20. Funding and Financial Management Arrangements

20.1. The Commission’s terms of reference direct it, in conducting its Inquiry and making recommendations to

… take into account the implications of the findings of the Independent Inquiry into Local Government Rates for local government arrangements in the Auckland region:

and to investigate

... what … funding responsibilities are required to ensure the effective, efficient, and sustainable provision of public infrastructure, services, and facilities …¹

20.2. The terms of reference direct that the Commission is not to make any “recommendations on the quantum of central or local government funding needed to support the Auckland region”.

20.3. The Commission’s interpretation of its terms of reference is that it should focus primarily on changes in funding and financial management arrangements consequent upon the structural changes it might recommend. The terms of reference indicate that it should not consider rating issues generally or comment on new sources of funding, these matters having been addressed by the Local Government Rates Inquiry in 2007 (“the Rates Inquiry”).

20.4. In summary, the principal conclusions and recommendations of the Rates Inquiry were as follows:

• Rates are likely to be unsustainable for significant sections of the community in 10 years’ time.
• Rates should remain the major source of income for local government, but should be stabilised at around 50% of total revenues.
• No new forms of taxes (for example, bed taxes, sales taxes) should be introduced to fund local government.
• Transfers from central government should be increased (an increase in the local authorities’ petrol tax, payment of full rates on Crown properties, additional central government funding of water infrastructure).
• Local authorities should consider greater use of debt to fund long-term assets.
• There should be volumetric user charging for water and wastewater.
• Capital value should be promoted as the preferred rating base.

• There should be greater use of targeted rates (in part to address affordability concerns).
• Differential rates and uniform annual general charges should be abolished.
• Regional councils should have power to levy development contributions.²

20.5. The following changes are noted since the Rates Inquiry report:

• Regional councils have been given the power to levy a regional fuel tax to obtain funding for capital expenditure on specific land transport projects.³ The Auckland Regional Council was planning to implement a regional fuel tax commencing on 1 July 2009.⁴
• The Auckland Regional Council has, in principle, been given the power to levy development contributions (this power is already held by territorial authorities), but the development of this power has been delayed pending the outcome of the Royal Commission.⁵

20.6. This chapter

• outlines the existing financing arrangements for Auckland’s local authorities
• discusses in general terms changes to funding approaches which might be adopted in future
• sets out the funding and financial arrangements for the proposed new Auckland Council and its proposed six local councils
• identifies financial issues that will need to be addressed to effect the transition to the Auckland Council.⁶

20.7. This chapter does not seek to assess the extent of any possible funding gap for Auckland local government. While it has been suggested that there is a significant gap between forecast expenditures set out in Auckland councils’ 10-year long-term council community plans (“LTCCPs”) and forecast available funding, it should be noted that LTCCPs may be unrealistic in their forecasts. Considering affordability and undertaking reprioritisation might reduce the forecast expenditures set out in the eight LTCCPs. There are also other factors that may affect future funding, such as the Government’s proposed national infrastructure programme.

Existing funding and financial arrangements for Auckland’s local government

Local authority financial operations

20.8. Under section 101(1) of the Local Government Act 2002 (“LGA 2002”), each local authority (the Auckland Regional Council and Auckland’s seven territorial authorities) is responsible for managing its own revenues, expenses, assets, liabilities, and investments in the interests of its local community. Section 100 of the Act requires that a local authority must maintain a balanced budget unless it decides it is financially prudent to do otherwise. Each has its own funding sources, including transfers from central government and the power to levy local rates in accordance with the Local Government (Rating) Act 2002. This Act provides for quite flexible rating powers, and the rating systems differ significantly between local authorities, as is discussed later. Local authorities also develop their own policies on revenue and financing, liability management, and investment in accordance with the provisions of the LGA 2002, and on financial contributions under the Resource Management Act 1991 or development contributions under the LGA 2002.

Funding sources

20.9. Most of Auckland’s local government operational funding ($1,596 million) comes from within the region (or is “own source”), with the bulk ($1 billion) coming from rates. A breakdown of funding sources is shown in Figure 20.1. The Rates Inquiry identified this high level of local financial autonomy as a strength of the New Zealand local government funding system.

20.10. Central government funds only a small proportion of local government operating expenditure ($72 million in 2006/07), this amount being principally road maintenance grants. However, central government’s total spend in Auckland, including direct spending by central government agencies and transfers to the Auckland Regional Transport Authority for transport, is significant. The New Zealand Institute of Economic Research has estimated Auckland’s total share of central government expenditure at $17 billion or 32% of total government spending nationally in 2007.⁷ Table 20.1 outlines the composition of this spending.⁸

20.11. The volume of spending is largely driven by the service needs of Auckland’s large population in areas such as social welfare, health and education. Between 2005 and 2007, the largest increase in central government funding was in the area of transport and communications, which increased by 95%.⁹

Table 20.1 Auckland share of Government expenditure (estimates for fiscal year 2007)

	NZ total ($ million)	Auckland share (%)	Auckland contribution ($ million)
Total social welfare	16,853	30%	5,118
Government Superannuation Fund	302	27%	83
Health	10,327	32%	3,259
Education	9,289	32%	2,958
Core Government service	4,357	33%	1,437
Law and order	2,653	33%	872
Defence	1,602	33%	528
Transport and communications	2,461	38%	944
Other	5,898	33%	1,972
Total	53,742	32%	17,171

Source: New Zealand Institute of Economic Research. Auckland’s contribution to the Government surplus in 2007. Updated estimates of the net flow of central government funding from the Auckland region in fiscal year 2007. Report to the Committee for Auckland, July 2007, p. 7.

20.12. Auckland’s local government funding for capital expenditure currently comes from the following sources:

• central government grants and subsidies
• rates and accumulated funds from rates
• long-term borrowing
• financial and development contributions (under the Resource Management Act and LGA 2002 respectively).

While capital expenditure and a breakdown of how it is funded is included in each of the eight councils’ annual plans, the categorisation of funding varies, making comparison difficult.

Rating system

20.13. The Rates Inquiry suggested that the rating system is not well understood by many ratepayers. The current rating system across the Auckland region varies considerably between local authorities, owing to the flexible powers provided by the Local Government (Rating) Act. This reflects decisions by the existing local authorities about the rating system they consider to be appropriate and equitable for financing the needs of their communities. The rating systems may vary on the valuation base used, the level of uniform annual general charges, the use of targeted rating powers, the use of differentials for certain classes of land, policies on the postponement and remission of rates, and the way in which water charges are structured and levied. The percentage of rates funding raised from general rates varies considerably across the region. This mix of rating systems is summarised in Table 20.2.

20.14. All Auckland’s local authorities except Papakura have rates per rateable property above the national average, as shown in Figure 20.2. Rates range from 70% above the national average for Auckland City, to Papakura District which rates at the national average.¹⁰ Auckland City also had the highest average residential rate of the Auckland local authorities in 2006/07 at $2,039.¹¹

Financial position

20.15. Generally speaking, Auckland’s local authorities appear to be in a sound financial position. Most have significant cash reserves, and in some cases financial investments, and modest levels of debt. Any concerns about financial viability of individual local authorities are addressed in annual reports of the Auditor-General – none have been recently raised about the eight Auckland local authorities. However this may change given the current economic downturn and some local authorities may be facing financial stress. Those facing rapid growth, and already committed to significant infrastructure spending, are likely to be particularly affected due to greater pressure to restrain rates.

20.16. The combined balance sheets and operating statements of Auckland’s local authorities are summarised in Tables 20.3 and 20.4.

20.17. While the asset position appears strong, the Commission notes that the balance sheet and operating statement information is incomplete as it does not include council organisations (“COs”) and council-controlled organisations (“CCOs”) or arrangements such as joint ventures with the private sector, as discussed below.¹² The need for a full inventory of, and reporting on, the financial results and position of these organisations is discussed in Chapter 21, “Council Organisations and Council-Controlled Organisations”. Nor are CO and CCO proposed revenues and expenditures included in council LTCCPs.

20.18. There is variation in financial performance across the councils. A number had significant operating deficits in 2007 (Rodney District, Waitakere City, Manukau City, Papakura District) and four had an operating surplus (North Shore City, Auckland City, Auckland Regional Council, Franklin District). All reported an overall net surplus.

Table 20.2 Rating systems used by Auckland councils, 2006/07

Local authority	Rating valuation basis	Maximum differential on business general rate	% of rates from general rate	% of rates from uniform annual general charge	% of rates from targeted rates	% of rates from water charges by meter1	Total rates collected2 ($ million)
Rodney District	Capital value	4.3	20	0	74	6	82
North Shore City	Land value	6.4	36	28	24	12	147
Waitakere City	Land value	6.5	38	29	19	15	111
Auckland City	Annual value	2.4	55	3	11	31	375
Manukau City	Annual value	1.8	51	12	6	31	154
Papakura District	Land value	4.5	74	22	4	0	22
Franklin District	Capital value	2	26	17	453	12	40
Auckland Regional Council	Capital value	1.6	53	0	47	NA	127

Notes: The Local Government Rates Inquiry did not include Franklin District because not all of its area is in the Auckland region. Information about Franklin District is sourced from Franklin District Council Community Plan 2006–2016, Our Blueprint for the Future, pp. 9 and 93–97. Table footnotes: 1 The higher water charges for Auckland and Manukau reflect the fact they charge for both water and wastewater. In Papakura, water and wastewater operations are contracted out to a private company. 2 Compiled from Table 18.3, Summary of Auckland local authority operating statements. 3 Includes roading rate charged by Franklin District (22%). Source: Funding Local Government, Report of the Local Government Rates Inquiry, Wellington, 2007, p. 112.

 

What needs to change

Rates

20.19. A number of submitters commented to the Commission that inadequate funding is one of the reasons for the ”problems” of governance in the Auckland region. Many submissions commented on the perceived heavy burden of rates, with some expressing concern that rates might increase as a possible consequence of reorganisation. Others saw reorganisation as a means of reducing rates by achieving greater streamlining and efficiencies.

20.20. The Commission has outlined in Chapter 32, “Achieving a High-Performance Auckland Council”, an indicative estimate of the financial benefits and costs of its reorganisation proposals, and outlined indicative overall savings. It has not, however, addressed the question of the redistribution of the rates burden under a uniform rating system across Auckland, and the quantum of central and local government funding for the future. These are matters for the Auckland Council to determine.

20.21. As shown in Table 20.2, there is significant variation in the rating systems currently used by Auckland councils. The Commission considers that the Auckland Council should adopt a uniform rating system (rating valuation basis and level of any uniform annual general charge) for the whole of Auckland. This need not preclude the use of targeted rates or differential rates under existing legislation, although it can be noted that the Rates Inquiry recommended against differential rates as being arbitrary and non-transparent.¹³ The valuation system to be adopted and the distribution of rating burden is a matter for the Auckland Council.

20.22. Section 101(3) of the LGA 2002 sets out factors councils need to consider when deciding whether specific council activities should be funded by rates or by some other means, and, if rates are appropriate, what type of rate should be applied. Factors to be considered include the distribution of benefits from the activity in question, the extent to which action or inaction by specific individuals or groups contribute to the need to undertake the activity, and the impact on community outcomes and policy transparency. The Rates Inquiry considered that affordability for low-income ratepayers should also be made a factor under section 101(3), but this has not yet been acted on.¹⁴

20.23. The Establishment Board should position the Auckland Council to make an early decision on rating policy by undertaking the necessary analysis and development of options for the Auckland Council. The new system will need to meet the requirements of section 101(3) of the LGA 2002 and be based on careful analysis of the impacts on individual Auckland ratepayers, addressing any equity or affordability implications for ratepayers. Decisions would be required on the rating valuation basis, the size of any uniform annual general charge, and whether any existing differential or targeted rates should be retained – or even new ones instituted. As discussed in Chapter 26, “The Three Waters”, it is anticipated that water charges (drinking and wastewater) would be covered by separate volumetric charges based on cost recovery.

Table 20.3 Summary of Auckland local authority assets and liabilities ($ million, year to June 2007

	Rodney District	North Shore City	Waitakere City	Auckland City	Manukau City	Papakura District	Franklin District	Auckland Regional Council	Total
Total liabilities	253	262	357	440	373	42	46	141	1,914
Total fixed assets	1,522	3,787	2,252	7,410	4,394	399	1,091	212	21,067
Total assets other than fixed assets	56	217	257	1,323	1,620	57	7	931	4,468
Total assets1	1,579	4,004	2,508	8,733	6,014	457	1,099	1,143	25,537

Note: The information on assets and liabilities presented is for the local body alone. It does not include financials for any council-controlled organisation (an organisation where one or more councils have 50% or more of the voting rights or have the right to appoint 50% or more of the directors) or for any council organisation (an organisation in which one or more councils own/control any voting rights or have the right to appoint any of the directors). Table footnote: 1 Includes fixed assets, current assets, and non-current assets. Source: Statistics New Zealand, “Local authority financial statistics by council”, available at www.stats.govt.nz/datasets/govt-finance/local-authority-financial-statistics-by-council.htm.

A more effective and efficient funding partnership with central government

20.24. An important aim of the Commission’s proposed structural changes is to enable a single Auckland Council to interact more effectively with central government. Clearly central government has a direct interest and a critical funding role in relation to the work of the Auckland Council. The Auckland Council is positioned to manage transport, environment, infrastructure, assets, and other long-term investment for the region. As discussed elsewhere, this must occur in partnership with central government, particularly in relation to shared areas of responsibility such as land transport, including public transport.

Table 20.4 Summary of Auckland local authority operating statements ($ million, year to June 2007)

	Rodney District	North Shore City	Waitakere City	Auckland City	Manukau City	Papakura District	Franklin District	Auckland Regional Council	Total
Rates	82	147	111	375	154	22	40	127	1,058
Regulatory income	11	15	14	51	23	4	5	15	138
All government grants	6	11	10	13	15	2	10	6	73
Investment income	1	3	2	31	24	0.6	0.2	2	63.8
Sales of goods & services	12	48	40	85	38	3	7	33	266
Total operating revenue	112	224	176	554	254	31	62	182	1595
Employee costs	27	50	60	123	74	6	10	40	390
Interest paid	15	12	18	32	20	0.8	2	0.3	100.1
Depreciation	31	44	35	113	67	8	13	7	318
Grants & subsidies	1	7	5	33	2	0.1	4	2	54.1
Purchases of goods	52	110	74	215	110	16	26	53	656
Total operating expenditure	125	223	192	515	273	31	54	102	1515
Operating surplus	-14	1	-16	39	-19	-0.4	8	80
Net non-operating items	27	84	20	12	68	15	15	47
Net surplus	13	85	4	51	49	15	24	127	368

Source: Compiled from Statistics New Zealand data, “Local authority financial statistics by council”.

 

20.25. This partnership involves recognition by central government that the Auckland Council can and should directly influence central government decision making and funding in these and other areas. For this reason the Commission is recommending joint decision making in a number of areas, particularly on social issues and transport. (See Chapter 9, “Promoting Social Well-Being” and Chapter 25, “Transport”.) Mechanisms such as a Cabinet Committee for Auckland and a possible central government “Auckland Budget” to assist in better prioritising Government expenditure in Auckland are referred to in Chapter 15, “The Elected Auckland Council”.

20.26. The Commission has also noted the concern expressed by a number of submitters about the lack of certainty in central government funding of local government, particularly with respect to long-term infrastructure planning. The Auckland Council would need reasonable assurance that its proposed 10-year expenditures set out in its LTCCP would be capable of being funded. Currently (as noted in the Rates Inquiry), central government financial planning horizons do not align with the LTCCP time frame. The Commission notes that the new Government’s proposed national infrastructure plan has the potential to address this issue in relation to infrastructure, but notes that other expenditures also need longer-term funding certainty.¹⁵

Access to a broader range of options for funding capital expenditure

20.27. Given ongoing increases in local government expenditure in Auckland (mainly for investment in infrastructure), there is concern about increasing rates when the level of rates per rateable property generally already exceeds the national average across all the region’s local authorities. The Rates Inquiry concluded that the forecast rates increases for the Auckland region are unsustainable and will lead to affordability issues for significant numbers of individual ratepayers.¹⁶

20.28. In future, it is anticipated that Auckland’s local government will need to better utilise the full range of funding options available to it, particularly for infrastructure, aside from direct central government funding, rates and development contributions. These mechanisms might include

• public-private partnerships for infrastructure development
• user charges, for cost recovery and/or demand management
• The Commission noted that the international cities it visited were already using, or were planning to use, road pricing. As outlined in Chapter 21, the proposed
• new integrated water organisation would operate the water and wastewater systems efficiently, as a successful business.
• greater use of debt for long term financing.
• This enables future generations to share the costs as well as the benefits of investment. The risk of excessive debt servicing requirements would, of course, need to be carefully managed.

20.29. The Commission recommends that the Establishment Board undertake a comprehensive review of such alternative funding tools, including assessing existing policies, mechanisms, and institutional capacity. The objective will be to position the Auckland Council to make decisions about any changes in these areas required to maximise its ability to make equitable and efficient use of these funding tools, as part of the financial policies required to be developed.

More transparency in rating

20.30. The Rates Inquiry made a number of recommendations to ensure budgets, rate notices and financial statements are structured in a way that ensures these are accessible and understandable to the public.¹⁷ The Commission would expect the Auckland Council to follow these recommendations.

Auckland Council – funding and financial arrangements

20.31. Under the proposed new arrangements, budgetary control, asset management, debt management, and revenue raising would be the responsibility of the Auckland Council. The six local councils would have delegated budgetary authority for service delivery and specified roles in place-shaping activities. Local councils would negotiate their budgets with the Auckland Council and would be responsible for managing the funding allocated to them. The system would be bound together by a framework of common accounting and financial policies and systems.

20.32. There would be a single centralised accounting system as outlined in the discussion in Chapter 32, meaning the Auckland Council would be able to monitor the financial performance and the position of local councils. All revenue collected in rates and from other sources would be payable to the Auckland Council. All financial assets and liabilities would be held by the Auckland Council and it would therefore exercise the treasury function.

20.33. Figure 20.3 illustrates this structure.

20.34. Funding would be centralised at regional level, and then allocated in accordance with the priorities of the Auckland Council’s LTCCP. The Auckland Council would

• directly fund regional activities
• fund local councils to deliver
delegated services and capital projects (major ones would include resource/planning/building consents and local roads)
representation/advocacy/place-shaping for their local community within the framework of the regional LTCCP and the local community action plan.¹⁸

20.35. Baseline levels of service would be established by the Auckland Council and negotiated further with each individual local council, on the basis of its community action plan, in order to ensure that the needs of different communities are met.

20.36. Further detail follows on the approach to be taken by the Auckland Council on rates, fees and investment income, central government funding, and other funding sources, followed by a discussion of the transfer of assets and liabilities to the Auckland Council. Budgeting and accountability mechanisms are then outlined.

Rates

20.37. Only the Auckland Council will have the power to rate. It would operate a single integrated rating system to meet regional and local funding needs.

20.38. The rating system should distinguish between regional and local expenditure. It is anticipated that the Auckland Council would levy a rate with the following components

(a) expenditure for regional activities required for Auckland Council to carry out the functions set out in Chapter 15

(b) expenditure for local services and activities required for local councils to carry out the functions set out in Chapter 16, “Local Councils”. This would be for the purpose of funding baseline levels of service and capital project delivery (for example building and maintaining local footpaths), and community representation/advocacy/place-shaping (for example, Diwali Festival in central Auckland or a local swimming pool).

20.39. The Auckland Council might also levy targeted rates under the Local Government (Rating) Act, including targeted rates for local activities as discussed below.

20.40. The ratepayer would receive one bill but with a breakdown between (a) and (b) and identifying the level of any targeted rate. The amount shown under (b) would represent a portion of the cost of funding local activities across the whole of Auckland, not just within the ratepayer’s local council area.

20.41. This system may therefore result in an element of cross-subsidisation between local council areas, in relation to component (b) above. The Commission acknowledges that this cross-subsidisation may be contentious. Submissions from some groups of ratepayers, particularly business, rural, and Māori, expressed concern that rates were already not being spent directly on those from whom they are collected. Nevertheless, it is the Commission’s view that funding effective Auckland-wide local government activities and services is a collective responsibility for all ratepayers. Failure to address the “urban paradox” described earlier in Chapter 1, “Why Auckland Matters”, where economic growth is accompanied by increased deprivation in some areas of cities, will impact negatively on long-term prosperity. Spending more in some parts of Auckland where the rate take is lower will, in the long run, accrue benefits to all Aucklanders. It cannot necessarily be expected that the proportion of revenue collected within each local council area will be matched by the same proportion of total expenditure. The Commission notes that current ARC regional rates are spent across the whole city and that rates collected from different areas of the current seven councils are not necessarily all spent in the area in which they are collected.

Fees and investment income

20.42. All fees and charges will be shown in the Auckland Council accounts including those collected by local councils, for example, consent processing, dog licences. Where fees are associated with a locally managed asset, for example rents for sports grounds, the fees would be notionally tagged to fund management costs and capital expenditure related to that asset, within the context of the overall asset management programme.

20.43. As mentioned above, water would be self-funding through user charges and with a uniform system across Auckland. This is discussed in Chapter 26.

Central government funding and other funding sources

20.44. All central government funding for Auckland’s local councils would be channelled through the Auckland Council or its CCOs as the Auckland Council may decide.

20.45. The Auckland Council would have sole authority to raise debt, impose user and development charges and enter into public private partnerships.

Assets and liabilities

20.46. All assets of the current local government bodies would be transferred to Auckland Council ownership, with subsequent management delegations to local councils as necessary.

20.47. The Auckland Council will take over all the assets and liabilities of existing councils. There will be no payments involved as the existing eight councils will go out of existence. The Commission notes that transferring ownership of assets such as the airport shares of the Manukau City Council and Auckland City Council, North Shore City Council’s Rosebank wastewater plant, and the Auckland City Council’s ageing stormwater system into a single council will involve some redistribution between ratepayers, in some cases bringing notional benefits and in other cases notional costs to different ratepayers of the new Auckland Council. It is the Commission’s view that attempts to rectify any such real or apparent inequities would be difficult and would be inconsistent with the objective of moving to unified funding arrangements. However, this would not preclude the Auckland Council at a future point, from setting a targeted rate, to address any significant inequities.

20.48. Financial assets are currently held by Auckland’s local authorities in a number of ways including direct shareholdings in COs, CCOs, and council-controlled trading organisations (“CCTOs”) and also through council-related organisations. While investment income is reported through council financial statements, the details of council investment in, and ownership of, related organisations, and potential liabilities is not always transparent or readily available. For example council financial statements generally do not include the assets and liabilities of related organisations. A list of COs, CCOs, and CCTOs is set out in Chapter 21.

20.49. The Rates Inquiry identified a few of Auckland’s major local government financial assets. These are listed in Table 20.5. The report also recommended that externally invested (financial) assets would be managed with a view to achieving a commercial rate of return, within a risk profile appropriate to local government.

20.50. In order to develop a financial asset management strategy, it will be essential for the Establishment Board to compile an inventory of all assets currently held by Auckland’s local authorities, including all COs, CCOs, and CCTOs. To facilitate this process, the Commission recommends that consideration be given by the Government to limiting asset sales during the establishment period until the establishment of the Auckland Council. ¹⁹

Table 20.5 Selected Auckland local government financial assets

Local authority	Commercial asset	Shareholding	Current value ($ million)
Auckland Regional Council	Auckland Regional Holdings including Ports of Auckland	100%	1,232.0 (total) 495.7
Auckland City Council	Auckland International Airport	12.8%	303.7
Manukau City Council	Auckland International Airport	10.1%	239.3

Source: 2007/08 annual reports of Auckland Regional Council, Auckland City Council, and Manukau City Council.

Local council budgets

20.51. Each local council would prepare a three year rolling budget specifying funds required to deliver on its community action plan, as discussed in Chapter 16. Local council budgets would follow a standard format (“common chart of accounts”) to promote transparency and accountability. Local councils would be responsible for managing their budgets.

20.52. Local council three-year rolling budgets would be approved by the Auckland Council. The Auckland Council would then allocate funds to the local council on an annual basis in accordance with the budget.

20.53. Local councils would be responsible for managing the funding they receive, but with some flexibility and incentive to make and retain efficiency savings. The Auckland Council would need to set parameters for flexibility in spending across budget items.

20.54. Local councils would, through the Auckland Council’s central accounting system, present a set of annual financial statements reporting on their financial management.

20.55. Local councils would be able to propose that the Auckland Council collect a targeted rate for expenditure on a particular project to deliver a delegated service or capital project over and above the base level of service provision. This will give communities the opportunity to fund a standard of urban amenity and services that reflects their preferences and priorities.

20.56. For local councils it will provide the means to enhance their place-shaping responsibilities. The process of engaging and consulting with local people to produce a credible and competitive case for Auckland Council funding will be a powerful accountability discipline on local councils, requiring them to understand and manage community expectations in an interactive and transparent way.

20.57. The Auckland Council will need to establish a policy for local councils on developing proposals for local targeted rates, including any limits on quantum and any specific consultation processes required.

Financial plans and policies

20.58. Total Auckland Council spending would be guided by a 10-year LTCCP. Local councils would produce a three-year community action plan, which would link into the regional LTCCP and their rolling three-year budget.

20.59. The Auckland Council would set explicit three-year fiscal targets against which councils would report, as a discipline on both rates and spending.

20.60. The Auckland Council would adopt standard financial policies, in accordance with sections 102 to 111 of the LGA 2002. These would include revenue and financing policy, liability management policy, investment policy, policy on development contributions or financial contributions, and a policy on partnerships with the private sector. The Establishment Board should prepare draft policy options for consideration by the Auckland Council.

20.61. The financial governance arrangements for the Auckland Council’s COs and CCOs are outlined in Chapter 21.

Accountability

20.62. The Auckland Council’s financial operations must be subject to a high degree of public and official scrutiny, given that it will have responsibility for the largest local government budget in New Zealand.

20.63. Oversight mechanisms of Auckland Council spending would have to include, as required by the LGA 2002,

• publication of annual financial statements and summary financial statements in accordance with International Financial Reporting Standards, accompanied by reports by the Auditor-General
• a formal process to ensure local council input and consultation on the Auckland Council budget and LTCCP.

20.64. It is anticipated that oversight of local council spending would occur as follows:

(a) Auckland Council would monitor the financial performance and position of each local council against its budget.

(b) Auckland Council would approve/not approve budgets, and assess whether proposed activities were consistent with delegations and the 10-year LTCCP.

20.65. The Commission also recommends that specific efficiency mechanisms be built into the culture and operation of the Auckland Council. Further work will be required to design these, but the Commission notes the following:

• the financial cost-benefit analysis contained in Appendix B (Taylor Duignan Barry report), which anticipates efficiency gains resulting from the establishment of the Auckland Council.
• the merit of a “best value” regime set down in legislation For example, in the United Kingdom, local authorities must make arrangements to secure continuous improvement in the way in which they exercise their functions, having regard to a combination of economy, efficiency, and effectiveness (Local Government Act 1999). They undertake “best value reviews” of their operations to achieve this.²⁰
• the proposed Auckland Council Services Performance Auditor, discussed in Chapter 32.

20.66. The establishment of a new Auckland Council provides the opportunity to introduce best practice financial and performance management. The Commission’s proposals for this are set out in Chapter 32.

20.67. A number of submitters argued for greater financial transparency including more information from local government about how their rates were spent, particularly tendering policy, council sub-contracting, and financial involvement in CCOs. The Commission considers that there is a need for greater transparency and notes that the establishment of a single budget and set of financial policies under the Auckland Council should facilitate this. Specific recommendations regarding improvements in CO and CCO financial reporting are outlined in Chapter 21.

20.68. The Commission considers that the Auckland Council should develop its financial reporting mechanisms with a view to maximising transparency. It may wish to consider options such as making supplementary material to the annual financial statements available online for ease of public access, and adopting a policy of mandatory disclosure of expenditure over a certain amount, as is done by the Greater London Assembly, which discloses all spending above £1,000.²¹

Transition

20.69. A key task for the transition will be ensuring that the Auckland Council has the funding and financial systems it needs to operate upon establishment, and has a report on the options for rating and financial policy as a basis for its decision making on these matters.

Rates and funding

20.70. The 1989 reorganisation of local government provided the new councils with a three-year period after the amalgamation date, to design, approve, and migrate to a new rating system. The valuation basis for each new council was set by the Local Government Commission, and each council designed its unified rating system and charging systems for water and the like.

20.71. The new councils came into being on 1 November 1989, and until the beginning of the next financial year, worked on the basis of an interim budget prepared by the Establishment Committee and funded by the revenue collected by the former local authorities in the area.

20.72. Auckland’s current local authority financial planning and budgeting system is based on the LTCCP, which each council must produce through a detailed statutory process every three years. LTCCPs were produced by each Auckland local authority for the financial year commencing 1 July 2006, and the next LTCCPs will be published on 1 July 2009. In the first year of the three-yearly cycle, the LTCCP is regarded as the annual plan. In the following two years, local authorities produce a separate annual plan, which closely follows the projections contained in the operative LTCCP for that year (LGA 2002, section 95).

20.73. Assuming the Auckland Council commences immediately after the 2010 local body elections, it will inherit the LTCCPs of the eight predecessor councils covering the three years from 1 July 2009 to 30 June 2012, and the annual plans that each has made for the 2010/11 year. The Auckland Council will need, almost immediately, to give attention to the development of its first annual plan to be published on 1 July 2011, and its first LTCCP to be published on 1 July 2012. In the interim, it will need to operate to a large extent under the LTCCPs and annual plans it has inherited from the predecessor councils.

20.74. The Commission recommends that the Establishment Board be tasked to

• develop an interim budget for the Auckland Council to cover the period from its establishment until 30 June 2011
• ensure sufficient funding is available to meet the operating costs of the Auckland Council from its establishment until it has approved and implemented a budget for the 2011/12 financial year (this will be met from income and reserves held by the existing eight councils).²²
• undertake a comprehensive analysis and develop options for a unified rating system (reflecting the findings of the Rates Inquiry) and other required financial policies for the Auckland Council
• prepare a report for consideration by the Auckland Council scoping out a process and timeline for development of the first annual plan for 2011/12 and the LTCCP for 2012.

20.75. The Commission recommends that the Auckland Council ratify a new unified rating system as soon as possible. The Auckland Council will need to strike a rate from July 2011 based on the rating systems previously used by the eight Auckland Councils. The Establishment Board will need to take any necessary steps to enable the Auckland Council to strike a rate in this way. It should be possible for the new rating system to apply for the 2012/13 year at the latest, but this would be a matter for further work by the Establishment Board with it making a recommendation to the incoming elected Auckland Council.

Recommendations

Financial management

20A The Auckland Council should ensure accountability in relation to its financial operations by adopting best practice oversight, transparency, and efficiency mechanisms.

20B Local councils should negotiate their budgets with the Auckland Council (through the community action plan process) and be responsible for managing the funding allocated to them. Rating

20C The Auckland Council should adopt a uniform rating system for the Auckland region, to meet city-wide and local funding needs.

20D The Auckland Council should levy a rate with the following components:

a) expenditure for activities undertaken by the Auckland Council

b) expenditure for local services and activities required for local councils to carry out their functions. This would be for the purpose of funding baseline levels of service and capital project delivery, and community representation/advocacy/place-shaping.

20E The Auckland Council should also consider levying targeted rates under the Local Government (Rating) Act 2002 including targeted rates for local activities.²³

20F The Auckland Council should ratify a new unified rating system as soon as possible. In the interim, the Auckland Council should from July 2011 strike a rate based on the rating systems previously used by the eight Auckland councils.

Transition

20G The Establishment Board should

a) undertake a comprehensive review of alternative funding tools for capital expenditure including assessing existing policies, mechanisms, and institutional capacity.

b) prepare draft standard financial policy options for consideration by the Auckland Council. These would include policies on revenue and financing, liability management, investment, development contributions or financial contributions, and partnerships with the private sector.

c) develop an interim budget for the Auckland Council to cover the period from its establishment until 30 June 2011.

d) ensure sufficient funding is available to meet the operating costs of the Auckland Council from its establishment until it has approved and implemented a budget for the 2011/12 financial year. This will be met from income and reserves held by the existing eight councils.

e) undertake a comprehensive analysis and develop options for a unified rating system for the Auckland Council, reflecting the findings of the Report of the Local Government Rates Inquiry.

f) prepare a report for consideration by the Auckland Council scoping a process and timeline for development of the first annual plan for 2011/12 and the long-term council community plan for 2012–2021.

g) take any necessary steps to enable the Auckland Council to strike a rate in the interim period from July 2011 until a new unified rating system is adopted as outlined in Recommendation 20F above.

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