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Part 2: Financial results and trends

Local government: Results of the 2013/14 audits.

2.1
In this Part, we summarise the financial results from the 2013/14 annual reports of local authorities, focusing on the audited information about operating revenue, rates revenue, operating expenditure, capital expenditure and debt.

2.2
The information excludes the results of Ruapehu District Council and Westland District Council. The annual reports of these two local authorities were not publicly available when we prepared this Part.

2.3
The financial results reflect the continuing trend of incremental increases in expenditure and revenue by local authorities. The results also show that local authorities are still spending less than they intended on capital works, including on asset renewals. We continue to emphasise the need for local authorities to review their asset management planning, depreciation practices, and capital expenditure management. Debt was also less than anticipated, due to the under-delivery on capital expenditure intentions.

What do the 2013/14 annual reports show?

Revenue and rates revenue

2.4
In 2013/14, local authorities recorded more revenue ($9.05 billion) than in 2012/13 ($8.29 billion). The main factor for the 9% increase in revenue was a large asset revaluation movement recognised by Auckland Council.

2.5
Auckland Council recognised net gains of $412 million on the revaluation of its property, plant, and equipment in 2013/14. This followed the recognition of a net loss of $401 million on the revaluation of property, plant, and equipment in 2012/13. These revaluations are in accordance with accounting standards. They are non-cash movements and show the increase or decrease in the value of the Council's assets, as opposed to the collection of more revenue from the Auckland community.

2.6
Due to the size and scale of Auckland Council, its financial results can dominate financial trends for the local government sector as a whole. When Auckland Council was excluded from our analysis, we found that local authorities received total revenue of $6.4 billion in 2013/14, 2% more than the $6.3 billion in 2012/13.

2.7
We estimate that local authorities (including Auckland Council) collected rates of about $4.9 billion in 2013/14, which was $204 million or 4% more than in the previous year. Because local authorities disclose their rates revenue in different ways, particularly targeted water rates, the total rates figure is more difficult to calculate than the total of all revenue. However, we believe that this is a reasonable estimate.

2.8
Rates revenue comprised 54% of local authorities' total revenue in 2013/14. Local authorities have limited alternative revenue sources. Other sources of funds include subsidies paid by New Zealand Transport Agency, development contributions, and vested assets. Rates are the main funding source for operational expenditure.

Expenditure

2.9
Total expenditure by local authorities in 2013/14 was $7.8 billion. This was slightly less than in 2012/13 ($7.9 billion).

2.10
Again, the reason for the decrease can largely be explained by Auckland Council's financial results. When Auckland Council was excluded from our analysis, we found that local authorities had expenditure of $5.8 billion, 3% more than in 2012/13. As noted in paragraph 2.7, we observed a similar increase between years in rates revenue.

2.11
Collectively, local authorities had planned an average year-on-year increase of 4% in expenditure during the period of their long-term plans.3 An increase of 3% in 2013/14 is therefore in line with that forecast.

Capital expenditure

2.12
Local authorities' capital expenditure in 2013/14 was $2.3 billion.4 This compares with $2.4 billion in 2012/13.

2.13
Local authorities budgeted to spend $3.2 billion on capital expenditure in 2013/14. Only 74% of budgeted capital expenditure was incurred.

2.14
We have previously expressed concern that local authorities have a trend of incurring substantially less capital work than budgeted. Most recently, we outlined our observations in our report, Water and roads: Funding and management challenges. We found that spending trends raised questions about local government asset planning, depreciation practices, and capital expenditure management.

2.15
Thirty local authorities performed better against their capital expenditure budgets in 2013/14 than in the previous year, but 12 were 20% lower than the previous year. Six local authorities achieved less than 50% of the capital expenditure that they had budgeted. Auckland Council spent only 45% of its capital expenditure budget in 2012/13, but spent 120% of the budget in 2013/14, confirming its position that some projects had been delayed due to planning refinements to the projects in relation to both timing and cost.

2.16
Figure 1 shows the forecasts of capital expenditure from all local authorities' 2006, 2009, and 2012 long-term plans, and budgeted and actual capital expenditure from the 2011 to 2014 annual reports.

Figure 1
Comparisons of forecast and actual capital expenditure for all local authorities

Figure 1 Comparisons of forecast and actual capital expenditure for all local authorities.

2.17
After the eight Auckland local authorities amalgamated in 2010, Auckland Council prepared its first long-term plan in 2012. This was a group long-term plan. As a result, the 2012 long-term plan forecasts in Figure 1 include the forecast capital expenditure for the Auckland Council group.

2.18
The information extracted from the annual reports (actual and forecast) includes both parent local authority capital expenditure and the capital expenditure of Auckland Transport and Watercare Services Limited, as Auckland Council's two largest subsidiaries.5

2.19
Figure 1 shows that the actual capital expenditure for 2010/11 to 2013/14 recorded in annual reports is quite different from that forecast in the corresponding annual plans. Collectively, local authorities have spent less on capital expenditure than forecast from 2010/11 to 2013/14.

2.20
We also collected and analysed the capital expenditure indicated in the funding impact statements for 2013/14. Capital expenditure is disclosed in three categories:

  • expenditure for new assets to meet additional demand;
  • expenditure to improve service levels; and
  • expenditure to replace or renew assets.

2.21
Local authorities were more likely to meet capital expenditure plans to improve levels of service of assets (spending at a rate of 91% of that budgeted), in contrast to 75% of budget on replacement assets and 79% of budget on renewing the existing asset base. This indicates spending on new assets to improve service levels while not maintaining the existing asset base.

2.22
For 21 local authorities, capital expenditure was less than 100% of depreciation. Comparing the level of capital expenditure to the depreciation charge is an indication of the adequacy of upkeep of the existing infrastructure investment. The capital expenditure of those local authorities that had spent less than 100% ranged from 43% to 99% of depreciation.

2.23
In contrast, Christchurch City Council and Environment Canterbury had capital expenditure of 471% and 469% respectively of depreciation. For Christchurch City Council, this was due to ongoing, substantial, earthquake-recovery work. Otago Regional Council had 469% expenditure to depreciation because of ongoing, significant, flood-protection work on the Leith River. West Coast Regional Council's 741% capital expenditure compared to depreciation related to expenditure on the Hokitika sea wall. Such high percentages are not uncommon for regional councils when they are completing capital expenditure that is significant for their region, because much of a regional council's assets are not depreciated.

2.24
It is arguable that capital expenditure on renewals is a better basis of comparison with depreciation expense. When we compare renewals expenditure to depreciation, we assume that depreciation is a reasonable estimate of the consumption of service potential within the asset and therefore the capital expenditure needed to reinstate the existing asset base. A result where renewals expenditure is equal to depreciation (100%) over time usually indicates that an asset (and therefore service) is sustainable.

2.25
In 2013/14, six local authorities had renewals that were 40% or less as a proportion of depreciation. The circumstances of each local authority need to be considered individually. However, it is likely that ongoing renewal of existing asset systems at such a low level will result in costs falling on future generations.

2.26
In our report, Water and roads: Funding and management challenges, we highlighted that 2012-22 long-term plans indicated a "renewals/depreciation gap" – the difference between renewals expenditure and depreciation – of between $6 billion and $7 billion by 2022.

2.27
Several factors could contribute to the gap between renewals and depreciation. Depreciation could be overestimated (for example, if local authorities do not review and adjust the useful lives of assets) or there could be changes in prices associated with asset renewal work over time.

2.28
However, local authorities need to turn their minds to the "gap" and the implications that it has to ensure that there is adequate financial provision for renewing assets in the future. This will require integration of governance with management and, in particular, asset planners, engineers, and accountants.

Debt

2.29
Debt and capital expenditure variances are generally closely aligned because local authorities typically use debt to fund the construction of long-life assets (at least in part).

2.30
Local authorities had debt of $10.8 billion at 30 June 2014. This was $1 billion less than budgeted, but $650 million more than at 30 June 2013.

2.31
The amount of debt at 30 June 2014 was 83% of that budgeted, which is 5% lower than the same comparison at 30 June 2013. This is also reflected in the proportion of rates revenue that is used to cover interest expenses, which dropped by 1% compared to 2012/13. Thirteen local authorities spent more of their rates revenue on interest expenses in 2013/14, but 30 spent less.

2.32
Of the eight local authorities with interest expenses as a proportion of rates revenue above 15%, half have either maintained the proportion spent on interest expenses or reduced the proportion by up to 5%. This indicates the focus that local authorities are placing on managing debt. We expect this to be a focus of the 2015-25 long-term plans, particularly given the requirement of local authorities to report on the financial benchmarks under the Local Government (Financial Reporting and Prudence) Regulations 2014.

2.33
The level of debt as a proportion of total assets – 5% – remains low.


3: Matters arising from the 2012-22 local authority long-term plans, page 43.

4: This information has been extracted from the statement of cash flows of local authorities. It includes the cash spent on capital expenditure in the financial year of the parent local authority only.

5: Because Watercare Services Limited does not disclose forecast capital expenditure in its annual report, we have used its actual expenditure as a proxy for forecast capital expenditure for the purpose of the graph in Figure 1.

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CoverLocal government: Results of the 2013/14 audits

ISBN 978-0-478-44211-3