Auditor-General’s overview

E ngā mana, e ngā reo, e ngā karangarangatanga maha o te motu, tēnā koutou.

Long-term planning that informs good decision-making by councils and helps communities to hold councils to account has never been more important.

For many years, most councils have had a relatively stable operating context. This is no longer the case. The impact of the Covid-19 pandemic, together with the number of reforms and reviews under way, means that the context that the local government sector is now operating in is highly uncertain.

However, regardless of context, councils need to continue to reliably and efficiently deliver services to maintain the trust and confidence of their communities.

In New Zealand, we are fortunate to have a robust long-term planning regime in the local government sector. Other parts of the public sector are not required to do such long-term planning. In my view, they would benefit from such a requirement.

Long-term planning allows councils to set out the challenges they and their communities face, provide options for how these challenges may be addressed, and seek input from their communities on their preferred way to address them. For many councils, the challenges that they face, and the financial commitment that they seek from their community to address those challenges, is a real test of community leadership.

I commend the efforts of council staff and elected members who sought to tackle many of the key challenges that their councils face. Most councils produced realistic long-term plans based on the best information available when the plans were adopted. This is a significant achievement even in less challenging times but even more so in the current operating context facing the local government sector.

We saw the following in the 2021-31 long-term plans:

• Councils are moving to address historical underinvestment in their infrastructure. The long-term plans had a richer discussion of the implications of previous decisions for investing in assets and what this meant for the future. The plans often had a particular focus on reinvestment in three waters assets within a significant proposed capital expenditure programme of $77.2 billion throughout the sector for the next 10 years.
• Many councils made tangible progress in collecting better condition and performance information about their critical assets. Having this information helps to support more accurate decision-making about the need for, and timing of, asset renewals and the risks of "sweating assets" in need of replacement.
• Councils set rates at higher levels than they may have previously to fund the increasing costs that they expect to face.
• Councils provided more discussion about climate change in their long-term plans, including what they were doing to adapt to, and mitigate the risks from, the impacts of climate change on their communities.
• Councils discussed the uncertainty created by the current significant reforms – three waters reforms, the reform of the Resource Management Act, and the future for Local Government review. These reforms are making the operating context for councils challenging.

Although there have been improvements, councils need to do more to produce financial and infrastructure strategies that are integrated and are clear about the risks that each council faces, what the council's risk appetite is, and how it is planning to mitigate or manage risks and the associated cost of this.

The financial strategy and the infrastructure strategy provide the strategic direction and the underpinning context for the long-term plan. Consequently, these two strategies need to be realistic and clear to the reader.

These two strategies also need to be integrated to provide a sense of the risks a council faces, the trade-offs that need to be made, and the resulting costs, including how those costs will be funded. Councils also need to base their plans on realistic assumptions that reflect their best information about the future.

A tight labour market and supply chain challenges are causing capacity issues. This creates risks to current service delivery, the delivery of future capital projects, and their cost. The financial and infrastructure strategies need to be able to respond to these challenges.

Councils are forecasting to invest more in their assets than in previous long-term plans. Assuming councils can substantially deliver this planned investment, this is a positive change. Historically, this has not been the case.

Councils' forecast renewals remain lower than forecast depreciation for the period of the long-term plans. This indicates that councils are still not reinvesting enough in their assets.

Each council's borrowing practices need to reflect its risk profile. With a significant increase in infrastructure investment being forecast, debt throughout the local government sector is also forecast to be the highest it has ever been. Debt is forecast to be more than $38 billion by the end of the long-term plan period in 2031.

In the current economic environment of increasing interest rates, councils with significant debt levels need to closely monitor interest costs and ensure that their treasury management policies and practices are fit for the risks that they are managing.

Councils that have relied on alternative funding sources face the risk that these do not eventuate as budgeted. This could have implications for the services that councils are planning to provide. It could also mean that councils will need to identify other funding sources.

Councils also need to address the inherent risks in the long-term operation of their infrastructure. It is critical that councils understand the state of their infrastructure and the ongoing investment that they need, including responding to the effects of increasingly severe weather events as a result of climate change.

Most councils disclosed that they needed to improve the information that they hold about their assets to support prioritised investment decisions. I agree with that, and also that Councils should continue focusing on asset management practices generally. It is important that councils implement the improvement plans they have for collecting and maintaining asset condition information.

We continue to highlight that improved information about the condition and performance of councils' assets is needed for three waters assets. Holding suitable information will be important for ongoing service delivery to the country, regardless of any future changes to the role councils may play in managing these assets.

Our audit of long-term plans helps to provide assurance to communities that the underlying information and assumptions that the long-term plan is based on is reasonable and supportable – for example, a council has reasonable knowledge of its assets.

My auditors issued two adverse audit opinions and nine qualified audit opinions on the 2021-31 long-term plans. Adverse and qualified audit opinions are normally rare in our audits of long-term plans.

In most instances, the qualification was limited to a disagreement or a limitation in scope about an aspect of the underlying information that the long-term plan was based on. For example, a council may not have had enough information about the condition and performance of its assets to suitably inform the council's renewal strategies and forecasts.

However, in my view, the two councils that received an adverse audit opinion did not present a plan that was fit for purpose. This is because the councils did not have a credible plan based on reasonable and supportable assumptions to address the challenges that those councils faced.

Our audit reports on the 2021-31 long-term plans also included more emphasis of matter paragraphs than in the past. An emphasis of matter paragraph does not mean that the auditor has found anything wrong. However, there were some important matters that we wanted to draw readers' attention to. In most instances, the emphasis of matter paragraphs reflected the significant uncertainties councils faced in preparing their long-term plans.

Our auditors emphasised the uncertainty associated with:

• the impact of the Government's proposed structural reforms of three waters services;
• whether some councils can deliver their proposed capital expenditure programmes, given the scale of the proposed programmes and the various challenges in delivering them;
• the nature and extent of the asset condition and performance information that some councils used to inform their forecasts of three waters asset renewals; and
• the funding assumptions that some councils used.

In my 2019 report about the matters arising from the 2018-28 long-term plans, I recommended that the Department of Internal Affairs and the local government sector review the required content for long-term plans so that they remain fit for purpose and do not include requirements that have limited value to their communities. This recommendation stands.

I acknowledge the dedication, time, and effort that elected members and council officers and staff put into preparing the 2021-31 long-term plans, particularly during the difficult circumstances of a pandemic. I also acknowledge my auditors and staff in the wider office who supported our audits.

This would have been a challenging year for both councils and our auditors even without a long-term planning process.

Nāku noa, nā

John Ryan
Controller and Auditor-General

20 July 2022