Part 3: Financial results in local authorities' 2011/12 annual reports

3.1
In this Part, we summarise the financial results from the 2011/12 annual reports of local authorities, focusing on operating revenue, rates revenue, operating expenditure, capital spending, and debt. Our interest is in what externally available financial information reveals and what the results show over time and compared to forecasts.

3.2
We collected all the information that we use in this Part from the audited financial information contained in annual reports for 2011/12. There are 78 local authorities - territorial councils (city, district, and six unitary councils) and regional councils.¹

Operating revenue and rates revenue

3.3
In 2011/12, local authorities had total operating revenue of $8.3 billion, which compares with their combined $8.1 billion budget. The operating revenue received for 2011/12 was $0.2 billion or 2.4% more than budget. The major difference in total operating revenue for 2011/12 is primarily because Christchurch City Council received $0.2 billion more earthquake income (insurance proceeds and revenue from the Crown) than budgeted.²

3.4
Rates revenue made up 55% of operating revenue – this percentage is slightly higher than the two previous years' proportions of 53% and 54%. In 2011/12, local authorities collected $4.6 billion of rates revenue, consistent with what was budgeted. Although the rates revenue was $0.7 billion more than in 2010/11 ($3.9 billion), the 2010/11 figure included only eight months of rates revenue for Auckland Council. This is because Auckland Council (which was formed on 1 November 2010) prepared eight-month results for 2010/11.

3.5
Apart from rates, the other major sources of revenue in 2011/12 were New Zealand Transport Agency subsidies of $938 million or 11% of operating revenue (2010/11: $933 million, 14.6%) and development contributions and vested assets of $320 million or 4% (2010/11: $243 million, 3.8%).

Operating expenditure

3.6
In 2011/12, local authorities' total operating expenditure was $8.1 billion, which compares with a budget of $7.2 billion. This was $0.9 billion or 12.5% more than budgeted. The total operating expenditure was $1.3 billion more than in 2010/11. The main reasons for the significant variance to budget were the operating results of Christchurch City Council and Auckland Council. Christchurch City Council's earthquake-related costs exceeded budget by $204 million.³ Amendments to accounting treatment of grants to Auckland Transport and unrealised losses from derivative financial instruments contributed to Auckland Council's operating costs increasing by $301 million.⁴

3.7
Operating expenditure for 2011/12 was made up of:

• employee costs of $1.6 billion (20%);
• depreciation of $1.4 billion (17%);
• finance costs of $0.6 billion (7%); and
• other operating expenditure of $4.5 billion (56%).

Capital expenditure

3.8
Local authorities' capital expenditure was $2.3 billion in 2011/12, which compares with a budget of $2.9 billion. This was $0.6 billion or 26% less than budgeted for 2011/12. Three Canterbury local authorities – Christchurch City Council, Selwyn District Council, and Waimakariri District Council  - collectively spent $328 million less than budget because of delays in capital projects after the earthquakes. Other local authorities that had significantly less capital expenditure compared to budget were Auckland Council ($82 million), Dunedin City Council ($26 million), and Queenstown-Lakes District Council ($22 million).

3.9
We found that some local authorities have improved their explanations of actual-to-budget capital expenditure variance in their annual reports but there remains room for improvement. This type of disclosure is mandatory. In our view, local authorities (and all public entities) could do this better so that the public can understand why the entities did not achieve what they had set out to do.

Debt

3.10
Local authorities mainly use debt to pay for long-life assets rather than to pay for their day-to-day operations.

3.11
Local authorities had debt of $8.5 billion as at 30 June 2012, which was $0.5 billion, or 6%, more than budgeted. The debt was $0.9 billion, or 12%, more than in 2010/11. Auckland Council constructed and acquired $360 million of operational and infrastructural assets during the year. Also, the Council funded $530 million of assets acquired by its CCOs. The Group funds a portion of these assets through a centralised borrowing programme resulting in increased borrowings by the Council of $880 million.⁵

3.12
Christchurch City Council had $196 million more debt than it had budgeted because of the complexity of anticipating earthquake-related costs.⁶

3.13
Conversely, some local authorities borrowed less because of lower capital expenditure during the year, and rescheduling or reprioritising projects. Some larger local authorities Greater Wellington Regional Council, Hamilton City Council, Kapiti Coast District Council, Marlborough District Council, Nelson City Council, New Plymouth District Council, Palmerston North City Council, and Queenstown-Lakes District Council collectively took out $245 million less debt than budgeted.

Group financial information

3.14
We have considered the 2011/12 group financial information for the 13 city councils. Eleven city councils prepared group financial statements incorporating their CCOs' financial results. Napier City Council and Porirua City Council have no CCOs and so do not have group financial statements. Some CCOs run core operations for example, Auckland CCOs operate water supply, wastewater, and transport activities.

3.15
The city councils collected total operating revenue of $6.8 billion, of which their CCOs contributed $2.1 billion or 31%. The four largest city council groups – Auckland Council, Christchurch City Council, Dunedin City Council, and Wellington City Council collected $5.8 billion of revenue, of which their CCOs contributed $2.0 billion or 35%.

3.16
Total group operating expenditure of the city councils was $6.5 billion, of which the CCOs spent $2.0 billion or 31%. The total operating expenditure of the four largest city council groups was $5.5 billion, of which CCOs spent $1.9 billion or 36%.

3.17
The total assets of the city council groups were $71.1 billion, of which $7.1 billion, or 10%, related to the CCOs. The four largest city council groups had total assets of $56.4 billion. CCOs held $6.8 billion or 12% of these assets. This reflects that CCOs do not hold significant levels of assets (including property, plant, and equipment) compared to their parent local authorities.

3.18
The city council groups had capital expenditure of $2.3 billion, of which their CCOs spent $1.0 billion or 43%. The four largest city council groups had capital expenditure of $2.0 billion, of which their CCOs spent $1.0 billion or 51%.

3.19
The total debt of the city council groups as at 30 June 2012 was $8.5 billion, of which CCOs accounted for $2.2 billion or 26%. The four largest city council groups had debt of $7.2 billion their CCOs' proportion was $2.1 billion or 29%.

1: A unitary local authority is a territorial local authority that has the responsibilities, duties, and powers of a regional local authority granted under the provisions of an Act or an Order in Council giving effect to a reorganisation scheme.

2: Christchurch City Council, Annual Report 2011/12, pages 110 and 111 Financial Highlights.

3: Christchurch City Council, Annual Report 2011/12, pages 110 and 111 Financial Highlights.

4: Auckland Council, Annual Report 2011/12, Volume 3, page 131, Note 34 Explanations of major variances against budget.

5: Auckland Council, Annual Report 2011/12, Volume 3, page 132.

6: Christchurch City Council, Annual Report 2011/12, page 114, Financial Highlights.