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Auditor-General's overview

Local government: Results of the 2012/13 audits.

Last year, when I set out the results of the annual audits of entities in the local government sector, I reported that 2011/12 was demanding. This situation did not change in 2012/13. The year saw a focus on cost containment by local authorities, demands for constraint by their communities, proposed legislative amendments to the Local Government Act 2002, proposals for reorganisation of local authorities in some areas, the continuing effects of the 2010 and 2011 earthquakes on Canterbury local authorities, and the local body elections in October 2013.

Continued focus on good governance is necessary

In demanding environments, weaknesses in governance can often expose entities that are poorly equipped to manage uncertainties (or risk) or that are incapable of making well-founded investment decisions.

My staff contributed to the training by Local Government New Zealand of new and re-elected members by talking about the nature of risk and the extent to which external auditing contributes to managing that risk. We discussed our concern that elected members see an audit opinion as protecting them from all the risks they must manage and are responsible for.

Elected members are responsible for what the local authority does and how it does it – they are responsible for "getting it right". It is the elected members who the public hold accountable for those decisions and actions.

In December 2013, I released my report on an inquiry into the Mangawhai community wastewater scheme. This report detailed the woeful saga of the Kaipara District Council's poor management and governance oversight of the scheme, with failings at almost every stage of the project, as well as highlighting shortcomings and inadequacies by other parties. I encourage all public entities to read the report and take heed of the lessons learned, and consider the messages about the importance of having robust accountability, governance, and management controls in place.

Local Government New Zealand's partnership with the Institute of Directors and the development of training modules focusing on governance, leadership, and strategy skills for elected members are positive moves. And many local authorities are putting in place audit and risk committees as part of their framework for managing uncertainty and risk.

My Office's theme for work in 2014/15 is Governance and accountability, and we will maintain an interest in the developments in local government.

Near enough is not good enough

The 2012/13 year highlighted some poor practices within local government. Although I consider that communities are well served by their local authorities, my Office has observed practices – often practices that have evolved over time – that are out of step with statutory requirements. Many of the actions might, in themselves, seem minor, but their cumulative nature risks undermining the reputation of an individual local authority and the reputation of the sector.

Some local authorities justify their practices on the grounds of "being pragmatic", but their practices might mean that legal requirements are not met. This is a risk that, in my view, the sector should not take. In my view, near enough is not good enough.

Setting rates

During the year, it became apparent that there were several widespread problems with rating practices. Our audit work on rates revenue found that most local authorities had some level of compliance failure. Problems ranged from potentially serious legislative breaches, which created a significant financial risk to the local authority's revenue, through to low-risk legal breaches.

The problems we saw were related to all aspects of the rating legislation. Many of the problems seem to have arisen because of insufficient attention to legal requirements. The power to rate comes with obligations that need to be given the appropriate level of attention. It is important that local authorities use their legal powers to impose rates on their communities properly.

Local authorities need to lift their game and improve their processes and practices for setting rates.

I am encouraged by the positive response to the issues we have raised. Most local authorities sought legal advice and either took corrective action to rectify the errors or drew the errors to the attention of their communities. Local Government New Zealand and the Society of Local Government Managers have undertaken to work with local authorities to provide training and support to ensure that rating practices improve.

Reporting annually to communities

Six local authorities failed to meet the statutory deadline for adopting their annual reports. This compares with one failure in 2011/12. Of those six, one local authority's audit was still incomplete as at 31 March 2014.

Those not meeting the deadlines for adopting and releasing their annual reports are failing to provide their communities with the timely information they are entitled to receive. It is disappointing to see this increase in the number of statutory breaches.

Consistent financial trends in local authorities

My Office analysed the audited financial information in local authorities' annual reports. We found that local authorities sought to contain operating costs and work within their set budgets in 2012/13. This helped local authorities to limit rates increases for their communities.

Rates are a critical revenue stream for local authorities, which have few alternative revenue sources. There is limited ability for a local authority to reduce its reliance on rates revenue.

In my 2012 report, Matters arising from the 2012-22 local authority long-term plans, we identified that local authorities planned to spend $36.8 billion on capital works in the 10 years to 2021/22. Local authorities typically use debt to fund (at least in part) the construction of long-life assets.

The 2012/13 results continue the significant trend of local authorities carrying out substantially less capital work than budgeted. Local authorities' capital expenditure was $3.5 billion in 2012/13, $0.9 billion (20%) less than the $4.4 billion budgeted. In my view, there is a need to analyse this trend in detail, particularly to identify whether there is a growing backlog of renewal work or whether budgeting is too optimistic in comparison to contracting and administrative capacity.

Canterbury earthquakes and insurance recoveries

The Canterbury earthquakes highlighted the importance of good risk management for public entities, and the part insurance plays in that. There are two main local government insurance entities, Civic Assurance and the Local Authority Protection Programme Disaster Fund. They provide insurance cover to Christchurch City Council, and proceeds from insurance recoveries are expected to make a significant contribution to funding the rebuilding of infrastructure.

Some amounts have been paid to Canterbury local authorities by these insurance entities, but there are also some delays due to disputes with reinsurers. The time frame for resolving those disputes is uncertain.

Future focus

Local authorities are starting to prepare their 2015-25 long-term plans. These plans are an opportunity for local authorities to communicate and engage with their communities. The right debate with the community on what levels of service are affordable over time is critical.

Our focus will remain firmly on good asset management and the levels of service that local authorities are proposing to provide. Local authorities will also need to demonstrate to their communities that their funding path or financial strategy is prudent and fair.

My staff and I look forward to continuing our work with the local authority sector as it meets the challenges ahead.

Signature - LP

Lyn Provost
Controller and Auditor-General

26 May 2014

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Report details

CoverLocal government: Results of the 2012/13 audits

ISBN 978-0-478-41073-0 (print)
ISBN 978-0-478-41074-7 (online)