Auditor-General's overview

Councils provide a range of important services to all New Zealanders, including the roads we travel on, the water we drink, and the locally owned community facilities, such as libraries, that we use. Councils need to plan well, often many years in advance, to ensure that they deliver these services for the long term, to a standard their communities want and can afford.

Every three years, councils are required to prepare a 10-year long-term plan (LTP). The LTP is the main way for councils to describe the services they plan to provide, the community outcomes they plan to contribute to, and the forecast cost of those services.

My auditors are required to express an opinion about whether each council's LTP is fit for purpose. Only one council received a modified audit opinion on its 2018-28 LTP. This was because it did not have reliable information to support some of its financial forecasts.

Councils have a hard job, and I acknowledge the effort those working in the local government sector make. Preparing an LTP is a significant task – the preparation takes time and costs money. However, I consider the LTP to be a fundamental tool for communities to hold their council to account.

The benefits of planning for a longer term, being transparent, and engaging with the community about the goals being pursued and their expected time frames and trade-offs cannot be underestimated. There is much about this process that other public organisations could learn from.

Challenges councils face

Councils are facing many significant and often conflicting pressures. Difficult decisions will need to be made as a result. Some councils are responding to unprecedented levels of growth. All councils are responding to increasing requirements for levels of service, including as a result of regulatory changes. They also need to reinvest in their existing infrastructure, often at higher levels than in the past to address historical underinvestment and improve services to meet community expectations.

This comes at a cost. The 2018-28 LTPs show significant forecast capital expenditure compared with previous LTPs. The increase in capital expenditure is not isolated to the 10-year period of the LTP. The 30-year infrastructure strategies reflect that this trend is expected to continue beyond the 10-year period.

Councils have a difficult job balancing the services they provide to communities with the long-term cost of those services, so providing affordable and sustainable services to their communities remains a challenge for councils. Council rates are forecast to continue to increase, and, for many communities, these increases are likely to be proportionately more than the increase in their other household costs or income.

Consistent with the principle of intergenerational equity, many councils use debt to fund much of their new capital expenditure. As a result, the 2018-28 LTPs reflect a sharp increase in expected debt for councils overall. Some "high-growth" councils (that is, councils experiencing high population growth) are starting to come up against the debt limits that they have set, in the context of prudent financial management.

Faced with this, councils are increasingly starting to consider using more innovative funding tools. For example, some are setting up "special purpose vehicles" to provide councils with alternative funding mechanisms. We will watch these developments and ensure that they are appropriately accounted for and disclosed.

The Productivity Commission is currently inquiring into the adequacy and efficiency of the existing funding and financing options for councils and whether these are sustainable. We expect that the inquiry will consider the trends and concerns that we discuss in this report.

To support better planning, councils need to do more to gain better information about the condition of their assets, the likelihood of a natural hazard event occurring, and the potential effects of climate change. I urge local and central government to work together to provide leadership on this.

Communities are already feeling the effects of climate change. Addressing these effects could compound the pressure of increasing capital expenditure forecasts. In many respects, councils do not know the extent of the challenges they face in responding to climate change and are forecasting expenditure without a good understanding of the risks.

The suitability of long-term plans

Since LTPs were introduced in 2002, there have been numerous changes to legislation. Some of the changes focused on increasing the ability of communities to engage in the planning process, and some were to provide more information.

LTPs, and the strategies they contain, remain long and complex. It is timely for the Department of Internal Affairs and the local government sector to discuss and review the required content for LTPs to ensure that they remain fit for purpose as planning and accountability documents.

Financial and infrastructure strategies are critical components of a council's LTP. These strategies must be clear about the current state of the council's finances and infrastructure, its goals, and the trade-offs that are needed. This is so readers of the LTP can meaningfully assess the prudence of their council's financial management and its long-term stewardship of infrastructure.

Councils should present their strategies concisely. In this report, I have set the challenge for councils to prepare a financial strategy in up to five pages. This is by no means easy but would hopefully aid a broader understanding of the council's strategy.

I also consider that there is an opportunity for further discussion about the effectiveness of councils' performance reporting to ensure that it remains fit for purpose. As part of our future work, we plan to take a more active role in influencing improvement in performance reporting throughout the public sector.

In my view, changes to the content of LTPs could make them more effective. I have heard from councils how resource-intensive it is to prepare an LTP. Improvements in requirements for LTPs could help decrease the burden on councils without compromising the primary purpose of LTPs.

Concluding comments

This report identifies that there is a lot for councils to grapple with. Further, with changes in technology, communities have different expectations for how they will interact with, and receive services from, their council. Future service delivery will look different. Councils can no longer plan based on the status quo – they need to actively consider what their future service delivery models will be.

Central and local government need to work together to ensure that the issues faced by our cities, districts, and regions are addressed in the best way for the benefit of all New Zealanders. LTPs provide a richness of information and planning that should be used by local and central government to form wider consideration of the important issues, and solutions to address these.

I have made four recommendations to central and local government to support the changes that, in my view, are needed.

John Ryan
Controller and Auditor-General

8 February 2019