Auditor-General's overview
The long-term plans (LTPs) that local authorities prepare every three years provide an insight into the position and future intentions of the local government sector. The recently completed 2012 round of 10-year plans coincides with the Better Local Government initiative, which seeks a local government sector that is leaner and more aligned to national economic needs.
This year, my office is focusing on the public sector's ability to meet the future needs of the nation. This report on LTPs is, by its very nature, our most significant contribution to that focus on future needs for local government.
The LTPs are formal documents that are subject to my office's audit. In their LTPs, local authorities should be planning for the delivery of important community services in prudent and sustainable ways. At the heart of the 2012-22 LTPs was the sector's response to the new requirement for each local authority to be clear on its financial strategy. A good financial strategy gives the local community a better basis for assessing the prudence and long-term financial sustainability of the local authority's plans.
Generally, I am satisfied with the response of local authorities to this challenge. The "direction of travel" is positive. However, a question remains about what specific information in the LTPs (and in the audited annual financial statements) is most helpful for informing judgements about the financial prudence and long-term financial sustainability of an individual local authority or the sector as a whole.
What constitutes prudence and long-term financial sustainability is a matter of judgement, and there are currently few agreed methods of analysis. As a result, it is difficult to be definitive about the state of an individual local authority or the sector.
Without a general consensus, my staff used a set of nine specific indicators to help describe the financial prudence of local authorities. I have included the set of nine indicators in this report to facilitate wider debate about financial prudence.
The set of indicators does not constitute an "audit test". My intention is that the set of indicators is debated in the coming months and used, refined, or superseded. We need consensus on how to better judge local authority and sector financial prudence and, ultimately, long-term financial sustainability.
I strongly believe that assessing the long-term sustainability of a community cannot be derived from financial analysis alone. Because of the importance of high-quality service delivery in the public sector, measures of those services are critical. However, the new requirement to include a financial strategy in LTPs and the need for a productive debate on prudence and sustainability mean that this report concentrates on those matters rather than service delivery.
Overall, local authorities are planning to live within their means, and they are not raising rates to unreasonable levels to do this. They are planning to raise more debt during the next 10 years to fund capital expenditure. This capital expenditure is often associated with the need to upgrade systems to meet new standards (for example, for water quality and the development of public transport systems). However, many local authorities are also expecting to repay some or all of this debt during the 10-year period of the LTPs. Net income almost always stays positive, and local authorities stay well within the golden rule of fiscal policy that governments should borrow only to invest.
Local authorities have a diverse range of circumstances and community requirements, each with its own demands. Local circumstances have led to arrangements that might appear unusual (for example, levels of debt). However, on closer examination, these arrangements are generally fit for purpose rather than imprudent.
My auditors issued audit reports on all the LTPs. Three of the audit reports contained modified opinions. Eight audit reports contained emphasis-of-matter paragraphs, pointing out significant risks that my auditors considered were fundamental to the local communities understanding the challenges and uncertainties those local authorities face in achieving their plans. None of the audit reports raised concerns about the financial prudence of local authorities' forecasts.
As part of the Better Local Government initiative, the Local Government Efficiency Taskforce is considering the nature of planning, accountability, and decision-making of local authorities. We have offered our insights (consistent with those outlined in this report) to the Taskforce. We have also suggested that local authorities present a more strategic focus on the main issues (including prospective financial information and level-of-service intentions), and provide access to supporting data and policies through the local authority's website.
I continue to encourage local authorities to consistently invest in preparing shorter, clearer, and more informative LTPs, so the community is able to take part in more informed and effective consultation on a local authority's intentions.
The future sustainability of local government services such as roads, water, libraries, and rubbish disposal are critical to our communities. Delivering on these LTPs in an effective and efficient manner is the next challenge.
Lyn Provost
Controller and Auditor-General
3 December 2012