Audit of Kaipara District Council's 2012-22 Long-Term Plan

Text of the letter sent by Karen MacKenzie, Director Audit New Zealand, to the Mayor and Councillors of Kaipara District Council is reproduced below.

Audit New Zealand logo.

13 August 2012

File Ref: EN/LCA/03-3318

Kaipara District Council
Private Bag 1001
Dargaville 0310

Dear Mayor and Councillors

AUDIT OF KAIPARA DISTRICT COUNCIL'S 2012-22 LONG-TERM PLAN

As you will be aware, Kaipara District Council’s Long-Term Plan Statement of Proposal (LTP SOP) for 2012-22 was adopted by the Council on 27 April 2012. Since then, the Council has consulted the community about the proposals in the LTP SOP, which has resulted in some key changes being made to the final LTP for 2012-22 (the LTP). We received a draft of the LTP on 31 July 2012 and have started our audit of it.

This letter sets out a number of outstanding issues identified during our audit so far, and the expected time frames for completing the audit. There may be further issues identified as we complete our audit. We have set out in a separate letter (also dated 13 August 2012) the status of our audit of Kaipara District Council’s 2011 annual report. Some of the issues – in particular, financial viability – that affect our audit of the 2011 annual report also affect our audit of the LTP.

There is a lot of work still to do for the Council to be in a position to adopt the LTP on 29 August 2012 as planned. We will continue to work with management and staff, and do all that we can to enable the Council to meet this time frame.

Outstanding issues

The main issues requiring your attention as elected members

We have set out the main issues requiring your attention under three broad headings, which collectively comprise the key building blocks of any local authority’s LTP:

  • financial strategy, including whether the LTP is financially prudent;
  • underlying information; and
  • assumptions.

Financial strategy, including whether the LTP is financially prudent

We are considering commenting on the Council’s financial strategy in our audit report.

Section 101A of the Local Government Act 2002 (the Act) requires the Council to set out its financial strategy as reflected within the financial forecasts in the LTP. Under section 101 of the Act, the Council also needs to be satisfied that its LTP is financially prudent.

Although the Council has set out its financial strategy, in our view, it is an open question whether or not the LTP is financially prudent. The Council is facing a complex and challenging set of factors, which combine to threaten the financial prudence of the LTP, including:

  • high Council debt of $87 million at the start of the 10-year period of the LTP;
  • the Council’s reliance on the continued support of its bankers, with at least one possible breach of its banking covenants;
  • the Council’s reliance on a significant level of revenue from development contributions during the 10-year period of the LTP;
  • the Council’s forecast cash flows within the LTP depending on timely collection of rates;
  • the Council’s reliance on not being required to repay any rates that may be found to have been invalidly set before the 2012-22 LTP; and
  • the Council’s series of reviews of underlying information to the LTP, including asset management plans, that may lead to increased renewals and/or other capital expenditure above that forecast in the LTP (see below).

In our view, the Council needs to ensure that its financial strategy within the LTP is appropriate in light of these factors, and that the LTP is financially prudent.

Underlying information

We are considering drawing attention in our audit report to the Council’s stated intention of carrying out a number of reviews which could lead to the Council amending its LTP before 2015.

The quality of forecast information within the LTP depends heavily on the quality of underlying information available to the Council, such as asset management plans. The Council has acknowledged that it needs to make improvements in this area.

On page 21 of Volume 1 of the LTP, the Council has noted that it has a number of initiatives planned or under way that may lead to an amendment to the LTP before 2015. These initiatives include, among other things, a review of the activities delivered and levels of service, the way in which services are delivered, and a review of asset management plans. These reviews have the potential to significantly change the underlying information upon which the LTP is based.

In our view, the Council needs to tell the community about those initiatives because they have the potential to change the levels of service received by the community, and/or the forecast costs of delivering those services. It also means that this LTP, setting out the Council’s current intentions, could be subject to significant change in a relatively short time frame. We expect to see the Council’s intentions more prominently disclosed within the LTP.

Assumptions

We are considering drawing attention in our audit report to the importance of certain assumptions about the financial viability of the Council, and the overall effect of these assumptions on the LTP.

The quality of forecast information within the LTP relies heavily on the assumptions made by the Council, and these assumptions are required to be reasonable and supportable.

The assumptions used to prepare the LTP are the same as those used to prepare the LTP SOP, which was adopted by the Council on 27 April 2012. However, the circumstances that the Council now faces have changed significantly.

The Council needs to be satisfied that the assumptions that underpin the LTP are reasonable and supportable, and that areas of significant uncertainty are appropriately disclosed within the LTP. This will enable the community and other interested stakeholders to gain a proper appreciation of the risks facing the Council during the period of the LTP.

In our view, there are a number of assumptions that may be less certain than previously presented and that need reconfirmation by the Council, including assumptions about:

  • growth;
  • the level of development contribution revenue; and
  • lower interest rates on debt, based on a presumption of being able to refinance debt with the Local Government Funding Agency.

Also, in our view, the Council needs to enhance its disclosure about the risks associated with its assumptions, including demonstrating the sensitivity of the assumptions to alternative scenarios, as required by schedule 10, clause 17 of the Act. This should help the community and other interested stakeholders assess the level of uncertainty within the forecast financial information in the LTP.

Other issues

In addition to the issues set out above, there are a number of other issues that we have been discussing with management and staff, including:

  • legislative non-compliance;
  • disclosure of information within the LTP;
  • calculations in the financial model; and
  • performance information.

Legislative non-compliance

We are considering commenting on the Council’s legislative non-compliance in our audit report.

We are aware that the Council’s LTP SOP attracted a high number of submissions from the public and that, although not unexpected, this put a lot of pressure on Council’s processes. Not surprisingly, Council staff have found it difficult despite their best efforts to follow the detailed procedures set out in the Act in every respect. As a result, there are some shortcomings in the procedures followed by Council (for example, acknowledgement of submissions received).

The Council is required to adopt its LTP before the start of 2012/13 (that is, on or before 30 June 2012). Clearly, it has been unable to do so.

Also, as noted above, the Council’s draft LTP is quite different to the Council’s LTP SOP, which the Council adopted on 27 April 2012 for the purpose of consulting with the community. We need to consider the Council’s legal advice on this matter to ensure that the Council has not inadvertently breached the requirements of the Act by changing the proposals that they have consulted their communities on.

Disclosure of information within the LTP

We have concerns, based on our audit work to date, about the democracy activity within the LTP. The activity appears to be unduly burdened with debt, and we need to better understand how that debt is being funded in accordance with the Council’s Revenue and Financing Policy.

We also have concerns, based on our audit work to date, about how well the Council has been accounting for reserves in relation to activities funded or partially funded by targeted rates, and how this is reflected within the LTP. The current information appears substantially incomplete.

Calculations in the financial model

We have identified a number of apparent anomalies in the financial information presented in the LTP (for example, flood protection rates are exactly the same for seven of the 10 years in the LTP). This has given rise to questions about some of the calculations in the financial model.

Performance information

We have concerns about the disclosures within the LTP about the levels of service that the Council plans to provide during the next 10 years when there have been substantial expenditure reductions in renewals (for example, roading).

Expected timetable for completing the audit

Our understanding of the expected timetable for completing the LTP is:

  • Completion of audit fieldwork 17 August 2012
  • Final LTP available for the Council 20 August 2012
  • Council to approve LTP 29 August 2012
  • Audit report to be signed 29 August 2012
  • Council to adopt LTP 29 August 2012

Concluding comments

Achievement of these dates depends heavily on you, as the elected members, and Council management, and staff being able to devote sufficient time to resolve the key outstanding issues affecting the LTP, including those set out in this letter.

The Council needs to decide how it wishes to respond to the matters raised in this letter. We know how important it is for the Council to adopt the LTP and set rates for 2012/13 by 29 August 2012. We will continue to work with management and staff, and do all that we can so that the Council is in a position to approve the LTP on 29 August 2012. When the Council has approved the LTP, I will then be in a position to issue our audit report. This will enable the Council to adopt the LTP, including the audit report.

Yours sincerely

Karen MacKenzie
Director