Part 4: Other issues affecting the sector

Local government: Results of the 2014/15 audits.

During our annual audits, the appointed auditor sometimes draws issues affecting an individual local authority to our attention. Some of these queries are seeking guidance, and others are for our information.

We looked into three matters that we consider worth bringing to the attention of others.

Hutt City Council – council-controlled organisations

In 2014, Hutt City Council amended its 2012-22 long-term plan to implement its Urban Growth Strategy 2012-2032, CBD Making Places 2030, and Economic Development Strategy 2009-2014. These are all designed to rejuvenate the city. The amendment provided for an accelerated capital programme, including some high-profile and high-value projects.

To facilitate the capital programme, the long-term plan amendment made some changes to the previously adopted financial strategy. However, it kept the main rate, debt level, and sustainability measures of the previous financial strategy. In 2013, the Council adopted a policy called Purchase and Sale of Property for Advancing Strategic Projects.24

During 2014/15, the Council asked one of its CCOs, UrbanPlus Limited, to create three subsidiary organisations. The purpose of these subsidiary organisations, as stated in the Council's annual report, was to advance the Council's rejuvenation strategy by buying properties within the city.25

The subsidiary companies were set up to protect the Council and UrbanPlus Limited from additional risk and debt, and to allow property purchases without the vendors knowing that the Council was involved. The Council told us that the vendor's asking price sometimes increases when a local authority is involved in a property purchase, and the Council wished to avoid this.

Section 56 of the Local Government Act 2002 requires the local authority to consult its community before setting up a CCO. Section 14(1) of the Act sets out principles for local authorities, including doing business "in an open, transparent and democratically accountable manner". However, there is no requirement to consult when a CCO establishes a subsidiary.

In this situation, there was some concern that the Council's focus on maintaining confidentiality, to ensure that it paid a fair market price for the properties it bought, could have a detrimental effect on its ability to meet the community's expectations of accountability. There was also concern about how well the Council recorded its decisions and processes.

During the 2014/15 audit, we considered whether creating these subsidiaries could have affected the audit opinion. In particular, we considered whether the standards of transparency that the community might reasonably expect were met, given that the community was not consulted before the three subsidiaries were formed.

We concluded that the audit report did not need to bring the matter to the attention of readers. We were comfortable that, because the Council's and UrbanPlus Limited's annual reports appropriately disclosed the setting up of these entities, transparency objectives had been met. In reaching this view, we determined that the activity was not material to the financial statements of the Council and that the transactions were in line with well-recorded and well-consulted policies. The actions appeared to be well intended, with no sign of inappropriate or unethical behaviour.

Despite this, we considered that the Council's management and oversight of the process was deficient. We recommended that, for any future activity, the Council:

  • seek internal and, where necessary, external advice to support its decision-making;
  • ensure that all managers involved are kept informed to ensure that accountabilities to the council are not compromised; and
  • ensure that key considerations and decisions, including the rationale for how decisions are reached, who makes them, and under what authority they are made are clearly recorded, with appropriate reporting to the full council.

It is important that local authorities carefully consider the principles of transparency and accountability in the actions of their CCOs and ensure that decisions are made openly and transparently.

South Waikato District Council – investment fund separation

In 2013/14, South Waikato District Council transferred most of its investment fund, valued at slightly more than $26 million, to two trusts − South Waikato Investment Fund and South Waikato Development Trust. These trusts are not public entities, and the Council does not control them.

The Council set up the investment fund in the 1990s using the proceeds of the sale of power company shares. Since 1998, the Council has managed the fund in-house. It has mainly used income from the fund to subsidise rates. In 2006, the Council resolved to make a portion of the fund available for activities focused on economic development, including to build facilities and amenities, enhance local employment opportunities, and attract people to move to, and stay in, the district. In 2012, the Council amended its Investment Policy so the fund could be used to fund community services and other specific projects.

In 2012, the Council assessed that the likelihood of South Waikato District Council being included in a local government reorganisation within the next five years was medium to high. The Council's concern was that, if there were to be an amalgamation, the investment fund might no longer be available exclusively for the benefit of the ratepayers of the current South Waikato District.

In September 2013, the Council consulted the community on an amendment to the 2012-22 long-term plan that would help to transfer the investment fund out of the Council's control. The aim was to protect the fund should an amalgamation take place, ensure that the fund was safeguarded for the South Waikato District community, and ensure that people with the right networks, experience, and skills in driving economic development manage the fund.

After the consultation process, the Council adopted the proposed changes to its policies and the investment fund was transferred into two trusts outside the Council's control. The trusts were established with a clear objective to maintain the goals of the investment fund that the Council had previously set.

The trusts are separate entities, and the Council does not control what they do. However, the Council was involved in setting up the trusts and drafting the trust deeds. The Council determined the process for selecting the trust members, but the actual selection was managed through the Waikato branch of the Institute of Directors. The Council is confident that the trusts and trustees have the best interests of the district at heart.

We considered whether the audit report should alert the community to these transactions. The Council's actions in removing significant public funds from the direct control of the Council could be considered financially imprudent.

However, after considering the planning process for setting up the trusts, the consultation carried out, and the clarity of the information presented to the community about the implications of the transfer, we concluded that the community had been appropriately involved in the decision-making process. We also noted that the Council had sought professional advice from several advisors, that none of the advisors had raised concerns about the proposal, and that the advisors had helped the Council to achieve its objectives.

Local authorities are able to use public money for various activities that add value to their communities. This comes with a responsibility to ensure that they make appropriate decisions about that use and disclose those decisions transparently.

Local authorities must carefully consider public expectations of how funds are used and how they will communicate the Council's decisions and actions to the community.

Auckland Council – employee costs

In our 2012 guidance on severance payments, we noted that:

public sector employers are expected to follow good human resources practices to avoid employment relationship breakdown, and to follow proper processes to avoid or reduce risk. Their overriding duty under the Employment Relations Act 2000 is to act in good faith.26

However, in some circumstances, employment relationships do break down and, occasionally, severance payments might be necessary if the relationship ends.

The Local Government Act 200227 and applicable accounting standards govern the disclosure of severance payments in the local government sector. The payments made when a person's employment ends can consist of several elements, including some that must be disclosed and some that do not have to be disclosed, such as payments provided for in the employment contract.28

Contractual payments do not have to be disclosed under legislation. However, the Local Government Act 2002 requires the disclosure of payments that exceed contractual provisions.

In our audit of the financial statements of Auckland Council and Group for 2014/15, we noted that the Council made total payments of more than $6 million to departing staff during the year. Many of these payments were made under legacy employment contracts. Of these payments, only 27 payments totalling $0.5 million were disclosed as severance payments to meet the requirements of the Local Government Act 2002. After completing our audit, we were satisfied that an in-house legal review of the payments had correctly identified contractual payments and severance payments.

It is common practice to focus on meeting the specific legislative disclosure requirements. However, the information available to the reader of the financial statements can be significantly reduced if other payments are not included.

We suggest that local authorities carefully consider the intention of the legislation. In the interests of transparency and accountability to the public, we recommend that local authorities disclose all redundancy payments, regardless of whether they are contractual payments or severance payments.

24: Hutt City Council (2014), Hutt City Annual Plan 2014-2015, pages 7 and 9, and Hutt City Council (2015), Hutt City Council Annual Report 2014-2015, page 83.

25: Hutt City Council (2015), Hutt City Council Annual Report 2014-2015, page 83.

26: Controller and Auditor-General (2012), Severance payments: A guide for the public sector, Wellington, page 7. [Updated in 2019]

27: Clause 33 of Schedule 10.

28: These include payments that are established under the ordinary contractual employment arrangement, such as any specified period of notice that can be paid out instead of worked, any payment if an employee's position becomes redundant, accrued annual leave, and any benefits that are part of the employee's remuneration package and that they have become entitled to by the time they leave, such as bonus or incentive payments.