The New Zealand Local Government League Table Table Final_June2012.pdf · The stresses of the GFC...

Larry. N. Mitchell Finance & Policy Analyst (Local Government)


The New Zealand

Local Government League Table

Territorial Local Authority Council’s Financial

Sustainability and Community Affordability Rankings

The LGLT June 2012

TO OBTAIN THE 2012 LGLT SEE NEXT PAGE

Contents Section One

Description of the 2012 LGLT – its objectives and specifications

Section Two

The League Table Composite Report (overall assessment) and supporting schedules

(NOT INCLUDED ON WEBSITE)

Section Three

Appendices



Terms for the purchase of the 2012 NZ TLA League Table

This year's edition of the NZ TLA League Table released in June 2012, which is of considerable public interest, ranks all NZ TLA's financial performance – principally based on benchmarks of financial sustainability. The Council performance reports used include financial measures-metrics and “Other” Factors which bear upon:

Council Sustainability, (debt, capital expenditure etc) and

Community Affordability, (rates, incomes etc) and

Other Factors, including the relative strength of a Council's financial position, financial contingencies and so on.

A copy of the full 2011 (last years) League Table report is at www.kauriglen.co.nz/larry select BASE STATS WITH TRENDZ / LEAGUE TABLE.

The 2012 NZ TLA League Table is priced at $2,500 per copy with special terms offered to the media, community groups and public agencies.

All prices quoted exclude gst and modest delivery costs.

Any enquiries to Larry.N.Mitchell 09 422 0598 or [email protected] or fill in your details below and post to Larry Mitchell, PO Box 404 103, PUHOI 0951.

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Larry. N. Mitchell Section 1 Finance & Policy Analyst (Local Government) Page 1

Section 1

Description of the 2012 LGLT – its objectives and specifications

1.0. Introduction and a bit of history ... the league table objectives

“A league table is a chart or list which compares sports teams, institutions, nations or companies by ranking them in order of ability or achievement. In the United Kingdom, many public-sector industries, including hospitals, compete in league tables”. Source: Wikipedia.

1.1. The New Zealand Local Government sector, its territorial local authority Councils provide essential, largely infrastructural, assets-based services to its 67 (territorial) local communities.

1.2. Increasingly, concern as to the costs of Council services, the financial sustainability of Council plans and their affordability to local ratepayers, have been expressed.

1.3. These concerns were first outlined in an article (Mitchell 2011) titled “Local authorities balance sheets warn of financial troubles” authored by Graham Hawkes, Editor, with content supplied by Larry.N.Mitchell Finance and Policy Analyst – (Local Government) and was first published in the February 2011 edition of the NZ Local Government magazine (see Appendix 2). Appendix 3 this year adds another “pointed” article titled ‘The Halo has slipped’.

1.4. Both articles pose questions relating to the prudence (or otherwise) of many Council financial plans of recent years and particularly for proposed expenditures and Council debt levels that are currently being considered for the 2012-2022 period ... within the next major financial planning cycle.

1.5. If any doubt remains as to the value (or timing) of this year’s League Table then consider the following ...

In the Q+A televised interview titled “Minister is pushing for Councils to rein in spending and stop rates rises” of the 20th May 2012, Local Government Minister David Carter said that Central government is intending ...

“to test rate increases” ... “introduce a warning system of flashing lights” and “ensure better cost effective delivery of service”

Michael Barnett of the Auckland Chamber of Commerce as part of the panel which followed up on the Minister’s interview quoted the following figures taken from this year’ 2012-2022 financial plans ...

“in the next 10 years Local Government is projecting to increase rates by 60%, debt by 96% and operating expenditures by over 50%”.

1.6. The case, justifying the LGLT ... and all other means to better local government and accountability ... (as they say) ... rests!

1.7. The inaugural 2011 LGLT was a twofold response to concerns affecting both Council financial sustainability ‘and’ ratepayer and residents financial capacity relating to the affordability of their Council services. The LGLT of 2012 is designed to further encourage and promote better Council performance. It is not intended to be a stick, more, a (somewhat and sometimes unpalatable) carrot.

http://en.wikipedia.org/wiki/Chart

http://en.wikipedia.org/wiki/United_Kingdom



1.8. Council finances, along with the rest of New Zealand were adversely impacted in 2008 by the Global Financial Crisis (GFC) bringing with it the rapid onset of recessionary economic conditions. Many Councils, three years later, according to the data, appear about ‘to hit the wall’ – a number, in 2012 ‘have’. Council debt, rates, interest and other financial indicators have ‘maxed out’ ... certainly in financial sustainability and likely also in affordability terms. Councils – with low-‘poor’ ranked assessments of the LGLT for these matters are those most ‘at risk’. They are clearly identified within the LGLT. Central government has recognised the danger of these circumstances to its plans for a high performing New Zealand economy.

1.9. There is a growing public interest in the findings of the LGLT, interpreting the metrics that indicate financial management prudence ... or a lack of it. The LGLT’s many metrics are comparable with those of the government’s intended Council performance measures, the Transparency, Accountability and Financial Management ‘TAFM’ initiative. These are the parameters, (some might term them benchmarks) with which to control and manage Council finances. For example; the setting of the correct financial metricated policies relating to a Council’s maximum sustainable (and prudent) level of debt.

1.10. The LGLT is intended to alert the sector and the public to dangers of inappropriate financial management of our Council finances. If Councils were to continue to ignore the plainly evident and disturbing signs of the LGLT ... and merely plan for more of the ‘same old same old’ financial strategies ... continuing to put their already unaffordable rates even higher, then the present underlying and fundamental financial management issues of sustainability and affordability that we now face are unlikely to be properly addressed.

1.11. This year’s 2012 League Table has in parts been reorganised. In the interests of brevity a great deal of content has not been repeated although it still applies. Much of the detail, relating to the LGLT methodology not repeated though is still relevant to this 2012 edition and can be found in last year’s edition at www.kauriglen.co.nz/larry select BASE STATS WITH

TRENDZ/LEAGUE TABLE.

1.12. The 2012 LGLT is set up as follows commencing with some background and history:

Introduction

Issues of prudence and financial management

Excesses of the past

The first of the commentary paragraphs titled:

“The State of Council’s Asset Replacement Financial Reserves”

Extraordinary events including Kaipara District, Local Government Reform and Earthquakes and Leaky Buildings

Auckland Council including an update progress report

‘Other factors’. This part of the methodology of the 2012 LGLT has been substantially modified and improved and repeats some earlier (2011 LGLT) content. The objectives and design of the ‘Other Factors’ ... and their current improvements are reported in detail.

Methodology paragraphs. These summary paragraphs (paragraph 9) have minimal new content. The bulk of their detail is contained in last year’s edition:

The justification for and the basic concept of the LGLT

The LGLT design Features

Data and disclosure issues




LGLT metrics – and their evaluation – the ‘at risk’ Council analysis

Earthquakes (EQ) and Leaky Buildings (LB)

An example of scoring and adjustments

The specifics of and the interpretation of the LGLT ... user notes

Guidance notes – evaluation

2.0. Issues of prudence and financial management

2.1. If, as is often contended, that many New Zealand Councils in recent times have behaved in a profligate manner then where is the evidence of these past excesses? One clear example of profligacy comes from even a cursory review of Council’s financial reports and the ‘Base Stats’ reports (www.kauriglen.co.nz/larry Base Stats with Trendz supra). This data shows clearly how low the levels of Council financial assets currently are, that is depleted financial asset funding reserves and high debt – all incidentally accompanied by alarming recent increases in Council rates and charges. The ‘two’ are certainly not unrelated.

2.2. Another starkly obvious factual example of profligacy ‘evidence’ is shown below, a ‘Base Stats with Trendz’ graph showing the last five year increases to June 2011 of local authority debt. The Council displayed is the Ashburton District Council. Their debt levels (now ranked 18th of 33) incidentally are at roughly average levels and are manageable when compared to others. It is not Ashburton’s debt at issue here but rather the two lines (purple Cohort and dotted blue Sector Average debt per ratepayer lines) ... that ‘tell the story’.

'Trendz' Graph

Cohort High $5,790 $6,653 $9,332 $9,332 $7,867

Cohort Low $359 $359 $315 $315 $310

Ranking 21/36 25/36 20/36 20/36 18/33

Debt per Ratepayer

$1,635 $1,607

$2,021 $2,021

$2,889

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

2007 2008 2009 2010 2011

Debt per Ratepayer Cohort Average Sector Average

This graph demonstrates important facets of the issues now being faced. In just the last five years, to 2011:

total NZ Council debt (the dotted line) has increased by 61%

from a sector-wide figure for all, (2010 – 73, 2011 – 67) Councils

rising from an average of $2,050 ... to $3,950 per ratepayer, a 93% increase.

A 15% annual increase of Council sector debt has been accompanied by an annual 22% increase in average residential rates (Appendix 1) over the last five years!




2.3. The effect of such excesses has been that the debt-interest servicing content of this level of debt, on a per ratepayer basis is now on average over 16% of a ratepayers total average annual rates. Many individual Council ratepayers pay much more than this average. (See also the Napier City sponsored rates comparisons at Appendix 1). Councils should be encouraged to conduct their own rates comparison surveys on a similar basis to the Napier City (A Big Thanks again this year to NCC for the provision of this data) ... as an annual exercise.

3.0. Excesses of the past

3.1. The stresses of the GFC coupled to inflexible and inappropriate Council financial policy settings have taken their toll on Council balance sheets, (even before earthquakes and leaky buildings are taken into account). In general, Council finances are in poor shape today as a result of the imprudence (and in many cases) the profligacy of Councils over recent years. Not only have most Council expenditures blown out and Council debt increased but more disturbing is the fact that Council reserve funds appear to have been used for purposes other than was intended.

3.2. As was pointed out in the Local Government magazine article (Hawkes 2011), many Councils have played fast and loose with their financial assets. In the past, financial assets were accumulated and treated as sacrosanct being accumulated for their specific purpose – as asset replacement reserves and with externally invested funding set aside, both to earn compounding investment income and to build up investment fund value to meet the future cost of asset renewals.

3.3. From the looks of a review of the June 2011 balance sheets it is highly likely that abuses of this process have continued to occur within most Councils and, as will be described, with potentially devastating results. Councils cash asset-related reserves are either non-existent or are at present of risible amounts ... considering their intended purpose.

3.4. Funded asset replacement reserves as their name suggests are created in a unique manner and are intended for a unique purpose. That is, wastewater charges for instance will have included a carefully calculated charge or allowance for water assets depreciation to create so termed asset replacement reserves! It is these and others like them termed ‘reserves’ that have been raided. In a great many cases actual financial funds, the asset backed reserves are now exhausted having no doubt been used for ‘other purposes’.

3.5. Furthermore, investment revenues from such assets has been forgone as a result of their depletion and (further) debt has had to be used to fund the actual asset renewals and replacements. It is obvious from the data the very adverse effect that these actions have had upon on-going Council financial (un)sustainability. For when the time comes for asset replacement ‘the cupboard is and/or will be bare’ ... with in many cases debt levels already at their maximum. There is now nowhere left ‘to hide’. Clearly, Councils in this mode are behaving in a financially unsustainable ... call it a ‘profligate’ manner.

4.0. The State of Council’s Asset Replacement Financial Reserves – more details

4.1. At various points, (recent media comment and in the 2012 LGLT) the phrase ‘the cupboard is bare’ has taken prominence. This refers to the current parlous state of Council financial reserves, the funding of which was intended to create the financial source of funds required in future to meet foreseeable asset renewal and replacement requirements (above).



4.2. As a general statement, Councils (most of them) have not established or sustained these actual funded reserves. A more detailed analysis and reporting (by the auditors or others) is long overdue. Succinctly, here are the areas and issues of concern that ‘might’ be included in their (audit) terms of reference:

An identification using straightforward financial analysis of those Councils that plainly do not have adequate asset replacement financial reserve provisions in place;

A forensic investigation of just ‘where these reserves have gone?’ considering inter alia the possibility that they have been ‘raided’ ... and used for purposes other than for the reasons that they were charged to ratepayers as asset-replacement-related funding.

A review of Council’s asset management plans which are now sufficiently reliable that each Council should provide a clear and accurate appreciation of the optimum level of its future asset replacement funding requirements, its financial reserves – using discounted cash flow iterations to then determine their timing to match asset renewal-replacement requirements.

Note: Beware of the old Council management canard that ‘our treasury management practices of matching will suffice’ because of itself this apology has proved to be, and clearly is not good enough. Only explicit verifiable asset plan and financial data (above) – and the provision of the reserve funding required should be developed and set in place to actually prove that a matching of requirements to the funding is in fact happening;

Incidentally, annual financial reports could be vastly more informative on these matters if they disclosed the detail of this process ... and then unfunded asset replacement reserves would be visible. At present ... they are not!

Further investigation to determine if the dire-worst case (horror story) scenario is in fact developing. Some very well informed pundits, armed with data purporting to prove their case, have suggested the following ‘horror story’ It runs like this:

o in the current absence of loan polls or of any requirement for the establishment of sinking funds (where asset funding financial assets are effectively placed in escrow);

o asset related (renewal and replacement) reserves have not been set up or maintained … due often to a reliance upon the notional ‘Treasury Management’ excuse?;

o the asset reserves that have been funded (if any) are inadequate, in some cases they have been completely exhausted – raided and the ‘cupboard is bare’ so that further debt funding is used in lieu (see further below);

o even worse, when the time comes (say at the end of an assets life) to fund an asset’s replacement, no funds are available and “quelle horreurs” ... further borrowing is used.

So ... what we have here now is a situation where in the first place an asset has been debt funded, no reserve funding has been set aside-protected, and with no debt retirement programme in place; when the asset is to be replaced further borrowing is required. No wonder we are witnessing such a build-up of Council debt!



The end result is that not only have Councils foregone the interest or other revenues accruing from asset ownership and thus available to assist with asset funding, but arising from the fact that reserves have been depleted or spent with no (or little) debt reduction, no asset replacement funds are available when they are needed.

At the point that the asset has reached the end of its useful life and is due for replacement and with no funds on hand to meet replacement requirements, further borrowing is entered into. The result: debt is now at a level perhaps as high as twice the value of the original asset. This is the principal reason supporting contentions of Council profligacy and/or financial unsustainability.

4.3. These facts account for a major part of current Council debt blowouts. One commentator has measured, what he terms the funding shortfall (black hole) attributable to this mismanagement of asset-debt-funding. He has put a figure of $6 billion and rising on this funding deficiency.

4.4. An investigation as is suggested would discover that much of the sector’s asset reserve funds have been raided. They have not been used on asset replacement as was intended ... that is, spent as intended upon essential revenue-generating public infrastructure assets. The suspicion is that these reserve funds have been misused to fund other more “sexy” adventures rather than upon (essential-core) pipes, sewage asset renewals and the like.

5.0. Extraordinary events ... the Kaipara District Council case, Local Government Reform, the Christchurch earthquake and leaky buildings

5.1. As demonstrated in the previous section the underlying Council financial figures (high debt – low reserves) are challenging enough without including the impact of recent adverse events that have occurred since June 2010, (such as the earthquakes affecting Christchurch City and bordering Council areas) or of the effect of financial contingencies soon to impact upon Council balance sheets (the leaky buildings fiasco).

5.2. Both of these circumstances have already had a huge impact upon matters of local government financial sustainability. One very recent and disturbing re-estimate of earthquake renewal costs for example is now put as high as $40 Billion – or over double the original guesstimate. The cost of these extraordinary events will ultimately, if only indirectly, have an adverse impact upon New Zealand’s GDP, private citizen’s personal incomes and hence upon Council ratepayer-residents financial well being … like it or not raising hitherto ignored key questions as to the affordability of Council services.

5.3. Since the GFC ... the world has changed. New Zealand’s and Local government’s long term financial planning must reflect these changes. Added to which Central Government’s drive to raise ‘NZ Inc’ productivity will no longer exempt Local Government from showing more discipline over and control of its costs.

5.4. The challenge this report poses and supported by clearly ‘scary’ data is ... “Will Councils react correctly? and if so, how will they financially manage through these conditions?”

5.5. The answers include much improved and cost-effective overall sector-wide performance. Coupled to the metrics and the messages drawn from the LGLT itself, this exercise can help by profiling some principled high performance targets and budgetary benchmarks with which to manage the improvement process.



5.6. Before the matter of earthquakes and leaky buildings are addressed, two events of 2011-2012 – the Kaipara DC case study and Local Government Reform deserve brief commentary as both provide more than passing matters of public interest ... and powerful support for the LGLT initiative!

5.7. Since last year’s LGLT ... and all within the short space of the last quarter of 2011, the dire circumstances of the Kaipara District Council have come to light. As if to prove the point of the LGLT – of its raison d’etre and with the added significance from the article published in March 2012 titled ‘The halo has slipped’ (Appendix 3 supra) ... the extraordinary KDC case has erupted.

5.8. Though to be fair, and simply put, the KDC case is less one of profligacy than of ... a previously good little Council – gone bad.

5.9. Poor judgements (or worse) have been exercised concerned with the Mangawhai area EcoCare wastewater project by many of the KDC parties, from elected members to management alike and have now put this Council in danger of (some form of) foreclosure!

5.10. People at the KDC plainly were not doing their jobs (the auditors included), meetings of Councillors under confidentiality hid the true facts, and those who were entitled to rely on proper reliable public information were blind-sided.

5.11. The unplanned EcoCare cost-debt blowouts were always going to be financially unsustainable just as much as they were unaffordable to the present numbers of Mangawhai ratepayers. The local media and the blogs, particularly that of Clive Boonham (Kaipara concerns), as well as numerous Kaipara Council Press releases refer. The OAG currently “is investigating”. It is hoped that they will not exempt their auditors as they appear prima facie to be culpable also.

5.12. 2011-2012 has seen the 50th National Government ‘at last’ taking steps to ‘Reform’ the Local Government sector via its “Better Local Government” programme. This initiative is an integral part of their policies involving an enlightened approach to improved productivity and performance of the public sector, (both Central and Local Government).

5.13. The article ‘The Halo has slipped’ (supra) refers … and suggests that for improvements to occur within our Councils, attitudinal/cultural change relating to how the sector performs are now essential if the extraordinary challenges are to be faced – with continuing attention paid to cost-effective and efficient management strategies.

5.14. New local government legislation will be introduced in late 2012. It is designed to address eight distinct (including performance) areas which cover:

A refocus of the purpose of local government

Introduction of fiscal responsibility requirements

Strengthening of council governance provisions

o Employment and remuneration policy

o Mayoral powers

o Assistance and intervention framework

Streamlining council reorganisation procedures

Establishment of a local government efficiency taskforce

Development of a framework for central/local government regulatory roles



Investigation of the efficiency of local government infrastructure provision and a

Review of the use of development contributions.

Note: The highlighted objectives (above) are of direct applicability to the focus-reasons for the LGLT project.

The ‘Better Local Government’ initiative is most heartening. The long awaited shake-up of Councils in the terms, for example of their efficiency, fiscal responsibility and governance should be applauded and enthusiastically supported – particularly by long-suffering ratepayers!

5.15. Now to earthquakes and such. Note: Using a series of key noted assessments, this 2012 LGLT reports financial contingencies for the earthquake-affected councils. Their LGLT assessments results are heavily caveated, (noted as EQ). Another key caveat/warning, (noted as LB) identifies Councils significantly affected by contingent liabilities associated with the leaky buildings issue.

5.16. The deeply shocking circumstances of the earthquakes on top of the leaky buildings issues sadly have become a (huge and additional) part of the overall disturbing findings of the LGLT ... many other New Zealand local authorities though, without these two added burdens also face major issues of financial sustainability, some of their own making, (Kaipara, Dunedin and others).

5.17. But wait there is more ... Another earthquake related issue not reported last year and only mentioned (not assessed) this year is looming on the horizon.

5.18. The LGLT ‘EQ’ assessments are concerned with actual earthquake (Canterbury region) damage. No allowance or consideration has (yet) been given to the enormous costs arising from earthquake strengthening.

5.19. This process is only just commencing ‘for real’. It is understood to involve a requirement for all buildings, (both Council and resident owned) that are not ‘up to 61% of code’ to be ‘strengthened if they are in an earthquake zone’. The enormous expense of these requirements merely adds to the present woes/challenges for the Local Government sector – again please note these strengthening cost-contingencies have not been factored into the 2012 LGLT assessments.

5.20. Finally, we should not forget to note other more local matters that affect the Council finances of smaller rural Councils – such matters as:

those few remaining Council’s still with ownership of unprofitable roading companies,

others who continue to suffer under historically high debt, and still others

whose cost-benefit-economic adverse-size factors work against their effective value for money service delivery.

Add to these local circumstances the effects of the New Zealand-wide recession, higher rates of unemployment, lower household incomes ... and the sustainability-affordability issues covered in this study are cast into stark relief.

5.21. If there was ever a time for all Councils to ‘get real’ with their finances ... it is now. Bring on ‘Better Local Government’ – it had better work!



6.0. Auckland Council – partly a repeat of last year’s report ... with emerging events added

6.1. The first edition of the LGLT included the seven Auckland area territorial Councils reported as separate identities ... that is, their individual financial data was included ... for the final time. In this year’s 2012 edition, all seven local Auckland Councils have been subsumed-combined – plus the Auckland Regional Council into the one “Auckland (Super City) Council”. As a result, there are numerous, many unique financial policy issues that arise from and are a feature of the merger of these eight Councils.

6.2. A publication titled, ‘Auckland City Finances Fairness or Fudging’ (see www.kauriglen.co.nz/larry Public Affairs) was widely circulated prior to the October 2010 Local Government elections. This study pointed out inter alia the equity issues of differing debt levels for each Council. The response to this study was underwhelming to say the least. The issues this report raised included matters of fairness amongst the Councils when combined within the new ‘Super’ city structure. Because of their importance they are repeated here.

6.3. In financial terms the best and most shortcut way to see the possibilities of one likely (Auckland City) inequity issue, discussed in detail in the ‘Fairness’ report and which arises as a result of the merger, is to review the net worth and debt positions of each Council at (or near to) the date of the merger ... see the table below.

6.4. Each of the eight Councils has brought its own net assets (assets net of liabilities) including its debt to the new organisation. Their individual net worth is represented below by their respective Ratepayers Equity figure, as are their debts ... as listed.

6.5. The balances of the seven TLA Councils at June 2009 (disclosed on a per ratepayer basis) revealed the following:

Auckland area Council Ratepayer’s Equity (Net Worth)

Council per ratepayer Debt total

Auckland $55,225 $6,962

Manukau $57,549 $5,495

North Shore $49,366 $5,549

Waitakere $34,837 $11,371*

Franklin $43,945 $3,618

Papakura $26941 $3,813

Rodney $30,320 $8,156*

Regional Omitted Omitted

6.6. Even just a quick glance at this table will indicate the Councils that were better off compared

to those who were less well financed (more indebted). It is the latter group who will fare best now that all of their debt has been pooled in the Auckland Council without reference to their relatively worse entry point funds and indebtedness positions.

6.7. The reported huge ‘spend ups’ conducted by some Councils prior to the merger has not helped, particularly for Waitakere and Rodney who have perversely been rewarded! under this pooling of debt strategy. Is that fair? But then is anyone still listening?




6.8. The inclusion of this ‘sidebar’ to the LGLT concerning Auckland City’s finances is also to signal but one of a whole raft of other more specific financial issues (including sustainability and affordability) that relate specifically to the Auckland City and will require separate consideration in future.

6.9. Future LGLT editions (post-2011) will continue to make out a special case for Auckland City in terms of its scale and operations. The new organisation must continue to measure improvement in terms of their predecessor Council pre-amalgamation baseline data as well as to look for benchmark models taken from overseas municipalities and develop meaningful financial and other performance standards.

7.0. 12 months further on from the last LGLT – and Auckland Council ‘progresses’

7.1. Note: The 2012 LGLT data for Auckland Council for the year ended 30 June 2011 reported in the 2012 LGLT is for just eight months from 1 November 2010 to 30 June 2011.

7.2. Because of the sheer size and complexity of the Auckland Council (AC) exercise – the amalgamation of eight units of Auckland local government (with net funds totalling $27 Billion making it roughly three times the size of Fonterra!) – the people and the systems of the new organisation are still bedding down. But even allowing for this catch up period, to date the breadth and depth of AC’s much vaunted and promised performance improvement and reporting has been very disappointing and unsatisfactory.

7.3. Some observations that support this (jaundiced) view are:

• The legislation creating Auckland Council was replete with highly desirable performance related provisions, such as attention to performance issues ... the appointment of a performance audit function and so on. To date, (apart from the mention below under “Transformation”) virtually nothing emanating from the Councils public information sources has shown useful evidence of Council performance, good or bad.

• Financial and audit reporting – leading (to be fair) to an unqualified June 2011 audit opinion has lacked any performance-related focus and has ignored, for example one large ‘elephant in the room’. By confining media releases relating to the Council to the status of mere PR ‘announcements’, really useful Council performance information, such as comparative performance assessments – that is a ‘before and after’ amalgamation picture (the elephant) has been ignored.

After all, most engaged ratepayers would want to know if they are getting a better deal measured in comparative terms – for their rates, charges, debt management etc than they had with their old local Councils, pre-amalgamation. (I along with other members of the public ‘remain totally in the dark’ on these matters).

• The ‘Transformation’ we are told though is coming. In documents released just as the 2012 LGLT was being finalised, in May of 2012 the Auckland Council under its heading Transformation – (denoting the period after the initial Transition, or the mid-to-longer term perspective of the 2012-2022 LTP), has issued a series of documents showing its grand future financial and other plans.

These papers include a promising looking performance chart which is hopeful for the fact that its content and title appear to set up a performance measurement framework. Unfortunately, without further public information of what this all means the chart lacks adequate descriptions of its rationale and process.



• While there are ‘some’ (but merely 2 out of 20 or so) measures of the chart that include financial ones, the major parts of the framework are customer or other service level-centric measures. There is next to nothing that a financial analyst might find useful for a comprehensive assessment of how the Auckland Council is performing in verifiable (and comparative) terms.

7.4. Note that the Auckland Council LGLT Measurement is reported – on two levels:

• Within the 2012 LGLT and

• Compared with targets – peers ...the Council must, in the public interest clearly demonstrate comparative evidence relating to pre-amalgamation-predecessor peers. This is absolutely essential to proving or disproving the worth of the whole amalgamation exercise.

7.5. Within the 2012 LGLT the Auckland Council results present some challenges (above re: size-complexity etc). Fortunately, all of the LGLT measures used in 2011 are still applicable in 2012. Because of their nature, AC’s size does not affect their efficacy (for example household incomes) or because they are rated on a per ratepayer basis (for example debt per ratepayer).

7.6. Such measures for year-on year comparisons of the LGLT are therefore ‘normalised’ – in spite of the fact that when compared with other New Zealand Councils the AC has a wholly different size and materiality. Note also that the 2011 LGLT data, compared with this (2012) year’s includes the merged Auckland Council information for such measures as sector averages but is excluded from the peer group measures – Auckland is so large by comparison with others that it has its own group (of one) within the NZLG context.

8.0. ‘Other Factors’

8.1. In addition to the LGLT’s ten Sustainability and Affordability metric measures, additional judgemental so-termed ‘Other Factors’ have again been used to adjust the scored metrics. These ‘Other Factors’ are intended to modify the raw scoring-ranking process.

8.2. In brief, and for example, this modification is designed to (say) soften/mark up the impact of a low sustainability/affordability metric score if the ‘Other Factors’ (favourable ones) were taken into account. The following commentary on the ‘Other Factors’, their circumstances has been added. This will assist a more balanced evaluation using both (metric and ‘Other Factors’) means of assessment.

8.3. In a nutshell, readers of the LGLT can make their own allowances based upon the two levels of assessment (metrics and ‘Other Factors’). The ‘Other Factors’ scoring sheet, combines the many additional judgmental factors indicated on its schedule, Very High debt, EQ etc.

8.4. All of these related assessment inputs thus combine to reach a view on a more comprehensive-balanced basis using the new five (was three) point ‘traffic light’ scale. The traffic light assessments of each Council are carried forward to the League Table Composite Report where ‘readers’, to gain a more balanced overall assessment can use these to modify the raw ten point metric scores/rankings.

8.5. Note that the ‘Other Factors’ assessments are all not capable of numerical (metric) measurement but are nevertheless fundamental to matters of sustainability and affordability. They are matters of judgment upon such things as the effect of earthquakes that will modify and give a more rounded view to the assessments than will a mere reliance upon the raw scores of the (ten measures ... by 5 ... ‘50 max’) point scale.



8.6. The ‘Other Factors’ ‘modifiers’ for issues of Council financial sustainability and affordability of the 2012 LGLT are retained ... in unmodified form from the 2011 version and include:

Council’s possession and beneficial ownership of assets ... commercial assets, ports, airports, water utilities, power and gas companies and so on;

Council’s possession of financial assets, cash or near cash held externally within invested reserves available to repay debt and or fund asset replacements;

Council’s possession and beneficial ownership of investments, investments in shares and equities, and investment property.

8.7. This year 2011 financials, (that is, the June 2011 data used for the 2012 LGLT), for the first time this year has introduced two additional metric-based LGLT assessments intended to expand and improve the analysis of Council debt.

8.8. The reasoning here is that a raw debt total (even if it is a ranked-comparative figure) tells us nothing about the “other side” of the debt equation, that is, a Council’s position relating to its asset backing and/or its revenues – sufficient or not to support/sustain debt

8.9. The additional debt asset backing-revenue related ‘modifiers’ of the 2012 LGLT are:

The debt to ratepayers equity ratio ... (asset backing) measures the relative wealth or asset backing and presumed ability of each Council to support its debt level as shown by the debt relationship to a Council’s net worth (assets less liabilities)

The debt to total (Council) revenues ratio … (ability to support/sustain debt) measures the relative adequacy of all Councils revenues (including rates) available to be used in payments to support/repay (sustain) the level of Council debt.

8.10. Another refinement of the ‘Other Factors’ assessments and added this year are the Surplus/Deficit columns. This data shows each Councils financial result (‘as near as dammit’ comparable to a net post tax profit of the private sector) but note without the inclusion of pesky asset revaluation and other accounting adjustment items of ‘comprehensive income’ – which tend to ‘muddy the waters’.

8.11. Particularly for the very high debt - ‘at risk’ Councils, (say) a sizeable current deficit plus a pattern of deficits over the last five years, , are used as further evidence for assessing just how ‘dire’ a Councils financial circumstances really are.

8.12. The extended (and ‘new’ 2012 ‘Other Factors’ analysis process of evaluation described above) relating to Councils in dire circumstances based on all the evidence of the ‘Other Factors’ has been conducted as follows:

Step 1 Identify a debt level for ‘at risk’ Councils – because their debt, relative to others is ‘Very High’ – that is within the top third of all 67 TLAs ranked by debt per ratepayer.

Step 2 For this ‘at risk’ group of Councils, review the ranked list (Appendix 5) for each of both the ratepayers equity and total revenue ratios. Assess each ‘at risk’ Council’s data relative to others by reviewing:

if the debt to ratepayers equity ratio is high (over 10%) and/or

if the debt to total revenue measure is high (over 1.0).

Step 3 Councils with high debt-low relative wealth (as measured by ratepayers equity) and low financial sustainability due to relatively high debt-low total revenues will be singled out.

Step 4 Review the lowest rankings of the Composite Report (Schedule 1).



These Councils are candidates for a MOST ‘at risk’ assessment denoted by both the above step 1-4 process and as denoted by the red traffic lights based on all of the identified ‘Other Factors.

8.13. The combined effect of the ‘Other Factors’ overall is shown as one of five traffic light indicators refining each Council’s aggregate raw metric score as follows:

Factors that will tend to assist sustainability and affordability (green);

Factors that are neutral (yellow) or;

Factors that will worsen (red) a TLA’s ability to reach or maintain sustainable financial positions.

8.14. The refinements to this year’s assessments are the introduction of two additional overall composite assessment traffic lights where:

Two green traffic lights (instead of just one) indicates that this Council has particularly strong favourable ‘Other Factors’ to take into account that ‘may’ suggest a higher ranking than just the ‘bald’ metric measures have indicated;

Two red traffic lights (previously just one) – the other end of the scale (of unfavourable factors) identifies the most ‘at risk’ Councils who ‘may’ warrant a lower ranking than the metrics have suggested.

8.15. As stated, readers, analysts and others can exercise their own judgements of the raw rankings by taking into account (as well as the ranked metric measures) the implications of the added traffic light assessments.



9.0. The following items merely note the paragraph references of the 2011 LGLT that (in the interests of brevity) are not repeated in the 2012 edition. Most relate to the methodology, technical concepts and design features of the LGLT.

All paragraph references (below) are those of last year’s 2011 LGLT edition and can be found on the website www.kauriglen.co.nz/larry select BASE STATS WITH TRENDZ/LEAGUE TABLE.

The ‘concepts’

Note: The full detail of Concepts is at Paragraph 6.1 to 6.4.

The LGLT design Features

Note: For the full detail of the ‘design features’ see Paragraph 7.1 to 7.4.

Data and disclosure issues

Note: For the full detail of the ‘Data and disclosure issues’ see Paragraph 8.1 to 8.3.

LGLT metrics – and their evaluation – the ‘at risk’

Note: Last year’s 2011 LGLT included at Paragraph 9 a detailed description/interpretation of the 10 measures-metrics used in the rankings. This content is not repeated here in the 2012 edition(s). In its place the 2012 edition focuses (supra) on a number of additional other factors including assessments of the ‘most at risk’ Councils.

Earthquakes (EQ) and Leaky Buildings (LB)

Note: See Paragraph 11.1 to 11.3.

An example of scoring and adjustments


The specifics of and the interpretation of the LGLT ... user notes


Guidance notes – evaluation


Schedules of the underlying data supporting the assessments of the LGLT may be obtained by subscription (Appendix 6 – the First Proof offer) and/or supplied to interested parties – enquiries welcomed to [email protected]


mailto:[email protected]



Section Two The League Table Composite Report

(overall assessment) and supporting schedules

Contents

Evaluation Summary

Overall Observations

Schedule 1 The League Table Composite Report – overall assessment

Schedule 2 Sustainability and Affordability Averages

Schedule 3 Sustainability Scoring Report

Schedule 4 Sustainability Data Sheet

Schedule 5 Affordability Scoring Report

Schedule 6 Affordability Data Sheet

Schedule 7 Keys to ‘Other Factors’ Evaluations Table

Schedule 8 ‘Other Factors’ Evaluations Table



Section Two

Evaluation Summary

Note: Section two contains the true ‘IP’ of the LGLT.

This summary is a quick read only – all of the full details of the Council rankings are contained in the succeeding Section Two Schedules. Note that the LGLT rates territorial local authorities – not the regionals.

Highlights of this year’s LGLT include the following:

The top and bottom ranked 10 Councils remain substantially the same as last years. This adds assurance and the consistency of the methodology;

The average metric scores – on a ten point scale of sustainability and affordability measures (a 10 x 5 = 50 maximum scale) on average are also very close to those of last year.

2011 2012

Average 30 29

Median 29 30

Standard deviation 4 5

The best 13 Councils score from 34 to 36 out of 50;

The worst 13 Councils score from 18 to 23 on the 50 point scale;

Three of the poorest Councils score just single figures for either their own Council’s financial sustainability or their Communities affordability (of rates, charges etc) – but there are none with such low scores for both measures;

The mid-range Councils assessed as ‘Fair’ to ‘Good’ comprises a large group numbering 37 – a ‘close to bell curve’ distribution – or 55% of the total;

The Auckland Council assessment has been rendered more difficult due to their lack of year-on-year comparative data;

Specific – individual Council rankings and assessments can be accomplished by reviewing all Section 2 Schedules.

Overall Observations – of the 10 Metrics Measures

The composition of the Top and Bottom groups (of 10 Councils) remains substantially the same, year on year (2011-2012)

‘Averages’ of the sustainability and affordability measures (surprisingly) are constant

Exceptions to this are:

o Queenstown and Carterton improve significantly and go in to the top 10

o Kaipara and Upper Hutt decline and go in to the bottom group

Biggest ‘improvers’ (+20 places or more) are – Masterton, Hastings, Nelson and New Plymouth

Biggest ‘decliners’ (-20 places or more) are – Thames-Coromandel, Otorohanga, Mackenzie and Kaipara (the four ‘Most at risk’).

Overall 2012 LGLT Assessments – combining the 10 metrics and the traffic light ‘Other Factors’ over all 67 territorial New Zealand Councils

Very Good = the Top 10 Councils ... ranked 1 to10 Good = the next group of 20 Councils ... ranked 11 to 30 Fair = (the biggest group) of 27 Councils ... ranked from 31 to 57 and Poor = Bottom 10 – ‘At Risk’ – the 10 lowest in the group of 67 Councils.

Larry. N. Mitchell Schedule 1 Finance & Policy Analyst (Local Government)


The 2012 League Table Composite Report

(DATA NOT INCLUDED ON WEBSITE)

Council Name

Big Mover Up Big Mover Down

Po

sitio

n la

st y

ear

ou

t of 7

3

Po

sitio

n th

is y

ea

r

ou

t of 6

7

Sustainability Overall Score

High = 25 Low = 5

Affordability Overall Score

High = 25 Low = 5

Composite Score

High = 50 Low = 10

Other Factors

Final Assessment

VG/G/F/P

Commentary These assessments relate to Composite Scores and with 'Other Factors' taken into

account.

2010 2011 2010 2011 2010 2011 2010 2011

AVERAGE 14 15 16 14 30 29

MEDIAN 14 15 16 14 29 30

STD DEVIATION 3 3 3 3 4 5



The Sustainability and Affordability Averages

The sustainability and affordability averages compared to last year are shown in the following table:

Sustainability 2011 Average 2012 Average % Movement Worse/Better

Debt per Ratepayer $3,686 $3,834 +4.0% Worse

CAPEX to Depreciation (> 1.0 = ‘at risk’) 1.7 1.6 -5.9% Worse

Surplus/Deficit $7,309,000 $3,416,000 -53.3% Worse

Debt Servicing to Rates Revenue 9% 9.1% +1.1% Worse (slightly)

Ratepayers Equity per Ratepayer $45,791 $48,647 +6.2% Better

Affordability

Household Income $67,153 $68,940 +2.7% Better

Property Value per Ratepayer $297,613 $274,141 -7.9% Worse

Rates per Ratepayer to Household Income 2.61% 2.61% Same Square (no

census data issue)

Wages to Operating Expenditure 21.2% 20.0% -5.7% Better (slightly)

Workforce Unemployed 5.9% 6.2% +5.1% Worse



Sustainability Scoring Report


Debt Per Ratepayer

2011 Score

CAPEX to Depreciation

2011 Score

Surplus/ Deficit 2011 Score

Debt Servicing to Rates

2011 Score

Ratepayers Equity per Ratepayer

2011 Score

Overall Score

High = 25 Low = 5

AVERAGE 3 3 3 3 3 15

MEDIAN 3 3 3 3 3 15




Sustainability Data Sheet


Council Name

$ Debt per

Ratepayer 2011

Debt per

Ratepayer 2011 Score


ratio 2011


ratio 2011 Score

$000 Surplus/ Deficit 2011

Surplus/ Deficit 2011 Score

% Debt

Servicing to

Rates Revenue

2011

Debt Servicing

to Rates

Revenue 2011 Score

$ Ratepayer

Equity per

Ratepayer 2011

Ratepayer Equity

per Ratepayer

2011 Score

AVERAGE 3,834 3 1.6 3 3,416 3 9.1% 3 48,647 3

MEDIAN 3,089 3 1.3 3 1,202 3 7.6% 3 45,987 3

STD DEVIATION 2,968 1 0.7 1 18,103 1 6.3% 1 15,320 1



Affordability Scoring Report


Council Name

Household Income

2011 Score

Property Average per Ratepayer

2011 Score

Rates per Ratepayer to Household Income

2011 Score

Wages to OpEx 2011 Score

Workforce Unemployed

2011 Score

Overall Score

High = 25 Low = 5

AVERAGE 3 3 2 3 3 14

MEDIAN 3 3 2 3 3 14




Affordability Data Sheet


Council Name

Household Income

2011

Household Income

2011 Score

Land Value per

Ratepayer 2011

Land Value per

Ratepayer 2011 Score

Rates per Ratepayer

To HH Income

2011

Rates per Ratepayer

To HH Income

2011 Score

Wages to

OpEx 2011

Wages to

OpEx 2011 Score


2011


2011 Score

AVERAGE 68,940 3 274,141 3 2.61% 2 20.0% 3 6.1 3

MEDIAN 67,410 3 255,902 3 2.58% 2 18.7% 3 6.2 3

STD DEVIATION 8,981 1 105,795 1 0.50% 1 6.6% 1 1.7 1



Keys to ‘Other Factors’ Evaluations Table The following explains the content of the previous Evaluations Schedule for the ‘Other Factors’ These are ‘factors’ that can be (judgementally) used to moderate (up or down) the raw rankings of the 10 metric measures utilising the five point “Traffic Light” markers.

Column Heading Explanation

Council Name Self explanatory – only includes the 67 NZ TLA Councils (last year 73). Note: ‘Auckland Council’ incorporates its 7 predecessor TLAs plus the Auckland Regional Council.

Councils affected by Earthquakes ‘EQ’

Identifies the South Island Councils financially affected by recent earthquakes damage.

Councils affected by Leaky Buildings ‘LB’

Identifies Councils materially impacted financially by weather-tightness (Leaky Building) issues/contingencies. Based on the most current information of numbers of active claims filed, Councils are identified that have a bigger share of the problem (the % refers). Others, have only a relatively minor number of claims, in all cases below 1.0% of the total for all of NZ.

Audit Opinion 30 June 2011 Annual Report

UNQ = the default auditors opinion of the 30 June 2011 Council financial statements (Annual Report) is unqualified. Q = auditors have ‘qualified’ their opinion with brief comments as to their reasons. OT = On time – audit completed within the statutory timetable, that is within 5 months following balance date or 31 October 2011. Late filing/completions are noted/dated and may be, (often is) an indicator of financial difficulties.

Commercial Assets/Debt

Financial Assets

Investment Property

Good (G) – Fair (F) – Poor (P) A review of every Council’s balance sheet was conducted to judgementally assess the extent of each Council’s ownership of those assets generally linked/associated with debt security. That is, ownership of these assets modifies a view of raw debt levels because of this ‘asset backing’. The three point assessment scale, Good, Fair or Poor is largely self-explanatory and refers to the perceived adequacy (or not) of the financial asset classes – to the extent that they may be used in liquid/cash form (if realised) to pay down excessive debt. Note: the poor rating is reserved for those Councils who appear to have little or nothing ‘left in the cupboard’. See the 2012 LGLT’s (new) section on ‘The State of Council Reserves’.

Very High Debt A ‘Yes’ – answers the high debt question. This refers to the raw ranking of Councils with debt in the upper third bracket – those ranked 1-24 of 67 Councils. The cut off is at/above debt of $4,000 per ratepayer. Note: these are the unmodified debt rankings before considering ‘Other Factors’ – the Traffic Light indicators.

Comments Brief reference is made to any known circumstances that might influence an assessment of a Council’s financial circumstances. NK = Not known. This denotes an absence of generally known adverse financial circumstances. It is no guarantee though that such circumstances, not made public are in fact present!



Surplus/Deficit 5 Yr Average

Surplus/Deficit Result 2011 Financial

Persistent Deficits

Three new columns this year record the June 2011 financial surplus/deficit result for each Council, compared to the ‘Base Stats’ 5 Yr Average. Naturally, any Council with a financial deficit (and a history of prior year deficits) is on balance, more likely to struggle with debt issues. Coupled to all other factors the surplus or deficit result is of significance to a more finely balanced financial sustainability assessment. Council Surplus/Deficit results of a two asterisk ** indicator denotes, that based on a judgemental assessment of the current June 2011 financial deficit result, supplemented by a review of the last five year average result of past deficits ... there exists a persistent/continuous deficit history. Note: this indicator has proven to be of limited value for a variety of reasons – one of which relates to the mixture of a pure 2011 result figure used (that excludes all comprehensive income (CI) elements) as opposed to the mix of the data – some including CI in the five year data used.

Poor Asset Backing Debt to Ratepayers Equity and Debt to Total Revenue ratios, * or **. These asterisks (two is ‘worse’) indicate an assessment of the two (equity/revenue) ratios shown at Appendix 5. For example, a Council with an equity measure above 10% and a revenue measure above 1.0 gets a *, a two ** is applied to Councils showing significantly higher ratios indicating significantly less manageable financial circumstances ... that is poorer conditions related to their debt-asset backing and revenues that are less capable of sustaining (the often higher) debt levels.

‘Other Factors’ 2011 (last year’s column FYI)

Other Factors 2012

(The Traffic Lights)

The traffic light assessment is a quick and simple indicator of the weight of all of the ‘Other Factors’ when reviewing Council’s financial circumstances-sustainability. A five point (last year it was just three) system is used. The five coloured ‘traffic lights’ are: (new)Two greens indicates a Council demonstrating the very best evidence of prudence and a sustainable debt-financial status. One green indicates a ‘good’ level of both debt and hence financial sustainability Yellow ... provides a Council with a ‘heads up’ indicator that may need to be factored into the raw metric data measures. For example (say), a Council rating as relatively low debt (a green) but with (say) an EQ plus an LB rating and a history of deficits would likely earn a yellow ... possibly tending to a red. One red indicates a Council whose ‘Other Factors’ are adverse – which will reinforce a low metric rating (or modify down a higher ‘Other Factors’ assessment). (new) Two reds Indicate a Council with very adverse ‘Other Factors’ modifying down a higher ranking … or further reinforcing down a lower one.

Big Mover (Down) Big Mover – a new column – denoting a warning of ‘Other Factors’ for a particular Council that has over 2010-2012 dropped ‘Down’ ... by at least two steps, for example from a Green to a Red.



‘Other Factors’ Evaluation Table (Schedule 7 ‘Keys’ refer)


Council Name

Co

un

cils affected

by

Earthq

uakes ‘EQ

’

Co

un

cils affected

by

Leaky B

uild

ings ‘LB

’

Audit Opinion

2011

Co

mm

ercial

Asse

ts/De

bt

Finan

cial Asse

ts

Inve

stme

nt

Pro

pe

rty

Very High Debt

Comments

NK = Not Known

Surp

lus/D

eficit

5 Y

r Ave

rage $

00

0

Surp

lus/D

eficit R

esu

lt 2

01

1 Fin

ancial

$0

00

Pe

rsisten

t De

ficits

Po

or A

sset B

acking

(See

Ap

pe

nd

ix 5)

Other Factors

2011

Other Factors

2012

Big Mover (Down)

Good - Fair - Poor



Section Three Appendices

Contents

Appendix 1 Average Residential Rates – Napier City Survey

Appendix 2 Local Government Magazine article - “Local authorities’ balance sheets warn of financial troubles” by Editor Graham Hawkes dated February 2011

Appendix 3 ‘The Halo has slipped’ by Larry.N.Mitchell dated March 2012

Appendix 4 Leaky Buildings Active Claims data

Appendix 5 Poor Asset Backing and Revenue Ratios data sheet

Appendix 6 Copy of the 2012 LGLT offer letter sent to CEO’s May 2012 (The First Proof offer)

Appendix 7 The BERL survey – Graham Hawkes Local Government Magazine article

Larry. N. Mitchell Appendix 1 Finance & Policy Analyst (Local Government)


Average Residential Rates (See Section One paragraph 2.3)

The data available on rates comparisons is contained in the next report. This information consists of a survey run annually by the Napier City Council ... its latest 2011 version is reproduced.

Councils subscribing to the LGLT may wish to conduct research of their comparable residential rates figures. The 2012 ‘Rates & Remuneration’ report, (a proprietary product of Larry.N.Mitchell & Associates) contains most of the 2012 rating datasets necessary for assessing all individual Council’s comparative rating data.

Average Residential Rates

2006/07

% Increase

2007-2008 2007/08

% Increase

2008-2009 2008/09

% Increase

2009-2010 2009/10

% Increase

2010-2011 2010/11

5 yr %

Increase

2007-2011

AVERAGE 1,424 5.0% 1,495 5.8% 1,582 3.5% 1,638 5.5% 1,728 21.3%

Timaru 1,292 3.5% 1,337 6.8% 1,428 2.5% 1,463 3.3% 1,511 17.0%

Napier 1,432 2.4% 1,467 3.6% 1,520 2.0% 1,550 3.2% 1,600 11.7%

Hamilton 1,350 7.8% 1,455 5.4% 1,533 1.4% 1,554 3.9% 1,614 19.6%

Invercargill 1,369 7.8% 1,476 4.1% 1,536 -3.2% 1,487 6.8% 1,588 16.0%

Hastings 1,449 5.5% 1,529 6.1% 1,623 1.8% 1,652 4.7% 1,729 19.3%

Wanganui 1,475 6.2% 1566 4.5% 1,636 3.5% 1,694 7.0% 1,813 22.9%

Tauranga 1,533 2.3% 1,569 4.5% 1,640 7.1% 1,757 10.4% 1,940 26.5%

Palmerston North 1,412 5.1% 1,484 10.8% 1,645 5.9% 1,742 5.0% 1,829 29.5%

Rotorua 1,502 4.5% 1570 6.9% 1,679 6.6% 1,789 6.1% 1,899 26.4%

Whangarei 1,430 12.7% 1,612 4.8% 1,689 0.1% 1,691 3.9% 1,757 22.9%

Note: By these measures the 2011 year Average Residential Rates increase of 5.5% (Tauranga high of 10.4% - Napier the low of 3.2%) “slightly” outstrips the % increase of the previous five years of 5.3% (5 year accumulated % average annual comparisons 2006-2010, 22.7%; 2007-2011, 21.3%).



Local authorities’ balance sheets warn of financial troubles

Published in the NZ Local Government Magazine Feb 2011

By GRAHAM HAWKES

Local government finance and policy analyst Larry Mitchell is waving a red flag over the state of some of our councils’ finances.

The man who has spent over fifteen years analysing the books of our territorial local authorities says compared to 10 years ago, some councils are now in a parlous financial state − perhaps as many as 15 to 20 per cent of them − have just hit the wall.

“My reasons for going public on these matters, is that I am very concerned at the developing deteriorating situation. I am especially worried, based on the moribund and apathetic reactions to recent entreaties that elected councillors are, to put it as kindly as possible ... not paying attention.

“I should apologise to councils many of whom are valued clients − that are getting their financial planning right. There are some who clearly are not.

“The financial tsunami currently hitting the beach of some New Zealand territorial local authorities is unprecedented. You don’t have to be a rocket scientist to go through the figures and see that it has come time to activate the warning systems.”

Mr Mitchell says some of the symptoms of looming financial trouble include council debt limits at or near their sustainable maximums, with rates and charges that are increasingly becoming unaffordable for both ratepayers and businesses.

“On the whole, councils were much sounder financially 10 years ago. By most measures, many are now unsustainable financially, unless of course rates and charges are increased to totally unacceptable and unaffordable levels,” he says.

Asked about the significant factors over this period that have led to the financial deterioration, he says “profligacy and with little emphasis upon improved performance. There’s also been a lack of auditor, ratepayer and elected member supervision of management with little emphasis and insistence from all three groups on financial prudence and the affordability of financial policies.

“There’s been a failure to husband funds for example, doing away with sinking funds and then just borrowing more for asset replacements.

“The analysis we have seen that has led me to these statements about the financial viability of some of our councils, stems from the fact that 10 years ago − even longer than that − councils were assiduously putting money aside to fund their future asset replacements in real money terms.

“They had sinking funds − that is, external investment funds that could by law only be used for the purpose the fund was raised for, which was asset replacement.

Financial imbalance

“There is now a double whammy effect in play here. Having done away with mandated funds management, few councils are fully protecting and investing these reserved funds…so that now not only do they not have the funds when the time comes to replace the asset, they have also missed out on the interest or dividend returns; actual investment cash flows over the period, say 15 years.

“And in some cases they have further complicated the situation by not only forgoing the investment income stream, they have also spent the money that was supposed to be set aside to replace the asset ... so they borrow again. Maybe we should make that a triple whammy.

“As an inevitable result you have a compounding and very adverse financial imbalance and this is starkly obvious in the 2010 and recent years’ audited financial statements.”

How can these complexities be addressed? “It is not all that hard” says Mr Mitchell. Using his experience including involvement in recent local government financial sustainability developments in Australia and North America as his guide, Mr Mitchell says that the four main financial and economic metrics-benchmarks which directly and quickly indicate the serious nature of the problems are:

high debt per ratepayer

high debt-servicing costs per ratepayer



low value of protected liquid financial reserves backed by external realisable financial assets and investments

low Council (and measured) financial performance accompanied by low relative local gdp/economic outcomes compared to other TLAs.

He believes the current situation is not sustainable and he has a principled process in place to help to fix the problems.

“First of all, let’s get good information (that’s good not perfect) with which to assess the situation, (the diagnostic phase). As an aside, there is only very slowly developing a council culture to obtain and use the correct financial performance measures that are vital for the management and control of these circumstances.

Recovery phase

“Next step, and it is a vital one, is to then act on this information, to analyse and interpret the results (the forensic phase) of the financial and economic data, as well as its reporting using useful commentary and in plain English.

“Then comes the recovery phase of the process; the revised affordable-sustainable plans (the financial policy setting and strategy stage) that are so urgently needed.

Mr Mitchell says longer term recovery strategies will be needed by 2012 or earlier. Financial plans must now confront the budget realities of affordability and ‘cut the cloth’.

“These steps should be followed by meaningful and ongoing audit and performance assurance, coupled with independent advice on the matters. Elected members must avoid ‘staff capture’ by insisting upon provision of independent advice covering a range of well understood and fully cost/benefited options.”

Mr Mitchell says he doesn’t accept that councils’ financial problems are principally due to the recession which has gripped New Zealand since the international banking crisis hit.

“No, I don’t think so. This situation, let’s call it a crisis, for that it may well be, has been a long time in the making.

“A major reason that springs immediately to mind is a perverse and unforeseen consequence of the 2002 Act. This legislation that promised so much has put councils into something of an inflexible and unresponsive medium term (three to ten-year) straitjacket. It is called the Long Term Council Community Plan. While this plan is regularly reviewed, it tends to build a model that has in its effect constrained councils’ ability to readily react to the external financial-economic environment. And this is particularly so of course, when a recession hits as quickly as this one has.

“If you go back to the 2006 and earlier plans, all of their projections were for steady increases, as if there was no tomorrow, including − and this is the killer − the failure to control maximum prudent-affordable-sustainable debt levels. The interest only content of an average residential rates bill for highly indebted councils is already over 25 per cent of its total; a bit like some heavily mortgaged homeowners really to put this into some context.”

Limitations

He believes that current financial difficulties have been exacerbated by the effects of the short term changes brought about by a three-year election cycle, coupled with the hands-off compliance and procedural nature of audits of the LTCCPs.

The LTCCP unfortunately has become a more prescriptive document than is desirable, he says.

“It tends not to stress the importance of affordability and sustainability issues; it pays only passing regard for the need to adopt accountable economic and financial performance measurement and to cap that lot off its legislative structure limits the flexibility of councils to make changes even when they see the tsunami coming.

“I believe councils tend to get locked into their plans. If it was a private-sector company, it could react within a month or at most within a quarter. Given council inertia linked to their legislative and operational environment it’s like turning around the Titanic.

“Councils are going to have to get pretty active in the next 12 to 24 months because they won’t have many easy options left. And now they just have! to take the correct actions.”



The Halo has slipped By LARRY.N.MITCHELL – MARCH 2012

I can vividly recall (now almost ten years back) of writing about the hopes and objectives for New Zealand Local Government when the bright shiny new 2002 Local Government Act was first being implemented.

As a framework for democratic and transparent decision-making it ranked as one of the best when judged on a worldwide basis. Certainly, when compared to other jurisdictions such as Canada’s overly prescriptive and legalistic codes, New Zealand local government was being entrusted with facilitative law and practice with mechanisms and processes that were intended to deliver better results.

The early (and were they merely naive?) hopes are now, years later somewhat blighted by events occurring since. Our media and ratepayers, in the face of unacceptable rates increases have at last woken up to statistics of their Councils with high debt levels, rates increases well above levels of inflation and employee headcounts and wages bills out of kilter with current economic realities. It can be fairly stated that overall (there are a few notable exceptions) that the Local Government sector has not lived up to our earlier expectations.

And the reasons for these serial failures I believe are simple ones that have arisen from human, as opposed to any legal or systems issues. Here are three obvious examples of where the “people stuff” has let us all down.

Audit and regulatory “hands off” attitudes. The recent deplorable events at one Northland Council, extensively covered on the net and in the media owes a great deal to audit failures. Add to these specific cases (where simply put, “the Plot was Lost”) there has been a general malaise characterising audit in the last ten or so years. As a result we have fostered an environment where audit legal sanctions and disciplines have been allowed to find their own level, generally in a race to the bottom for standards of cost- effectiveness and efficiency measurements which audit were supposed to superintend.

The “it’s not our money” coupled to “castle-building” attitudes of elected members. We have elected many Councillors over the last ten or so years whose debt- fuelled adventures with our money have lead to Council debt levels and gold plated community infrastructure without consideration of their basic affordability to ratepayers and their effect upon ongoing financial sustainability. Large stadia (Dunedin) expensive Council organisations with expensive tastes (with Auckland Council leading the way) and bloated payrolls have unfortunately become the norm. Audit meantime has stood idly by without exercising their wider mandate powers to ensure that public monies are not wasted. Elected members have failed to adequately set and supervise affordable policies that match the incomes and demographics of their ratepayer-electors.

And finally, the role played by the beauracrats. There are some very good people out their working for Councils. But far too many, starting at the top and with CEO leadership missing in action who have paid little heed to matters such as cost containment . They continue to project expenditure/rates increases that pay little heed to the realities of a persistent recession. Enough has been written already of inflated senior staff salaries. I would just add this. Within the relatively stable, secure, mostly risk free circumstances of their employment Council employee terms of engagement do not justify the present private sector competitive rates of payment. The public service factor of working for a Council is hardly ever considered in these days of presumed competitive (public-private sector) neutrality.

So here’s the thing. If indeed people are the problem, then we should quit blaming Council law and process and make these things work. Sure some fine tuning, even ubiquitous re-organisations will always be necessary but let’s not as well throw the baby out just yet.

Our Council sector needs (is overdue for) a root and branch shakeout, a sea change of its existing pervasive attitudes, of its culture. Fixing the three issues (above) might make for a good short list to start with.

The 2002 Act has plenty of performance management and improvement processes that if followed virtually ensure good and cost effective outcomes. Audit need to get busy (by merely properly doing their job ... PFO!), elected members need to rein in the engineering profession and bureaucrats with their preferences for expensive options and we as electors need to support prospective Councillors who treat our money “as if it were their own”.



Leaky Buildings Active Claims

Council that issued the building consent Number of active claims

as at 30 April 2012 % of Total Number of active

claims as at 30 April 2012

Auckland City Council 664 36.8%

Franklin District Council 8 0.4%

Manukau City Council 81 4.5%

North Shore City Council 216 12.0%

Papakura District Council 3 0.2%

Rodney District Council 79 4.4%

Waitakere City Council 197 10.9%

Total for Auckland Council 1248 69.1%

Christchurch City Council 89 4.9%

Hamilton City Council 25 1.4%

Porirua City Council 21 1.2%

Tauranga City Council 97 5.4%

Wellington City Council 144 8.0%

TOTAL excluding Auckland 558 30.9%

TOTAL 1806 100.0%



Poor Asset Backing and Revenue Ratios Data Sheet

Council

$ Debt per

Ratepayer 2011

$ Ratepayers

Equity per

RatePayer 2011

% Debt per

Ratepayer to Ratepayers Equity per Ratepayer

2011

Debt to

OpRev 2011

Poor Asset Backing & Revenue

Ratios

Kaipara 7,217 30,554 24% 2.3 **

Christchurch 9,963 42,450 23% 2.1 **

Auckland 12,271 54,326 23% 2.5 **

Dunedin 14,201 66,639 21% 1.7 *

Waitomo 8,847 42,263 21% 2.0 **

Rotorua 5,832 30,933 19% 1.5 *

Western Bay of Plenty 7,867 44,688 18% 2.3 **

Invercargill 4,437 27,385 16% 1.1 *

Queenstown Lakes 6,788 42,083 16% 1.4 *

Tauranga 9,604 60,947 16% 3.2 **

Taupo 7,819 52,592 15% 2.0 **

Tasman 7,061 47,836 15% 1.6 *

Hamilton 8,484 57,544 15% 2.2 **

Palmerston North 5,744 39,970 14% 1.9 *

Wanganui 5,129 37,941 14% 0.9

Timaru 4,823 36,472 13% 1.3 *

Whangarei 4,551 34,831 13% 1.5 *

Kapiti Coast 3,786 30,413 12% 1.7 *

South Taranaki 6,150 52,530 12% 1.6 *

New Plymouth 7,048 63,316 11% 1.4 *

Buller 4,502 41,007 11% 1.4 *

Horowhenua 2,380 21,772 11% 1.1 *

Hutt 3,130 29,367 11% 1.0 *

Otorohanga 4,733 45,278 10% 1.7 *

Ruapehu 3,688 35,776 10% 1.0

Far North 4,197 42,614 10% 1.3

Whakatane 3,528 38,909 9% 1.0

Matamata-Piako 3,089 37,751 8% 1.0

Wellington 6,606 84,693 8% 1.2

Ashburton 2,889 37,795 8% 0.9

Marlborough 3,606 51,508 7% 0.9

Nelson 3,784 58,783 6% 0.9

Grey 2,228 36,523 6% 0.8

Selwyn 3,600 59,926 6% 1.1

Thames-Coromandel 2,627 44,015 6% 0.9

Porirua 3,546 60,820 6% 1.0

Kaikoura 3,035 52,465 6% 0.9

Masterton 3,070 55,194 6% 1.0

Hastings 2,715 48,998 6% 0.9

Westland 3,287 59,795 5% 0.9



Council

$ Debt per

Ratepayer 2011

$ Ratepayers

Equity per

RatePayer 2011

% Debt per

Ratepayer to Ratepayers Equity per Ratepayer

2011

Debt to

OpRev 2011

Poor Asset Backing & Revenue

Ratios Chatham Islands 4,335 79,689 5% 0.4

Waimakariri 2,508 46,596 5% 0.8

Hurunui 2,197 42,442 5% 0.5

Hauraki 2,232 45,448 5% 0.8

Opotiki 1,356 32,049 4% 0.6

Gore 1,998 48,482 4% 0.8

Waipa 2,041 53,560 4% 0.6

Wairoa 1,142 31,236 4% 0.3

Upper Hutt 1,256 35,285 4% 0.5

South Waikato 1,213 34,337 4% 0.4

Waikato 1,668 47,542 4% 0.5

Manawatu 1,348 38,506 3% 0.5

Gisborne 2,481 75,523 3% 0.6

South Wairarapa 1,826 56,548 3% 0.8

Carterton 1,004 33,101 3% 0.3

Kawerau 585 21,571 3% 0.2

Tararua 2,169 80,532 3% 0.4

Central Hawkes Bay 1,992 86,897 2% 0.7

Stratford 1,116 59,711 2% 0.4

Napier 804 53,801 1% 0.2

Waitaki 608 48,525 1% 0.2

Rangitikei 691 56,497 1% 0.2

MacKenzie 383 42,795 1% 0.2

Southland 538 64,219 1% 0.2

Waimate 671 84,419 1% 0.3

Clutha 518 75,347 1% 0.2

Central Otago 310 45,987 1% 0.1

Note: See ‘Keys’ Schedule 7 Poor Asset Backing for * ** assessments.

Appendix 6


Larry.N.Mitchell Finance & Policy Analyst (Local Government)

PO Box 404 103, Puhoi 0951, Auckland, NZ

Ph 09 422 0598 Mobile 0274 792 328

[email protected]

Skype callto: larryave

9 May 2012

Dear CEO Announcing the Terms for the purchase and moderation of the

2012 NZ TLA League Table This year's edition of the NZ TLA League Table is scheduled for release in June 2012.

The table, which is of considerable public interest, ranks all NZ TLA's financial performance – principally based on benchmarks of financial sustainability. The Council performance reports used, include financial measures-metrics and “Other” Factors which bear upon:

Council Sustainability, (debt, capital expenditure etc) and Community Affordability, (rates, incomes etc) and Other Factors, including the relative strength of a Council's financial position,

financial contingencies and so on.

The table is to be produced in two formats:

A First Proof edition available mid-May which will only be marketed to the 67 TLA's reported upon. In recognition of Council support for this project a concessional price has been set at $1,250. The First Proof will allow all Councils the opportunity to review the report, assist with validating its data and if appropriate to moderate its results ... prior to its public release.

The Final moderated edition will be sold to the public at $2,500 per copy with special terms offered to the media, community groups and public agencies.

A copy of the full 2011 (last years) League Table report is at www.kauriglen.co.nz/larry select BASE STATS WITH TRENDZ / LEAGUE TABLE. Any enquiries to Larry.N.Mitchell 09 422 0598 or [email protected]

Note for ‘Base Stats’ subscribers ... as part of your 2012 subscription to the 'Base Stats' package, a concessional/complimentary price has been set at $ zero.

All prices quoted exclude gst and modest delivery costs. No charge will be made for data validation and moderation services. For purchase and delivery email [email protected] or fill in your details below and post to Larry Mitchell, PO Box 404 103, PUHOI 0951.

Kind regards

Larry Mitchell

……………………………………………………………………………………………………………………………………………

I wish to purchase a First Proof copy of the 2012 NZ TLA League Table @ $1,250

Name: Phone:

Title: Email:

Council: Signature:



South Auckland (sic ‘Island’) councils ‘rule’

Buller (64th-64th Yellow-Red) District Council was the top-performing local authority in the annual BERL listing of

local authorities.

Another South Island council, Queenstown Lakes (19-4 G-R), was in second place, with Waimakariri (EQ 15-7

Y-R) and Selwyn (EQ 5-5 Y-R) taking out the third and fourth places.

Waikato (14-6 Y–G), Western Bay of Plenty (52-42 R-RR), Central Otago (7-24 Y-Y) and Tauranga City (50-32

Y-R) were next in line, followed by Ashburton (6-17 Y-G), Hurunui (3-3 R-R) and Tasman (42-29 Y-Y).

Auckland (23-35 G-R) was placed three positions behind Tasman and the next city councils were Nelson (41-19

G-Y), four places behind Auckland and Hamilton (69-50 G-RR), five places behind New Zealand’s biggest

council.

Berl says Buller district topped four of the nine ranking indicators. It had the highest employment and business

unit growth in 2011and the best employment and GDP growth over the past five years of all districts.

Buller is up four places in the rankings from last year, mainly due to improved employment and population

growth in 2011.

Over the past year, the district’s employment growth has improved from sixth to first, while its population

ranking improved from sixty-first to twenty-eighth place.

The mining sector continues to drive economic activity. The void created by Pike River has been quickly filled

by expansion in other mines.

Looking forward, the consenting for Bathurst mines has progressed, and a major growth period is looming for

the district.

We expect Buller to go from strength to strength over the next few years as increasing demand for mineral

resources continues.

Tauranga (50-32 Y-R) is the only city in Berl’s top ten and it has achieved this with a ‘stellar’ improvement from

its thirty-third rank in 2010.

While population growth has eased — with Tauranga City only the twenty-fifth fastest in 2011 — the city’s

economy was humming. Tauranga City ranked third in both employment and GDP growth, and sixth in

business units growth.

Tauranga City’s rapid population growth is reflected in its medium term ranking, where it has had the sixth-

fastest growing population over the last five years. As well it has had the fourteenth fastest employment growth

and the seventeenth-fastest GDP growth.

Most of the local authorities in the bottom five of BERL’s list had negligible or negative population growth for

2011.

These districts were also predominantly rural and had small populations to start with. All of the bottoms five are

located within the Central North Island.

New Zealand’s poorest performing economy for 2011 is the Ruapehu (59-53 Y-Y) district. This is the second year

running that Ruapehu has been in last place.

Throughout 2011, Ruapehu struggled to retain population and employment. Ruapehu’s highest ranking is forty-

fifth on the openness index.

LNM Note: It is interesting to note that the bold LGLT financial figures only roughly coincide with the BERL more economic rankings – a ‘thin’ correlation?

Key: In brackets above are the 2012 LGLT ratings ... “2011 Place to 2012 Place”; “2011 Colour to 2012 Colour”.

The New Zealand Local Government League Table Table Final_June2012.pdf · The stresses of the GFC...

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Transcript of The New Zealand Local Government League Table Table Final_June2012.pdf · The stresses of the GFC...