Reports
Workforce reform in three amalgamated councils
The Inner West Council and the Snowy Monaro and Queanbeyan-Palerang Regional Councils have all made progress towards efficient organisational structures following the amalgamation of their former council areas in 2016, according to a report released today by the Auditor-General of New South Wales.
All three councils are now operating with a single workforce and have largely achieved the milestones they planned for the first stage of their amalgamations. None have finished reviewing and aligning services across their former council areas nor integrated their ICT systems. They need to do this to be in a position to implement an optimal structure.
On 12 May 2016, the NSW Government announced the amalgamation of 42 councils into 19 new councils. This followed a period of 18 months during which the NSW Independent Pricing and Regulatory Tribunal (IPART) had assessed councils' ‘fitness for the future’, and communities were consulted about proposed mergers. A further amalgamated council was created on 9 September 2016.
Upon amalgamation, existing elected councils were abolished, interim General Managers appointed, and Administrators engaged to undertake the role of the previously elected councils until Local Government elections were held 18 months later. During the period of administration, councils were asked to report on the progress of their amalgamations to the Department of Premier and Cabinet (DPC).
Council amalgamations not only require a re-drawing of boundaries, but re-establishment of local representation, decisions about alignment of services across the former council areas, and establishment of an amalgamated workforce.
The objective of this audit was to assess whether three councils, Inner West Council, Queanbeyan-Palerang Regional Council and Snowy Monaro Regional Council, are effectively reforming their organisation structures to realise efficiency benefits from amalgamation and managing the impact on staff.
Following amalgamation, all three councils developed detailed plans to bring their former workforces together, review positions and salaries, amalgamate salary structures and align human resources policies. All three councils have largely achieved the milestones included in these plans.
Benefits realisation plans show that councils did not expect to achieve material savings or efficiencies from workforce reform within the first three years of amalgamation.
Administrators at all three councils endorsed lower savings targets than the NSW Government’s early analysis suggested may be possible. All three councils have plans or strategies to progress and achieve benefits from the amalgamation. However, Inner West Council and Snowy Monaro Regional Council could more clearly link their reform initiatives with expected benefits and include this in public reporting.
Amalgamations represent a substantial period of change for affected communities and amalgamated councils should be routinely reporting to their communities about the costs and benefits of amalgamation.
Councils have not yet determined their future service offerings and service levels nor completed integration of ICT systems. These decisions need to be made before an optimal organisation structure can be implemented.
Before amalgamated councils can implement an optimal organisation structure, they need to review and confirm their customer service offerings and service levels in consultation with their communities. This work is underway but is not yet complete in any of the councils.
Progress towards an efficient structure has been slowed by staff protections in the Local Government Act 1993 (the Act) and a range of logistical and administrative issues associated with amalgamation. These include multiple IT systems and databases that need to be integrated and different working conditions, policies and practices in the former councils that are not yet fully
harmonised.
The councils implemented legislated staff protections and focused on the people side of change but cannot reliably measure the impact of their change management efforts.
The Act provides protections that reduce the impact of amalgamations on staff. Beyond implementing these protections, the councils have communicated with staff, sought to prepare them for change, and involved staff in key decisions. All councils have conducted staff surveys over time. However, at this stage these staff surveys have not provided an effective or reliable measure of the impact of change management efforts.
Appendix one - Response from councils and Office of Local Government
Appendix two - Compliance with staff protections in the Local Government Act 1993
Appendix three - About the audit
Appendix four - Performance auditing
Parliamentary Reference: Report number #317 - released 1 May 2019
Governance of Local Health Districts
The main roles, responsibilities and relationships between Local Health Districts (LHDs), their Boards and the Ministry of Health are clear and understood, according to a report released today by the Auditor-General for New South Wales, Margaret Crawford. However, there are opportunities to achieve further maturity in the system of governance and the audit report recommended a series of actions to further strengthen governance arrangements.
Fifteen Local Health Districts (LHDs) are responsible for providing public hospital and related health services in NSW. LHDs are:
- established as statutory corporations under the Health Services Act 1997 to manage public hospitals and provide health services within defined geographical areas
- governed by boards of between six and 13 people appointed by the Minister for Health
- managed by a chief executive who is appointed by the board with the concurrence of the Secretary of NSW Health
- accountable for meeting commitments made in annual service agreements with the NSW Ministry of Health.
The NSW Ministry of Health (the Ministry) is the policy agency for the NSW public health system, providing regulatory functions, public health policy, as well as managing the health system, including monitoring the performance of hospitals and health services.
The current roles and responsibilities of LHDs and the Ministry, along with other agencies in NSW Health, were established in 2011 following a series of reforms to the structure and governance of the system. These reforms began with the report of the 'Special Commission of Inquiry into Acute Care Services in NSW Public Hospitals' ('the Garling Inquiry'), which was released in 2008, and were followed by reforms announced by the incoming coalition government in 2011.
These reforms were intended to deliver greater local decision making, including better engagement with clinicians, consumers, local communities, and other stakeholders in the primary care (such as general practitioners) and non-government sectors.
The reforms empowered LHDs by devolving some management and accountability from the Ministry for the delivery of health services in their area. LHDs were made accountable for meeting annual obligations under service agreements.
This audit assessed the efficiency and effectiveness of the governance arrangements for LHDs. We answered two questions:
- Are there clear roles, responsibilities and relationships between the Ministry of Health and LHDs and within LHDs?
- Does the NSW Health Performance Framework establish and maintain accountability, oversight and strategic guidance for LHDs?
- continued progress in moving toward patient experience, outcome, and quality and safety measures
- improving the Health Performance Framework document to ensure it is comprehensive, clear and specifies decision makers
- greater clarity in the nexus between underperformance and escalation decisions
- including governance-related performance measures
- more rigour in accountability for non-service activity functions, including consumer and community engagement
- ensuring that performance monitoring and intervention is consistent with the intent of devolution.
NSW Health is large and complex system, operating in a dynamic environment. The governance reforms introduced in 2011 were significant and it is reasonable that they take time to mature.
The main roles of LHDs and the Ministry are clear and well-understood, and there is good collaboration between different parts of the system. This provides a sound foundation on which to further mature the governance arrangements of LHDs.
While the broad roles of LHDs, their boards, and the Ministry are well understood by stakeholders in the system, there are matters of detail and complexity that create ambiguity and uncertainty, including:
- the roles and relationships between the LHDs and the Pillars
- to what extent LHDs have discretion to pursue innovation
- individual responsibility and obligations between chairs, boards, executive staff, and the Ministry.
These should be addressed collaboratively between boards, their executives, and the Ministry, and should be informed by a statement of principles that guides how devolved decision making should be implemented.
Better clinician engagement in health service decision making was a key policy driver for devolution. Priority should be given by LHDs and the Ministry to ensuring that clinicians are adequately engaged in LHD decision making. It appears that in many cases they are not, and this needs to be addressed.
The quality of board decision making depends on the information they are provided and their capacity to absorb and analyse that information. More can be done to promote good decision making by improving the papers that go to boards, and by ensuring that board members are well positioned to absorb the information provided. This includes ensuring that the right type and volume of information are provided to boards, and that members and executive managers have adequate data literacy skills to understand the information.
Recommendations
- By December 2019, the Ministry of Health should:
- work with LHDs to identify and overcome barriers that are limiting the appropriate engagement of clinicians in decision making in LHDs
- develop a statement of principles to guide decision making in a devolved system
- provide clarity on the relationship of the Agency for Clinical Innovation and the Clinical Excellence Commission to the roles and responsibilities of LHDs.
- By June 2020, LHDs boards, supported where appropriate by the Ministry of Health, should address the findings of this performance audit to ensure that local practices and processes support good governance, including:
- providing timely and consistent induction; training; and reviews of boards, members and charters
- ensuring that each board's governance and oversight of service agreements is consistent with their legislative functions
- improving the use of performance information to support decision making by boards and executive managers.
This cultural shift has achieved greater recognition of the importance of transparency in how well LHDs perform. However, as NSW Health is a large, complex and dynamic system, it is important that these accountability and oversight mechanisms continue to evolve to ensure that they are sufficiently robust to support good governance.
There are areas where accountability and oversight can be improved including:
- continued progress in moving toward patient experience, outcome and value-based measures
- improving the Health Performance Framework document to ensure it is comprehensive, clear and specifies decision makers
- greater clarity in the nexus between underperformance and escalation decisions
- by adding governance-related performance measures to service agreements
- more rigour in accountability for non-service activity functions, such as consumer and community engagement
- ensuring that performance monitoring and intervention is consistent with the intent of devolution.
Recommendations
3. By June 2020, the Ministry of Health should improve accountability and oversight mechanisms by:
a) revising the Health Performance Framework so that it is a cohesive and comprehensive document
b) clarifying processes and decision making for managing performance concerns
c) developing a mechanism to adequately hold LHDs accountable for non-service activity functions
d) reconciling performance monitoring and intervention with the policy intent of devolution.
Appendix one - Response from agency
Appendix two - Functions of a Local Health District
Appendix three - Functions of a Local Health District Board
Appendix four - Routine performance monitoring and reporting
Appendix five - Escalation model for the NSW Health Performance Framework
Appendix six - About the audit
Appendix seven - Performance auditing
Parliamentary Reference: Report number #316 - released 18 April 2019
Local Government 2018
The Auditor-General for New South Wales, Margaret Crawford, released her report today on the Local Government sector. The report focuses on key observations and findings from the 2017-18 financial audits of 135 councils in New South Wales and the 2016-17 audit of Bayside Council. The report also includes commentary on three performance audits published in 2018.
Unqualified audit opinions were issued on the 2017-18 financial statements of 135 councils. The audit opinion for Bayside Council’s 2016–17 financial statements was disclaimed as management were unable to confirm that the financial statements present fairly the performance and position of the Council. A further 24 councils required material adjustments to correct errors in previous audited financial statements. Three audits are still in progress and will be included in next year’s report.
This report analyses the results of our audits of financial statements of local councils for the year ended 30 June 2018. The table below summarises our key observations and recommendations.
Financial reporting is an important element of good governance. Confidence and transparency in Local Government decision making is enhanced when financial reporting is accurate and timely.
This chapter outlines our financial reporting audit observations across councils for 2018.
| Observation | Conclusions and recommendations |
|---|---|
| 2.1 Quality of financial reporting | |
|
Unqualified audit opinions were issued for 135 out of 138 council's financial statements. The audits of three councils are in progress. Three councils, with previously qualified audit opinions, resolved those issues during 2017–18. |
Sufficient audit evidence was obtained to conclude the financial statements for 135 councils were free of material misstatement. |
|
A disclaimed audit opinion was issued for Bayside Council’s 30 June 2017 financial statements as management were unable to confirm that the financial statements present fairly the performance and position of the Council. We were unable to obtain enough evidence to support the financial results reported. |
Bayside Council did not resolve all issues related to the former councils, resulting in a disclaimed audit opinion. |
|
The 30 June 2018 financial audits reported:
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Our audits continue to identify opportunities to improve the quality of councils’ financial reporting. |
| We reported 95 instances in our management letters where councils could be better prepared for the upcoming changes to accounting standards. | To help councils implement the new standards, the Office of Local Government is running workshops, developing guidance and mandating options with the new standards for councils to adopt on transition. |
| 2.2 Timeliness of financial reporting | |
| One hundred and eleven councils lodged their 30 June 2018 audited financial statements to the Office of Local Government by the statutory deadline. | Eleven more councils submitted financial statements on-time compared with the prior year. |
| Almost half of councils performed early financial reporting procedures including valuing IPPE before 30 June 2018. | Councils performing early financial reporting procedures improved the timeliness of their financial reporting. |
Strong governance systems and internal controls reduce risks associated with managing finances, compliance and delivering services to ratepayers.
This chapter outlines the overall trends for council controls and governance issues, including the number of findings, level of risk and the most common deficiencies. Our audits do not review all aspects of internal controls and governance every year. We select a range of measures, and report on those that present heightened risks for councils to address.
| Observation | Conclusion or recommendation |
|---|---|
| 3.1 Internal controls | |
| The 30 June 2018 financial audits reported 83 high-risk findings. | Recommendation: Councils should reduce risk by addressing high-risk findings as a priority. |
| Thirty-nine of these high-risk findings related to information technology. See Chapter 4. | Control weaknesses in information systems may compromise the integrity and security of financial data used for decision making and financial reporting. |
| Several internal control findings were common across councils. | There may be opportunities for councils to work together to address common findings through Joint Organisations or other avenues. |
| 3.2 Governance | |
| Ninety-seven councils have an audit, risk and improvement committee (85 at 30 June 2017). | Proposed legislative changes will require councils to establish an audit, risk and improvement committee by March 2021. |
| Ninety-two councils have an internal audit function (86 at 30 June 2017). | It is envisaged that the Local Government Act 1993 will require the establishment of an internal audit function in each council to support the work of the audit, risk and improvement committee. |
| Eighty-three councils do not have a legislative compliance policy and 94 councils do not have a legislative compliance register. | Councils can improve their monitoring of compliance with key laws and regulations. |
| Eighteen councils do not have a risk management policy and 38 councils do not have a risk register. | Risk is better managed when there is a fit-for-purpose risk management framework, register and policy to outline how risks are identified and managed. |
| Most councils have a procurement policy, a manual, and are providing training to relevant staff. Only 34 per cent of councils have a contract management policy. | Councils with effective procurement and contract management reduce risks of error and fraud and achieve better outcomes for ratepayers. |
Councils increasingly rely on information technology (IT) to deliver services and manage information. While IT delivers considerable benefits, it also presents risks that council needs to address.
Our audits reviewed whether councils have effective governance and controls in place to manage key financial systems and IT service providers. This chapter summarises the following IT findings:
- governance
- IT general controls
- managing service providers.
| Observation | Conclusion or recommendation |
|---|---|
| 4.1 Governance | |
| Ninety-four councils have not formalised all policies which manage key information technology (IT) processes. Of those policies that are formalised, 78 are not reviewed to ensure they are up to date. | A lack of IT policies increases the risk of inappropriate and inconsistent practices. |
| Sixty-five councils do not register their IT risks and 44 councils do not regularly report IT risks to management and those charged with governance. | Risks that are not communicated to senior management and those charged with governance may not be assessed and managed appropriately. |
| 4.2 IT general controls | |
| Most internal control deficiencies related to information technology processes and control environment. | Control weaknesses in information systems may compromise the integrity and security of financial data used for decision making and financial reporting. |
| 4.3 Managing service providers | |
Seventy-two councils outsource at least one IT function to a third-party service provider. Of these:
|
Councils can more effectively manage IT service provider by:
|
Councils are responsible for planning and managing a significant range of assets on behalf of the community. This chapter outlines our asset management observations across councils for 2018.
| Observation | Conclusion and recommendation |
|---|---|
| 5.1 Asset management planning | |
| All but six councils have an asset management strategy, policy and plan. However, 11 councils have not reviewed their asset management strategy, policy and plan in the last five years. | Recommendation: Councils’ asset management policy, strategy and plan should comply with the requirements of the Local Government Act 1993 and the Integrated Planning and Reporting Guidelines issued by the Office of Local Government. |
| We found 86 instances where asset management strategies, policies and plans do not comply with the essential elements in the Integrated Planning and Reporting Guidelines released by the Office of Local Government. | |
| 5.2 Asset valuation process | |
Our audits found:
|
Deficiencies in the asset valuation process can result in significant errors to the financial statements. |
| The deficiencies in the asset valuation process resulted in errors in financial statements of $2.6 billion, including $1.9 billion of prior period errors. | |
We also identified:
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Depreciation may not be accurately recorded in the financial statements. It may also impact key sustainability indicators reported by the council. |
| 5.3 Asset management systems | |
Our audits identified 64 instances where councils:
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Weaknesses in asset management systems can impact the accuracy and completeness of asset data, resulting in errors to the financial statements. |
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Our audits identified discrepancies between the Councils' Crown land asset records and the Crown Land Information Database (CLID) managed by the NSW Department of Industry. Five councils corrected $225 million of previously unrecorded Crown land assets. |
Councils should regularly reconcile asset registers to the CLID and investigate discrepancies to ensure Crown land under their care and control is captured. |
| 5.4 Rural fire-fighting equipment | |
|
Inconsistent practices remain across the Local Government sector in accounting for rural fire-fighting equipment. A number of councils do not record rural fire-fighting equipment, meaning that a significant portion of rural fire-fighting equipment continues to not be recorded in either State or council financial records. |
The Office of Local Government should continue to address the different practices across the Local Government sector in accounting for rural fire-fighting equipment. In doing so, the Office of Local Government should continue to work with NSW Treasury to ensure there is a whole of-government approach. |
Asset overview
Councils own and manage a diverse range of assets to deliver services to the community. As at 30 June 2018, the combined carrying value of NSW council assets was $140 billion.
Strong and sustainable financial performance provides the platform for councils to deliver services and respond to community needs.
This chapter outlines our audit observations on the performance of councils against the Office of Local Government's (OLG) performance indicators.
| Observation | Conclusions and recommendations |
|---|---|
| 6.1 Operating performance and revenue measures | |
Nineteen amalgamated councils received significant one-off grant funding in 2016–17. In 2017–18:
|
The overall operating performance and revenue measures in 2017–18 for amalgamated councils were impacted by lower operational grant income. |
| Thirty-five of the 56 rural councils did not meet the benchmark for own source revenue (41 in 2016–17). | The ability to generate own source revenue remains a challenge for rural councils. Rural councils have high-value infrastructure assets covering large areas, less ratepayers and less capacity to raise revenue from alternative sources compared with metropolitan councils. |
| 6.2 Liquidity and working capital performance measures | |
| Most councils met the liquidity and working capital performance measures over the last two years. | Most councils:
|
| Nineteen additional councils would not meet the cash expense cover ratio benchmark when externally restricted funds are excluded. | Councils with a higher proportion of restricted funds have less flexibility to pay operational expenses than the cash expense cover ratio suggests. |
Each local council has unique characteristics such as its size, location and services provided to their communities. These differences may affect the nature of each council's assets and liabilities, revenue and expenses,and in turn the financial performance measures against which it reports.
The Office of Local Government prescribes performance indicators for council reporting.
The analysis in this chapter is based on performance measures prescribed in OLG’s Code of Accounting Practice and Financial Reporting (the Code).
Council’s audited financial statements report performance against six financial sustainability measures.
Operating performance and revenue measures
| Operating performance |
Measures how well councils keep operating expenses within operating revenue |
| Own source operating revenue | Measures council’s fiscal flexibility and the degree to which it can generate own source revenue compared with the total revenue from all sources |
Liquidity and working capital measures
| Unrestricted current ratio | Measures a council’s ability to meet its short-term obligations as they fall due |
| Debt service cover ratio | Measures the operating cash to service debt including interest, principal and lease payments |
| Rates and annual charges outstanding percentage | Assesses how successful councils are in collecting rates and annual charges |
| Cash expense cover ratio | Estimates the number of months a council can continue paying its expenses without additional cash inflow |
| Building and infrastructure renewals ratio | Assesses the rate at which infrastructure assets are being renewed against the rate at which they are depreciating |
| Infrastructure backlog ratio | Shows the amount of infrastructure backlog expenditure relative to the total net book value of a council's infrastructure assets |
| Asset maintenance ratio | Compares a council’s actual asset maintenance expenditure to the amount planned in their asset management plans |
| Cost to bring assets to agreed service level | Compares the estimated cost to renew or rehabilitate existing infrastructure assets, that have reached the condition-based intervention level adopted by a council, to the gross replacement cost of all infrastructure assets |
Each audited measure and three of the four unaudited measures has a prescribed benchmark.
Appendix one - Response from the Office of Local Government
Appendix two - List of 2018 recommendations
Appendix three - Status of 2017 recommendations
Appendix four - Sources of information and council classifications
Appendix five - Financial data
Appendix six - Status of audits
Appendix seven - List of Joint Organisations and their member councils
Appendix nine - OLG’s performance indicators from the audited financial statement - Descriptions
Appendix ten - OLG’s performance indicators from the unaudited Special Schedule 7 - Descriptions
Auditor‑General’s Report to Parliament
Report on Local Government 2018
Executive Summary
The second point ‘Governance’ under point 3 ‘Governance and internal controls’ on page 2 should read:
There has been an increase in the number of councils with an audit, risk and improvement committee or an internal audit function compared with the prior year. Seventy per cent of councils have an audit, risk and improvement committee (62 per cent at 30 June 2017) and 67 per cent of councils have an internal audit function (62 per cent at 30 June 2017).
Chapter 3 Governance and Internal Controls
The two observations under 3.2 Governance on page 21 should read:
Ninety-seven councils have an audit, risk and improvement committee (85 at 30 June 2017).
Ninety-two councils have an internal audit function (86 at 30 June 2017).
Section 3.2 Governance on page 26 should read:
Twelve more councils established audit, risk and improvement committees during 2017–18 resulting in 97 councils having committees.
Six more councils established an internal audit function during 2017–18 resulting in 92 councils having an internal audit function.
Appendix three: Status of 2017 recommendations
Under the heading ‘Governance and internal controls’ on page 62, the two points in the right-hand column should read:
Twelve more councils established audit, risk and improvement committees during 2017–18 resulting in 97 councils having committees. Please refer to Section 5.2 for more details.
Six more councils established an internal audit function during 2017–18 resulting in 92 councils having an internal audit function.
The above changes are reflected on the Audit Office website, and should be considered the true and accurate version.
