Councils should stick to knitting

Local Government New Zealand president Lawrence Yule has welcomed  comments  from Auditor General Lyn Provost on local authority Long Term Plans:

It notes councils’ financial strategies in their Long Term Plans (LTPs) are characterised by:

  • reducing or deferring spending
  • stabilising or reducing overall debt.

Regarding rates, it is noted that “the year-on-year movement is on average five per cent (for Auckland Council the average is 6.1 per cent and for all other local authorities the combined average is 4.3 per cent).

“The findings are in stark contrast to the justification for the recent Local Government Act 2002 Amendment Bill, which has just received the Royal Assent. The Bill was introduced in response to a perceived crisis in the way councils manage their finances,” says LGNZ President, Lawrence Yule.

“The sector continually seeks efficiencies and savings and the audit process will always focus a Council’s attention on this approach. This report shows that these improvements are being made.”

Although the report also highlights the challenges facing councils in funding infrastructure, it states “overall, local authorities are planning to live within their means.”

Debt when used wisely can be a way of spreading the costs of infrastructure over a period of time.

Debt  used wisely can be a way of spreading the cost of infrastructure which has inter-generational benefit over its lifetime.

But that doesn’t mean that the LGA 2002 didn’t require amendments because Ms Provost said:

However, a question remains about what specific information in the LTPs (and in the audited annual financial statements) is most helpful for informing judgements about the financial prudence and long-term financial sustainability of an individual local authority or the sector as a whole.

What constitutes prudence and long-term financial sustainability is a matter of judgement, and there are currently few agreed methods of analysis. As a result, it is difficult to be definitive about the state of an individual local authority or the sector. . .

The AG points out that some capital expenditure is often associated with the need to upgrade systems to meet new standards which reinforces the justifiable complaint from councils about the burden imposed on them by successive governments.

The AG concludes:

As part of the Better Local Government initiative, the Local Government Efficiency Taskforce is considering the nature of planning, accountability, and decision-making of local authorities. We have offered our insights (consistent with those outlined in this report) to the Taskforce. We have also suggested that local authorities present a more strategic focus on the main issues (including prospective financial information and level-of-service intentions), and provide access to supporting data and policies through the local authority’s website.

I continue to encourage local authorities to consistently invest in preparing shorter, clearer, and more informative LTPs, so the community is able to take part in more informed and effective consultation on a local authority’s intentions.

The future sustainability of local government services such as roads, water, libraries, and rubbish disposal are critical to our communities. Delivering on these LTPs in an effective and efficient manner is the next challenge.

The report says:

1.14
In the last two years, local authorities have been good at budgeting for their operational expenditure, but overestimated their likely levels of capital expenditure. We consider this under-expenditure indicative of the challenges of delivering a diverse range of projects each year. However, there is scope for the sector to improve reporting in this area so that it is easier for the users of local authorities’ annual reports and LTPs to understand whether forecast projects have been delayed, whether there is a tendency for conservative overestimating, or whether cost savings have been achieved. In the LTPs, capital expenditure for 2012-22 is forecast at $37 billion. Of this, 59% is to meet increasing demand (often as a result of growth) or to improve levels of service.

1.15
The overestimation of likely levels of capital expenditure in the past two years raises questions about the realism of local authorities’ longer-term assessments of the cost of their asset renewal and expansion programmes, as forecast in the LTPs. This emphasises the importance of robust asset management plans (AMPs) as the foundation of every LTP. . . .

1.18
However, we are concerned that a small number of non-metropolitan local authorities are planning large increases to their debt levels. We assessed these local authorities as financially prudent, but they face greater risks in the accuracy of their forecasting, growth patterns, and ability to deal with the unexpected as their capacity to respond to shocks reduces.

1.19
Conversely, a number of mostly smaller local authorities are planning for little or no debt during the 10-year period. If these local authorities are carrying out large capital projects, this raises some questions about the appropriateness of their financial strategies and equity between ratepayers in paying for long-term infrastructure projects. These two contrasting approaches demonstrate the importance of a clearly described financial strategy that enables the community to understand the current and long-term implications of the local authority’s forecast use of debt, particularly in the context of asset condition and forecast capital expenditure levels. . .

My interpretation of that is that councils need to stick to their knitting, and ensure the patterns they use are simple and easily understood by ratepayers.

Hat Tip: Credo Quia Absurdum Est.

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3 Responses to Councils should stick to knitting

  1. TraceyS says:

    The following statement was printed in the “Mayor’s Desk” section of DCC publication “FYI” (Issue 02, 2 December 2012);

    “This year’s Annual and Long Term Plan budgets addressed last minute funding holes of more than $4 million but saved $12 million in operating costs and reduce projected group debt by over $40 million over the next two years. All in all, a very solid achievement.”

    Isn’t that like counting your chickens before they hatch? Any chicken farmer will know that is not very prudent. And how many farmers spout about their lambing or calving percentage before the births occur?

    A budget is, after all, not an achievement, but a process. As far as saving $12M in operating costs, the savings are not achieved until they have actually occurred. A financial statement showing reduced spending IS an achievement and something to blow trumpets over.

    Perhaps they are seriously “planning to live within their means”. But that’s not the same as doing it. That is the really hard bit.

  2. robertguyton says:

    Your interpretation is ideologically tainted and quite wrong. Read this:

    “Overall, local authorities are planning to live within their means, and they are not raising rates to unreasonable levels to do this. They are planning to raise more debt during the next 10 years to fund capital expenditure. This capital expenditure is often associated with the need to upgrade systems to meet new standards (for example, for water quality and the development of public transport systems). However, many local authorities are also expecting to repay some or all of this debt during the 10-year period of the LTPs. Net income almost always stays positive, and local authorities stay well within the golden rule of fiscal policy that governments should borrow only to invest.”

    http://blog.greens.org.nz/2012/12/10/attacks-on-local-government-have-no-basis/

  3. TraceyS says:

    Robert, I notice that when presented with logic that you don’t like, you often respond with the words “wrong” or “nonsense” without countering the argument with your own logical reasoning. I would like to hear your reasoned argument because I am open-minded. Why don’t you give it a go in future?

    My comment was to point out that it is dangerous to make suppositions regarding events that have not yet occurred. Rates income may be almost guaranteed, making Councils a good bet for lenders. Just like the beneficiary who applies for a mortgage. The income might not be adequate, but it is guaranteed and therefore a low risk. But expenditure requirements are not guaranteed and that’s why it is imprudent to say the savings have been made before they really have been.

    I followed your link. Of interest was the first comment on the post:

    “Former Minister Dr Nick Smith claimed councils’ poor spending decisions were driving up rates. In the matter of my local council, I have the rare and dubious honour of agreeing with Nick Smith 100%”.

    You might like to follow this link: http://www.odt.co.nz/news/dunedin/207169/dcc-surplus-nearly-10m
    Another example of premature overexcitement, or counting chickens before they hatch.

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