Agenda of Audit and Risk Committee

Audit and Risk Committee

Minutes of an Audit and Risk Committee meeting held in the Council Chamber, 26 Gordon Street, Dannevirke on Tuesday 17 March 2020 commencing at 1.00pm.

1. Present

Mr K Ross (Chairperson), Her Worship the Mayor - Mrs T H Collis, Crs E L Peeti-Webber (Deputy Mayor), A K Franklin, S A Hull, C J Isaacson, P A Johns, R A Treder and S M Wards.

In Attendance

Mr B King - Chief Executive

Mr R Taylor - Governance Manager

Mr R Suppiah - Chief Financial Officer

Mr C McKay - Finance Manager

Mrs S Walshe - Senior Financial Accountant

Ms S Lowe - Risk Manager

Mr H Featonby - Alliance Planning Manager

Mr P Wimsett - Manager Strategy and District Development

Mr D Le Mar - Financial Accountant

Ms B Fowler - Financial Accountant

Ms J McKenzie - Projects Coordinator

Ms T Love - Programmes and Projects Support

Ms G Tracy - Financial Accountant

Mr B Rush - Health and Safety Coordinator

Mrs A Howell - Risk Administrator

2. Apologies

2.1	*That an apology be sustained from Cr K A Sutherland for non-attendance at the meeting.* Ross/Collis Carried

3. Notification of Items Not on the Agenda

3.1

Nil

4. Reports

4.1

Health and Safety

4.1.1

That the report from the Risk Manager dated 10 March 2020 concerning health and safety (as circulated) be received, and

That the Audit and Risk Committee note the following with regard to the focus on health and safety matters and this update:

· Emphasis is being placed on contractor management.

· The Health and Safety Committee is reviewing the current systems and processes for staff working alone.

· An annual review is being undertaken of the health and safety registers.

· All Council sites holding and using hazardous substances are compliant with the Hazardous Substances Regulations (2017).

· Council sites have been surveyed for asbestos containing materials, and an asbestos management plan is in place to manage any disturbance of these materials for regular maintenance, demolition, disturbance, intentional damage and fire/natural disaster.

· A SharePoint software system has been created to house everything relating to Council’s management of health and safety.

· The Health and Safety Coordinator role will be undertaken by Brook Rush of Manawatu District Council while the Risk Manager takes a one year leave of absence from this position.

· There has been a reduction in the number of accidents and near miss events noted with regard to Council activities in the last year.

Ross/Johns Carried

4.2

Risk Management

4.2.1

That the report from the Risk Manager dated 10 March 2020 concerning risk management (as circulated) be received, and

That the Audit and Risk Committee note the risks arising from the spread of coronavirus causing a human disease pandemic, and the actions taken by Council through its continuity planning to respond to such an event impacting on the district’s communities, and

That Council through its Long Term Plan continue to place emphasis on building resilience into the provision of the district’s water supplies to manage demand and the risks arising from climate change and population growth, noting the impact of the current drought and the critical water shortage crisis being experienced.

Hull/Treder Carried

4.3

Project Risk Management

4.3.1

That the report from the Project Manager dated 10 March 2020 concerning project risk management (as circulated) be received, and

That the Audit and Risk Committee note the organisational approach and framework developed and implemented as part of strengthening the way Council projects are managed with regard to risk, and

That the application of this approach to assess planning for risks relating to projects and capital works proposed in the 2020/21 Annual Plan is acknowledged.

Johns/Wards Carried

4.4

Draft Audit New Zealand Management Report

4.4.1

That the report from the Senior Financial Accountant dated 10 March 2020 concerning the Draft Audit New Zealand management report (as circulated) be received, and

That the Audit and Risk Committee acknowledge an unmodified audit opinion was issued by Audit New Zealand in respect of the 2018/19 Annual Report, and note the following matters arising from the audit:

· The need to ensure the quality and timeliness of information completed by Council is as per the agreed audit plan.

· The reporting issue of non-consolidation of Tararua Aquatic Community Trust’s financials is still outstanding.

· The Principals Group for the IT Alliance operational agreement is working towards implementing more formal monitoring of the project schedule.

Hull/Franklin Carried

4.5

Progress with Audit New Zealand Findings and Recommendations

4.5.1

That the report from the Finance Manager dated 10 March 2020 concerning progress with Audit New Zealand findings and recommendations (as circulated) be received, and

That progress by management in implementing the Audit New Zealand recommendations is noted and acknowledged, with six issues being closed in the Draft Audit Management Report, and

That the Audit and Risk Committee acknowledge management is taking action to address the four outstanding Audit New Zealand recommendations, and it shall continue to provide updates on this matter as progress is made, and

That the Audit and Risk Committee note the new Audit New Zealand recommendation regarding the IT Alliance operational agreement, and the intention that the Principals Group shall work towards implementing more formal monitoring of the project schedule.

Hull/Ross Carried

4.5.2

The meeting adjourned at 1.55pm, and resumed at 2.15pm.

4.6

Adoption of Council's Draft Annual Plan 2020/21

4.6.1

That the report from the Finance Manager dated 10 March 2020 concerning adoption of Council's Draft Annual Plan 2020/21 (as circulated) be received, and

That the recommendation regarding this matter is recognised as being significant in terms of Council’s Significance and Engagement Policy, and

That the Audit and Risk Committee recommend to Council in accordance with Section 100 of the Local Government Act 2002, the Draft Annual Plan 2020/21 budgets have been prepared based on reasonable judgement and assumptions, and it considers the projected financial results, including the projected operating deficit (section 8.1.6) to be financially prudent given its financial position, and

That the Audit and Risk Committee recommend to Council the Consultation Document and Draft Annual Plan and the Fees and Charges Schedule for the 2020/21 financial year be adopted for consultation (subject to the correction of any typographical errors or changes which may be required), and with the addition of reference to the developments regarding coronavirus in the Mayor’s message, and

That the Audit and Risk Committee recommend to Council the activities of solid waste management, animal control, footpaths, parks and reserves and cemeteries fall outside the funding limits of its Revenue and Financing Policy.

Johns/Hull Carried

4.7

New Zealand Transport Agency Technical Audit

4.7.1

That the report from the Alliance Planning Manager dated 10 March 2020 concerning the New Zealand Transport Agency technical audit (as circulated) be received, and

That the Audit and Risk Committee note the overall assessment from this audit is a positive outcome, with no major improvements required or any compliance breaches identified in respect of giving New Zealand Transport Agency assurance it is receiving value for money and risks are being appropriately managed, and

That the Audit and Risk Committee acknowledge the intention of the Alliance leadership team to implement plans to address the New Zealand Transport Agency recommendations for making improvements regarding activity management planning and data quality recording and reporting processes.

Collis/Hull Carried

4.8	Process to Seek Expressions of Interest for the Audit and Risk Committee Chairperson Appointment
4.8.1	The Chairperson declared a conflict of interest regarding this item of business, and withdrew from the Council Chamber while that matter was considered.
4.8.2	The Mayor chaired the discussion and voting on the motion during this part of the meeting.
4.8.3	That the report from the Chief Financial Officer dated 10 March 2020 concerning the process to seek expressions of interest for the Audit and Risk Committee Chairperson appointment (as circulated) be received, and That the proposed roles and responsibilities along with the draft advertisement to seek expressions of interest for consideration to the appointment to this position be agreed subject to including the following amendments: · *Add financial acumen to the attributes required of an ideal Chairperson.* · *Change the wording in the third bullet point of attributes required of an ideal Chairperson to read “able to work constructively with management and Council members”.* · *Specify the appointment to this position shall extend to the period until year one of the new Council following the 2022 election.* And that the interview panel for this purpose comprise Her Worship the Mayor - Mrs T H Collis, Cr S M Wards (Strategy and Policy Committee Chairperson), Cr S A Hull (Economic Development and Marketing Committee Chairperson), Cr K A Sutherland (Works Liaison Committee Chairperson), Mr B King (Chief Executive) and Mr R Suppiah (Chief Financial Officer). Wards/Treder Carried
4.8.4	The Chairperson returned to the Council Chamber following the completion of determining this item of business, and assumed the chair for the remainder of the meeting’s proceedings.
4.8.5	The meeting adjourned at 3.25pm, and resumed at 3.38pm.

5. Notified Items Not on the Agenda

5.1

Nil

Public Excluded Items of Business

6.1

That the public be excluded from the following parts of the proceedings of this meeting, namely:

Alliance performance framework audit

Alliance financial audit

The general subject of each matter to be considered while the public is excluded, the reason for passing this resolution in relation to each matter, and the specific grounds under Section 48 (1) of the Local Government Official Information and Meetings Act 1987 for the passing of this resolution follows.

*General subject matter to be considered*	*Reason for passing this resolution in relation to each matter*	*Ground(s) under Section 48(1) for the passing of this resolution*
*Alliance performance framework audit*	*To protect the commercial position of a third party*	*Section (1)(a)(i)*
*Alliance financial audit*	*To protect commercial activities*	*Section (1)(a)(i)*

This resolution is made in reliance on Section 48 (1) (a) of the Local Government Official Information and Meetings Act 1987 and the particular interest or interests protected by Section 6 or Section 7 of that Act or Section 6 or Section 7 or Section 9 of the Official Information Act 1982, as the case may require, which would be prejudiced by the holding of the whole or the relevant part of the proceedings of the meeting in public are as follows:

s7(2)(b)(ii) The withholding of the information is necessary to protect information where the making available of the information would be likely unreasonably to prejudice the commercial position of the person who supplied or who is the subject of the information.

s7(2)(h) The withholding of the information is necessary to enable the local authority to carry out, without prejudice or disadvantage, commercial activities.

Wards/Johns Carried

6.2

Alliance Performance Framework Audit

6.2.1

That the report from the Chief Financial Officer dated 10 March 2020 concerning the Alliance performance framework audit (as circulated) be received, and

That progress and achievements made by the Alliance management team as commended by the auditing team be noted along with their recommendations for the 2018/19 financial year to keep the performance framework relevant and aligned to the strategic intent and detailed requirements of the Council.

Ross/Collis Carried

6.3

Alliance Financial Audit

6.3.1

That the report from the Chief Financial Officer dated 10 March 2020 concerning the Alliance financial audit (as circulated) be received, and

That the efforts of the Alliance management team and the Principals Group to ensure that the pain/gain pool calculated fairly reflects the financial performance for the 2018/19 financial year is noted and acknowledged.

Johns/Hull Carried

6.4	*That open meeting be resumed.* Ross/Collis Carried

6.5	*That the decisions taken with the public excluded be confirmed in open meeting.* Ross/Collis Carried

Health and Safety and Risk Management

7.1

Presentations were made in a workshop briefing session for the purpose of discussion and information on the following matters:

· Risk Manager - Health and safety induction

· Risk Manager - Overview of Council’s risk management framework

There being no further business the Chairperson thanked those present for their attendance and contributions, and declared the meeting closed at 4.05pm and the workshop briefing session at 4.55pm.

____________________________

Chairperson

Report

Date	:	9 June 2020
To	:	Chairperson and Committee Members Audit and Risk Committee
From	:	Sandy Lowe Risk Manager
Subject	:	Health and Safety
Item No	:	6.1

1. Reason for the Report

1.1 To provide an update to the Audit and Risk Committee on health and safety matters.

2. Health and Safety Coordinator Role

2.1 Due to travel disruptions, Sandy Lowe is no longer embarking on a one-year career break from Council and will be continuing in her role as Risk Manager.

2.2 Due to resourcing shortages at Manawatu District Council, Brook Rush has been delayed in beginning his secondment to Tararua District Council as the Health and Safety Coordinator. Sandy Lowe will continue management of this area until commencement of Brook’s secondment, which is expected mid-July 2020.

3. Health and Safety Regional Group

3.1 No update – investigation into a joint contractor management system is on hold due to pandemic response and has not progressed since previously reported in March.

4. Continual Improvement

4.1 Work will begin to organise the SafePlus assessment likely to be conducted at Tararua District Council in December 2020.

4.2 Review of the improvements since the December 2018 Audit are outlined below;

· We have developed a formal staff reward and recognition programme for health and safety – the health and safety star award

· We have revamped the health and safety risk register to display the effectiveness of controls in the risk assessment process

· Creation of Health and Safety system through LOKI to ensure all Health and Safety information is centralised

· All of our Health and Safety Representatives completed training to increase their risk management knowledge

· SHE contractor management module is being implemented to ensure efficiency through the contractor management process

· Risk Register deep dives with each team, exploring their top risks – in progress

· Creation of the Health and Safety Critical Risks video

4.3 Review of outstanding items still to be addressed;

· Develop an overarching strategic plan with measurable goals

· Implement a Council Officers’ Due Diligence plan to ensure governance requirements for Health and Safety are in place

· Further development of the health and safety expectations for hiring Council facilities

5. Health and Safety Committee

5.1 After missing committee meetings in both April and May, the committee has resumed meetings as normal from 3 June 2020. These meetings are now available to be attended remotely.

5.2 All representatives have been asked to compile a report on current situations in which staff work alone and what controls are currently in place. This will inform a whole of Council review of the controls in place for this risk.

5.3 The quarterly wellbeing activities, to support our wellness wheel, are on hold until Brook Rush begins in the role of Health and Safety Coordinator in July 2020.

5.4 Anna Sinclair and Brook Rush will be attending the Investigation Techniques Training course through IMPAC to further their skills in managing incidents.

6. Risk Management

6.1 Departmental risk register reviews and deep dives into ‘top’ risks have been rescheduled to resume from July when Brook Rush commences the Health and Safety Coordinator role.

6.2 At the beginning of Alert Level 3 Tararua District Council implemented a COVID-19 health and safety plan to provide guidance to staff of the expectations of Tararua District Council in reducing transmission of the disease. This has been reissued at Alert Level 2 and will be reissued again with the changes that Alert Level 1 brings.

6.3 The Government will be reducing the contact tracing requirements from Alert Level 1 and putting the onus back onto the customer, quick response (QR) codes for the contact tracing app are being encouraged and we are investigating these for all Council sites accessible to the public.

7. Contractor Management

7.1 Implementation of the new contractor management software has been delayed due to disruption from the drought and COVID-19 response and recovery. Implementation likely delayed until July 2020.

7.2 Throughout Alert Level 3 and 2 COVID specific health and safety plans have been requested from all contractors. This was to ensure the hygiene, contact tracing and physical distancing elements were implemented into their day-to-day activities.

8. Hazardous Substances Regulations (2017)

8.1 Peter O’Donnell, an Environmental Engineer and Compliance Certifier from Environmental Services has advised that a location compliance certificate is not required for the Woodville Wastewater Treatment Plant.

8.2 A peer review of our hazardous substances compliance is likely to be added as an item to the internal audit calendar.

9. Accident Investigation

9.1 Throughout the lockdown period there have been minimal incidents which is reflective of the change in the way we were working during this time.

10. Recommendation

10.1 That the report from the Risk Manager dated 9 June 2020 concerning Health and Safety (as circulated) be received, and

10.2 That the Audit and Risk Committee note the following with regard to the focus on health and safety matters and this update:

· The Health and Safety Coordinator secondment has been delayed until mid-July 2020.

· Preparations are being made for the SafePlus audit towards the end of the calendar year.

· Health and safety plans were implemented as guidance to staff and contractors in managing the risks of Covid-19 and its transmission.

· A peer review of hazardous substances compliance is likely to be added as an item for internal audit.

· Throughout Covid-19 lockdown there were only minimal health and safety incidents reflecting the changed work environment during that period.

Attachments

Nil.

Report

Date	:	9 June 2020
To	:	Chairperson and Committee Members Audit and Risk Committee
From	:	Sarah Walshe Senior Financial Accountant
Subject	:	Draft Audit New Zealand Interim Management Report 2019/2020
Item No	:	6.3

1. Reason for the Report

1.1 To review and comment on the Audit New Zealand Interim Management Report for the 2019/20 Annual Report.

2. Background

2.1 Audit New Zealand has completed the interim audit of the Tararua District Council 2019/20 Annual Report. The attached report sets out their findings from the audit and where appropriate makes recommendations for improvement.

3. Summary of Findings

3.1 Audit New Zealand concluded the following:

· Assessment of the control environment - Overall, the auditors concluded that the District Council has appropriate and operationally effective systems of internal control, which is consistent with previous years.

· Internal controls – Controls over key financial and non-financial information were reviewed and 2 recommendations were made.

3.2 Matters Noted during the interim audit;

3.2.1 There were 3 new recommendations made to the District Council as a result of the interim audit, 2 of these were related to internal controls.

3.2.2 Impact of COVID-19 pandemic on the financial statements – Council has been asked to prepare an assessment of the impact of COVID-19 on its financial statements taking into account any drop-in revenue, increase in expenditure, borrowings and compliance with its policies and relevant legislation.

Management have noted that to date the impact of COVID-19 on Council has not been significant. Revenue from Fees & Charges and other revenue (excluding rates) has been minimal. Council has seen its NZTA subsidy revenue being affected due to the carry forward to the capital programme into the next financial year. Debt levels were higher but that was as a result of the cost variances for the capital projects, namely Pahiatua Water Treatment Plant and Pahiatua Main Street upgrade. Additional costs incurred were minimal. In fact, cost incurred by Council for the water crisis was more significant than that of COVID-19. Council has considered the affordability and prudent aspects from its financial strategies in the 2020/21 Annual Plan and will look to discuss these comments and address any audit concerns with the audit team.

3.2.3 Bank Reconciliations – ensure that reconciliations are signed and dated by the preparer and the reviewer within a month of being prepared.

Management has noted this and will ensure that bank reconciliations reviewed, signed and dated in a timely manner. During COVID-19 and staff working remotely management implemented a process of having these sent and approved via email weekly and is continuing this process moving forward.

3.2.4 Sensitive expenditure policy – recommendation that the sensitive expenditure policy be updated to reflect best practice and the Office of the Auditor General (OAG) guidance.

Management noted this and advise that the policy is being updated and will ensure it is consistent with OAG guidance.

4. Status of Previous Recommendations

Priority	Priority
Priority	Urgent	Necessary	Beneficial	Total
Open	0	4	0	4
Implemented or closed	0	0	0	0
Matters that will be followed up during our final audit visit	0	2	2	4
Total	0	6	2	8

4.1 Status of previous recommendations is set out in appendix 1 of the attached draft report to the Council on the interim audit of Tararua District Council for year ending 30 June 2020 and discussed further in Raj Suppiah’s Progress with Audit New Zealand Findings and Recommendations Report.

5. Adoption of New Accounting Standards

5.1 Audit New Zealand have raised the adoption of new accounting standards with the Council with regards to public benefit entities needing to comply with the new “group” accounting standards PBE IPSAS 34 Separate Financial Statements, PBE IPSAS 35 Consolidated Financial Statements, PBE IPSAS 36 Investments in Associates and Joint Ventures, PBE IPSAS 37 Joint Arrangements, and PBE IPSAS 38 Disclosure of Interest in Other Entities, in preparing their 30 June 2020 financial statements.

Management have noted this and advised that they have sought advice from PWC with regards to the consolidation of the Tararua Aquatic Community Trust in light of these new standards and will develop a transition plan if required and continue to work with the auditors on this matter.

6. Conclusion

6.1 The attached report concerning Draft Audit New Zealand Interim Management Report 2019/2020 is received and the recommendations noted.

7. Recommendation

7.1 That the report from the Senior Financial Accountant dated 9 June 2020 concerning the Draft Audit New Zealand Interim Management Report 2019/2020 (as circulated) be received, and

7.2 That the Audit and Risk Committee note the assessment of the control environment has concluded Council has established appropriate and operationally effective systems for internal controls, with two recommendations made in respect of key financial and non-financial information, and

7.3 That the draft management comments on the impact of the Covid-19 pandemic for reference in the financial statements, and actions to review bank reconciliations and update the sensitive expenditure policy be noted with management to finalise these comments.

Attachments

1 ⇩. Draft Audit New Zealand Interim Management Report

· Contents

· Key messages. 3

· 1.................................................................................................................. Recommendations. 5

· 2........................................................................................... Assessment of internal control 7

· 3........................................................................... Matters noted during the interim audit 9

· 4............................................................................ Adoption of new accounting standards. 12

· 5................................................................................................................. Useful publications. 13

· Appendix 1: Status of previous recommendations. 16

· Appendix 2: Disclosures. 18

Key messages

· We have completed our interim audit for the year ending 30 June 2020. This report sets out our findings from the interim audit.

Summary

· We performed an assessment of the District Council’s control environment. In performing this assessment, we considered both the design effectiveness and operational effectiveness of internal control.

· Overall we have assessed the control environment as “effective” based on work done to date. This means, based on the work we performed, the District Council has adequate internal controls in place that will either prevent or detect material misstatements in its financial statements and statement of service performance. We have however identified where improvements can be made. Our recommendations are set out in section 1, 3 and Appendix 1 of this report.

· COVID-19

· On March 11, 2020, the World Health Organization declared the outbreak of a coronavirus (COVID-19) a pandemic and two weeks later the New Zealand Government declared a State of National Emergency. From this the country was in lockdown. As a result of the lockdown, economic uncertainties have arisen which are likely to negatively affect the operations and services of the District Council. The full impact is not yet known. For more details, refer to section 3.1.

· New group accounting standards

· Public benefit entities must apply the new “group” accounting standards, PBE IPSAS 34 Separate Financial Statements, PBE IPSAS 35 Consolidated Financial Statements, PBE IPSAS 36 Investments in Associates and Joint Ventures, PBE IPSAS 37 Joint Arrangements, and PBE IPSAS 38 Disclosure of Interest in Other Entities, in preparing their 30 June 2020 financial statements.

· Management is responsible for performing the necessary transition work to successfully implement these new standards. We encourage the District Council to share its transition plan and transition work with us early in the audit process so we can agree issues and adjustments in a timely manner.

· In particular we have identified that the consolidation of the Tararua Aquatic Community Trust needs to be considered in light of these new standards. We are currently working with the District Council to assess this impact.

Thank you

· We would like to thank management and staff for their assistance during the interim audit, particularly as the audit commenced at the same time as the country as going into lockdown and Council staff were organising themselves to work from home. We would like to acknowledge the District Council staff for the way that they worked with us in these difficult circumstances.

· Debbie Perera

· Appointed Auditor

· DRAFT – 8 June 2020

1 Recommendations

1 Our recommendations for improvement and their priority are based on our assessment of how far short current practice is from a standard that is appropriate for the size, nature, and complexity of your business. We use the following priority ratings for our recommendations.

Priority	Explanation
· Urgent	· Needs to be addressed urgently · These recommendations relate to a significant deficiency that exposes the District Council to significant risk or for any other reason need to be addressed without delay.
· Necessary	· Address at the earliest reasonable opportunity, generally within six months · These recommendations relate to deficiencies that need to be addressed to meet expected standards of best practice. These include any control weakness that could undermine the system of internal control.
· Beneficial	· Address, generally within six to 12 months · These recommendations relate to areas where the District Council is falling short of best practice. In our view it is beneficial for management to address these, provided the benefits outweigh the costs.

1.1 New recommendations

2 The following table summarises our recommendations and their priority.

Recommendation	Reference	Priority
· Impact of the Covid-19 pandemic on the financial statements · Prepare an assessment of the impact of COVID-19 on the District Council’s financial statements.	· 3.1	· Necessary
· Bank reconciliations · Ensure that reconciliations are signed and dated by the preparer and reviewer within a month of being prepared.	· 3.2	· Necessary
· Sensitive expenditure policy · Update the sensitive expenditure policy to reflect best practice and the OAG guidance.	· 3.3	· Necessary

1.2 Status of previous recommendations

3 Set out below is a summary of the action taken against previous recommendations. Appendix 1 sets out the status of previous year’s recommendations in detail.

Priority	Priority
Priority	Urgent	Necessary	Beneficial	Total
· Open	· 0	· 4	· 0	· 4
· Implemented or closed	· 0	· 0	· 0	· 0
· Matters that will be followed up during our final audit visit	· 0	· 2	· 2	· 4
· Total	· 0	· 6	· 2	· 8

2 Assessment of internal control

4 The Council, with support from management, is responsible for the effective design, implementation, and maintenance of internal controls. Our audit considers the internal control relevant to preparing the financial statements and the service performance information. We review internal controls relevant to the audit to design audit procedures that are appropriate in the circumstances. Our findings related to our normal audit work, and may not include all weaknesses for internal controls relevant to the audit.

2.1 Control environment

5 The control environment reflects the overall attitudes, awareness and actions of those involved in decision-making in the organisation. It encompasses the attitude towards the development of accounting and performance estimates and its external reporting philosophy, and is the context in which the accounting system and control procedures operate. Management, with the oversight of Council, need to establish and maintain a culture of honesty and ethical behaviour through implementation of policies, procedures and monitoring controls. This provides the basis to ensure that the other components of internal control can be effective.

6 We have performed a high level assessment of the control environment, risk management process, and monitoring of controls relevant to financial and service performance reporting. We considered the overall attitude, awareness, and actions of the Council and management to establish and maintain effective management procedures and internal controls.

We consider that a culture of honesty and ethical behaviour has been created. The elements of the control environment provide an appropriate foundation for other components of internal control.

2.2 Internal controls

7 Internal controls are the policies and processes that are designed to provide reasonable assurance as to the reliability and accuracy of financial and non-financial reporting. These internal controls are designed, implemented and maintained by the Council and management.

8 We reviewed the internal controls, in your information systems and related business processes. This included the controls in place for your key financial and non-financial information systems. During the interim audit, we considered the following systems:

· Revenue and accounts receivable.

· Expenditure and accounts payable.

· Payroll.

· Cash and cash equivalents and investments.

· Property, Plant and Equipment and intangible assets.

· General ledger reconciliations and journals.

· Performance Reporting Systems and Controls

9 We have identified some improvements which are detailed in section 3 and in Appendix 1.

3 Matters noted during the interim audit

3.1 Impact of the COVID-19 pandemic on the financial statements

10 Recommendation

11 Prepare an assessment of the impact of COVID-19 on the District Council’s financial statements.

Background

12 On March 11, 2020, the World Health Organization declared the outbreak of a coronavirus (COVID-19) a pandemic and two weeks later the New Zealand Government declared a State of National Emergency. From this the country went into Alert Level 4, and lockdown. As a result, economic uncertainties have arisen which are likely to negatively affect the operations and services of the District Council.

13 While it is not yet possible to determine the full impact of the COVID-19 pandemic on the District Council, it may impact on:

· Council revenues and spending, borrowings and cash flow;

· Value of investments and other assets measured at fair value;

· Fair value assessments of infrastructure assets and other property, plant and equipment measured at fair value across the group and valuation triggers.

· Impairment indicators of non-financial assets

· The 2020-21 rates setting and the annual plan process;

· Wider economic forecasts;

· Achieving service performance targets and levels of service; and

· The Governance/Regulation work streams, including the LTP process.

14 The Local Government Act 2002 (the Act) puts an ongoing obligation on Councils to manage their finances prudently as they make decisions over time. This is a long-term obligation rather than something linked to a particular action, document, or event.

15 The onus is on Councils to ensure that they have considered whether they are being financially prudent and to be transparent about this with their communities.

16 Not all Councils will be affected in the same way by COVID-19. However, many Councils are expecting a drop in revenue.

17 Councils will need to consider all available tools to address a drop in revenue and the possibility of additional costs. This may include, for example, reviewing their current expenditure (what should or shouldn’t be incurred). The District Council’s Audit and Risk committee could provide helpful advice and support in this regard.

18 The District Council will also need to consider their policies, borrowing terms and conditions, and legislative requirements.

19 We will review the District Council’s assessment the impact of COVID-19 on the operations and services of the District Council and will confirm whether any disclosures required in the financial statements are made appropriately relating to the effect and the uncertainties caused by it.

20 We will also assess whether the District Council has complied with its policies and the relevant legislation.

Management comment

21 The impact of Covid-19 on Council has not been significant. Revenue from Fees & Charges and other revenue (excluding rates) has been minimal. NZTA subsidy revenue has been affected due to the carry forward to capital programme into the next financial year.

22 Debt levels were higher but that was a result of the cost variances for the capital projects namely Pahiatua Water Treatment and Pahiatua Mainstreet projects.

23 Additional cost incurred were minimal. In fact cost incurred for the water crisis were more significant than Covi-19.

24 The 2020/21 Annual Plan has considered the affordability and prudent aspects in our Financial strategies.

25 We will discuss the above and the audit concerns further with the audit team

3.2 Bank reconciliations

26 Recommendation

27 Ensure that reconciliations are signed and dated by the preparer and reviewer within a month of being prepared.

28 Background

29 During the bank reconciliation testing it was noted that the following bank reconciliations were not reviewed on time:

· September was reviewed on 20 December 2019

· December was reviewed on 10 February 2020

30 This may result to errors not being picked up on time by the reviewer.

31 We further noted that both of these reconciliations did not have signature or date of the preparer meaning that the timeliness of preparation could not be established.

32 Management comment

33 Noted. We will ensure bank reconciliations are reviewed in a timely manner and are signed and dated by the preparer and authoriser. During COVID-19 we implemented having these be sent and approved via email weekly and will look to continue this process moving forward.

3.3 Sensitive expenditure policy

35 Recommendation

36 Update the sensitive expenditure policy to reflect best practice and the OAG guidance.

37 Background

38 Our review of the sensitive expenditure policy identified areas that did not meet OAG guidance. The policies in place should meet OAG guidance to ensure that they provide sufficient detail, cover all relevant areas of sensitive expenditure and are reflecting best practice.

39 The sensitive expenditure policy should be updated to meet OAG guidance and this should include:

· Credit cards

· Rental cars

· Expenditure claims

· Approval of sensitive expenditure

· Koha

· Gift giving

40 Management comment

41 Noted. Policy is being updated and we will ensure it is consistent with OAG guidance.

4 Adoption of new accounting standards

Public benefit entities must apply the new “group” accounting standards, PBE IPSAS 34 Separate Financial Statements, PBE IPSAS 35 Consolidated Financial Statements, PBE IPSAS 36 Investments in Associates and Joint Ventures, PBE IPSAS 37 Joint Arrangements, and PBE IPSAS 38 Disclosure of Interest in Other Entities, in preparing their 30 June 2020 financial statements.

Management is responsible for performing the necessary transition work to successfully implement these new standards. Areas of focus with the transition include:

· Assessing whether the revised control definition and guidance result in an entity being assessed as controlled under PBE IPSAS 35 for those entities previously assessed as not controlled under prior standards. For example, trusts established by Tararua District Council that support Tararua District Council in achieving its objectives.

· Determining whether a joint arrangement is categorised as a joint venture or joint operation. Joint ventures must be accounted for using the equity method.

· Updating the “group” accounting policies and “group” related disclosures in the financial statements. PBE IPSAS 38 generally requires more disclosure about interests in other entities than the previous standards.

· Implementing changes to systems and processes that may be necessary to support changes in accounting practices.

· Keeping relevant parties informed, such as your auditor and audit committee.

The transition to these new standards may require significant judgement for some arrangements and maybe particularly time consuming for those entities with a large number of potentially controlled entities. It is important that management substantially completes its transition work on these new standards well in advance of 30 June 2020. We recommend that as part of this, management prepare pro-forma financial statements so that revised group-related disclosures can be agreed.

We encourage Tararua District Council to share its transition plan and transition work with us early in the audit process so we can agree issues and adjustments in a timely manner. In particular we have identified that the consolidation of the Tararua Aquatic Community Trust needs to be considered in light of these new standards. We are currently working with the District Council to assess this impact.

42 Management comment

43 Noted. We have sought advice from PWC regards the consolidation of the Tararua Aquatic Community Trust in light of these new standards.

5 Useful publications

44 Based on our knowledge of the District Council, we have included some publications that the Council and management may find useful.

Description	Where to find it
Model financial statements
· Our model financial statements reflect best practice we have seen to improve financial reporting. This includes: · significant accounting policies are alongside the notes to which they relate; · simplifying accounting policy language; · enhancing estimates and judgement disclosures; and · including colour, contents pages and subheadings to assist the reader in navigating the financial statements.	· On our website under publications and resources. Link: Model Financial Statements
Tax matters
· As the leading provider of audit services to the public sector, we have an extensive knowledge of sector tax issues. These documents provide guidance and information on selected tax matters.	· On our website under publications and resources. · Link: Tax Matters
Client substantiation file
When you are fully prepared for an audit, it helps to minimise the disruption for your staff and make sure that we can complete the audit efficiently and effectively. We have put together a tool box called the Client Substantiation File to help you prepare the information you will need to provide to us so we can complete the audit work that needs to be done. This is essentially a tool box to help you collate documentation that the auditor will ask for.	· On the OAG’s website under publications and resources. Link: Client Substantiation File
Good practice
· The OAG’s website has been updated to make it easier to find good practice guidance. This includes resources on: · audit committees; · conflicts of interest; · discouraging fraud; · good governance; · service performance reporting; · procurement; · sensitive expenditure; and · severance payments.	· On the OAG’s website under good practice. · Link: Good practice
Earthquake accounting matters
The purpose of this document is to provide a summary of Audit New Zealand’s views reached on earthquake accounting issues and provides the following guidance: · Accounting for insurance claims and receivables; · Accounting for earthquake damage to PPE; · Accounting for Government grants received that relate to the earthquake; · Investment property, lease, and other issues; · Disclosures	· On our website under publications and resources. · Link: Earthquake accounting
Reporting fraud
· The OAG have released data from 2012‑2018 on fraud in public entities. This includes how the fraud was detected, the type of fraud and the methods and reasons for the fraud. The graphs show the high-level sector, and this can be broken down further into sub-sectors by opening the spreadsheets available.	· On the OAG’s website under data. · Link: Reporting Fraud

Appendix 1: Status of previous recommendations

Open recommendations

Recommendation	First raised	Status
Necessary
Age of rates debtors
· Review outstanding rates debtors on a regular basis and that outstanding rates are reviewed for recovery or write off.	· June 2017	· In progress: · Management continues the focus on reducing the amount of outstanding rates debtors
Removal of users access
· Ensure council managers and HR are providing information to IT promptly about additions, changes and terminations of staff and contractors.	· June 2018	· In progress: · The following actions have been undertaken: · IT procedures reviewed and updated-User accounts will be disabled in systems as soon as the IT alliance is notified of the staff member leaving the organisation- · Accounts are permanently removed upon receipt of formal notice from HR. We understand that Council is working on a series of checks that will tighten control in this area, this will include regular checking of contractor and temporary/casual staff accounts.
Sensitive expenditure
· Finalise the staff handbook (sensitive expenditure) as soon as possible, reviewing it against best practice, such as those set out in the OAG’s Guidelines as applicable. · Ensure that sensitive expenditure is approved as required by the policyto provide enhanced control and judgements for sensitive expenditure that can withstand public scrutiny.	· April 2017	· In progress: · The staff handbook is currently being finalised.
Alliance agreement
· Update the performance framework for the Alliance be updated to include specific measures across roading, water and asset management to enable the District Council to assess performance of the Alliance across the different services delivered.	· June 2017	· In progress: · We understand that the Council has agreed to the extension of the Alliance agreement. We will complete our review when this has been signed.
Update and test organisational business continuity and IT disaster recovery plans
· Update and test IT Disaster recovery plans and organisational business continuity plans.	· June 2017	· We will follow this up during the final audit.
Formal monitoring of alliance agreements for IT Services
· We recommend that the Principals Group meet as per the IT Alliance agreement, to monitor the performance of the IT support provider. · The Principals Group also need to finalise and monitor the project schedule.	· June 2019	· We will follow this up during the final audit.
Beneficial
Carry-over of capital projects
· Continue to monitor the level of carry forwards of capital expenditure and reduce these were possible.	· June 2014	· We will follow this up during the final audit.
Expenditure approval
· Implement one up approval for purchases.	· June 2017	· We will follow this up during the final audit.

Appendix 2: Disclosures

Area	Key messages
· Our responsibilities in conducting the audit	· We carry out this audit on behalf of the Controller and Auditor‑General. We are responsible for expressing an independent opinion on the financial statements and performance information. This responsibility arises from section 15 of the Public Audit Act 2001. · The audit of the financial statements does not relieve management or the Council of their responsibilities. · Our audit engagement letter contains a detailed explanation of the respective responsibilities of the auditor and the Council.
· Auditing standards	· We carry out our audit in accordance with the Auditor‑General’s Auditing Standards. The audit cannot and should not be relied upon to detect every instance of misstatement, fraud, irregularity or inefficiency that are immaterial to your financial statements. TheCouncil and management are responsible for implementing and maintaining systems of controls for detecting these matters.
· Auditor independence	· We are independent of the District Council in accordance with the independence requirements of the Auditor‑General’s Auditing Standards, which incorporate the independence requirements of Professional and Ethical Standard 1 (Revised): Code of Ethics for Assurance Practitioners, issued by New Zealand Auditing and Assurance Standards Board. · To date, in addition to the audit we have carried out engagements in the areas of the Debenture Trust Deed, which are compatible with those independence requirements. Other than the audit and these engagements, we have no relationship with, or interests in, the District Council.
· Fees	· The audit fee for the year is currently being negotiated through our Audit Proposal Letter. · To date, no other fees have been charged in this period.
· Other relationships	· To date, we are not aware of any situations where a spouse or close relative of a staff member involved in the audit occupies a position with the District Council that is significant to the audit. · We are not aware of any situations to date where a staff member of Audit New Zealand has accepted a position of employment with the District Council during or since the end of the financial year.

Report

Date	:	9 June 2020
To	:	Chairperson and Committee Members Audit and Risk Committee
From	:	Cameron McKay Finance Manager
Subject	:	Adoption of Council's 2020/2021 Annual Plan and Schedule of Fees and Charges
Item No	:	6.6

1. Reason for the Report

1.1 To review the report and recommend to Council the adoption of the 2020/21 Annual Plan and the Schedule of Fees and Charges. The adoption of the Annual Plan is a specific requirement of Section 95 of the Local Government Act 2002 (LGA).

2. Background

2.1 Council must prepare an Annual Plan for each financial year as required by Section 95 of the Local Government Act 2002.

2.2 The Annual Plan, is defined by Sections 95(5) and (6) of the Local Government Act and requires that Council present an account of significant changes from the Long Term Plan for the year in which the Annual Plan is being developed and include all relevant financial and funding impact statements for the year in which the Annual Plan is being prepared. The Act also states that clear reference needs to be made to the relevant parts of the Long Term Plan.

2.3 Council initially held a series of workshops in November 2019, January and February 2020 to determine the service levels, capital programme, fees and charges, activity expenditure and rates requirement for the Draft 2020/21 Annual Plan. The result of this was the Audit and Risk Committee recommending to Council in March to adopt a draft plan requiring a rate increase of 5.97%.

2.4 Council decided to revisit the Draft 2020/21 Annual Plan previously recommended by the Audit and Risk Committee due to Covid-19 and the drought affecting ratepayers in the district.

2.5 This was done through weekly discussions, finding a balance between providing relief to all ratepayers, recognising the priorities of the original Draft Annual Plan remained post Covid-19, and the need to respond and recover from Covid-19 and the drought being added to the work programme.

3. Key Messages

3.1 Original Draft Annual Plan Priorities Remain Post Covid-19:

3.2 Prior to Covid-19, Council planned for district wide growth and increasing government compliance requirements through a relatively high 5.97% rates increase. These requirements were consistent with Council’s vision and strategic objectives in the Long Term Plan. The legislative and growth pressures still exist post Covid-19, but what has changed markedly is ratepayers ability to meet these costs at this point in time.

3.3 The cost drivers of the original Draft Annual Plan that still remain are outlined below:

Business as Usual

3.3.1 Council is often a ‘price taker’ for many costs, with little to no ability to negotiate prices. An example of this is insurance, where Council has faced large premium increases. This is as a result of the increased frequency of severe natural disasters within New Zealand impacting on the risk premium that insurance companies charge.

3.3.2 The security contracts that include animal control and noise control afterhours operations are currently being revisited. The cost to deliver on the agreed level of service has increased significantly.

Growth, Demand for Services, Levels of Service:

3.3.3 The district is experiencing growth in population significantly beyond the high growth assumption in the Long Term Plan. To ensure Council continues to meet its current levels of service and to enable growth, resourcing, both internally and with the use of technical experts have been budgeted for the district plan review. Resourcing has also been included in the building team by way of two cadetships due to an increasing trend in consents for building activity and a national shortage of building officers. Building fees have been increased to reflect the actual inputs required in the consenting process.

3.3.4 Council plans to invest in extending its pensioner housing portfolio beyond what has been budgeted, by building 6 new units in Dannevirke. Pensioner housing is a self-funding activity for Council and surpluses built up over time form a reserve that can be applied to maintenance or new builds. When not being used this reserve is applied to reducing Council debt.

Risk and Resilience

3.3.5 A significant cost driver is to meet Council’s outcome of mitigating risk and improving resilience in the infrastructure across the district.

3.3.6 As Council builds new infrastructure the overall operating costs increase. Not only does it need to fund direct operating costs like electricity and chemical treatment, but also needs to cover costs like interest and repayments on debt to build the plant and fund depreciation. Council plans to commission the Pahiatua Water Treatment Plant this calendar year. This new plant addresses the drinking water standards, and the complexities of sourcing water from two different sources, the bore and the river.

3.3.7 Increased compliance following the Havelock North Inquiry adds an additional layer of cost compared to what was planned in the 2018/28 Long Term Plan when it comes to providing water services. The costs of operating treatment plants and treating water to meet new drinking water standards have already increased significantly.

3.3.8 To utilise the remaining New Zealand Transport Agency (NZTA) funding in the 3-year funding block, management have proposed increasing sealed pavement maintenance, improving the longevity of the road pavement by 10 years on average. This has added $450,000 to the budget of which $295,000 is funded by NZTA.

External Debt

3.3.9 Council’s external debt has increased to $43 million versus $30 million as provided for in the Long Term Plan. This is mainly due to significant projects incurring additional requirements after the detailed design phase, and significant unplanned expenditure from emergency works due to climate events.

3.3.10 Council is taking advantage of extremely low interest rates to fund projects and increased costs through borrowing. Despite the debt increase Council maintains a strong balance sheet and is within its self-imposed debt benchmarks, which are significantly lower than many other councils across New Zealand.

3.4 Overview of Strategies to reduce rates increase post Covid-19

3.4.1 In this final Annual Plan, Council is proposing a significantly leaner budget that still delivers on the priorities of the original Draft Annual Plan and allows room to provide economic stimulus to the district’s economy through the various roading, water and other projects to be undertaken.

3.4.2 Staff have reviewed the project pipeline to bring forward those that can help create jobs and provide stimulus to the district’s economy needs.

3.4.3 By reviewing Council’s approach to some capital projects such as extensions to the reticulation network by spending the upcoming year planning and developing a strategic approach before construction, and minimising operational costs where feasible, the rates increase has been reduced to 2.5%.

3.4.4 Council will be increasing overall debt to enable the projects to continue within the reduced rates increase, striking what staff believe is a sound balance. Section 4 outlines the funding tools and strategies that have been implemented.

3.4.5 While this budget is lean, Council has some options to deal with unforeseen strategies. These include drawing on reserves and rating for them in subsequent years, and the headroom on Council borrowing limits allows for additional debt drawdown if required. Where there is a need to overspend, these will be reported through the quarterly performance report along with strategies to address the overspend.

3.5 Key Changes from pre COVID-19 to Post COVID-19

3.5.1 The diagram below shows at a group of activity level what activities were driving the pre Covid-19 5.97% rates increase, and what has changed to achieve a 2.5% increase. Also included, is where the rates would have sat if Council had not introduced the funding tools outlined in section 4 below.

3.5.2 Note – some activities require less rates as a result of applying loan funding as per section 4. Therefore, these show in the graph below 0%.

3.5.3 The draft budget set pre COVID-19 that resulted in 5.97% was a lean budget representing the cost pressures facing Council resulting from growth, compliance and to deliver existing levels of service.

3.6 The key changes from the 5.97% rates increase to 2.5% are outlined below:

Footpaths

3.6.1 Reallocating $200,000 of footpaths maintenance budget (rates impact of $68,000) from operations to renewals. Renewing footpaths will have a greater impact to the quality of the footpath network then the corresponding value put into maintenance. This is also timely, particularly as the fibre rollout is underway in the district.

Water and Wastewater

3.6.2 The saving in Water and Wastewater from the original budget is the original budget had provision for a compliance role and replacing an engineer in the 3 waters treatment team.

3.6.3 Due to Covid-19, a staff member who was relocating overseas is unable to relocate, meaning that with recent recruitment the treatment teams are now resourced. Council will undertake the compliance role within these staff.

3.6.4 The trade-off for the above reduction is the introduction of an adult apprentice / cadet scheme for the 3 waters reticulation team. This was indicated in the Recovery Plan “in the pipeline” document. Training cadets provides employment and qualification opportunities and is in an area of growing importance.

Regulatory

3.6.5 The increase in the regulatory team is a 0.5 increase (total increase of 1.5 from current year) in planning resources. The heavy (and increasing) demand from the growth pressures currently being experienced has necessitated an increase in 0.5 resource. The remaining 1 FTE increase is to support the district plan urban zoning review as part of Council’s desire to enable growth and with the trade-off being reduced consulting resource that would otherwise be required to perform this work.

Interest and Depreciation

3.6.6 Reduction in interest rate assumption from 3% to 2.75%. The new Treasury Policy enables a greater portion on floating interest rates that are a lower cost of debt to Council. Future interest rate fixing is also likely to be significantly lower than what was achieved in the past.

3.6.7 Revisited the Capital Expenditure Programme. Significant changes are outlined in section 5 below.

3.6.8 The infrastructure valuation has been completed, resulting in an increase in depreciation expense higher than what was already accounted for in the Plan. This would have resulted in a further 0.30% of rates being required – however this has been factored into the depreciation un-funding in section 4 below.

4. Funding Tools Used

4.1 Now is an opportune time to be borrowing due to the low cost of debt and the strong position of Council’s balance sheet, but staff are mindful of ensuring borrowing headroom for future generations. The below funding tools increases Council’s debt to $43 million, 13 million higher than the Long Term Plan year 3 projections.

4.2 The funding tools Council has decided to use is the use of debt for identified operational projects, and funding of depreciation.

4.3 Council’s Revenue and Financing Policy does not allow for Council to borrow for operations. Where the departure from the Revenue and Financing Policy does not involve changes to the use of rate funding, Council can apply section 80 of the Local Government Act in making a decision not consistent with an adopted policy. The use of Section 80 to use operating loan funding is supported by guidance provided to the Covid-19 Local Government Response Unit (SOLGM) by legal specialists Simpson and Grierson and has been distributed to the Local Government sector.

4.4 Section 80 – Identification of inconsistent decisions is applied when a decision of Council is significantly inconsistent or is anticipated to have consequences that will be significantly inconsistent with any policy adopted by Council. In these circumstances, the Act requires the following to be clearly identified when making the decision:

· The inconsistency; and

· The reasons for the inconsistency; and

· Any intention of the local authority to amend the policy or plan to accommodate the decision.

4.5 The following outlines the operating loan, and un-funding of depreciation that Council is proposing to reduce the rates increase from 5.46% to 2.5%.

4.6 Operating Loan

4.6.1 The operating loan is not significant in terms of Council’s total debt, and in terms of Council’s operating budget, being $383,000 or less than 0.1% of both.

4.6.2 Operating projects identified below were chosen for funding from an operating loan as the funding of these is able to be spread of multiple years without causing a spike in rates in the future, with repayments spread over the life span of these projects as shown in the table below. The impact of this is a reduction in rates in 2020/21 of 1.51% and will be funded as per the Operating Loan Framework below:

4.7 Depreciation Funding

4.7.1 The balance of the funding to bring the rates increase to 2.5% has been funded from reducing depreciation funding in Roading and Water Supplies.

4.7.2 The rationale behind this is that by receiving Government subsidy for Route 52 and Asbestos Cement Pipe renewals (not guaranteed but promising) they would have been funded out of the depreciation reserves over a much longer period of time.

4.8 Strategies to mitigate the risk from the above funding decisions

4.8.1 If these projects do not materialise, staff will revisit depreciation funding as part of the 2021/31 Long Term Plan and if necessary, accelerate depreciation funding to ensure the depreciation reserves are funded to an appropriate level. In total, $410,000 has been underfunded from deprecation.

4.8.2 Council will need to commit in the upcoming Long Term Plan to accelerating loan repayment. This will feature as a key strategy in the Financial Strategy for the Long Term Plan and will require additional rates throughout the life of the LTP to repay loans. This strategy will ensure that Council has the ability to respond to a crisis in the future.

5. Key Changes between the Draft Annual Plan and the Long Term Plan

5.1 Rates Increase

5.1.1 The overall rates increase for 2020/21 Annual Plan is 2.50%. This is lower than the 3.88% increase forecast in the Long Term Plan and lower than the pre-Covid-19 proposed increase of 5.97%. The rates increase complies with the rates limits set in the Financial Strategy.

5.2 Source of Funding Mix

5.2.1 During the 2018/28 Long Term Plan Council agreed to a pricing strategy to provide guidance on setting fees and charges.

5.2.2 The Financial Strategy showed a shift in the mix of funding from subsidies and other revenue to rates funding. The trend of increasing reliance on rates funding exposes Council to a risk of a concentrated source of funding.

5.2.3 In response to this risk, Council reviewed its fees and charges in line with the pricing strategy set during the LTP and continues to actively pursue external subsidies to contribute to the funding of infrastructure.

5.2.4 Fee increases were held where possible due to the impact of Covid-19 and the drought. However, some areas have been adjusted to reflect the cost of delivering the service. The key changes to fees and charges in the Annual Plan are:

· General refuse disposal fees to reflect increased dumping costs at the Central Hawke’s Bay Landfill.

· Increased regulatory services fees to reflect the costs of delivering the service.

5.2.5 Council has budgeted for significant subsidy revenue for Route 52 and Asbestos Cement pipe replacements that have made it to the next stages of the Crown Infrastructure Projects and Provincial Growth Fund. Council will not proceed with these projects if it does not receive subsidy funding.

The table below highlights the effect of these changes on the mix of Council’s funding sources:

Year	Rates	Subsidies	Fees & Charges	Other Revenue
2009/19 LTP – Yr 1	49%	38%	10%	3%
2012/22 LTP – Yr 1	60%	26%	13%	1%
2015/25 LTP – Yr 1	62%	26%	9%	3%
2018/28 LTP – Yr 1	66%	26%	8%	1%
2019/20 Annual Plan (LTP Yr 2)	61%	30%	8%	1%
2020/21 Annual Plan (LTP Yr 3)	48%	45%	7%	1%

5.3 Distribution of Changes to Rates

5.3.1 A supplementary report will be provided to the Audit and Risk Committee to highlight the distribution of changes to rates across the different rates sectors.

5.4 Capital Programme

5.4.1 The budgeted capital programme for the 2020/21 Annual Plan is $31.6 million, compared to the Long Term Plan budget of $20.2 million. Most of the programmes in the Annual Plan 2020/21 are consistent with what was indicated in the 2018/28 Long Term Plan. Changes have been supported through discussion at Council workshops.

5.4.2 The significant changes are:

· Shovel Ready Projects - Council has applied for the 2 projects under the Crown Infrastructure, namely the Route 52 and AC pipes renewals totalling $9.2 million (these are a 3-year project totalling $27.6 million).

· Completing the wastewater projects resulting from new consent over 2 years (2020/21 and 2021/22) where planning/scoping/design and where possible procurement occurs in 2020/21 with construction the following year.

· Focus on developing a strategic approach to 3 waters reticulation projects namely Inflow & Infiltration, network extensions, leak detection and stormwater development projects.

· Carry forward $4.6 million of current year budgets due to Covid-19 impact on project completion.

· Increase in budgets for Woodville water (address the water crisis issue) and earthquake strengthening of Council buildings namely Pahiatua Service Centre and Dannevirke Administration Building.

5.4.3 A key focus for the upcoming year is on planning and scoping a number of major projects, with a construction budget being pushed out to 2021/22. This reflects the improved planning approach, along with utilising the project management capabilities of the Programme and Projects Team to better manage project risks and deliver on the planned capital programme.

6. Communicating with the Community

6.1 Council had planned to formally consult on the Draft Annual Plan in April prior to the Government announcement of a national lockdown. The reason for the planned consultation was due to a proposed rates increase of 5.97% being higher than Council’s 4.20% rates limit.

6.2 Due to COVID-19, Council has revisited the Annual Plan, reducing the proposed rates increase to 2.5%, lower than both the rates limit, and the proposed rates increase for year 3 of the Long Term Plan of 3.88%.

6.3 Council does not need to consult with the community on the 2020/2021 Annual Plan as the revised plan does not differ significantly from the Long Term Plan. Instead, Council will be informing the community of Council projects, activities, fees and charges planned for 2020/2021 as it adopts the Annual Plan. Staff will highlight the changes from the original Draft Annual Plan, highlighting the use of debt to achieve a 2.5% rates increase.

7. Revenue and Financing Policy

7.1.1 Council has set funding limits by way of the Revenue and Financing Policy in the 2018/28 Long Term Plan. Where Council does not comply with these limits, it must formally approve those that fall outside the policy limits. Those not complying are highlighted in the table below:

	Rates Policy	Actual percentage	Fees and charges Policy	Actual percentage	Grants and Other revenue Policy	Actual percentage
Cemeteries	70%-80%	65%	20%-30%	34%	0%-5%	2%
Parks and Recreation Grounds	85%-95%	82%	0%-5%	5%	5%-10%	13%
Animal control	10-20%	30%	80-90%	69%	-	0%
Resource Management	80%-90%	72%	10%-20%	27%	-	0%
Footpaths	100%	80%		-		20%
Roading	35-45%	26%	0%-5%	1%	55-65%	73%
Solid waste management	70%-80%	55%	20%-30%	40%	0%-5%	5%

7.1.2 The reasons and required action are noted in the table below. These will need approval as part of adopting the Annual Plan:

Activity	Reason
Solid Waste Management	Council has increased fees and charges for refuse disposal to recover the costs incurred for providing this service. Action Required: Council to revisit the Revenue and Financing Policy in the 2021/31 LTP.
Animal Control	Council has significantly increased the level of service for Animal Control in recent years, whilst only making small incremental fee changes. This year, fee increases are being put on hold to aid in the recovery from Covid-19 and the drought. Action Required: Animal Control fees increased over the coming two years to address this non-compliance.
Footpaths	New Zealand Transport Agency has extended its Funding Assistance Rate for roading to also include footpaths. This was announced after the adoption of the Revenue and Financing Policy and is beneficial to ratepayers. Action Required: Council to revisit the Revenue and Financing Policy in the 2021/31 LTP.
Resource Management	Council is proposing to fund the costs of the District Plan – urban zoning review over 10 years. The result of this is rates are lower than policy limits. No Action Required
Cemeteries	Fees & Charges are slightly higher based on historical trends of cemetery plot sales. If demand for plots were to drop marginally then this activity would comply. No Action Required
Roading	The Route 52 upgrade has a higher than standard subsidy applied being 100%. No Action Required
Parks and Recreation Grounds	The reason for non-compliance is due to a capital subsidy for a planned capital upgrade. No Action Required

8. Financial Strategy Limits and Revenue and Financing Compliance

8.1 Financial Prudence Benchmarks

8.1.1 The table below displays Council’s planned limit as per the Annual Plan 2020/21 against its Quantified Maximum limits set in the Financial Strategy.

Benchmark	Quantified Maximum Limit	Planned Limit	Met	Headroom
Rates affordability benchmark
- Income	$24,257,000	$ 23,859,000	Yes	$ 397,718
- Increases	4.20%	2.49%	Yes
Debt Affordability:
Net Debt as a percentage of total revenue.	<100%	79%	Yes	$ 10,733,000
Net interest as a percentage of total revenue.	<7%	2.08%	Yes	$ 43,422,403
Net interest as a percentage of annual rates income.	<10%	4.25%	Yes	$ 24,897,852
Liquidity (External, term debt + committed loan facilities + available liquid investments to existing external debt)	>110%	119%	Yes	$ 1,818,273
Balanced Budget Benchmark	>100%	125%	Yes
Essential Services Benchmark	>100%	190.50%	Yes
Debt Servicing Benchmark	<10%	2.13%	Yes

8.1.2 Council complies with all of the limits set in the Financial Strategy. The proposed rates increase of 2.49% is under the maximum limit of 4.2% and represents the significant investment on improving and maintaining infrastructure and continuing to meet legislative requirements.

8.1.3 The debt limit with the least headroom is liquidity, with $1.8 million headroom in the 2020/21 Annual Plan. This was expected in the Financial Strategy. If an unplanned event occurred (such as a major earthquake) Council has options to increase its liquidity either through a larger standby loan facility, or re-prioritizing planned projects if required. Council previously held a stand-by facility of $3 million, but this was increased to $5 million. Council has a strong relationship with both Westpac and BNZ banks, allowing Council to negotiate this stand-by facility if required.

8.1.4 Council has also set lower benchmark limits than LGFA (Local Government Funding Agency) covenants. The LGFA limit for net debt as a percentage of total revenue is <170% compared to Council’s limit of less than 150% as per the recently adopted Treasure Risk Management Policy. This allows for significant future headroom and also ensures the cost of debt is maintained at an affordable level to ratepayers.

8.1.5 Council’s planned external borrowing position of $43 million is higher than the LTP year 3 forecast of $30 million.

9. Significance Assessment

9.1 The 2020/21 Annual Plan continues the priorities of efficient local infrastructure, public services and regulatory functions as consulted on through the Long Term Plan (LTP).

9.2 The proposed changes recommended are not considered significant in terms of the Council’s Significance and Engagement Policy.

10. Conclusion

10.1 The Annual Plan 2020/21 proposes a low rates increase of 2.5% in response to the financial pressures being incurred by ratepayers from the drought and Covid-19. This has been achieved by developing a lean budget and using the funding tools outlined in section 4 above. The issues and challenges facing Council, being growth and compliance are consistent with the Financial Strategy.

10.2 Taking into account the above, the Audit and Risk Committee recommend to the Council it adopt the 2020/21 Annual Plan and the Fees and Charges Schedule.

11. Recommendation

11.1 That the report from the Finance Manager dated 9 June 2020 concerning the Adoption of Council's 2020/2021 Annual Plan and Schedule of Fees and Charges (as circulated) be received, and

11.2 That the Audit and Risk Committee recommend to Council through Section 80 of the Local Government Act 2002 to deviate from the Revenue and Financing Policy for the use of an operating loan to fund operating projects as outlined in section 4 of this report, and in so doing provide relief to ratepayers through aiding the recovery from Covid-19 and the drought impacting on the district, and

11.3 That the Audit and Risk Committee note the risk of the funding options chosen to be addressed by accelerating loan repayments in the Long Term Plan, and

11.4 That the Audit and Risk Committee recommend to Council the adoption of the 2019/2020 Annual Plan and the Fees and Charges Schedule subject to the correction of any typographical errors or changes which may be required, and

11.5 That it be noted and recommended for Council’s approval the activities of Solid Waste Management, Animal Control, Resource Management, Parks and Recreation Grounds, Roading, Footpaths and Cemeteries fall outside the funding limits of its Revenue and Financing Policy.

Attachments

Nil.