Part 1: The operating environment for councils

Insights into local government: 2023

1.1
In this Part, we describe the environment that councils operate in. Specifically, we look at:

Economic challenges facing councils

1.2
Increases in inflation, interest rates, and staff costs, as well as skill shortages and continued supply chain challenges, have created challenging economic conditions for councils in the last two years.

1.3
Under the Local Government Act 2002, councils must prepare and consult on audited long-term plans and accompanying infrastructure and financial strategies. They must also prepare annual plans that outline their activities, revenue, and expenditure for each financial year.2

1.4
When some councils prepared their 2021-31 long-term plans, they redrafted their budgets in response to the predicted effects of the Covid-19 pandemic on their communities. These councils minimised rates increases for 2021/22 and 2022/23 or reduced the cost of services that were not funded by rates.

1.5
Councils are required to report their balanced budget benchmark. This compares the council's revenue with its operating expenses and indicates whether the council is generating enough revenue to meet its costs. In 2022/23, 45 councils failed to meet the balanced budget benchmark (an increase from 27 councils in 2021/22 and 19 councils in 2020/21).

1.6
Councils account for depreciation, which enables assets to be replaced in the future. Depreciation costs have been increasing, reflecting the increase in infrastructure asset valuations from higher material and construction costs.

Reform programmes and working with central government

1.7
Significant reform programmes for water and resource management introduced by the then Government caused uncertainty for councils as a whole in 2021/22 and 2022/23. Council staff were severely stretched, as they were participating in these programmes of work alongside their normal roles.

1.8
In 2023/24, the current Government stopped the water and resource management reform programmes and repealed the related legislation.

1.9
The uncertainty arising from the reform programmes and their subsequent repeal affected councils' ability to plan and prepare their 2024-34 long-term plans and carry out their wider responsibilities.

1.10
The size of a council can affect its ability to engage with central government reform processes. Key sector groups, such as Local Government New Zealand and Taituarā, are important for helping councils of all sizes engage with these processes.

1.11
Although councils are required to implement a range of national legislation through devolved or delegated powers from central government (for example, the Resource Management Act 1991), the responsibilities of regional, territorial, and unitary councils vary. However, all councils have to plan for the long term.

1.12
To respond to the economic challenges they face, more councils are now looking at new approaches to funding and are seeking joint solutions with central government. During the past year, central and local government have also worked together to fund urgent recovery efforts after the severe weather events in early 2023.

The 2023 North Island weather events

1.13
In early 2023, floods in Auckland and Cyclone Gabrielle caused significant damage and disruption to six regions in the North Island. The weather events affected a wide geographical area and placed additional stress on many communities and councils that were already experiencing other pressures, including economic pressures. The rebuild and recovery effort is significant.

1.14
In response, central and local government organisations set up new work programmes under new governance structures and distributed funding to businesses and communities. Immediate funding decisions included money for urgent infrastructure repairs, to assist with temporary accommodation, and for providing business and community support.

1.15
This type of response relies on the public sector's ability to rapidly adapt and respond to unexpected events. In these circumstances, public servants in central and local government often have to work under extreme pressure.

1.16
Central and local government organisations need to co-operate and co-ordinate with each other effectively to support the recovery from severe weather events. There are particular challenges in working out how cyclone damage will be repaired and paid for, as well as in determining what level of resilience can be achieved. Resourcing is a particular challenge for smaller councils.

1.17
The Treasury has forecast that the public and private sectors will invest about $9 billion in cyclone-related rebuild and recovery between 2023 and 2026 (with an additional $1 billion after 2026). About $5 billion of this is for local and central government infrastructure.

1.18
The Treasury monitors and tracks cyclone-related spending by central government. This is an encouraging initiative that supports accountability for this significant amount of government spending.

1.19
In recent years, we have emphasised the importance of transparency and integrity in public spending decisions, particularly in response to crises. Approaches such as high-trust funding arrangements, preparing policies at speed, and urgent procurement processes have resulted in significant spending. Although these approaches have been necessary, they come with risks to probity and can raise questions about integrity and value for money.

1.20
It is important that, in their annual reports, councils provide clear and informative detail on how much central government funding they received in response to such events and how they have applied it. Where it would help support transparency to the public, councils should consider getting assistance with the processes for administering these funds.

Climate change and its effects on planning and investing in infrastructure

1.21
Several factors affect infrastructure investment in New Zealand, including population pressures and increasing construction costs. For many years, we have commented on the need for councils to increase their investment in infrastructure. The effects of the recent weather events also highlight that councils need to include climate resilience into their infrastructure planning and management.

1.22
Many public organisations, including councils, are responsible for meeting commitments under the government's National Adaptation Plan and the Emissions Reduction Plan. These plans require wide-reaching changes that include adapting legislative and decision-making frameworks, co-ordinating within and between central and local government, and introducing funding mechanisms that enable adaptation to climate risks.

1.23
When we reviewed councils' 2021-31 long-term plans, we noted a marked improvement in climate-related content and approaches compared with their 2018-28 long-term plans. We expect a similar improvement in councils' 2024-34 long-term plans. The 2024-34 long-term plans provide opportunities to focus more on adapting to climate change and reducing council greenhouse gas emissions.

1.24
We expect climate reporting in the local government sector to increase over time as climate reporting becomes more established. We also expect that councils and council-controlled organisations will focus more on climate change mitigation and adaptation. We acknowledge the work councils are doing in leading the public sector in this area.

Annual audit completion rates

1.25
The public audit system is critical for supporting the scrutiny of government spending and performance. Annual audits provide assurance to the public and Parliament that they can rely on the information that public organisations report about their use of public money and their performance.

1.26
In 2022, the Covid-19 pandemic continued to affect the nature and timing of our annual audits. The first half of 2022/23 was particularly difficult. Audits were affected by the global auditor shortage and other effects of the Covid-19 pandemic, including staff illness and shortages in audit service providers and public organisations.

1.27
Given these challenges, we prioritised the most significant audits. These included the audits of the financial statements of the Government, of government departments, and of Financial Markets Conduct Act 2013 reporting entities, such as Auckland Council.

1.28
We have now mostly cleared the backlog of deferred audits, and our audit completion rates are now largely similar to rates before the Covid-19 pandemic. However, some councils continue to struggle to provide robust information for audit in a timely fashion.

2: In certain circumstances, an annual plan must be consulted on if it proposes material differences to the long-term plan it is implementing.