Part 8: Our recent and ongoing work with local authorities

Local government: Results of the 2011/12 audits.

This Part discusses our performance audits and other reports of interest to local authorities that we published during 2012, namely:

The full reports are available on our website.

At the end of this Part is a summary of further work that we intend to report on during 2013.

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

The recently completed 2012 round of local authorities' long-term plans coincided with the Better Local Government reform, which seeks a leaner local government that is more in line with national economic needs.

In 2012/13, we are focusing on public entities' ability to meet the future needs of the nation. The report on long-term plans is our most significant contribution to that focus on future needs for local government.

At the heart of the 2012-22 long-term plans was local authorities' response to the new requirement to be clear on their financial strategy. A good financial strategy allows local communities to better assess the prudence and long-term financial sustainability of local authorities' plans.

Generally, local authorities have responded to this challenge. However, a question remains about what specific information in the long-term plans (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 of local authorities as a whole.

Views on what constitutes prudence and long-term financial sustainability differ and there are few agreed methods of analysis. As a result, it is difficult to be definitive about the state of an individual local authority or of local authorities as a whole.

Without a general consensus, we used nine specific indicators to help to describe local authorities' financial prudence. Figure 7 shows these indicators.

Figure 7
Indicators to help to understand local authorities' financial performance

Stability Resilience Sustainability
Actual to budgeted net cash flows from operations Interest expense to debt Capital expenditure to depreciation
Actual to budgeted debt Interest expense to rates revenue Renewals expenditure to depreciation
Actual to budgeted capital expenditure Fixed costs to operating and investing cash outflows Gross debt to total assets

The indicators are not an "audit test". We need consensus on how to better judge local authorities' financial prudence and, in the end, long-term financial sustainability. Although the indicators show our thinking to date, we welcome any opportunity to discuss their usefulness and framework and possible refinements or different approaches.

Overall, local authorities plan to live within their means and keep rate increases reasonable. They plan to raise more debt during the next 10 years to pay for capital expenditure, much of which will be to upgrade systems to meet new standards.

Many local authorities expect to repay some or all of this debt during the 10-year period of the long-term plans. Net income almost always stays positive, and local authorities obey the golden rule that they should borrow only to invest.

Local authorities have a diverse range of circumstances and community requirements, with specific demands. Local circumstances have led to arrangements that might appear unusual (for example, more debt than usual). However, on closer examination, these arrangements are generally fit for purpose.

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 local authorities' performance.

We audited all the long-term plans. Three of our audit reports contained modified opinions. Eight audit reports contained emphasis-of-matter paragraphs, pointing out significant risks that our auditors considered were fundamental to helping local communities to understand the challenges and uncertainties that their 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 reform, the Local Government Efficiency Taskforce is considering the nature of planning, accountability, and decision-making of local authorities. We have offered our insights to the taskforce.

We have suggested that local authorities present a more strategic focus on the main matters (including prospective financial information and intentions about level of service), and provide access to supporting data and policies on their websites.

We continue to encourage local authorities to invest consistently in preparing shorter, clearer, and more informative long-term plans, so communities are able to contribute more effectively to discussions about each local authority's intentions.

Survey into fraud awareness, prevention, and detection in public entities

New Zealand has a "clean" image when it comes to fraud. This country consistently ranks highly in surveys that measure public trust in government and the effectiveness of systems and processes that deal with fraud and corruption. We attribute the general absence of systemic large-scale corruption in the private and public sectors to the integrity of our standards and controls, underpinned by strong and shared common values, within a small and cohesive society. Maintaining our integrity culture is our best way of keeping fraud at bay.

In June 2012, we reported on a survey we commissioned of fraud awareness, prevention, and detection that aimed to provide better insight into fraud in public entities.34 The results of the survey confirm that public entities are strongly committed to protecting public resources.

Fraud survey results for local authorities

Local authorities have good anti-fraud frameworks – most respondents said that their local authority had a fraud policy, a clear policy on gifts, and almost all had a code of conduct for staff. Respondents were well aware of their local authorities' protected disclosures policy. Staff were confident that managers understood their responsibilities for preventing and detecting fraud. Most respondents said that their local authority encouraged staff to come forward if they saw or suspected fraud or corruption.

Thirty-eight percent of respondents were aware of at least one incident of fraud or corruption in their local authority within the last two years.

The most frequent types of fraud within local authorities were:

  • theft of cash (36%);
  • theft of plant, property, and equipment or inventory (17% combined);
  • payroll fraud (9%); and
  • false invoicing (7%).

Our report on the fraud survey results for local authorities is on our website.

Fraud survey results for airports, port companies, electricity distribution businesses, other local government, and CCOs

Respondents from these entities told us that their entities have some of the essentials in place. The entities:

  • have codes of conduct;
  • encourage staff to raise concerns; and
  • have senior managers who understand their roles and responsibilities.

Local government – other and port company respondents could not recall any incidents of fraud in the last two years. For these reasons, local government – other and port companies are not included in the following discussion.

Thirty-two percent of the airport company respondents were aware of at least one incident of fraud or corruption in their airport within the last two years. The most frequent type of fraud for airports was theft of cash (40%).

Half of the respondents from electricity distribution businesses were aware of at least one incident of fraud or corruption in their entity within the last two years. The most frequent type of fraud for electricity distribution businesses was theft of inventory (29%).

Almost one in five CCO respondents were aware of at least one incident of fraud or corruption in their organisation within the last two years. CCOs experienced a wider range of fraud. The most frequent types of fraud within CCOs were:

  • payroll fraud (21%);
  • theft of cash (16%);
  • theft of plant, property, and equipment, and inventory (27% combined);
  • false invoicing (11%); and
  • misuse of fuel cards (11%).

Our report on the fraud survey results for these entities is on our website.

Lessons for local authorities

One of our messages from this work is the need for local authorities to always report suspected or detected fraud to their auditor. All local authority staff need to recognise that "doing the right thing" means not keeping quiet about suspected or detected fraud in an effort to be fair to the person or people suspected of fraud.

"Doing the right thing" means speaking up, and that includes telling the appointed auditor about every suspected or detected fraud. We are not sure that this always happens and intend to monitor the extent of reporting to our auditors. Advising of a suspected or detected fraud is a sign that controls are working and that the environment supports employees voicing their concerns.

Using the information that auditors receive from public entities, we will continue to regularly update and share information about fraud incidents with local authorities. From this, it will be possible for people to see which sorts of controls or procedures are working to identify potential fraud in their workplaces or similar workplaces. We intend that the cumulative effect of this co-operation and sharing will be stronger controls and a cleaner public sector.

Auckland Council: Transition and emerging challenges

Creating a single local authority for Auckland was one of the most significant public sector reforms in recent years. The scale of the change and transition to Auckland Council was huge. It brought eight local authorities together, to create a new organisation with $32 billion in assets and a $3 billion annual budget, and 8000 staff from local authorities and CCOs.

Auckland Council (as a group) has complex and finely balanced governance arrangements and provides many important infrastructure and regulatory services that affect the daily lives of more than a third of New Zealanders. Auckland Council's strategy and planning affects national economic and social prosperity. Therefore, Auckland Council's governance and use of resources is of significant interest.

Two years on, we wanted to reflect on the transition and Auckland Council's emerging governance challenges. We hope that our report will be useful to those involved in the governance of the Council as an "outsider's" view of the matters and challenges. We hope that it will be useful for others contemplating such change. However, Auckland is unique and not all its changes or experiences will be relevant for others.

Through our work with Auckland Council, we see that a lot is happening. Those we interviewed reflected on the unified and integrated direction that has been achieved for Auckland through the Auckland Plan. Respondents told us that the enhanced Mayoral role and powers have invigorated and integrated Auckland Council's planning.

Although challenging, the tight transition arrangements gave Auckland Council momentum. Many people reinforced the importance of strong and principled leaders committed to working together and to building trust among the public, staff, and partners by being reliable.

Despite much potential for the transition to go wrong, it was managed well. The smoothness of the transition is a credit to the leadership and management of the Chief Executive, his executive leadership team, and the managers and staff of Auckland Council.

Everyone is committed to making the two-tier governance system of Auckland Council work as best they can. There are inherent tensions in the Council's governance arrangements that will need to be managed well and ways to strengthen governing body and local board relationships need to be found.

Auckland Council's governance relationships are evolving, with efforts to provide more guidance to CCOs about shareholders' expectations. We are not confident that the Council will be able to build the more future-orientated and trust-based culture it seeks by using more formal processes and mechanisms.

Being so large, Auckland Council will wrestle to communicate internally effectively. The Council still needs to understand and standardise the differing policies, regulations, service expectations, and performance it has inherited from the former councils.

To carry out decision-making openly and transparently, the governing body and local boards need to be supported by relevant, timely, and useful information that takes account of local, regional, and functional governance needs and perspectives.

In our view, Auckland Council and the Department of Internal Affairs should continue to liaise to consider whether legislative changes might be needed to provide for processes appropriate to Auckland.

Auckland Council, with support from the Independent Māori Statutory Board, needs to continue to find the most effective and efficient ways to get and consider the views of Māori in decision-making. The Independent Māori Statutory Board is working with clarity of focus and vigour on what it wants to achieve and how it thinks it can best contribute to the Council.

Auckland Council faces challenges to maintain momentum, support, and goodwill. It now rests on the Council, through its services, results, and work with others, to achieve the aspirations of the Auckland Plan and the intentions of the Auckland reforms.

Roles, responsibilities, and funding of public entities after the Canterbury earthquakes

The Canterbury earthquakes of 2010 and 2011 killed 185 people, damaged more than 100,000 homes, destroyed much of Christchurch‘s central business district, and badly damaged infrastructure. Although Canterbury has begun to recover, the recovery is likely to take many years to complete, and requires many public agencies, communities, non-governmental organisations, and private companies to work together.

In reporting on the recovery, we intend to look at four aspects:

  • the roles and accountabilities of public entities;
  • public funding of the recovery;
  • public sector procurement; and
  • the effect of the earthquakes on insurance in the public sector.

Our first report provided an objective view of how the recovery is being run. It described how the recovery is being carried out, the roles of agencies, how the recovery is being funded, and what the main risks and challenges are for the agencies involved and for Cantabrians.

The recovery calls for many public entities to work in new and challenging ways. The report shows that the administrative arrangements for the recovery are complex, reflecting a wide-ranging and challenging programme of tasks. The Canterbury Earthquake Recovery Authority (CERA) is responsible for leading and co-ordinating the work of many public entities. CERA cannot deliver the recovery alone. It must work with local councils, among others, to pursue local recovery agendas.

Our report encourages collaboration, specifically for all agencies involved to gain an understanding of their respective roles and responsibilities. There is a risk that, if there is a lack of clarity, work might not be mutually supportive, could lack direction, and could be wasteful because of duplication. We will continue to monitor the accountability arrangements for the recovery and the effective use of public spending.

The recovery is expensive. The Treasury estimates that the cost to the Crown will be about $13.5 billion. Christchurch City Council and other local authorities will continue to have significant expenses from the earthquakes. The rising cost of insurance has hit public entities hard.

As with our first report on the recovery, our future reports will highlight the challenges that local authorities face in the aftermath of a disaster. Local authorities need to be mindful of these challenges and consider how they are placed to cope if they face similar circumstances.

Department of Conservation: Prioritising and partnering to manage biodiversity

The Department of Conservation (DOC) is responsible for managing biodiversity on conservation land and waterways. DOC also provides support, advice, and funding to others who lead biodiversity management on private land.

The job of managing biodiversity on conservation land is far greater than the resources available. In 2012/13, DOC will spend about $202 million on managing biodiversity, allowing it to manage about one-eighth of our conservation land and about 200 of the 2800 threatened species.

DOC's ability to prioritise and partner with others is critical to effectively protecting indigenous biodiversity.

In our performance audit, we focused on:

  • how well DOC has used information to prioritise resources;
  • how well DOC has taken an integrated, strategic approach; and
  • how effectively DOC works with other government and non-governmental agencies to manage indigenous biodiversity.

We found that DOC will need better data than it has. Knowing this, DOC has prepared a national approach and tools for prioritising work in managing species and ecosystems. The tools appear to be technically sound, but their effectiveness will depend on how successfully they are put into effect. Our audit highlighted several risks to this process.

DOC is one of the public entities that show signs of focusing on better integrating biodiversity management in central and local government. There were concerns about out-dated conservation management strategies and that activities that DOC has allowed on conservation land are not in line with conservation management strategies agreed with local communities.

We used eight case studies to look at how effectively DOC has worked with others to achieve biodiversity goals.

DOC was working well with some partners and less well with others. Some initiatives struggled to show tangible results despite years of DOC and its partners working together.

The detailed recommendations from Department of Conservation: Prioritising and partnering to manage biodiversity are available on our website.

Future work

During the coming year, we plan to report on our inquiry into Kaipara District Council‘s management of the Mangawhai community wastewater scheme. Paragraphs 8.65-8.83 describe other work we have planned for 2013 that could be of interest to local authorities.

Ageing population

The proportion of older people in the population is growing at a faster rate than ever before. This is resulting in a major change in the population structure. The number of New Zealanders aged 65 years or over will exceed one million by the late 2020s. The population's different profile will put different demands on public services, and present challenges and opportunities. In particular, there will be a significant effect on health and social services. More people over 65 will remain at work.

The Political Declaration and Madrid International Plan of Action on ageing (2002) sets out to address the opportunities and challenges of ageing in the twenty-first century. The Plan of Action includes at least 50 indicators to track progress. We are part-way through a project to find out whether we can get information on each of the indicators for our country and to answer questions, including whether the indicators are useful to us, and why. Many of the indicators cover topics that local government is concerned with, such as accessibility of transport, emergency planning, and access to telecommunications, crime, and policies that facilitate the employment of older persons.

We are progressively sharing our interim results for each indicator on our website. We hope that the final report will provide assurance about our country's preparations over the last 20-30 years to deal with an ageing population. However, it is possible that our report could raise more questions than it answers. If this is the case, we hope our report will stimulate discussion and change amongst public entities, the private sector, non-government organisations, and individuals.

Management of significant assets

Significant assets, such as infrastructure, underpin many essential community services. Usually, these assets comprise many components that together make up a network.

Although individual components have useful lives and require regular maintenance and eventual replacement, the network as a whole is expected to continue to deliver essential community services in the long term.

Public entities are responsible for managing their assets and typically do so through formalised asset management planning processes.

We intend to review the management of significant assets throughout central and local government. We asked our auditors to gather information about asset management as part of their 2011/12 annual audits of selected public entities.

Using the information collected, we hope to better understand:

  • how entities describe and explain the services they are aiming to deliver;
  • the condition of significant assets; and
  • the extent of deferred maintenance and deferred renewals.

How well insured are public entities?

After the Canterbury earthquakes and other natural disasters, public entities are finding it increasingly difficult to secure adequate insurance for their assets at an affordable cost.

We intend to review the insurance cover throughout much of the public sector. We asked our auditors to gather information about insurance as part of their 2011/12 annual audits of public entities.

Using the collected information, we are interested in better understanding:

  • the nature of insurance cover;
  • the extent to which assets are uninsured;
  • any significant policy exclusions that mean assets are not covered for certain types of events (for example, earthquakes and tsunamis);
  • the proportion of claims that entities will not be able to recover (the excess under the insurance policy);
  • the cost of insurance; and
  • the main changes in insurance arrangements since 2010.

Local authorities' subsidiaries

The Auditor-General has an ongoing interest in the governance and accountability of CCOs and other subsidiaries and how effectively they deliver services on behalf of local authorities.

The number of such public entities has increased steadily, but there is little research or analysis available about the reasons for this or about how effective the entities are.

In some instances, high-profile governance matters have raised questions of interest for local government as a whole. We last looked at the governance of local government subsidiaries in 2001.35 It is time for us to update this work.

In 2013/14, we intend to begin some analysis of CCOs and subsidiaries. We will look at how many there are, what they do, and, for the larger entities, their financial performance and how they are contributing to effective service delivery.

As part of this work, we will consider matters arising in the governance and accountability of CCOs and other subsidiaries and the sort of governance and accountability arrangements that are working well in the interests of effective service delivery.

Our aim is to then report to Parliament and local authorities on how well the statutory framework for governance and accountability of local government subsidiaries is working, including:

  • accountability – who is accountable for CCOs and subsidiaries;
  • alignment of strategic direction – how CCOs and subsidiaries fit within the overall Council strategy, and their awareness of that strategy and their role;
  • appointment of directors, including whether councillors and officers are appointed;
  • performance monitoring – including the value of the statement of intent framework and reporting, oversight arrangements, for example, council committees and holding companies;
  • engagement and communication; and
  • formal and informal accountability mechanisms.

We intend to look at case studies and report on common themes that arise. We plan to further consider the governance arrangements between the Auckland Council and its CCOs and in other metropolitan councils, including Dunedin City Council. Our work on the Delta Utility Services Limited inquiry discussed in Part 9 will contribute to our study of the Dunedin City Council group.

We will also look at governance issues that arose in 2011 between Queenstown-Lakes District Council and its airport company. We intend to report on what is working well, and any issues or problems with the accountability and governance framework.

34: See Fraud awareness, prevention, and detection in the public sector (2012), on our website.

35: Local Authority Governance of Subsidiary Entities, available on our website.

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