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:
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.
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. . . .
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.
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.