In Victoria, the local government sector comprises 79 councils, their 10 regional library corporations and 16 associated entities. While administered under the Local Government Act 1989, each council operates autonomously and is directly accountable to ratepayers. Local Government Victoria (LGV), within the Department of Environment, Land, Water and Planning (DELWP), provides policy advice, oversees legislation and works with the Minister for Local Government and local councils.
In this report, we analyse and discuss the results of our 2016–17 audits of the financial reports and performance statements of Victoria's councils, regional library corporations and associated entities.
We assess their financial performance during 2016–17, and their financial position as at 30 June 2017. In addition, we discuss the financial sustainability of the sector based on our analysis of council budgets and the 30 June 2017 audited financial reports. We also analyse the sector's response to the introduction of the Victorian Government's rate capping policy in 2015.
The councils' audited financial reports and performance statements for the year ended 30 June 2017 are reliable, and Parliament and the wider community can have confidence in them.
In the short term, the sector as a whole has a relatively low financial sustainability risk. The longer-term impact of rate capping is yet to be fully determined, but it has created the impetus for councils to review their cost structures.
To mitigate and minimise any potential risks arising from issues in their internal control environment, councils need to ensure they promptly resolve the issues we have identified.
Results of audit
For the financial year 2016–17, we issued clear audit opinions for 104 financial reports.
The opinion for MAPS Group Limited—an associated entity that has a 30 September balance date—remains outstanding at the date of this report.
Compared to the prior financial year, in 2016–17 councils made a small improvement in the median time taken to certify their financial reports. This could be significantly improved by bringing forward key elements of the financial reporting work, such as the timing of asset revaluations.
As new Australian Accounting Standards will apply over the next few years, the timely preparation and certification of financial reports is particularly important. Councils are encouraged to assess these new standards and prepare for their implementation at their earliest opportunity.
We issued 78 clear audit opinions on councils' performance statements for 2016–17. We qualified our audit opinion for Towong Shire Council's performance statement. As the council did not conduct or participate in a 2016−17 community satisfaction survey, it was unable to obtain information for two indicators and, therefore, could not report the results.
Performance statements are important, as they communicate key financial and non-financial results. Currently, in their performance statements, councils explain significant variations in performance indicators in the context of results from prior years. While this information is useful, setting a target would assist readers to determine whether a council is operating efficiently and effectively.
We assess councils' internal controls as generally well designed and operating as intended by management.
However, we continue to observe issues in key IT internal controls and have identified this as an increasing trend across the sector. Persistent high-risk IT internal control issues include:
- unsupported systems and software
- weak user access management
- lack of software patch management.
Combined, these matters increase the risk of a successful cyber attack and could result in the destruction of data or recording of non-existent transactions.
Overall, councils have resolved over 60 per cent of the internal control issues identified in our current and prior-year audits.
In 2016–17, 29 councils identified $175.3 million of assets that they had not known about or recorded (compared to 31 councils and $149.3 million assets in 2015–16). Councils use asset information to plan and monitor their maintenance and capital works planning. Therefore, it is important that they know about all relevant assets.
In our November 2016 report Local Government: 2015–16 Audit Snapshot, we highlighted the lack of completeness and accuracy of councils' underlying data about the assets they control as a recurring issue. This continued to be an issue in 2016–17.
We have assessed the sector as having a relatively low financial sustainability risk in the short term.
Our analysis shows a gradual decline in the asset renewal and maintenance indicators. Overall, the sector forecasts spending less on asset renewal and maintenance.
We also found that most councils are accumulating cash—in preference to acquiring debt—to replace or expand their asset base. This is shown through the declining trend in the indebtedness indicator, and the sector's increasing cash and term deposit holdings.
We note that rural and regional councils have a higher financial sustainability risk than metropolitan councils. This is linked to their relative inability to generate sufficient own-sourced revenue streams as well as steady increases in expenditure.
The impact of rate capping
Our analysis shows that, on average, councils are forecasting their revenue to decrease by 1 per cent over the next three financial years, while expenditure is set to increase by 2 per cent over the same period. Councils need to better understand the impact this disparity may have on the services that they provide to their communities.
It is encouraging that most councils have identified longer-term viability risks that may result from rate capping, but many do not yet understand how they can respond to this risk. To do this, a first step councils must take is to understand the nature and cost of all services they provide to their communities.
Councils also need to understand the impact of reduced revenue on their capital works programs. We found that, in response to rate capping, councils have started to reduce their longer-term capital expenditure programs. However, these programs typically only focus on the next four years. We recommend that councils develop longer-term plans, covering the next 10 to 20 years, to ensure they make appropriate decisions.
We recommend that Local Government Victoria:
- introduce targets for each of the performance indicators included in each councils' performance statements (see Part 2).
Submissions and comments
We have consulted with DELWP and the councils named in this report, and we considered their views when reaching our audit conclusions. As required by section 16(3) of the Audit Act 1994, we gave a draft copy of this report to those agencies and asked for their submissions or comments. We also provided a copy of the report to the Department of Premier and Cabinet.
The following is a summary of those responses. The full responses are included in Appendix A.
DELWP notes our findings and supports in principal the report's recommendation. DELWP intends to write to all mayors and CEOs recommending that they review the report and address matters relevant to their council.
Horsham Rural City Council provides further information on its case study. City of Kingston, Moreland City Council and City of Stonnington comment on found assets. City of Moonee Valley and Moreland City Council provide information regarding their management letter issues.