Deputy Auditor-General’s overview
E ngā mana, e ngā reo, e ngā karangarangatanga maha o te motu, tēnā koutou.
Councils are facing rising inflation and interest rates, workforce shortages, climate change, and the recent severe weather events that caused significant damage and disruption throughout the North Island. How councils respond to these challenges depends on what they and their communities can afford.
In previous reports, we said that councils need to invest more in infrastructure to accommodate growth, build climate resilience into their infrastructure planning, and address the backlog in renewals. For example, many councils will find it difficult to make the significant investment needed to upgrade their water infrastructure to meet new standards.
Councils have been responding to these challenges in recent years. We saw an increase in budgeted investment in infrastructure in councils' 2018-28 and 2021-31 long-term plans, and councils also closed the gap between their spending on renewals and depreciation. Councils have largely delivered on these budgets in recent years. At the same time, they have continued to deliver core services to their communities.
Councils face complex issues
Our audits of councils' 2022/23 reports showed that many councils are finding it difficult to balance what they and their communities can afford against the various complex challenges they face.
For the first time in several years, councils' investment in infrastructure renewals as a percentage of depreciation declined. Councils are not replacing infrastructure at the same rate as it is being "run down", and many councils are not fully funding depreciation.
In 2022/23, councils as a whole invested $7 billion in infrastructure – the highest level of investment in 11 years. Councils are generally funding this investment through debt. As a result, council debt increased by 26% during the past two years.
However, debt is still less than the amount councils budgeted. This indicates that councils are not fully delivering on their infrastructure programmes.
Councils have increased their investment in three waters infrastructure, but we have not observed any improvement in their performance against water quality measures. Although councils continue to increase their investment in water infrastructure, it remains low compared to their investment in other types of assets. Investment in stormwater infrastructure is particularly low.
The lowest performance against water quality measures in both 2021/22 and 2022/23 was "safety of drinking water" measures. Councils achieved 48.3% of safe drinking water measures in 2021/22, but they achieved only 33% in 2022/23. This is an area of significant concern.
We also observed that 45 councils failed to meet the balanced budget benchmark in 2022/23 (an increase from 27 councils in 2021/22 and 19 councils in 2020/21). The balanced budget benchmark compares the council's revenue with its operating expenses and indicates whether the council is generating enough revenue to meet its costs. Some councils' debt levels are getting close to their prudential debt limits.1
Councils are responding to these challenges through their 2024-34 long-term plans.
Councils' performance reporting is generally good, but there are opportunities to improve
The annual audits we carry out provide assurance to the public that councils' financial reporting complies with generally accepted accounting practice and that they have prepared and presented it in a manner that we consider to be fair and materially correct. This is not easy for councils, given the challenges they face.
Good financial reporting and robust independent assurance of financial information are not enough to demonstrate a council's competence, reliability, and honesty. Most annual reports are unlikely to be widely read or understood, and the financial information in them can be complex and dense.
Councils have to prepare long-term plans that set out the framework for how they will report on their non-financial performance in their annual reports. When our auditors audit a long-term plan, they assess whether that framework is appropriate for clear and transparent reporting.
As a result, councils' reporting on their non-financial performance is more established than that of other public organisations, whose reporting frameworks do not have the same legal requirements or level of scrutiny.
The large number of qualified audit opinions on councils' service performance information indicates that many council performance reporting systems are not fit for purpose. This makes it challenging for councils to report on their performance completely and accurately, and it could affect the community's confidence in their council's reporting.
Common themes from councils' reporting this year
Encouragingly, we have seen more councils voluntarily reporting on climate-related issues and their progress in reducing greenhouse gas emissions in their annual reports. These councils are some of the first public organisations to do this.
This is an evolving area, and both reporting and auditing climate-related information can be complex. I acknowledge the work these councils are doing in leading the sector in this area.
Central government funding packages (such as "better off" funding) have played a part in driving increases in council revenue during the past two years. These packages were available through the Three Waters Reform Programme and cyclone recovery funding, and this type of funding has almost doubled since 2018/19.
However, it is not always clear from councils' annual reports what they have achieved with this funding. Councils should consider explicitly reporting on the funding received.
Councils' timeliness for processing building and resource consent applications continues to decline. Timeliness measures can indicate a council's effectiveness and efficiency in responding to growth.
In 2022/23, most councils did not meet the statutory time frames for processing these applications. A small number of councils continue to not report on their performance against timeliness measures. We expect all councils to report their performance against the statutory time frames.
Most councils published their audited annual reports by the statutory deadline in 2022/23. However, 22 councils missed their reporting deadline (compared with 36 councils in 2021/22).
In 2022/23, our auditors issued qualified opinions to 22 councils (compared with 21 councils in 2021/22). Of these qualified opinions, 19 were about councils' underlying systems that support performance information, such as inaccuracies in how they calculated customer complaint information.
All qualified opinions were limited to specific aspects of a council's annual report.
Acknowledgement
Councils continue to operate in a challenging environment. On the whole, they have continued to deliver services despite the challenges they face. I commend councils for this.
I thank our auditors for continuing to provide assurance to communities about the reliability of the information in councils' annual reports. Reliable financial and service performance information is critical to the trust and confidence that communities have in their councils.
Nāku noa, nā
Andrew McConnell
Deputy Controller and Auditor-General
13 August 2024
1: The Local Government (Financial Reporting and Prudence) Regulations 2014 require councils to prepare a debt affordability benchmark, which compares the council's actual debt with the prudential debt limit specified in its long-term plan.