Late Agenda of Finance Audit & Risk Sub-committee

HAWKE’S BAY REGIONAL COUNCIL

Finance Audit & Risk Sub-committee

Wednesday 12 February 2020

Subject: Financial Results for the 2019-20 Financial Year, for the Period to 31 December 2019

Reason for Report

1. To provide the Sub-committee with a financial progress report for the first six months of the 2019-20 financial year to 31 December 2019.

Financial Summary to 31 December 2019

2. The financial results for the first half of the 2019-20 year are detailed in the attachment with commentary on the high level variations.

3. The budgets are currently prorated evenly across the year. However, a significant level of operational expenditure occurs in the second half of the year due to summer work programmes and planting season. Therefore the funding requirements show a favourable position however this is to be expected based on the even spread of budgets.

4. Based on the above, the following could have an overall impacts on the year end position.

Revenue

4.1. For Consents and Compliance, the budget assumes an 80% cost recovery from private benefits (Fees and Charges). While the majority of revenue for this group is received at the end of the financial year, indications are that this level of cost recovery will not be met. A more detailed analysis of this has been started to assist with the requirements of the Long Term Plan and any policy changes that may be required.

4.2. There is some potential upside given the year to date performance of the Long Term Investment Fund (based on expected annualised returns detailed in the Treasury report). This may be required to offset the above and any additional operational costed detailed in this report.

Operational Expenditure

4.3. Following the outcome of the Remuneration Review in June, the financial impact on the 2019-20 financial year was estimated as an increase of 4.4% on staff costs against a budgeted increase of 2%. This is anticipated to be offset in 2019/20 by the large number of vacancies (currently 20 vacant positions).

4.4. The IT infrastructure environment has been moving from on-premise to Infrastructure as a Service due to a security event which has sped up the transition. As a result of this additional costs have been identified and are now better understood. Therefore the budget for 2019/20 was not adequate. It is expected that costs in this area will exceed budget.

Capital Expenditure

4.5. For Regional Income (Water Security and Forestry) it is expected that capital expenditure will be below budget for the 2019-20 year and that any unspent money will be requested to be carried forward as the overall programme is expected to be on budget.

4.6. For Asset Management, the Heretaunga Plains Flood Control Capital programme will be underspent as previously reported while the modelling and concept development is being undertaken over the next 12 months. ($1.2m).

5. Overall, we are expecting there to be variances against full year budgets and the Finance team will be working with budget holders to quantify the impacts. Details are anticipated to be reported to the next Sub-Committee meeting.

Financial Reporting Development

6. A significant program of work is underway to improve and enhance the capability for financial reporting including the replacement of the Financial Management System and the redevelopment of the Financial Reporting across Council. In the future, staff would like to work with the FARS to develop more robust and transparent reporting to ensure that Council is provided with financial information that adequately supports governance and decision making.

7. This programme of work is expected to take place over the following 18 months to 2 years and will include the budget development and reporting requirements for the Long Term Plan.

8. An update on this project will be provided at the meeting.

Decision Making Process

9. Staff have assessed the requirements of the Local Government Act 2002 in relation to this item and, as such, the updated Business Continuity Plan needs to be accepted by the Finance, Audit and Risk Sub-Committee.

Recommendation

That the Finance, Audit and Risk Sub-committee receives and notes the “Financial Results for the 2019-20 Financial Year, for the Period to 31 December 2019” staff report.

Authored by:

Bronda Smith

Chief Financial Officer

Approved by:

Jessica Ellerm

Group Manager
Corporate Services

Attachment/s

⇩1

Financials for period to 31 December 2019

Financials for period to 31 December 2019

Attachment 1

SECTION A

Management Comments on Operating Statement
Activity	Management Comment (major variances)
Operational
Strategic Planning	Primarily due to delays to the notification of TANK has resulted in the budget being underspent in this financial year.
Asset Management	Most work for the asset management group is completed over summer and expenditure is expected to be on budget other than Karamu and Raupere planting. These activities are being resourced for the second half of the year and any underspend will be transferred to the reserve.
Integrated Catchment Management	The Erosion Control Scheme (ECS) planting beings in May. Shortage of contractor labour especially for fencing has seen delays in delivery of this part of the ECS.
Consents & Compliance	Income for Compliance programmes is charged at the end of the year and therefore this is due to the phasing of budgets. Income is expected to be lower than budgeted for the full financial year against the expectation of 80% cost recovery.
Emergency Management	On track
Transport	Transport results are partly a function of reduced public transport patronage and mostly a function of increased cost pressures under the Gobus contract - indexing cost rises and specific costs related to ERA changes for bus drivers as a result of new driver break legislation. Regional Road Safety also has approx. $100K of revenue to be recognised for November and December.
Governance & Partnerships	Charging to HBRIC for support is done annually.
Capital
Internally Constructed Assets	This is due to the timing of loan funding for the projects which is drawn down at the end of the year.
Asset Management	Heretaunga Plains Flood Control Capital programme will be underspent as previously reported while the modelling and concept development is being undertaken over the next 12 months. ($1.2m)
Regional Resources	Farm Environmental Management Plans contributions and the ECS financing for the land owners contributions have not been required to date. Sustainable Homes is above budget however loan funding has not been drawn down.
Regional Income	Investment in the Regional Water Assessment, Tuki Tuki Water Security and Heretaunga Water Security has been forecast to be approx. $1m this year with the remaining $2m to be carried forward for 2020/21 and 2021//22.

Scheme Reserves

Management Comments on Scheme Balances

Note Ref

Activity

Variation from

Reforecast $’000

(F) or (U)

Management Comment (major variances)

Sustainable Homes

$2,203 (U)

Sustainable Homes loan funding is yet to be raised.

SECTION B

Management Comments on Balance Sheet Movements
Note Ref	Activity	Management Comment (major variances)
1	Property, Plant and Equipment	Property, plant and equipment have increased by $1.547m due to the budgeted capital purchasing programme offset by depreciation.
2	Infrastructure Assets	Infrastructure assets have increased by $451,000 since the beginning of the year reflecting capital expenses made for the maintenance and improvement of infrastructure assets offset by depreciation.
3	Investment Property	Investment property has decreased by $1.171m reflecting the disposal of leasehold and properties to the leaseholders.
4	Intangible Assets	Intangible assets have decreased by $710,000 due to the amortisation on existing assets.
5	Financial Assets	Total cash, cash equivalents and financial assets have increased by $30.236m since the beginning of the year with the expenditure of operating cash being offset by the receipts from HBRIC of $43m from the IPO. Cash has reduced by $21m with the bulk of liquid assets now being invested in managed funds.
6	Sustainable Homes	Advances to Home Owners through the sustainable homes programme have increased by $945,000 reflecting the increased up-take from the public since the beginning of the year offset by repayments of existing clean heat loans.
7	Forestry Assets	Forestry Assets have increased by $59,000 reflecting the capital spending on the harvest road and bridge for Tutira.
8	Accounts Receivable	Accounts Receivable have increased by $18.012m since the beginning of the year reflecting the rates invoices that were sent out in September and are due at the end of January.
9	Loan to HBRIC Limited	Council approved a loan facility for HBRIC Ltd of which $6,500,000 had been drawn down but was repaid in September.
10	Accrued Income, Prepayments and Work in Progress	Accrued Income has decreased by $2.755m reflecting a decrease in accruals, prepayments and work in progress provisions compared to year end.
11	Borrowings	Borrowings have decreased by $1.95m, being the repayments made for the year to date. 2019/20 borrowings as per the annual plan will occur later in this year.
12	Employee Entitlements	Employee Entitlements have decreased by $8,000 overall due to provisions for outstanding annual leave balances, sick and long service leave being used during the year.
13	Accounts Payable	Accounts payable have decreased by $6.184m. This is due to the $3.9m payable to ACC for annuity costs and $2.1m in trade payables.
14	Accrued Expenses	Accrued expenses have decreased by $55,000 compared to last year due to the reversal of accruals from year end.
15	Deposits and Retentions	Income in advance has increased $10.239m since the end of last year due to rates income received in advance.