Part 1: Introduction and summary

Matters arising from the 2012-22 local authority long-term plans.

This report sets out matters arising from our audits of the 2012-22 long-term plans (LTPs) prepared by local authorities. The purpose of this report is to:

  • tell Parliament and the local government sector about matters arising from our audit of the LTPs;
  • discuss the quality of information in the LTPs; and
  • allow Parliament and the local government sector to assess the effect and implications of changes resulting from the transparency, accountability, and financial management (TAFM) reform of the Local Government Act 2002 (the Act).

The process for preparing and consulting on an LTP is well known, and has now been carried out four times since 2002, when the Act introduced the requirement to produce LTPs. Appendix 1 summarises the main requirements for LTPs.

Local authorities are next due to prepare their LTPs for the 10-year period 2015-25. However, we note that the Government's advisory Efficiency Taskforce is considering, among other matters, the nature and content of LTPs. This may give rise to changes in the long-term planning environment.

Some of the matters discussed in this report assume a working knowledge of the wider local government environment, so we have included a glossary at the start of this report.

Some of the analysis in this report is most useful when readers can compare the forecasts in the 2012-22 LTPs with current and actual figures. Where appropriate, the text and graphs include 2009/10 and 2010/11 actual figures and 2011/12 forecasts1 as base years alongside the forecasts for 2012/13 to 2021/22.

Main features of the 2012-22 long-term plans

Local authorities have a wide range of circumstances and requirements, and each local situation has its own demands.

The primary purpose of an LTP is to outline the financial and non-financial circumstances faced by the local authority and the local authority's proposed response to those circumstances. An LTP provides a basis for consultation and decision-making, and also helps the community to hold the local authority to account.

The new requirement to publish financial strategies was helpful

Helping generate the "right debate" (see paragraph 1.27) was the new requirement to include a financial strategy in the 2012-22 LTPs. We consider that this requirement improved the way local authorities presented the financial issues in their LTPs. This helped communities to assess the implications of proposed financial decisions during the consultation process.

The main themes evident in the financial strategies were:

  • reducing or deferring expenditure;
  • an increased use of district-wide funding to spread the costs of infrastructure upgrades for small communities;
  • the need for a number of large infrastructure projects to meet legislative requirements;
  • a focus on stabilising or reducing overall debt; and
  • delaying capital projects because of lower or uncertain growth.

Although financial strategies are useful in increasing the quality of information in LTPs, we consider that local authorities could incorporate more assessment of the long-term view, beyond the 10-year scope of the LTP. In our view, local authorities could also explicitly consider the implications of trends, using a wider range of indicators of their long-term financial and non-financial sustainability.

Local authorities generally are preparing financially prudent LTPs

The global financial crisis and central government focus on restraint in public sector expenditure clearly influenced the LTPs. Overall, we saw a strong focus on affordability.

Local authorities, by and large, are cautious rather than drastic in their forecast approach to cost containment. Some have forecast "no frills" and "just in time" approaches to infrastructure development that will need very good asset management planning to ensure that current and forecast service levels are not put at risk.

Rates are forecast to increase at an average of 5% annually during 2012-22. Rates are forecast to increase relative to the underlying index of consumer costs (CPI), but decrease relative to overall income growth (as measured by GDP). Operating expenditure, meanwhile, is forecast to increase at an average of 4%, meaning that local authorities are planning to live within their means and with small operating surpluses during the period of their LTPs.

In the last two years, local authorities have been good at budgeting for their operational expenditure, but overestimated their likely levels of capital expenditure. We consider this under-expenditure indicative of the challenges of delivering a diverse range of projects each year. However, there is scope for the sector to improve reporting in this area so that it is easier for the users of local authorities' annual reports and LTPs to understand whether forecast projects have been delayed, whether there is a tendency for conservative overestimating, or whether cost savings have been achieved. In the LTPs, capital expenditure for 2012-22 is forecast at $37 billion. Of this, 59% is to meet increasing demand (often as a result of growth) or to improve levels of service.

The overestimation of likely levels of capital expenditure in the past two years raises questions about the realism of local authorities' longer-term assessments of the cost of their asset renewal and expansion programmes, as forecast in the LTPs. This emphasises the importance of robust asset management plans (AMPs) as the foundation of every LTP.

Our view is that local authorities generally show good stability and resilience to short-term uncertainty, with relatively low levels of interest expense and fixed costs.

Levels of debt are forecast to nearly double during the 10-year period of the LTPs, reaching $18.7 billion in 2021/22. Auckland Council, Greater Wellington Regional Council, and a small group of other local authorities serving our largest urban communities plan to use increased levels of debt to fund large infrastructure projects. Their LTPs forecast doing this within reasonable financial limits and expectations of income.

However, we are concerned that a small number of non-metropolitan local authorities are planning large increases to their debt levels. We assessed these local authorities as financially prudent, but they face greater risks in the accuracy of their forecasting, growth patterns, and ability to deal with the unexpected as their capacity to respond to shocks reduces.

Conversely, a number of mostly smaller local authorities are planning for little or no debt during the 10-year period. If these local authorities are carrying out large capital projects, this raises some questions about the appropriateness of their financial strategies and equity between ratepayers in paying for long-term infrastructure projects. These two contrasting approaches demonstrate the importance of a clearly described financial strategy that enables the community to understand the current and long-term implications of the local authority's forecast use of debt, particularly in the context of asset condition and forecast capital expenditure levels.

In the longer term, the LTPs suggest that the financial sustainability of the sector is reasonable, with small operating surpluses, reasonable debt levels, and provision for an increasing proportion of expenditure on renewing and improving assets. However, some individual local authorities are at greater risk than others.

Overall, we concluded that all local authorities had prepared LTPs that are financially prudent. For eight LTPs, we used an emphasis of matter paragraph in the audit report to highlight certain assumptions or risks related to the financial strategies that those local authorities are using to achieve their plans.

Each local authority has its own story

The broad findings summarised above are about the sector as a whole. Later in this report, we provide detailed information about local authorities whose circumstances have led to uncommon arrangements (such as levels of debt).

For example, Auckland Council, with a forecast population of 1.7 million, is on a different scale from every other local authority in New Zealand. As a new body expecting significant population growth, it faces challenges on every front. Its financial strategy is centred on a number of substantial investment projects, mostly relating to transport and economic activity, while balancing the budget. This inevitably leads to a high, but not unsustainable, level of debt. However, we considered that one project, the City Rail Link, was of such scale and significance, and had enough uncertainties associated with it, that we needed to draw attention to the associated risks in our audit report.

Like Auckland Council, Queenstown-Lakes District Council faces significant challenges in planning for the effects of growth. We issued a qualified audit report on its LTP for 2009-19, based on the Council's inability to fund its forecast capital expenditure. The Council addressed this issue, and, although it still faces risks associated with its planned levels of capital expenditure and debt, we consider that the Council's 2012-22 LTP is financially prudent.

There are some emerging differences between local authorities based on population size, reflecting their response to the influences and pressures they face. The differences suggest that further analysis is warranted within a wider debate on sector performance.

In our view, the uncommon situations that some local authorities find themselves in are suitably addressed in their LTPs. The arrangements they propose are fit for purpose, given their circumstances.

Consultation processes were generally suitable

Local authorities need to seek community views on the LTP as a whole. This is usually achieved by asking the community to focus on the major issues facing their community. We call this engaging in "the right debate".

In our view, the LTPs presented important issues to communities. In some situations, the choices for how a local authority might address those issues were less clear than in previous LTPs, and not in keeping with guidance issued by the Society of Local Government Managers (SOLGM) and our Office.

Not all local authorities took the opportunity offered by changes to the Act in 2010 to produce shorter LTPs. Those that did, on the whole, provided more accessible documents to their communities.

In our view, local authorities still need to find a suitable middle ground in LTPs between a high-level description of strategy and a detailed record of management intentions. Most local authorities provide too little of the first and too much of the second. Whether this is an inevitable response to current legislative requirements is debatable.

The processes that local authorities used to consult on their LTP were, by and large, suitable.

1: The figures for 2011/12 come from the comparative figures that local authorities had to include in their 2012-22 LTPs.

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