Seven years is a long time in local goverment

David McGregor, Senior Partner | June 2002

The report of the retiring Controller and Auditor-General, David MacDonald, offers an insight on the local government sector from a uniquely placed commentator. "Local Government - Looking Back and Looking Forward", is a statutory document, but deserves wider consideration as a reflection on the significant changes to Local Government since it's author took office on 1995. It includes his views on local government's response to those changes, as well as future challenges.

The report comes at an interesting time for local government with submissions still being heard on the Local Government Bill 2001, and the legislative timetable for that Bill now being in question with the uncertainty surrounding the election date.

Mr MacDonald's term of office did not commence until after the 1989 wave of reorganisation of the units of local government. It also followed the introduction of a new accountability regime for local government through the Annual Plan and Annual Report, and amended accounting practices. But in 1995, councils were still coming to grips with these changes, and also with the introduction of other significant legislation such as the Resource Management Act 1991 and the Building Act 1991. By 1995 changes in the utility and transport sectors had seen local authorities becoming major shareholders in energy companies, port companies and airport companies. The desirability or otherwise of retaining these shareholdings was in question, and in some cases has yet to be resolved.

So Mr MacDonald took office at an interesting point in time, and he tells us he had concerns at the time about how well local authorities would cope.

Changes over time

His report then traverses the legislative changes and other influences on local government from 1995 to the present.

The first of these was the Local Government Amendment Act (No 3) 1996 which changed local authority financial management profoundly. The amendment specified the principles of financial management to be adhered to, required a 10-year financial strategy to be prepared, and freed up the borrowing regime. For the first time councils were required to fund depreciation.

Subsequently, new financial reporting standards were introduced in relation to accounting for physical assets and contingent liabilities, with direct impact on local authorities. Local government funding has also been reviewed over Mr MacDonald's term of office with a process for establishing a funding policy being set by the Local Government Act, and the introduction of the Local Government (Rating) Act 2002.

The report criticises local authorities for their poor understanding of the assets that are used in the delivery of essential services such as water supply, sewage, stormwater disposal and roading. Better asset management and a trend towards outsourcing delivery of services has occurred over the period in question. Outsourcing has sometimes resulted in the passing of functions to local authority trading enterprises (LATEs), with relatively few local authorities fully contracting out functions. The report notes the demand for increased and better services in areas of burgeoning population, and correspondingly the problem of maintaining the services in areas where population is in decline.

Two governance issues are noted. The first concerns the position of the Chief Executive and his or her relationship to elected members. The requirement for advertisement of the Chief Executive's position every five years, coupled with misunderstanding by elected members of that role and their own has led to a greater turnover. We suggest the first issue could be overcome in part by conferring discretion in relation to advertising. It is to be expected that the passage of time would help to resolve the second issue, but this does not obviate the need for education as to these roles.

Local authorities have also had to come to terms with managing the relationship between the council and its subsidiary entities. Most often these are LATEs, and there can be a conflict between the commercial imperative of the LATE and the political sensitivities of the council as owner.

Performance

In turning his attention to Local Government performance in response to these issues, Mr MacDonald notes that initial long-term financial strategies were marred by the lack of information on infrastructural assets. He suggests that most of the planning effort goes into the Annual Plan to the detriment of longer term planning, and laments the lack of a legislative requirement to produce a strategic plan. He says that funding of depreciation has proved difficult from a practical point of view, and local authorities are still not good at reporting on non-financial performance.

Asset management has been improved by the formation of the National Asset Management Steering Group, and for the first time in 2002 his office had no cause to issue qualified audit reports on this issue.

He also points out the conflicting interest which can arise in outsourcing service delivery to a LATE, where councils can be caught between their ownership interests and purchase interests. LATEs were often established with very favourable contacts in place for supply to the council that created them. However a number of LATEs were subsequently sold thus avoiding this issue. Monitoring of service contracts is seen as an on-going weakness.

The report suggests demands on essential services are being addressed, and is particularly complimentary of the apparent co-operative effort in Auckland in relation to matters such as transport, waste water treatment, sewage/stormwater reticulation and catchment management. In this regard we suggest the time and effort required to achieve consensus outcomes is proving excessive, and the results have yet to appear.

In relation to administration of the Resource Management Act the report suggests regional councils are coping with the process satisfactorily, and that the unitary authority model is capable of delivering appropriate environment management under the Act. There is no comment on the performance of district and city councils.

Looking Ahead

The Audit Office works closely with all local authorities, and is well positioned to identify the challenges now facing local government. Mr MacDonald identifies seven specific areas in his report.

First and foremost is the challenge of meeting the requirements of the new legislation. Most obviously the Local Government Bill when it is enacted, but also other legislation such as the Local Government (Rating) Act 2002.

Improving governance is seen as an important issue, and he makes the telling point that the legislative framework proposed in the Local Government Bill is secondary to the human element in giving effect to governance policies and principles.

The next challenge he identifies is the capability of councils, both in terms of financial and human resource capacity, to meet the expectations of their communities and the legislation. Consultation is not the least of these expectations. He points out the difficulties faced by smaller and some mid-sized local authorities in providing the range of expertise required to deal with legislative obligations. Similar difficulties will be faced by districts with declining populations.

There is a need to continue improving the delivery of services to customers, and this requires advanced asset management; better management of contracts for service delivery; and improved customer focus. In this last respect he points out that in many cases the customers are involuntary users of services, and that there are particular responsibilities on councils as a service provider. In fact he advocates increased and better consultation with the customers about service delivery, which would be yet another element to the layers of consultation already imposed on local authorities - or about to be imposed under the coming legislation.

Mr MacDonald sees a need for continuing improvements in financial management and performance reporting. In particular, the need to use financial reporting as a management tool rather than a necessary evil, and he goes on to recommend "sustainable development" or "triple bottom line" reporting be adopted.

The report notes that risk management is relatively undeveloped, or under development in local authorities and needs to be better organised. He points to the Cave Creek disaster as an example (albeit a central government one) of what can happen without good risk management in place. In fairness to local government, risk management as it is now perceived is a reasonably new concept, and the local government sector is not alone in not having advanced systems in place.

Finally the report notes the difficulties of ensuring that local authorities can properly manage their regulatory and administrative responsibilities under the Resource Management Act and the Building Act. As resource management practitioners we suggest that local government has yet to face up to the need to fully resource the processes associated with these functions. The consequence of this failure is increased costs for the community and business, largely arising from delays. Poor performance in this area is perhaps the biggest detractor from the reputation of local government.

While the report is undoubtedly a snap shot of local government seen through an accountant's eyes, it is nevertheless and instructive and interesting viewpoint. Mr MacDonald's views are reflective rather than directive, and the report is interesting in that it charts first changes, then outcomes, and concludes by looking into the future. For those caught up in the whirlwind of local government change it is a useful and readable summary of the how, what and why of New Zealand local government today.

The report is available at www.oag.govt.nz