The OLG is responsible for strengthening the local government sector but inadequate performance measurement and reporting limits its transparency and accountability

The Department of Planning and Environment (the department)'s key planning documents identify the Office of Local Government (OLG) as responsible for improving council performance and governance, and strengthening the system of local government. The department lacks an adequate framework to define, measure and report on the OLG’s performance, and to assess the contribution of its regulatory activities to its strategic objectives as well as departmental and state outcomes.

Departmental annual reporting since 2019–20 has not included specific information about the OLG's role in regulating the sector, or its outputs and outcomes. As a business unit within the department, the OLG is not required to produce an annual report, and the OLG does not otherwise routinely publicly report on its performance as a regulator. Doing so would be good regulatory practice to support transparency and accountability.

Defining measurable outcomes and reporting performance are also core to ensuring the effective and economical use of resources. The OLG does not routinely review the costs or evaluate the efficiency and effectiveness of its regulatory activities towards continuous improvement. Its processes and systems do not readily support analysis of whether resources are being effectively prioritised.

The OLG finalised its new strategic plan for 2022–26 in December 2022 and is developing a delivery program and performance measures to support its delivery.

The OLG has not adequately defined and communicated its regulatory role in the sector creating risks to its regulatory effectiveness

The OLG is the state regulator of the local government sector, alongside other responsibilities. But the scope and intent of the OLG's various activities and points of engagement with councils have not been well defined. The OLG's 2022–2026 strategic plan sets a new goal to build strong state, local government and stakeholder relationships, including by defining the role OLG plays in the local government sector. It would be expected that a clearly defined role would already underpin the OLG’s strategic planning process to enable it to develop its vision, goals and objectives for the future consistent with its role.

The OLG's publicly available 2017 Improvement and Intervention Framework in relation to NSW Councils describes the OLG's regulatory approach, stating that the OLG will encourage voluntary compliance and good practice before taking steps to 'persuade' or 'enforce' compliance. The OLG delivers a range of activities that aim to support and strengthen sector performance and compliance. But the OLG was slow to finalise guidance for the sector on key issues such as cyber security, risk management and internal audit. It has also not developed and implemented a clear sector engagement strategy to ensure its regulatory approach is well understood and coordinated, including in view of its other activities.

An inadequately defined and communicated role in the sector presents risk and challenges to the OLG's regulatory effectiveness. For example, Audit Office reports to Parliament since 2017 have recommended that the department and OLG communicate the State's view and address different practices across the sector in councils' accounting for rural firefighting equipment. But rather than proactively adopting a clear regulatory position that addresses the issue of continued council non-compliance with the Australian Accounting Standards, the OLG has attempted to broker between levels of government. This has not resolved the issue, and has caused confusion about its role as the state regulator of the local government sector. Forty-three councils received qualified audit opinions on their 2021–22 financial statements due to non-compliance on this matter. ²

The OLG's 2022–2026 strategic plan, which includes reference to a 'council engagement strategy' (to be developed), presents an opportunity for the OLG to improve how it develops and implements sector-wide and council-specific engagement activities.

The OLG lacks a structured approach and effective systems to support sector monitoring, limiting its capacity to identify risks and implement timely responses

Targeted, intelligence-led sector monitoring is important so that the OLG can identify trends, risks and issues early. The OLG has various sources of information about sector-wide and council-specific compliance and performance, but lacks adequate processes to ensure the most relevant information is gathered and used in a structured and coordinated way.

Information about the sector and councils is used by different OLG teams for regulatory and non-regulatory functions, and it is analysed and handled manually across a number of systems that are not integrated. The OLG does not have a data management framework that defines the roles and responsibilities of teams and key staff for managing data, including for regulatory purposes.

The OLG also lacks a structured, risk-based approach to using the information available to it to proactively develop responses to known and emerging issues in the sector.

The OLG's main mechanism for routinely reviewing sector performance is an annual benchmarking of financial and other data that it requires councils to submit after each financial year. But this process does not provide timely information about councils' financial sustainability or other performance indicators. As such, it is of limited relevance to sector monitoring for the purpose of the OLG identifying and acting on risks and issues early.

Opportunities for the OLG to improve its digital systems and better use information for sector monitoring (such as data on complaints about councils and councillors) were identified in an internal audit, two consultant reviews and departmental projects since 2019, but have not resulted in substantive changes.

The OLG's operational planning documents since 2019–20 have also identified various actions to improve its approach to sector monitoring, including ways to be more proactive, but there has been limited progress. Some projects are identified as subject to resourcing.

The OLG is procuring a case management system for its investigation and intervention functions.

The OLG's processes to consider performance and compliance issues have lacked a clear and consistent risk assessment framework, but a new tool is being implemented in 2023

There are regular meetings of OLG managers and directors that act as a forum to share information and discuss risks relevant to councils and the sector. Risk levels have been applied to councils during these meetings, but the rationale for these assessments is not clearly or consistently documented.

The Audit Office's 2012 performance audit on 'Monitoring local government' recommended that the OLG establish a risk-based framework for assessing council performance and determining how to respond to issues. In 2019, the OLG identified that the timeliness of its interventions could be negatively impacted by not implementing effective risk profiling. In November 2022, the OLG commenced a project to develop a council risk assessment tool. The OLG started implementing the tool in March 2023.

The OLG has frameworks to guide its regulatory responses but relevant aspects are out of date and there are gaps in procedures to support their application

The OLG's regulatory responses are guided by frameworks developed in 2014 and 2017, and relevant criteria under the LG Act. The OLG has not updated these frameworks to reflect changes to (or the most current) business operations, regulatory strategies, and legislative provisions.

These frameworks are also not supported by complete and approved procedures, and related templates are not consistently used. For example, quality assurance and control mechanisms are not adequately reflected in the OLG's procedures, and the OLG has not provided staff with clear guidance on the implementation of departmental conflict of interest considerations specific to staff undertaking regulatory activities. The OLG also lacks approved procedures to guide staff when preparing and reviewing advice and recommendations related to interventions, and other regulatory responses.

Our review of documentation related to advice on the use of ministerial intervention powers to issue performance improvement orders and suspension orders since 1 July 2019 found that the OLG's advice to the Minister for Local Government considered the relevant legislative criteria: we did not identify inconsistencies with procedural requirements under the LG Act. But gaps in the OLG's procedures are significant because they create risks to the consistency and transparency of processes for ministerial and departmental executive decisions and other regulatory responses.

Projects to review the OLG's resourcing did not progress, but resourcing is under consideration as the OLG implements its new strategic plan

Resourcing has been identified in OLG operational planning documents and risk registers as limiting the progress of actions to deliver on its (previous) 2018–2022 strategic plan.

A September 2021 departmental document describes adequate resourcing and systems as an ‘issue’ for the OLG’s regulatory activities. Projects since 2021 to review the OLG’s resourcing, and consider increases, did not progress.

The OLG advises that it intends to review resources as part of finalising the delivery program for its new 2022–2026 strategic plan, and in view of recommendations made in the 2022 review of the councillor misconduct framework.

Recommendations from the review of the councillor misconduct framework

A 2022 review of the councillor misconduct framework made 49 recommendations, including to develop a new accountability framework for dealing with councillor misconduct. It was outside the scope of this audit to assess the framework or the 2022 review. It is the responsibility of the department to consider the relevance of findings and recommendations from the review, and any relevant reform activities, when implementing recommendations made in this Audit Office report.

By December 2023, the Department of Planning and Environment's Office of Local Government should:

1. Publish a council risk assessment tool to support councils to self-assess and report on performance and compliance issues, including to their audit, risk and improvement committee.
2. Ensure that its sector engagement strategy incorporates a clear articulation of the OLG's regulatory approach, and that activities under this strategy are consistent with and support its regulatory approach.
3. Implement enhanced processes for regularly tracking and internally reporting on operational activities, including their status, risks and relevant impacts on the delivery of the OLG's regulatory activities.

By July 2024, the Department of Planning and Environment's Office of Local Government should:

4. Publish a report on its regulatory activities and performance that is underpinned by:
   1. a performance measurement framework for the OLG's activities that is linked to its regulatory objectives, as well as departmental and state outcomes
   2. a review and analysis of recent and emerging sector-wide issues and trends.
5. Establish a program of yearly reporting on its regulatory performance, informed by analysis of sector-wide issues and trends.
6. Publish an annual calendar of key sector support and monitoring activities, to promote transparency and communicate the OLG's regulatory priorities to the sector.
7. Develop and maintain a data management framework that supports efficient, coordinated and controlled data gathering, sharing and use across OLG teams.
8. Review and update frameworks and procedures for regulatory responses to ensure they are current and support transparent advice and decision-making, including through:
   1. consistent approaches to documenting key considerations when identifying appropriate regulatory responses
   2. guidance on identifying and managing conflicts of interest specific to the OLG's regulatory activities
   3. routine processes to review the costs, effectiveness and impact of regulatory activities.

In New South Wales, the Local Government Act 1993 (the LG Act) and Local Government (General) Regulation 2021 (the Regulation) provide the legal framework for the system of local government.

The Minister for Local Government is responsible for administering the LG Act and has various powers and responsibilities.

The LG Act also confers powers and responsibilities on the ‘Departmental Chief Executive’, currently the Secretary of the Department of Planning and Environment (the department).

Chapter 3 of the LG Act sets out principles that provide guidance to enable councils to carry out their functions in a way that facilitates local communities that are ‘strong, healthy and prosperous’. These include principles for exercising functions, for decision-making and community participation, for sound financial management, and for integrated planning and reporting.

The LG Act has been amended in the last decade, including as part of the NSW Government’s local government reform which started in 2014 when the government released its ‘Fit for the Future' program. Amendments to the Act include:

• the introduction of new powers for the Minister for Local Government to issue performance improvement orders and to temporarily suspend councils
• the inclusion of principles for councils; expanded role descriptions for councils, mayors, councillors and general managers; financial and performance auditing of councils by the Auditor-General; and requirements for councils to have audit, risk and improvement committees
• introduction of joint organisations of councils
• amendments to requirements relating to councils charging rates to their communities.

The local government sector

The local government sector in New South Wales is made up of 128 local councils, nine county councils and 13 joint organisations of councils. According to data published by the department, taken together the 128 local councils employ over 48,000 staff. In 2021–22, local councils managed $175.2 billion in infrastructure, property plant and equipment, held $16.8 billion of cash and investments, collected $7.8 billion in rates and charges and entered into $3.7 billion of borrowings.

The department is the primary state government agency with responsibility for policy, legislative and program functions for local government matters, including activities to monitor and regulate the local government sector. It identifies the OLG as responsible for a priority to ‘Improve council performance and governance and strengthen the system of local government’, relevant to the state outcome to ‘Create a strong and liveable NSW’. The department has stated that:

The Office of Local Government

The OLG is a business unit within the department that advises the Minister for Local Government and exercises delegated functions of the Secretary of the Department of Planning and Environment under the LG Act. A deputy secretary oversees the OLG and reports to the Secretary.

The functions of the OLG have been differently positioned within government over time. The Department of Local Government was established in 1995 and abolished in 2009 when its functions were transferred to a Division of Local Government within the Department of Premier and Cabinet. The OLG was created as a separate public service agency in February 2014 until it was abolished in July 2019 and its functions were transferred to a newly established department, the Department of Planning, Industry and Environment (DPIE). The Department of Planning and Environment was created in December 2021 and has maintained the OLG's functions and branding since that time.

A 2021 Audit Office performance audit on 'Machinery of government changes' found that ‘specific reasons for establishing DPIE were not documented at the time of the change and anticipated benefits were not defined’.

The OLG’s 2018–2022 strategic plan set a vision for ‘Local and state governments working together to better serve communities’. The OLG's new strategic plan for 2022–2026 was finalised in December 2022.

The OLG's regulatory approach

The OLG’s 2017 Improvement and Intervention Framework in relation to NSW Councils out what type of response may be appropriate where council compliance or performance risks and issues are identified. The framework states that the purpose of any intervention is to encourage councils and individuals to voluntarily act appropriately.

According to the framework, where councils are not performing as expected the OLG will:

• respect the democratic mandate of councils and importance of self-improvement
• intervene early to strengthen a council’s capacity to meet its obligations
• escalate action appropriately, promptly and proportionally
• consider the broader implications of any intervention on the local government sector
• commit to maintaining strong and constructive relationships.

The OLG's Performance team and Investigations team are primarily responsible for implementing the framework, and for monitoring and responding to sector risks and issues, but other teams also undertake relevant activities.

The OLG also supports the administration of the councillor misconduct framework under the LG Act.

The OLG's other functions and activities

The OLG has other functions which form part of its core activities including developing policy, supporting local government election processes, grants administration, promoting responsible pet ownership, managing the NSW Pet Registry, and providing advice to the state government and Minister for Local Government on local government matters.

The OLG has delivered and coordinated supports to councils impacted by recent emergency events, including bushfires, floods and the COVID-19 pandemic, including through grants administration, membership of NSW government emergency working groups and issuing guidance and updates to the sector.

These other functions are primarily undertaken by the OLG's Program Delivery, Council Engagement, Council Governance and Policy teams, as well as the Emergency Recovery & Strategy directorate.

The objective of the audit was to assess whether the OLG, as part of the department, is effectively monitoring and regulating the local government sector under the LG Act. It focused on:

• the effectiveness of departmental arrangements for the OLG to undertake its regulatory functions
• whether the OLG has effective mechanisms to monitor and respond to risks and issues relating to council compliance and performance.

The audit scope covers administrative arrangements and processes since 1 July 2019 that support the Secretary of the department and the Minister for Local Government to hold councils to account using the powers available under Chapter 13 of the LG Act, and related activities to monitor and strengthen compliance and performance in the sector (see Appendix two).

The audit did not examine the OLG’s broader functions and activities or regulatory activities relating to the councillor misconduct framework, which were out of scope.

The performance or compliance of individual councils and the merits or impact of decisions about the use of investigation and intervention powers in relation to councils were also not in scope.

For further detail on our audit procedures see Appendix three.

The OLG is responsible for strengthening the local government sector but lacks an adequate framework to measure its regulatory performance

The department identifies the OLG as being responsible for improving council performance and governance, and strengthening the system of local government. The OLG has stated that it is responsible for strengthening the sustainability, performance, integrity, transparency and accountability of the local government sector. But the department lacks an adequate framework to define, measure and report on the OLG’s performance as the state's regulator of the local government sector. This limits departmental accountability for effective sector regulation.

The department's business planning documents identify the OLG as responsible for improving council performance and governance and strengthening the system of local government, relevant to a state outcome to ‘Create a strong and liveable NSW’. These documents reference the OLG’s regulatory functions and goals, and include performance measures. These measures have been in place since at least September 2021 but do not provide meaningful performance information about the OLG’s regulatory activities and their contribution to departmental and state outcomes. These measures are discussed below:

• Number of councils assessed for financial performance (measured annually, target 100% per annum). This measures outputs only, that is the number of councils assessed by the OLG each year. A link between this output and the OLG's contribution towards strengthening sector performance is not well defined, for example performance is not defined in view of the quality, relevance or timeliness of the assessment (see also Chapter 3.1).
• Whether all councils had adopted the audit, risk and improvement committee (ARIC) framework (measured quarterly). It is unclear whether this indicator aims to measure compliance with the statutory requirement for councils to have an ARIC by 4 June 2022, or councils' implementation of related policy requirements and expectations, such as those set out in the Guidelines for Risk Management and Internal Audit which were not approved until December 2022. The OLG has advised that it does not collect data on council compliance with the requirement to have an ARIC. Its current target is 100% adoption by June 2023.

The only other departmental performance measure for the OLG relates to the number of cat and dog registrations, relevant to the OLG’s role to maintain the NSW Pet Registry.

The OLG’s 2018–2022 strategic plan did not include performance measures for its goals.

In December 2022, the OLG finalised a new strategic plan for 2022–26, with the vision to be ‘A trusted regulator and capability builder enabling councils to better serve their communities'. The department has advised that delivery plans and performance metrics for the new strategic plan are being developed.

Defining measurable outcomes, tracking and reporting performance are core to ensuring the effective and economical use of resources. Inadequate performance measures create a risk that the OLG is not able to demonstrate its regulatory effectiveness, and participate effectively in outcome-based budgeting processes.

The lack of public reporting on OLG’s regulatory activities and performance limits transparency and accountability

Departmental annual reporting since 2019–20 has not included specific information about the OLG's role in regulating the local government sector, or the outputs and outcomes of the OLG’s regulatory activities. This limits transparency and accountability around the OLG’s activities and priorities, and whether it is achieving its regulatory objectives.

The OLG publishes some information about its regulatory activities on its website, such as lists of current and previous interventions, public inquiries, completed investigations, and information on the number of complaints it has received about councils or councillors. But this reporting is limited in detail does not provide visibility around the OLG's operational and regulatory priorities or communicate the extent to which OLG's regulatory activities have contributed to sector outcomes.

When the OLG was a separate agency it was required to prepare and publish an annual report with information about its performance, management, activities, risks and financial position. This requirement does not apply to the OLG as a business unit with the department, but routine reporting on regulatory activities and outcomes is good practice. Some other regulators in New South Wales, and at the Commonwealth level, publish reports or statements (other than annual reports) that aim to provide assurance around the performance of their regulatory activities towards objectives.

The OLG does publish council data on its Your Council website. This aims to enable councils and members of the public to see how their council is performing in comparison to other councils against OLG financial benchmarks and a range of other indicators.

Departmental arrangements for the OLG have changed multiple times impacting the continuity of governance arrangements and key projects

The positioning and executive reporting lines for the OLG business unit have changed four times since the OLG's functions were transferred to the department in July 2019. Changes to arrangements for the OLG within the department have impacted the progress and continuity of governance arrangements including for risk management, and key projects relevant to the OLG's operations.Since December 2022, the OLG has been part of the 'Local Government Group' with a dedicated deputy secretary. Prior, the OLG was part of three other departmental groups with broader portfolio responsibilities.

The OLG has not adequately defined its role in the sector, creating risks to its effectiveness

The OLG is the state regulator of the local government sector under the LG Act, alongside other responsibilities. But the scope and intent of the OLG's various activities and points of engagement with councils have not been well defined. The OLG’s 2022–2026 strategic plan includes a strategy to ‘define the role OLG plays in the local government sector’ towards building strong state and local government and stakeholder relationships. It would be expected that a clearly defined role in the sector already underpins the OLG’s strategic planning processes to enable it to develop its vision, goals and objectives for the future consistent with its role. Its core activities and legislative responsibilities are varied but have not undergone substantial reforms since at least 2018, and the purpose of the LG Act has not changed.

The OLG's 2017 Improvement and Intervention Framework sets out features of the OLG’s regulatory approach, but the publicly available framework is not current in relevant aspects (see Chapter 3.2). The lack of clarity with respect to the OLG's regulatory role is also consistent with findings from consultations with other agency and local government sector representatives.

An inadequately defined regulatory role contributes to challenges and risks to the OLG’s effectiveness, including:

• challenges to defining what key data/information about councils and the sector is needed for the efficient, intelligence-led monitoring of performance and compliance risks and issues (see Chapter 3.1)
• operational challenges for the OLG when it receives high volumes of correspondence and requests that that fall outside of its remit, such as enquiries related to development or planning decisions made by councils
• strategic challenges for the OLG in responding to ministerial or departmental priorities and operational demands, such as defining the appropriate scope of OLG support to the sector in relation to emergency events
• coordination challenges with other regulators and agencies when engaging with councils on operational or policy issues, and when referring issues or responding to information, for example around the referral of complaints about councils/councillors
• reputational risks for the department being able to demonstrate that the OLG's activities are contributing to clearly defined outcomes (see Chapter 2.1), and where there is a perceived lack of alignment with public or sector expectations of the OLG, or with state government priorities or requirements.

Councils are required under the LG Act to maintain proper accounting and prepare financial statements in accordance with the Australian Accounting Standards. The State Government, through NSW Treasury (and in agreement with the department), has concluded that under the Australian Accounting Standards rural firefighting equipment vested to councils is not controlled by the State, and that on balance councils control this equipment. The non-recording of rural firefighting equipment within councils' financial statements increases the risk that these assets are not subject to at least an annual stocktake, not properly maintained and managed, and that councils' financial statements do not comply with the Australian Accounting Standards.

Audit Office reports to Parliament since 2017 have recommended that the department and OLG should communicate the State's view and address different practices across the sector in accounting for rural firefighting equipment. Rather than proactively adopting a clear regulatory position to address the issue of continued council non-compliance with the Australian Accounting Standards, the OLG has attempted to broker between levels of government. This has not resolved the issue and has caused confusion about its role as the state regulator of the local government sector. Forty-three councils received qualified audit opinions on their 2021–22 financial statements due to their failure to either perform a stocktake of this equipment and/or recognise this equipment.

The OLG has not developed and implemented a sector engagement strategy to ensure the scope and intent of its various activities and points of engagement with councils is well-defined, and that its regulatory approach and activities are well understood. Its sector engagement activities are not clearly coordinated, and it lacks clear procedures setting out expectations for its various engagement activities.

The department determined that a risk relating to the OLG ineffectively communicating its role and powers was no longer relevant to monitor and manage, archiving it in September 2022.

In January 2023, the department reinstated this risk as relevant to monitor.

Projects in 2021 to review the OLG's resourcing did not progress, but resourcing is under consideration as the OLG implements its new strategic plan

The department determines the OLG’s budget, consistent with NSW Treasury requirements for outcome-based budgeting. Resourcing has been identified in OLG operational planning documents and risk registers as limiting progress on delivering its 2018–2022 strategic plan. Projects in 2021 to review the OLG’s resourcing, and consider increases, did not progress.

As at February 2023, there are 21 positions within the OLG's Performance and Investigations teams, which is around a quarter of the OLG's total positions. Departmental information shows that $241.6 million of the OLG’s $255.7 million total latest approved budget for 2022–23 is committed to specific programs or activities, such as grants programs for floods and companion animals, pensioner council rate concessions, maintaining the NSW Pet Registry, and depreciation. The remaining $14.1 million is available for the OLG’s labour and other operational costs, including for activities relevant to the delivery of its regulatory functions. The department anticipates a decrease in the OLG's overall budget in the coming years, consistent with cost-saving measures across the department.

A September 2021 departmental document describes adequate resourcing and systems as an ‘issue’ for the OLG’s regulatory activities. In late 2021, the department agreed to projects to consider resourcing and investment in the OLG's regulatory effectiveness:

• In November 2021, a review identified opportunities for operational changes and increased investment in systems and technology to improve the OLG’s sector performance and intervention activities. Recommendations from that review were not progressed. Departmental documents in 2022 identified enhancing the OLG's digital capability as a priority.
• In December 2021, the department endorsed a project to develop a budget strategy to identify the resources required to enable the OLG to operate at ‘full functionality’ (including to proactively build the capability of the local government sector). Ministerial and departmental administrative changes occurred later that month. The project did not progress.

The OLG advises it is reviewing its resources as part of finalising the delivery program for its new 2022–2026 strategic plan, and in view of reforms resulting from the review of the councillor misconduct framework. That review comments on resourcing levels and the OLG's remit, and notes limitations that affect delivery of investigation and intervention functions. The OLG's resourcing has also been a consistent theme in consultations with the department and stakeholders in this audit.

The Audit Office's 'Audit Insights 2018–2022' report states that adequate resourcing levels should be defined in resourcing models to ensure delivery can reach expected performance levels, meet complex needs, be responsive to changing environments, and coordinate requirements. The OLG's operational plans to support the delivery of its 2018–2022 strategic plan were not consistently approved, updated or reported against since 2019. There are opportunities for the OLG to implement clearer mechanisms for regular reporting to senior management on milestones, budget, and key risks in delivering its new strategic plan.

The OLG does not have fit-for-purpose information management systems to support effective sector monitoring

The OLG does not have fit-for-purpose systems or coordinated processes to effectively use information about the sector and councils to inform its sector monitoring and regulatory responses. The OLG also does not have a data management framework that defines the roles and responsibilities of its teams and key staff for managing data.

The OLG’s main record keeping system enables it to categorise documents and manage correspondence, but it lacks adequate search and reporting functionalities for sector monitoring. OLG teams also use other systems and manual processes when handling information and analysing data about councils. This results in a range of uncoordinated data sets, and a high reliance on key personnel to share relevant, timely information without the support of controlled systems and processes. This includes information from the Council Engagement team that has access to, but does not routinely use, a customer relationship management system. In March 2023, the OLG advised that a data management framework is being developed.

Opportunities for the OLG to better use information for sector monitoring were identified in an internal audit and two consultant reviews since 2019. These included opportunities related to using complaints data about councils and councillors. In 2020–21, it received 1,543 complaints about 123 councils, of which 43% related to financial management, management/maladministration, or council governance. The OLG has not implemented an improved approach for analysing complaints data and using it for sector monitoring purposes.

Projects in 2022 to consider the efficiency and productivity of the OLG's digital systems have not resulted in substantive changes.

The OLG lacks a structured approach to proactive sector monitoring, limiting its capacity to identify risks and implement timely, proportionate responses

The OLG collects various sources of information about council compliance and performance, but does not have adequate processes to ensure the most relevant information is gathered and used in a structured, coordinated way to proactively develop responses to known and emerging issues in the sector. This limits its capacity for targeted, intelligence-led sector monitoring to identify sector trends and council-specific risks and issues early.

The OLG sets out standards and expectations for councils, including in its guidelines and handbook on the integrated planning and reporting (IP&R) framework, annual Code of Accounting Practice and Financial Reporting, a Calendar of Compliance, and model codes of conduct and meeting practice. However, the OLG has not clearly defined its approach to sector monitoring in view of these or other relevant requirements under the LG Act, or other policy expectations. For example, the OLG does not have a structured approach to monitoring compliance with the IP&R framework under the LG Act.

The lack of structured monitoring is a particular issue in the context of compliance, financial management and governance issues that have been identified in reviews and inquiries by State government agencies and integrity bodies and reported by the sector. Audit Office data for 2021–22 identified the following deficiencies relevant to governance and internal controls:

• 63 councils did not have basic governance and internal controls to manage cyber security
• 62 councils did not have or did not regularly update key corporate governance policies such as for risk management, contract management and business continuity
• 31 councils did not have an audit, risk and improvement committee
• 20 councils reported deficiencies in fraud control processes
• 21 councils did not have a sufficient legislative compliance policy or register.

The OLG has not routinely implement targeted monitoring activities based on these or similar indicators, and taking into account the diversity of the sector. For example, considering differences between rural and metropolitan councils, or for local and county councils.

However, there is evidence of some targeted monitoring starting recently. For example, in August 2022, the OLG announced that it would audit compliance with Model Code of Conduct requirements for certain council officials, including councillors, to lodge a written declaration of their personal interests. This proactive project could provide useful intelligence on compliance and potential governance risks.

Financial management and sustainability risks

Under the LG Act, councils are expected to apply sound financial management principles that require responsible and sustainable spending and investment, and consideration of intergenerational equity.

The OLG reviews financial data submitted by councils on an annual basis to assess and benchmark their financial performance. This data does not provide timely information about councils' financial sustainability or other performance risks and issues. As such, it is of limited relevance to sector monitoring for the purpose of identifying and acting on risks and issues early. In addition, the timeliness of the OLG's review is impacted by whether councils seek an extension to submit their financial statements.

For the 2021–22 financial year, the number of councils and joint organisations applying for an extension of time to submit their audited financial statements increased from 41 in 2020–21 to 57 in 2021–22.³

Councils are required under the Local Government (General) Regulation 2021 to prepare quarterly budget reviews setting out a revised estimate of their income and expenditure for the year. The OLG is developing a process to review these budget statements to inform its monitoring activities.

The OLG has identified projects that could improve its sector monitoring, but relevant progress has been limited

The OLG's operational planning documents since 2019–20 have identified various actions or projects relevant to improving its sector monitoring approach, and making it more proactive, but its progress on these has been limited (Exhibit 5).

Audit Office performance audits in 2018 and 2019 recommended that the OLG progress the development of a performance measurement framework and associated performance indicators, for use by councils and the government in sector-wide performance reporting. The OLG has identified delivering such a framework as a high priority for councils since 2019–20. The lack of progress on this is significant considering the OLG reports it has been reviewing the framework since 2013, and the OLG's guidelines for staff conducting financial reviews have not been updated since 2012. An April 2022 consultant report also recommended that the OLG update its performance indicators for councils, but the OLG has not yet done this.

The OLG advises that it has started to implement recommendations from a 2021 review of its framework for joint organisations of councils which included a recommendation to develop a performance measurement framework for joint organisations.

The OLG has made limited progress on its refresh of the Promoting Better Practice Review program which ran from 2004 to 2014. According to the OLG's website, this program was designed to act as a 'health check' and aimed to assist in strengthening the local government sector by providing councils with the opportunity to reflect on the systems, policies and procedures contributing to their overall performance. The program involved the OLG working with councils to recommend improvements following a council self-assessment to consider whether it has appropriate arrangements across the following key areas: strategic planning, governance, planning and regulation, asset and finance, community and consultation and workforce relations. Sector peak organisations and stakeholders informed the audit that this was generally a useful and proactive program, and some councils advised that they still use the checklist that was developed for the program as a guide.

Regular meetings support the OLG’s consideration of sector risks and issues, but has lacked a clear and consistent risk assessment framework

Regular meetings of OLG team managers and directors provide a forum for discussing risks and issues relevant to councils and the sector. These meetings aim to maximise the value of internal expertise and information across teams to support coordinated and consistent regulatory responses. The Audit Office's 2012 performance audit report on 'Monitoring local government' recognised that similar meetings occurring at that time were an appropriate way to respond to high-risk councils.

But the OLG has lacked a clear and consistent framework for assessing council risks during these meetings, or for related monitoring and regulatory purposes. The 2012 performance audit included a recommendation that the OLG establish a risk-based framework for assessing council performance and determining how to respond to performance issues. The OLG applied risk levels (high, medium and low) to a selection of councils as part of meetings between February 2019 and October 2022 without a clear framework. This limits transparency around the rationale and evidence used. It also makes it difficult for the OLG to demonstrate that it is prioritising resources and activities towards the greatest risks.

In 2019 the OLG identified that the timeliness of its interventions could be negatively impacted by a failure to implement an effective risk profiling strategy, and identified that a 'council risk profile framework' would be developed.

In November 2022, the OLG commenced a project to develop a risk assessment tool. The OLG started implementing the tool in March 2023.

The OLG has frameworks to guide its regulatory responses, but relevant aspects are out of date

The OLG aims to take early action on poor performance and intervene in councils when warranted and appropriate. The OLG advises that its 2017 Improvement and Intervention Framework and its 2014 Framework for Implementing Early Intervention Orders guide advice and decision-making around regulatory responses. But these frameworks have not been reviewed to ensure that they reflect the OLG’s current operating model and regulatory approach.

The OLG’s 2017 framework outlines strategies available to the OLG, such as providing advice, issuing warning letters, delivering training, issuing guidance, visiting councils and using statutory powers to investigate or intervene. It also includes relevant considerations to assist identification of the appropriate strategy, such as purpose, context, risks and resources. The OLG’s 2014 framework was developed to guide the implementation of performance improvement and suspension orders.

But the OLG has not reviewed these frameworks to ensure that they reflect current business activities, regulatory strategies, and legislative provisions. For example, the 2014 framework does not reflect legislative provisions relating to the appointment of financial controllers, whose functions can be specified in a performance improvement order. One financial controller has been appointed since 1 July 2019. The 2017 framework does not reflect roles and responsibilities of staff managing relationships with councils, including in the context of the creation of the Council Engagement team in 2018. Neither the frameworks nor other internal documents incorporate current control mechanisms, and departmental requirements such as conflict of interest or duty considerations.

For example, the OLG does not provide guidance on when its staff involved in regulatory activities should make activity or project-specific declarations.

In addition, the OLG’s procedures for handling complaints about councils and councillors have not been updated since 2013. A review of these commenced in 2021 but was not completed.

The OLG lacks complete and approved procedures to guide decision-making with respect to regulatory responses

The OLG lacks complete and approved procedures to support the application of its 2014 and 2017 regulatory frameworks. This creates risks to the consistency and transparency of advice and recommendations relating to regulatory responses, including on the use of statutory powers to issue guidance, to investigate councils, and intervene. Appendix two provides an overview of these powers.

There are also key gaps in guidance available to staff for developing and implementing regulatory responses. Staff expertise and knowledge-sharing is important for regulatory decision-making, but neither the frameworks nor other internal documents provide sufficient guidance on:

• how to assess the seriousness of behaviour or actions, for example, through the application of risk assessments to consider instances of non-compliance
• provide guidance on coordinating interactions with councils, such in relation to council visits
• referring relevant matters to other sector regulators and oversight agencies, such as the NSW Ombudsman, the Independent Commission Against Corruption, or the Audit Office
• approaches to different types of entitles in the local government sector, such as county councils and joint organisations
• the type and level of support provided by the OLG during the public inquiry process and when a council is under administration, such as with respect to reviewing and responding to administrators' reports.

OLG planning documents for 2022–23 include actions to identify and maintain a comprehensive suite of investigation tools and resources, and review and update the frameworks. The broader OLG delivery program and related resourcing are not finalised.

The OLG considered relevant statutory criteria when advising the Minister on the use of intervention powers

The OLG provides advice and assistance to the Minister for Local Government in relation to the exercise of powers under the LG Act relating to performance improvement orders, suspension orders and public inquiries. The Act and Regulation specify criteria which must be considered, and procedural steps which must be taken by the Minister before issuing a performance improvement order or suspension order. The Minister has not delegated these powers.

Our review of the key documentation relevant to the above interventions, and three other councils where an intervention was proposed but did not proceed, found that OLG advice to the Minister for Local Government considered relevant legislative criteria and did not identify inconsistencies with procedural requirements under the LG Act.

The OLG's 2017 Improvement and Intervention Framework includes a template to support the identification of appropriate regulatory response strategies based on considerations such as purpose, context, risks and resources. However, the OLG advises this template is not used, and these factors were not always clearly considered in our review of the key documentation relevant to interventions.

The OLG lacks but is procuring a system to manage information for its regulatory responses

The record keeping system used across the OLG does not support effective and efficient information handling for its regulatory responses.

In particular, the OLG does not have a case management system (or similar) to track progress and support the timely management of investigations and interventions. The OLG's systems also do not enable its staff to efficiently extract information about previous engagements with councils. This information could be relevant when advising the Minister for Local Government on considering statutory criteria for certain interventions, such as whether previous intervention attempts (such as telephone advice, warning letters) have had the intended effect.

The OLG's ‘investigation plan’ template in its 2017 Improvement and Intervention Framework is intended to track the progress of investigations, but it is not being effectively used for this purpose.

The OLG is procuring a case management system. This process has been ongoing since at least mid-2021 and there is no set timeframe for its implementation. The OLG has identified that potential benefits of this system would include improved visibility and searchability of information relevant to particular cases.

The OLG does not routinely review the costs or efficacy, or evaluate the impact, of its regulatory responses to ensure continuous improvement

Post-implementation evaluation to assess whether regulatory activities are contributing to intended outcomes can enable continuous improvement. But the OLG does not have processes to routinely evaluate how it could strengthen the design and delivery of its regulatory responses.

The OLG’s 2017 Improvement and Intervention Framework includes a template that can be used to analyse the desired outcome and impact of a particular intervention, as well as for considering whether the intervention process could be improved. The OLG advises this template is not used in practice, and we did not see evidence of its use, or an alternative review mechanism, in the interventions assessed for this audit.

The absence of meaningful performance measures for the OLG’s regulatory activities (see Chapter 2.1) presents a challenge to the OLG evaluating the impacts of its activities and developing strategies for continuous improvement.

The OLG has not routinely collected and analysed data on the time, resources or other costs involved in its regulatory activities. This limits its ability to understand or assess the efficacy of its regulatory responses, and may present a barrier to the OLG using provisions under the LG Act that enable it to recover reasonable expenses incurred in investigations and public inquiries from the relevant council. The OLG has undertaken some activities to collate costs information relevant to public inquiries.

The OLG has provided a range of supports to build sector capacity

The OLG undertakes a range of sector support activities consistent with the 2017 Improvement and Intervention Framework and its role in strengthening sector performance and compliance. Key examples of activities delivered since 1 July 2019 include:

• developing or updating guidelines and codes that councils must have regard to in exercising their functions under section 23A of the LG Act, such as guidelines on the integrated planning and reporting framework and on council elections
• developing or updating other guidance on requirements and best practice, such as a guideline on the use and management of credit cards following an Audit Office recommendation in September 2020
• issuing regular newsletters and circulars to provide updates or guidance to councils (145 circulars were issued between 1 July 2019 and 1 March 2023)
• providing information in response to enquiries, such as on council governance matters (OLG has reported that it received 9,787 pieces of incoming correspondence in 2021–22)
• delivering training, including training webinars for new councillors following the December 2021 local government elections
• undertaking sector engagement activities such as attending sector conferences or visiting councils and joint organisations.

The OLG's sector support activities lack a structured and well-communicated approach to their delivery, and the OLG has been slow to finalise some key guidance

A range of factors impact the OLG's priorities in delivering sector support, but the OLG lacks a structured and well-communicated approach to delivering these supports. This limits transparency and accountability around these activities.

Factors that can impact the OLG's priorities in delivering its sector support activities include ministerial priorities, legislative amendments or reforms and emerging issues. Information and recommendations from other NSW government agencies are also relevant, including reports by other oversight bodies such as the NSW Ombudsman and the Independent Commission Against Corruption, in addition to the Audit Office.

The OLG has used its operational plans to track some of its sector support activities since at least 2019, but the OLG also lacks an effective process for documenting decisions about what is (or is not) progressed or prioritised, and why. This limits the OLG's capacity to demonstrate that its sector support activities are delivered to achieve intended objectives or address emerging issues, and that challenges to delivery are being appropriately managed. The OLG has been slow to finalise guidance for the sector on key issues such as cyber security, risk management and internal audit.

Local government sector peak organisations and other stakeholders have informed the audit that the OLG’s support activities can be useful, but their approach to prioritising activities and reasons for delays in finalising particular resources is unclear. This is consistent with our assessment of the OLG’s processes and documentation. There are also concerns about the OLG’s timeframes to deliver resources, and currency and accessibility of information on its website.

The OLG's 2022–2026 strategic plan, which includes reference to a 'council engagement strategy' (to be developed), presents an opportunity for the OLG to improve how it develops and implements sector-wide and council-specific engagement activities.