Skip to content. | Skip to navigation.

Navigation

Part 1: Financial results

Local government: Results of the 2014/15 audits.

1.1
In this Part, we summarise the financial results from the 2014/15 annual reports of local authorities, focusing on the audited information about revenue, operating and capital expenditure, and debt.1

1.2
We also consider two additional financial matters that we know are of interest to local authorities and their stakeholders:

  • using uniform annual general charges (UAGCs) as a rating mechanism; and
  • internal borrowing.

1.3
Because of its size, Auckland Council dominates the consolidated financial results of all local authorities. When we remove Auckland Council from the overall results, we see increases in local authorities' revenue, operational expenditure, and debt compared with 2013/14.

1.4
The most significant result in the financial results is in capital expenditure, where overall spending fell compared to 2013/14 and continues to be substantially under-budget. Some local authorities have significantly improved their capital expenditure forecasting, but there are also some larger variances to budget than in previous years. This suggests that some local authorities are not carrying out enough capital work when it is needed. If the under-investment continues, the long-term ability to deliver services is called into question.

1.5
We also looked at capital expenditure on the renewal or replacement of assets and compared it to depreciation expenditure. The number of local authorities with renewals that were 40% or less of depreciation has more than doubled since 2013/14. This could indicate that future generations will inherit the cost of those deteriorating assets.

1.6
Our interest is in the effective and sustainable delivery of essential services to the community. Every local authority needs to consider its position and continue to review and refine its approach to maintaining and renewing the assets that are critical to the community. This includes local authorities continuing to refine their knowledge about assets' condition and assessing the likely future demand on these assets.

Revenue

1.7
In 2014/15, local authorities recorded revenue of $8.93 billion. When the dominating effect of Auckland Council is excluded, local authorities received total revenue of $6.83 billion in 2014/15, compared to $6.5 billion in 2013/14.2

1.8
The revenue of 11 local authorities increased by 10% or more. The revenue of five increased by 20% or more, and the revenue of three increased by 25% or more.

1.9
Taupo District Council had the largest percentage increase in revenue (68%). This was mainly because of a seven-year roading infrastructure project that was completed during the year. Part of State Highway 1 (from the Wairakei roundabout to the airport roundabout) and State Highway 5 (from Lake Terrace to the East Taupo Arterial roundabout), valued at $54.5 million, is now the Council's asset.

1.10
Christchurch City Council had the largest dollar-value increase in revenue. The Council's revenue increased by $126.9 million, an increase of 14%. Movements in several of the Council's revenue streams reflect increases in rates (see paragraph 1.14) and development contribution revenue. However, the largest movements were a $75 million increase in vested assets (assets that the Council now owns) and a $42 million increase in insurance receipts.3

1.11
Most of the movement in revenue can be put down to once-only projects or transactions. Factors outside of a local authority's control, such as the value of assets transferred to the local authority and development contributions, can significantly influence the local authority's performance against revenue budgets.

Rates revenue

1.12
We estimate that local authorities (including Auckland Council) collected rates of about $5.1 billion in 2014/15, which was $150 million or 3% more than in 2013/14.4

1.13
In 2014/15, rates revenue represented 57% of local authorities' total revenue, up from 54% in 2013/14 and slightly more than historical results and average levels forecast in long-term plans.5 We could not determine any particular reason for this movement, but some projects that were delayed during the global financial crisis might have been budgeted for and completed during 2014/15, affecting rates and debt levels.

1.14
Selwyn District Council had the greatest percentage change in rates − an increase of 19% ($6.2 million) – mainly because of growth in the district.6 Apart from Auckland Council, Christchurch City Council had the greatest dollar-value movement – an increase of $26.2 million. This resulted from an increase in the number of rateable properties and property values as the rebuild progresses. Under transitional earthquake legislation, the Council can rate new properties from when they are completed rather than from the start of the next rating year.

Uniform annual general charges

1.15
Each local authority makes policy choices that affect how rates are set. It is difficult to distinguish the components of rates revenue and compare all local authorities in anything other than total rates revenue.7

1.16
The UAGC is a fixed charge applied to each separately used or inhabited part of a rating unit, no matter the value of the property. As a result, the UAGC influences how the rates burden falls on a community. As a first approach to considering this influence, we have assessed how local authorities are using the UAGC, based on the rates proposed for the first year of the 2015-25 long-term plans. We welcome comments on whether such a comparison would be useful.

1.17
In 2015/16, 62 local authorities used a UAGC as part of their rating approach. Four of the 16 local authorities that did not set a UAGC were regional councils, four were city councils, and eight were district councils in the lower North Island. In Hawke's Bay, Taranaki, and Southland, every local authority set a UAGC.8

1.18
The UAGCs for 2015/16 ranged from $14.41 set by Otago Regional Council to $804.29 set by Carterton District Council. The average UAGC was $371.13. Twelve local authorities set UAGCs well below this average, from $14.41 to a little under $100, and 12 set UAGCs above $600.

1.19
Where we could extract the number of rating units for 2015/16 from the long-term plans,9 we estimated the revenue from UAGCs. It is only an estimate because, for various reasons, some rating units are not subject to the full UAGC. We were then able to estimate the proportion of the total rates revenue that is derived from the UAGC.

1.20
Using this approach, the average proportion of total rates revenue from UAGCs is 18.8%. The proportion ranged from 1.5% for Mackenzie District Council to 36.8% for Carterton District Council.10 These two local authorities have different revenue and financing policies. Carterton District Council's rating approach has minimal differentials11 for its small district. Mackenzie District Council, a similarly sized district, has a more differentiated approach to its overall rating – but it has increasingly moved to uniform charges for water supply in recent years.

Operating expenditure

1.21
In 2014/15, local authorities' total operating expenditure was $8.45 billion. This was 8% higher than in 2013/14 ($7.82 billion).

1.22
When Auckland Council is excluded from these results, local authorities incurred total operating expenditure of $6.15 billion in 2014/15, which is 5% more than the $5.9 billion in 2013/14. This is in line with the overall revenue increase noted in paragraph 1.7. Auckland Council's operating expenditure is 27% of the operating expenditure of all local authorities. It makes up 54% of the sector-wide movement between years.

1.23
Taupo District Council had the most significant increase in operating expenditure. As noted in paragraph 1.9, the Council completed a significant roading project during 2014/15. The Council transferred the East Taupo Arterial to the New Zealand Transport Agency, with it becoming a State Highway. As a result, the Council recognised a loss for accounting purposes, and this contributed to its operating expenditure increasing by 111% ($96.5 million).

Capital expenditure

1.24
Local authorities' capital expenditure in 2014/15 was $2.2 billion, slightly less than the $2.3 billion in 2013/14.12

1.25
Local authorities budgeted to spend $3.4 billion on capital expenditure in 2014/15. However, only 66% of budgeted capital expenditure was actually spent.13

1.26
Figure 1 compares forecast and actual capital expenditure for all local authorities. It shows the forecasts of capital expenditure from all local authorities' 2006-16, 2009-19, 2012-22, and 2015-25 long-term plans, and budgeted and actual capital expenditure from the 2011 to 2015 annual reports.14

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.

1.27
Excluding Auckland Council, local authorities incurred capital expenditure of $1.86 billion in 2014/15, which is 3% less than the $1.93 billion in 2013/14. This decrease contrasts with the increases seen in revenue and operating expenditure.

1.28
The total capital expenditure spending, with Auckland Council excluded, is 62% of the amount budgeted.

1.29
Auckland Council's capital expenditure is 17% of the capital expenditure of all local authorities. Auckland Council spent 99.5% of its capital expenditure budget in 2014/15. The 120% result in 2013/14 was explained as responding to some timing delays and planning refinements from previous years.

1.30
In 2014/15, 65 local authorities incurred capital expenditure below budget, one more than in 2013/14. Five local authorities spent less than half of their budgeted capital expenditure. Thirty-nine local authorities performed better against their capital expenditure budgets in 2014/15 than in 2013/14.

1.31
As we have done in previous years, we collected and analysed the capital expenditure disclosed in the funding impact statements for 2014/15. Capital expenditure has to be disclosed in three categories:

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

1.32
For all local authorities, spending against each category of capital expenditure was well below budget. It ranged from 66% for spending to meet additional demand to 91% to improve levels of service and 71% to renew existing assets. This low level of capital expenditure calls into question the accuracy of budgets and highlights the risk, if under-investment continues, that local authorities might not be doing enough work to maintain service levels in the future.

1.33
The variances between budgeted and actual capital expenditure set out in Figure 2 indicate that budgets for spending to renew or replace existing assets are more accurate than budgets for demand spending and spending on levels of service. This result should give communities more reassurance about the continuity of services. We continue to encourage all local authorities to carefully assess the accuracy of budgets and other factors that result in substantial differences between the actual delivery of capital expenditure work and that planned.

Figure 2
Whole-of-council funding impact statement – variances between budgeted and actual capital expenditure

Capital expenditure typesDemandLevels of serviceRenewal or replacement
Range of variances -100% to +1200% -74% to +651% -78% to +44%
Median expenditure variance compared to budget -48% -19% -15%
Number of local authorities with variance to budget greater than +/- 40% 38 33 13

1.34
Of the core activities, the activities related to sewerage appear to have the most consistent results against budget (see Figure 3). However, the results show that local authorities carried out about 25% less work than planned. Water supply, roading and footpaths, and flood protection all have at least one category where the amount spent was within 10% of budget. However, the category of capital expenditure that is closest to achieving budget varies. Actual spending compared to budget varies less in each of the core activities for work to renew or replace existing assets than other expenditure categories.15

Figure 3
Core activity funding impact statements – total actual capital expenditure and variances to budgeted capital expenditure

Capital expenditure typesDemandLevels of serviceRenewal or replacement
Water supply Capital expenditure $89.1m $128.6m $127.2m
% of budget spent 76% 95% 85%
Roading and footpaths Capital expenditure $122.8m $319.6m $583.2m
% of budget spent 96% 90% 72%
Sewerage Capital expenditure $107.7m $116.4m $461.4m
% of budget spent 74% 77% 76%
Stormwater drainage Capital expenditure $46.7m $42.6m $90.2m
% of budget spent 71% 60% 86%
Flood protection Capital expenditure $5.1m $46.6m $11.8m
% of budget spent 217% 81% 99%

1.35
Our analysis of the core activity areas show that most local authorities spent at least 60% of their budgeted capital expenditure. The number of local authorities spending without any budget provision was unexpected and may warrant some attention from these local authorities.

1.36
The range of variances to budget for these activities is surprising. All activities and expenditure types had some budgets completely unspent.

Capital expenditure compared with depreciation

1.37
For 19 local authorities, capital expenditure (including renewals) was less than depreciation. Comparing capital expenditure to the depreciation charge can indicate whether local authorities are investing enough to pay for the upkeep of existing infrastructure. The capital expenditure of those local authorities that had spent less than 100% ranged from 51% to 99% of depreciation. This is a slight improvement on 2013/14, where the range was from 43% to 99%.

1.38
In contrast, as in previous years, several local authorities had high capital expenditure relative to depreciation. These were mainly regional councils. Environment Canterbury, Horizons Regional Council, Northland Regional Council, Taranaki Regional Council, and West Coast Regional Council all had ratios of three or more times depreciation. Such high ratios are common for regional councils because much of a regional council's assets, such as flood protection works, are not depreciated.

1.39
Waimakariri District Council's capital expenditure was also more than three times depreciation, mainly because of the timing of work to repair and rebuild some community facilities. Three large projects were completed near the end of 2014/15.

1.40
This year, we also considered capital expenditure on renewing or replacing existing assets (as opposed to all capital expenditure) because this is generally accepted as a better basis of comparison with depreciation. As we have noted in previous years, this calculation is only an indication that expenditure on existing assets is occurring at sustainable levels.

1.41
In 2014/15, 13 local authorities had renewals that were 40% or less of depreciation (six in 2013/14). Such low results are likely to indicate that the quality of the assets is deteriorating and could indicate costs that will fall on future generations.

1.42
However, it is not appropriate to assume, based on this, that the level of spending is inadequate. Individual local authorities need to consider whether they are adequately managing their assets. If the depreciation rates are not a reasonable reflection of actual consumption and asset deterioration, this ratio will not indicate the true state of the infrastructure network. For this reason, depreciation rates need to be regularly reviewed and, where appropriate, updated.

1.43
We recognise that most local authorities continue to develop and refine their knowledge of their assets' condition, along with assessing future demand (increases or decreases depending on demographic changes).

1.44
Better asset information and local authorities considering depreciation rates further should provide elected members with enough information to make good decisions about asset investment. As local authorities refine their asset information, they need to use it to refine their asset management approach.

1.45
Our interest remains focused on the effective long-term delivery of essential services to the community. To achieve this, it is important that local authorities continue to focus on improving the accuracy of their forecasting of future physical infrastructure needs and their budgeting for delivering these services. With these fundamentals established, communities can be better assured of sustainable service delivery and that they are appropriately meeting the costs of these services through their rates.

Debt

1.46
Local authorities had debt of $12.3 billion at 30 June 2015. This was $861 million less than budgeted but $1.4 billion more than at 30 June 2014. The debt was 93% of that budgeted, which is 2% higher than last year.

1.47
After excluding Auckland Council from these results, local authorities had debt of $5.7 billion at 30 June 2015. The debt of the sector, excluding Auckland Council, was 88% of that budgeted, and 1% higher than last year.

1.48
The effect of debt on local authorities is best assessed by considering the cost of debt and, by implication, the effect on spending options. The proportion of rates revenue used to meet financing costs was 14% for 2014/15, an increase of 1% compared to 2013/14 and consistent with earlier years.16

1.49
Thirty-six local authorities spent more of their rates revenue on debt financing in 2014/15 than they did in 2013/14 and 35 spent less. Only one local authority held financing costs at the same level as in 2013/14. Seven local authorities had no financing costs in 2014/15. Ten local authorities had no debt at 30 June 2015. Financing debt was 24.8% of Auckland Council's rates revenue in 2014/15, compared to 21.5% in 2013/14.

1.50
Eleven local authorities had financing costs as a proportion of rates revenue at or above 15%, compared to only eight local authorities in this position in 2013/14. For nine of these 11 local authorities, the proportion of rates revenue spent on financing costs has increased from the year before. Five of these increases are minor,17 but three are financing cost increases of between 8% and 11%.18

1.51
In our view, managing financing costs that are more than 15% of rates revenue is likely to be challenging. It will reduce a local authority's ability to respond to unexpected events by borrowing further. However, there is no specific rule on the appropriate level of such costs. Each local authority's circumstances, and financial strategy limits, need to be considered.

1.52
Local authorities that borrow through the Local Government Funding Agency (LGFA) must comply with a set of financial covenants. These are set to ensure that local authorities are able to service their debt and to protect the interests of the LGFA guarantors.19 The LGFA requires externally credit-rated local authorities to meet a net20 interest-to-rates-revenue ratio of less than 30%, and unrated local authorities to meet a ratio of less than 25%.

1.53
The LGFA identified no concerns about the debt position of local authorities at 30 June 2015. It noted that it is comfortable with the forecast debt increases because they are matched by equivalent revenue increases, which means that local authorities can continue to service total debt.

1.54
Overall, local authorities appear to have planned for the increase in debt and the cost of financing debt in 2014/15. The increase does not reflect a significant change in the sector's overall debt position.

1.55
The level of debt as a proportion of total assets remains low and consistent with previous years, at 5%.

Internal borrowing

1.56
During 2014/15, we received several enquiries from the public about local authorities' internal borrowing practices. It is important to note that total debt, as discussed in this Part, reflects local authorities borrowing from the external market. This debt is recorded in local authorities' financial statements. Internal borrowing is where an entity sources funding, usually for a capital project, from internal investments or reserves.

1.57
Since 2013, the Local Government Act 200221 has required local authorities to disclose activities where the local authority used internal borrowing, the funds borrowed and repaid during the year, and the interest paid, if any. In our view, these disclosures have helped to make internal borrowing more transparent.

1.58
In general, the goal of internal borrowing is to use funds on hand and to reduce the overall cost to the local authority. One activity of a local authority can lend surplus funds to another at the prevailing investment/deposit interest rate rather than borrowing externally and paying interest to the external debt market at a higher rate.

1.59
We have not collated data on the total internal borrowing activity by local authorities for 2014/15. In future years, we might collect this information and analyse it, if we continue to receive queries about local authorities' internal borrowing.

1.60
In our view, when a local authority uses internal borrowing, it should take the following considerations into account:

  • The project or item requiring funding should be of a capital or long-term nature and of a reasonable size for administrative efficiency.
  • There should be a defined and transparent benefit, such as a difference between the investment interest rate and the borrowing interest rate.
  • The robust approval processes and formal record-keeping that would be required for external borrowing should be in place for internal borrowing. This will be particularly important where different communities of interest are involved.
  • Internal borrowing should be sourced from funds not required for other purposes or not required for other purposes within the term of the borrowing arrangement. Enough funds should remain on hand to allow the local authority a funding "buffer" for unexpected events.
  • Interest should be charged to the activity using the funds, and interest should be attributed to the activity where the loan is drawn from.
  • Internal borrowing could be included as part of the local authority's prudential borrowing limits, in addition to the external borrowing limits.

1: The information excludes the results of Ruapehu District Council and Wairoa District Council. The annual reports of these two local authorities were not publicly available when we prepared this report.

2: In 2014/15, Auckland had net losses of $176 million related to valuations of financial instruments. This compares with the $412 million net gain on revaluation of property, plant, and equipment in 2013/14 and makes up most of the $513 million (20%) movement in Auckland Council's revenue. The 2013/14 figures are based on information collected historically. The 2013/14 figures disclosed in local authorities' 2014/15 annual reports might differ because the financial statements for the year ended 30 June 2014 were adjusted as part of the transition to the new public benefit entity accounting standards.

3: Christchurch City Council (2015), 30 June 2015 Annual Report, page 167.

4: As a result of continuing inconsistencies in the presentation of rates revenue, particularly targeted water rates, it is not always possible to isolate rates from total revenue. However, we are confident that this is a reasonable estimate and that the comparison to 2013/14 is also reasonable. We expect that reporting against the 2015-25 long-term plans will be more consistent because of changes to the reporting regulations about targeted water rates.

5 The average rates revenue as a proportion of total operating income for the 2015-25 long-term plan forecast period is 53.4% and, for the 2012-22 long-term plan forecast period, 52%. See Controller and Auditor-General (2015), Matters arising from the 2015-25 local authority long-term plans, page 15.

6: Selwyn District Council (2015), Annual Report 2015, page 48.

7: We plan to provide more information in future reports about trends in rating for water supply. This will be possible when local authorities report against the information required for the 2015-25 long-term plans.

8: Among unitary councils, Auckland Council, Gisborne District Council, Nelson City Council, and Tasman District Council have a Uniform Annual General Charge. Chatham Islands Council and Marlborough District Council do not have a Uniform Annual General Charge.

9: For six local authorities' 2015-25 long-term plans, we could not find the required disclosure of rating units.

10: The Uniform Annual General Charge is part of the 30% limit for rates calculated uniformly. Therefore, the highest percentage within this range should be 30%. It is more than 30% because of the method of estimation applied, as explained in paragraph 1.19. For Carterton District Council, when the calculation is based on the exact number of rating units and taking into account the number of half-rated and excluded properties, the percentage of total rates revenue from the charge is 27%, below the 30% cap.

11: Rates can be set on a differential basis, where the local authority can take into account factors such as property value and location. Carterton District Council has a policy to maximise the Uniform Annual General Charge within the statutory limit and, by implication, to minimise the general rates based on property value.

12: This information has been extracted from the statement of cash flows of local authorities. It includes only the cash that the parent local authority (not any subsidiaries) spent on capital in 2014/15.

13: When capital expenditure as reflected in all local authorities' whole-of-council funding impact statements is compared to budget in those statements, 77% of budgeted capital expenditure has been incurred. It appears that the difference relates to the level of year-end accruals between years.

14: After the eight Auckland local authorities amalgamated in 2010, Auckland Council prepared its first long-term plan in 2012. This was a plan for the group. To make the long-term plan data in Figure 1 comparable with the annual report data, we have used the Auckland Council group figures. For all other local authorities, parent-only figures have been used.

15: The range for renewal and replacement is 72% to 99%, compared to 71% to 217% for demand-related expenditure and 60% to 95% for expenditure to improve levels of service.

16: Finance costs have been drawn from the Statement of Comprehensive Income. It is possible that these figures could include non-cash items. We also note that this calculation is only an indication of the pressure that debt can place on a local authority. Other sources of revenue, such as development contributions and user charges, also contribute to meeting the cost of debt.

17: In the range from -1.47% to 1.29%.

18: Based on the disclosures of total finance costs included in the Statement of Comprehensive Income and rates revenue, including targeted rates for water supply, Western Bay of Plenty District Council has a movement of 8.7% and the proportion of rates revenue is 25.9%. However, as disclosed in Note 8 to the financial statements (Council's annual report, page 138), $6.1 million of the finance costs are non-cash unrealised market-to-market swap portfolio valuation changes. When these non-cash amounts are adjusted for, the proportion of rates used to fund debt is 15.5% and the movement between years is -1.7%.

19: Local authority members of the LGFA have a joint guarantor role. The LGFA limits are intended to be consistent with the requirements of credit rating agencies to maintain at least an "A" rating or higher. See the LGFA December 2015 briefing, A snapshot of local government's financial health: a sector in good shape, page 7.

20: The LGFA covenants are based on a net position – this allows for the offset of investments against debt. Our assessment is based on the gross debt position of the local authority.

21: Clause 27 of Schedule 10 of the Local Government Act 2002.

page top
Report details

CoverLocal government: Results of the 2014/15 audits

ISBN 978-0-478-44235-9