by the appointed auditor as a matter for future improvement.

The clear disclosure of risks and uncertainties contributes significantly to the reader's depth of understanding of the LTCCP forecasts. We encourage all local authorities to work towards full compliance with the requirements of the Act on assumptions, particularly the disclosure of risks and uncertainties.

How improvements were made

Many of the 40 local authorities that improved the way they presented information about their assumptions, risks, and the related uncertainties moved from a narrative form of presentation to a tabular format. Using a tabular format appears to make it easier for local authorities to clearly and systematically set out the information required by the Act.

We also noted that local authorities had improved the extent to which they disclosed their estimates about the potential effects of uncertainties on their financial forecasts. For many local authorities, estimating the effects of uncertainties with assumptions and associated risks is difficult and, sometimes, because of the nature of the assumptions, not possible. Local authorities put a lot more effort into doing this. As a result, the information provided on potential effects was more informative than it was in the 2006-16 LTCCPs.

Other required disclosures

Not all local authorities included assumptions about the useful life of assets and the sources of funds for future replacement, as required by clause 11(b) of Schedule 10 of the Act. Figure 1 provides more detail about how well the different types of councils complied with this requirement.

In general, auditors accepted that the information required by clause 11(b) could be obtained from the detailed activity sections of most LTCCPs, and that a legislative compliance breach had therefore not occurred. In our view, this information is generally more accessible for the reader when it is included with the assumption disclosures. We encourage local authorities to consider how they disclose these assumptions in future LTCCPs.

Preparing for 2012

We expect that all local authorities will meet the requirements of the Act in future LTCCPs. This means clearly disclosing the risks and uncertainties associated with all assumptions applied, and the assumptions specifically required by clause 11(b) of the Act.

There is scope for local authorities to continue improving how they present assumptions, risks, and uncertainties in a manner that helps the reader to evaluate the implications of the assumptions for the financial and non-financial forecasts. As noted in paragraph 6.43, a tabular format seems to help local authorities make better disclosures.

Local authorities can make whatever assumptions they deem fit and necessary in preparing their LTCCPs. We observed that, where the broader non-financial assumptions were disclosed, local authorities often took the position that the situation was too uncertain to actually apply any assumptions in the forecasts. This position was taken for many assumptions in LTCCPs, particularly for the effects of climate change, the Emissions Trading Scheme, and some aspects of population growth and other demographic changes. We do not dispute the validity of this approach in the 2009-19 LTCCPs. However, we encourage local authorities to continue assessing the effect of these issues on their communities in the medium to long term, and to specifically build the effects into their future LTCCP forecasts.

54: 2009 and Beyond LTCCP guides. These are available at

55: Timaru District Council did not apply inflation to its forecasts, but it did specify that it was taking this approach (non-application) to inflation in its assumptions.

56: We developed these assumption categories for our review. They do not reflect categories required by the Act and may not match the actual assumption categories used by local authorities.

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