Agenda of Finance Audit & Risk Sub-committee

HAWKE’S BAY REGIONAL COUNCIL

Finance Audit & Risk Sub-committee

Wednesday 05 May 2021

Subject: Internal Audit Work Programme Update

Reason for Report

1. This item updates the Finance, Audit and Risk Sub-committee (FARS) on the progress carrying out corrective actions that respond to internal audit findings as previously reported to the FARS, along with a status update on the current Annual Enterprise Internal Assurance plan approved by FARS in August 2020.

Officers’ Recommendation

2. Council officers recommend that the FARS members consider and note the internal assurance dashboard and corrective action status update, and the internal assurance plan status update with a view to confirming the adequacy of corrective actions undertaken and reporting as such to the Corporate & Strategic Committee (C&S).

Discussion

3. The purpose of the corrective action status update is to provide oversight to the FARS of open internal assurance findings from previously reported internal assurance reviews. The dashboard tracks progress of the corrective actions against agreed milestones, until the action is closed. At a Glance, as at April 2021:

	Carried out	Total no of actions	Closed	On track	At Risk	Behind
HBRC Covid-19 Response Debrief Report	Nov 2020	7	2	0	0	5
Internal Audit – Risk Management Maturity	June 2020	11	4	5	1	1
Internal Audit – Procurement & Contract Management	May 2018	2	2	0	0	0
Internal Audit – Health and Safety	Sept 2018	8	4	2	0	2
Internal Audit – Cyber Security	August 2019	20	11	3	0	5

4. Members should note that, as a consequence of the departure of the Risk and Assurance Lead, progression of risk maturity actions were prioritised over the Business Continuity Plan (BCP) actions over Quarter 3. The BCP actions relating to the HBRC Covid-19 Response Debrief report will be prioritised for progression during Quarter 4.

5. While a number of actions are reported above as behind for Internal Audit – Cyber Security, management is comfortable with the progress that has been and continues to be made, and the subsequent level of risk being carried by the organisation. Prioritisation of effort continues, focusing limited resources on the highest risk areas raised in the audit, being the 11 closed items and the 3 on track items:

5.1. Finance system replacement

5.2. Disaster recovery planning

5.3. IT architecture & planning to replace legacy systems

6. Phase one (Information stocktake) of the Information Management Programme is progressing. Workshops have been held to gather information required to develop a gap analysis and critical information asset register which will identify confidential/sensitive information. Several areas of risk have been identified for immediate intervention.

7. The purpose of the Annual Enterprise Internal Assurance plan status update is to provide the FARS with oversight of progress on individual internal assurance reviews that were approved by the Committee as part of the Annual Enterprise Internal Assurance plan.

8. Both internal assurance dashboards have been updated as at April 2021 and are attached.

Financial and Resource Implications

9. There are no financial implications or additional resource requirements resulting from this internal audit programme update.

Decision Making Process

10. Council and its committees are required to make every decision in accordance with the requirements of the Local Government Act 2002 (the Act). Staff have assessed the requirements in relation to this item and have concluded:

10.1. The decision does not significantly alter the service provision or affect a strategic asset, nor is it inconsistent with an existing policy or plan.

10.2. The use of the special consultative procedure is not prescribed by legislation.

10.3. The decision is not significant under the criteria contained in Council’s adopted Significance and Engagement Policy.

10.4. The decision is in accordance with the Finance, Audit and Risk Sub-committee Terms of Reference, specifically to report to the Corporate and Strategic Committee to fulfil its responsibilities for:

10.4.1. receiving the internal and external audit report(s) and review actions to be taken by management on significant issues and recommendations raised within the report(s).

10.4.2. Ensuring that recommendations in audit management reports are considered and, if appropriate, actioned by management.

10.4.3. Given the nature and significance of the issue to be considered and decided, and also the persons likely to be affected by, or have an interest in the decisions made, Council can exercise its discretion and make a decision without consulting directly with the community or others having an interest in the decision.

Recommendations

That the Finance, Audit and Risk Sub-committee:

1. Receives and notes the ‘Internal Audit Work Programme Update’ staff report and accompanying dashboards.

2. Confirms that management actions undertaken or planned for the future adequately respond to the findings and recommendations of the internal audits.

3. Confirms that the dashboard reports provide adequate information on the progress of corrective actions and the progress of the approved Annual Internal Audit programme.

4. Reports to the Corporate and Strategic Committee, the Sub-committee’s satisfaction that the Internal Audit Work Programme Update provides adequate evidence of the adequacy of Council’s internal assurance functions and management actions undertaken or planned to respond to internal assurance review findings and recommendations.

Authored by:

Olivia Giraud-Burrell

Business Analyst

Approved by:

Jessica Ellerm

Group Manager Corporate Services

Attachment/s

1 ⇩	Internal Assurance Dashboard – Corrective Action Status Update
2 ⇩	Internal Assurance Annual Plan FY20-21 Status Update

HAWKE’S BAY REGIONAL COUNCIL

Finance Audit & Risk Sub-committee

Wednesday 05 May 2021

Subject: Internal Assurance Framework

Reason for Report

1. This item seeks the Finance Audit & Risk Sub-committee’s (FARS) endorsement of the draft Internal Assurance Framework as endorsed by the Executive Leadership Team (ELT) on 23 February 2021.

Officers’ Recommendation(s)

2. Council officers recommend that the FARS members endorse the draft Internal Assurance Plan and support the Internal Assurance Implementation Plan as proposed.

Background /Discussion

3. At the Corporate and Strategic (C&S) Committee meeting held on 10 June 2020 the Committee endorsed a risk maturity roadmap for the ‘Regional Council’ (Council). The Council’s risk maturity roadmap targeted mid-2021 for the development of an internal assurance framework. The draft Internal Assurance Framework that the FARS is asked to endorse and recommend to the C&S is attached.

4. The FARS should note that this framework has been peer reviewed by Council’s key management system owners including Quality Management, Health and Safety Management, Asset Management, Environmental Management, and Information Management. These teams were identified as suitable peer reviewers as usually when structured management systems are in place an internal operational audit programme is required.

5. Throughout Council several reviews and audits are undertaken each year. The reviews and audits may provide assurance or identify opportunities for improvement to Council’s management or governance. For the reviews and audits currently being undertaken across Council there is no centralised assurance view or assurance register. Therefore, at times this has resulted in more than one review targeting a single area within Council, while other areas of Council may not have been subject to any independent review.

6. Therefore, the intent of this internal assurance framework is to take an organisational and proactive risk-based approach to assurance that covers the breadth and depth of Council. Which, in turn should provide greater confidence to governors and to management that the organisation is well run with the ‘right’ things being delivered in the ‘right’ way. It is noted that assurance itself does not deliver outcomes.

7. A summary of key points in the draft Internal Assurance Framework includes:

7.1. Adoption of internal audit principles as defined by the International Institute of Internal Auditors.

7.2. Adoption of the three lines of defence model which is an assurance model that has been endorsed by the Office of the Auditor General. The Office of the Auditor General notes that this model allows for scalability of an assurance programme based on the: criticality of the activity being reviewed, type of assurance being undertaken, and level within the organisation requiring assurance

7.3. Assurance review classification based on the type of review being undertaken and the recipient of the assurance. The three types of review classifications, classification review examples, and the intended recipients are:

7.3.1. Internal assurance, e.g. S17a – Council Committee and management that is responsible for the activity being reviewed

7.3.2. Enterprise Internal audit, e.g. management system audits – the FARS

7.3.3. Operational internal audits, e.g. review of ‘Codes of Practice’ (COP) – Council’s Management and ELT.

7.4. Outline of critical elements that must be evident in any assurance review, including:

7.4.1. Independence from the process or activity being reviewed

7.4.2. Assurance sponsor endorsement

7.4.3. Unrestricted access

7.4.4. Adequate resourcing

7.4.5. Competent auditors

7.4.6. Standardised assurance review processes, including:

7.4.6.1 The annual assurance plan

7.4.6.2 The pre-assurance planning

7.4.6.3 Fieldwork that uses recognised techniques

7.4.6.4 Reports that have a common format and have a standardised assessment criterion for findings to enable comparison between individual reports and report findings for easier prioritisation of resources for corrective actions, and

7.4.6.5 follow-up and tracking of agreed corrective actions.

8. Lastly, the framework outlines the key roles and role responsibilities applicable to internal assurance at Council from Governance to all of Council Staff.

Strategic Fit

9. The Internal Assurance Framework is a module of the Risk Management System which contributes towards achieving all strategic goals/vision by protecting the organisation.

Financial and Resource Implications

10. There are no financial implications or additional resource requirements resulting from this Internal Assurance Framework.

Decision Making Process

11. Council and its committees are required to make every decision in accordance with the requirements of the Local Government Act 2002 (the Act). Staff have assessed the requirements in relation to this item and have concluded:

11.1. The agenda item is in accordance with the Sub-committee’s Terms of Reference, specifically:

11.1.1. The purpose of the Finance, Audit and Risk Sub-committee is to report to the Corporate and Strategic Committee to fulfil its responsibilities for (1.3) the independence and adequacy of internal and external audit functions

11.1.2. The Finance, Audit and Risk Sub-committee shall have responsibility and authority to (2.6) receive the internal and external audit report(s) and review actions to be taken by management on significant issues and recommendations raised within the report(s)

11.1.3. The Finance, Audit and Risk Sub-committee is delegated by Council to (3.6) review the objectives and scope of the internal audit function, and ensure those objectives are aligned with Council’s overall risk management framework; and (3.7) assess the performance of the internal audit function, and ensure that the function is adequately resourced and has appropriate authority and standing within Council.

Recommendations

That the Finance, Audit and Risk Sub-committee:

1. Receives and considers the “Internal Assurance Framework” staff report.

2. Endorses the draft Internal Assurance Framework and supports the Internal Assurance Implementation Plan as proposed.

3. Recommends that the Corporate and Strategic Committee approves the draft Internal Assurance Framework and the Internal Assurance Implementation Plan as proposed and recommends the adoption of both to the Hawke’s Bay Regional Council.

Authored by:

Olivia Giraud-Burrell

Business Analyst

Approved by:

Jessica Ellerm

Group Manager Corporate Services

Attachment/s

1 ⇩	Draft Internal Assurance Framework
2 ⇩	Internal Assurance Framework Implementation Plan

HAWKE’S BAY REGIONAL COUNCIL

Finance Audit & Risk Sub-committee

Wednesday 05 May 2021

Subject: Data Analytics Internal Audit Report

Reason for Report

1. This item presents the internal audit report (attached) for the Data Analytics audit undertaken by Crowe in February 2021.

Background

2. The Finance, Audit and Risk Sub-committee (FARS) agreed at its meeting on 12 August 2020, as part of the internal audit work programme, to engage Crowe to conduct an internal audit of Council’s Data Analytics.

3. The agreed scope and purpose of the audit was to review payables and payroll, and master and transactional data for the financial year ended 30 June 2020. This data was then analysed independently by Crowe for any potential anomalies or suspicious transactions.

4. The report was then provided to staff, along with a separate spreadsheet listing the transactions that required review. These spreadsheets were initially analysed by the Payroll Officer and the Team Leader Finance and then reviewed by the Chief Financial Officer to identify any findings requiring further investigation.

5. This is the fourth consecutive annual Data Analytics audit conducted by Crowe. Previous reporting of the findings of the 2018-19 audit was presented to the sub-committee on 12 August 2020. A comparison to previous findings is also provided following.

6. It is important to note that when a transaction is identified; it does not necessarily indicate that there is anything suspicious. There are often legitimate business reasons for a transaction being identified, such as different types of payments to a Council (rates credits versus payment for services) by way of pure example. These types of transactions may display in areas such as “duplicate address”, “GST/non-GST transactions”, or “duplicate IRD number” for example.

7. In addition, some transactions are listed purely for review purposes due to their deemed higher risk nature, such as “review of top 50 vendors” as an example. This in itself allows staff to easily assess whether vendors are in line with expectations and would highlight any vendors that may appear erroneous.

8. Given the small size of Hawke’s Bay, there are often times when an employee may share the same address as a vendor, usually a spouse. Transactional processing staff ensure that employee approvals are not allowed where any known conflicts exist between an employee and a vendor.

Discussion

9. There were 111 duplicate bank accounts with similar Vendor names where one of the vendors received a payment. These were reviewed and where required vendors were blocked. Of these 111, 77 were duplicates which were blocked following the review. The primary reason is for a change in master data such as GST number changes or changes to the trading name of the entity. An additional process will be added to ensure that the old accounts are blocked as part of the establishment of the new account. The remaining 34 duplicates are valid. These are instances when a vendor has more than one business function or GST/Non-GST accounts i.e. Hastings District Council. There were no incorrect payments within the above transactions.

10. There were 8 possible duplicate payments identified with 3 payments being genuine payments. Five invoices totalling $11,210.88 were paid twice and have been refunded. Four were identified prior to the audit . One was identified as a result of the audit totalling $38.96 and has since been refunded. The invoice processing errors occurred during the invoice scanning and were incorrectly scanned with different invoice numbers for example: !NV-0332 & INV-0332. Officers continue working with the scanning software provider to reduce the errors and also systemically review the scanning results for any errors as part of the scanning process.

11. In terms of the cross matching of data between payroll and accounts payable all records were reviewed with no issues to note.

12. For the payroll data, all data was reviewed with no issues noted.

2018-19 Comparison

13. The list of duplicates within the supplier master file, i.e. supplier account information has increased from 34 to 111. Previously the criteria was based on supplier accounts where at least one of the accounts had a payment over $5000. This year’s criteria is based on any payment from one of the duplicate accounts.

14. The number of possible duplicate payments increased from 4 to 8 with 5 being actual double payments in comparison with none last year.

15. Overall the number of errors arising from internal processes is comparable to prior year, with internal checks continuing to keep the number of flagged or highlighted transactions arising within the review to a low percentage of the overall transactions. Staff recognize that there is a need to maintain appropriate process to reduce errors and to ensure correct internal controls are used to reduce the risk of fraud or misappropriation.

New Finance System Process Changes

16. The implementation of the new finance system will reduce the opportunity for the following issues.

16.1. Duplication of supplier accounts will be reduced as GST/Non-GST triggers can be controlled by the GL account they are posted as well as at supplier account level.

16.2. The introduction of purchase orders will reduce duplicate payments as invoices will need to be matched to purchase orders with values.

Next Steps

17. Staff are seeking feedback as to whether this Sub-committee would like to see another data analytics assignment be conducted for 2020-21, as Auditors recommend completing a data analytics audit every year. With the low rate of issues, the Data Analytics audit could be delayed a year.

18. A Data Analytics audit is recommended for the 2021-22 year as this will be the first year of processing transactions in TechOne One Council.

Decision Making Process

19. Staff have assessed the requirements of the Local Government Act 2002 in relation to this item and have concluded that:

19.1. as this report is for information only, the decision-making provisions do not apply.

19.2. any decision of the sub-committee is in accordance with the Terms of Reference and decision-making delegations adopted by Hawke’s Bay Regional Council 25 March 2020, specifically the Finance, Audit and Risk Sub-committee shall have responsibility and authority to:

19.2.1. Receive the internal and external audit report(s) and review actions to be taken by management on significant issues and recommendations raised within the report(s)

19.2.2. Ensure that recommendations in audit management reports are considered and, if appropriate, actioned by management.

Recommendation

That the Finance, Audit and Risk Sub-committee receives and notes the “Data Analytics Internal Audit Report”.

Authored by:

Bronda Smith

Chief Financial Officer

Approved by:

Jessica Ellerm

Group Manager Corporate Services

Attachment/s

1 ⇩

Internal Audit Data Analytics report

HAWKE’S BAY REGIONAL COUNCIL

Finance Audit & Risk Sub-committee

Wednesday 05 May 2021

Subject: Quarterly Treasury Report for 1 January - 31 March 2021

Reason for Report

1. This item provides compliance monitoring of Hawkes Bay Regional Council (HBRC) treasury activity and reports the performance of Council’s investment portfolio for the quarter ended 31 March 2021.

Overview of the Quarter - ending 31 March 2021

2. Borrowing totalling $10m was raised with the LGFA. Two forecast $5m loans were raised. Both raised at fixed rates of 1.6% (4 years) and 1.97% (5 years) respectively.

3. Managed Funds have provided a year-to-date gross income net of fees of 6.6%. The funds continue to perform better than the Covid-19 Adjusted 2020-21 Annual Plan.

4. The C&S Committee declined an offer by the building owner to purchase one of HBRCs Wellington leasehold properties.

5. As at 31 March 2021 closing, HBRC was non-compliant with its Treasury policy in the following 4 parameters:

5.1. Funding Risk Control

5.2. Interest Rate Risk

5.3. Counterparty Credit Limits (now within policy limits)

5.4. Asset Allocations (now within policy limits).

6. All breaches, and proposed actions to rectify, are discussed in detail in this report.

Background

7. The Investment management reporting requirements, outlined within Council’s Treasury Policy, requires quarterly reporting to the Financial Audit & Risk Sub-Committee (FARS) of current investment allocation and investment performance.

8. All Treasury investments are to be reported on quarterly. As at 31 March 2021, Treasury Investments to be reported on consist of:

8.1. Liquidity

8.1.1. Cash and Cash Equivalents

8.1.2. Debt Management

8.2. Externally Managed Investment Funds

8.2.1. Long-Term Investment Fund (LTIF)

8.2.2. Future Investment Fund (FIF)

8.3. Investment properties

8.4. HBRIC Ltd

8.5. 2020-21 Year to Date Performance Summary.

9. Since 2018, HBRC has procured treasury advice and services from PwC and their quarterly compliance report is attached.

Discussion

Liquidity – Cash & Cash Equivalents

10. To ensure HBRC has the ability to adequately fund its operations, current policy requires HBRC to maintain a liquid balance of $3.0m.

11. The following table reports the cash and cash equivalents as at 31 March 2020.

31 March 2021	$000
Cash	4,943
HBRC Held Cash	4,279
Works Group	325
Other – managed trusts	339
Short-term bank deposits	14,000
Cash & and cash equivalents	18,943

12. HBRC liquidity throughout Q3 benefited from the strong YTD cash position at the end of Q2 and the loans raised with the LGFA on 15 March 2021 ($10m). - The $10m in loans raised with the LGFA reflects HBRC cash requirement through to approximately June/July 2021.

13. Any cash surplus to operating requirements is placed on term deposit. All of the possible 90 days in the quarter had an average of $8.6m held in term deposits; returning an average of 0.25% or $6.1k for the period.

14. At 31 March 2021 closing, HBRC had placed all its short- term bank deposits ($14m) with Westpac Bank with the intention to maximize the interest being earned. This resulted in HBRC not being compliant to current counterparty policy limits. Counterparty policy risk is the risk of any loss arising from a counterparty defaulting. Current policy limits officers to place a maximum of 50% of Rates Revenue placed in 1 RBNZ Registered Bank. HBRC was over this limit by ~$500k for a total 23 days. The timing of already held term deposit maturating and the materiality of separating $500k, would have negated any gains having the full $14m placed with Westpac. The proposed Treasury Policy within the 2021-31 LTP, sees the Counterparty limit increase to $15m.

15. To manage HBRC liquidity risk, HBRC retains a Standby Facility with BNZ. This facility provides HBRC with a same day draw down option, to any amount between $0.3-$5.0m, and with a 7-day minimum draw period. The cost of the renewed current facility is an establishment fee ($10,000), an annual line fee 0.37% ($18,500) + a margin above BKBM of 1.45% on any borrowings.

16. With advice from PwC, this facility has recently been renewed with BNZ, in favor of the LFGA due it its minimum draw period and the 4-year facility term. The current LGFA facility would frustrate HBRC liquidity policy requirements with its rolling 15 month term, i.e. not having a secured liquidity beyond 15 months.

17. As new debt is drawn in line with the proposed 2021-31 LTP, consideration will be given to a mix of LGFA and BNZ facilities.

18. The renewal of this facility briefly placed HBRC outside current policy compliance to its funding & liquidity risk positions. Funding & liquidity risk positions are set to avoid the occurrence of Council needing to refinance a substantial proportion of debt at the same time and being exposed to unfavorable pricing. By renewing the Standby Facility, at 31 March, 10% of HBRC debt profile maturated within 3 years. The current policy’s minimum requirement is 15%. This breach was only temporary and is now compliant.

19. The following graph shows the daily closing cash position and Term Deposits held throughout Q3.

Debt Management

20. As at 31 March 2021, current external debt was $31.3m, $48.0m when taking into consideration the internal $16.7m HBRIC loan All financial covenant ratios are currently at least 4 times under any internal or external limit. The financial covenant ratios can be seen in the attached PwC report.

21. The year-end debt position is forecast to be $36.9m, excluding the HBRIC loan and any further distributions form Managed Funds. Accounting for the existing $31.3m plus the forecasted $5.9m requirement detailed below. This is slightly above that forecast in the 2018-28 LTP, which forecast borrowing to be $35.5m at the end of the 2020-21 year, and below the 2020-21 Covid-19 Adjusted Annual Plan of $41.3m.

22. With HBRC current debt profile continuing to mature, along with the proposed “ramp up” in borrowings forecasted within the 2021-31 LTP, HBRC remains outside its interest rate risk management policy. The policy is written to minimize any adverse movements in interest rates which could affect future cash flows.

23. Officers continue to work with PwC to adhere to best practice on this noncompliance. An option available to correct HBRC interest rate position is utilising financial instruments such as swaps to effectively fix existing floating rated loans. This option can have undesired effects however, where future expected borrowings are delayed and HBRC is then required to rebalance its interest rate position again.

24. It should be noted that the forecast remaining debt requirement for 2020-21 would still not allow HBRC to be operating within the current policy.

25. Upon writing this report, Q3 reforecasts are still being completed. Full year forecasts will be presented at the next Corporate & Strategic Committee meeting. The table below details the current understood debt requirements compared to the 2020-21 Annual Plan.

Loan Requirements	2020-21 Annual Plan	Approved Additional Funds	Total Approved Requirement	*2020-21 Debt Forecast¹**	Variance to Approved Requirement
	$000	$000	$000	$000	$000
Sustainable Homes	3,527	-	3,527	3,527	-
Systems Integration	1,913	-	1,913	1,275	(638)
Building Accommodation	2,000	-	2,000	500	(1,500)
HBRC Recovery Fund	1,000	-	700	-	(700)
Porangahau Catchment			300	50	250
Integrated Catchment	2,250	2,450	4,700	3,900	(800)
Covid-19 Budget Impacts	7,584	-	7,584	5,000	(2,584)
Other	755	-	755	755	-
Total	19,029	2,450	21,479	15,857	(3,172)
*¹ As at the end of Q3, only $10m of 2020-21 requirement has been raised.

26. As at 31 March 2021, the borrowing forecast of $15.9m is based on the expected full year expenditure for 2020-21. The adjusted forecast requirements for “Systems Integration” and “Building Accommodation” is due to the timing of expenditure and request to carry forward this borrowing into 2021-22 is expected.

27. Borrowing required for the Covid-19 related reduction in investment income is subject to change. Any upside in investment income, from either an additional HBRIC dividend or managed fund returns, will reduce the current requirement.

28. The Recovery Fund has committed spend of $300k on the Porangahau Catchment, with $50k expected to be spent within 20-21, $100k in 2021-22, $100k in 2022-23 and $150k in 2023-24.

Managed Funds

29. For the purposes of this report, the below terms have been referred to and have the following meaning.

Term	Meaning
Gross Income Net of Fees	The full amount the fund has returned for the period, net of any fees paid to the fund managers. This amount remains in the funds unless divested.
Capital Protection	The amount the fund must earn in relation to the rate of inflation to retain its real purchasing power.
Funding Council Operating Costs	The amount the fund must earn to fund Council operating costs (offsetting rating requirements).
Divested Capital	Gross Income Net of Fees less Capital Protection and have now been withdrawn from the funds.
Undivested Funds Available	Gross Income Net of Fees less Capital Protection that are still invested within the funds.

30. The Fund performances have slowed over the last quarter, however are still performing ahead of forecast with a weighted average gross income net of fees of 9.3% (annualised 12.6%) compared to the Post Covid-19 2020-21 Annual Plan of 4% (6% annualised).

31. Officers cautious approach of de-risking against short market fluctuations and divesting $6.4m at the end of Q2 was seemingly a prudent decision.

32. Should the current performance of the funds continue, Officers intend to divest from the funds, further reducing the borrowing requirement arising from the Covid-19 adjusted 2020-21 Annual Plan.

33. The table and graphs following summarise the quarter end fund balances over the last 12 months.

Fund	31 Mar 2020	30 Jun 2020	30 Sep 2020	31 Dec 2020	31 Mar 2021
	$000	$000	$000	$000	$000
Long-Term Investment Fund	46,305	49,950	51,810	49,925 *	50,206
Future Investment Fund	41,712	61,128	63,094	64,300 *	64,418
Total	95,398	88,017	111,078	114,904	114,625

* December 2020 saw $6.5m (LTIF $4.5m & FIF $2.0m) Funds being divested for the first time, which explains the reduced fund balance.

Long-term Investment Fund

34. Invested since November 2018, the fund provides a return which, protects capital value first and then funds Council’s operating costs.

35. The table below shows the LTIF income earned YTD against the 2020-21 Annual Plan.

Income	Full Year Annual Plan 2020-21		YTD Ann. Plan		YTD Q3 Actuals		Variance to YTD Ann. Plan
	$000	%	$000	%	$000	%	$000
Capital Protection	838	2%	629	1%	718	1%	91
Fund Operating Costs	1,876	4%	1,407	3%	4015	8%	2,608
Gross Income Net of Fees	2,715	6%	2,036	5%	4,735	9%	2,699

36. The table below shows the key balances of the LTIF as at the end of Q3.

	1 July 2020 – Opening Balances			31 March 2021 – Closing Balances
	Capital Protected Balance	Undivested Funds Available	Total Fund Balance	Capital Protected Balance	Undivested Funds Available	Total Fund Balance
	$000	$000	$000	$000	$000	$000
LTIF	47,996	1,954	49,950	48,719	1,487	50,206

37. The table above has been prepared as at 31 March 2021 (Q3). It should be noted, that the LTIF needs to earn a further $240k to meet the required annual capital protection of $980k. This amount is slightly different to the 2020-21 Annual Plan, due to the budgeted numbers being set off the Fund Balances in March 2020.

38. At closing on 31 March 2021, Jarden’s asset allocation was below SIPO policy minimum limits for International Fixed Income in the Long-Term Investment fund (LTIF). This was caused by the asset classes negative return reducing the value relative to the portfolio. The allocation returned to policy compliance during April.

Future Investment Fund (FIF)

39. Invested since September 2019, the fund provides a return which, protects capital value first and then funds Council’s operating costs.

40. The table below shows the FIF income earned YTD against the 2020-21 Annual Plan.

Income	Full year Annual Plan 2020-21		YTD Ann. Plan		Q3 YTD Actuals		Variance to YTD Ann. Plan
	$000	%	$000	%	$000	%	$000
Capital Protection	974	2%	731	1%	927	1%	196
Fund Operating Costs	1,690	4%	1,268	2%	4,306	7%	3,038
Gross Income Net of Fees	2,665	6%	1,999	3%	5,232	8%	3,234

41. The table below shows the key balances of the FIF as at the end of Q3.

	1 July 2020 – Opening Balances			31 March 2021 – Closing Balances
	Capital Protected Balance	Undivested Funds Available	Total Fund Balance	Capital Protected Balance	Undivested Funds Available	Total Fund Balance
	$000	$000	$000	$000	$000	$000
FIF	61,775	(647)	61,128	62,706	1,662	64,418

42. As mentioned previously, the previous table has been prepared as at 31 March 2021 (Q3). Similar to the LTIF, the FIF will need to earn a further $305k to meet the required annual capital protection of $1,236k.

Investment Property

43. In the current financial period, 2020-21, 16 Napier Endowment Leasehold Properties have been freeholded totaling $2.4m. $2.1m of this has been subsequently paid to ACC as settlement for the remaining 42 years rent for these properties.

44. The income from leasehold sales is recognised in the current financial year. Most of which goes into offsetting the movement in the ACC liability – the additional proceeds are now being placed in the Sale of Land Reserve.

HBRIC

45. Per Council Policy, HBRIC will separately provide a quarterly update to the Corporate and Strategic Committee in May 2021. Main matters of relevance are:

45.1. Consultation on establishing a new Council Controlled Trading Organisation has completed and an update will made by HBRIC.

45.2. Potential that the PONL will pay a final dividend in June 2021

45.3. The table below shows the key balances of the FIF (HBRIC) as at the end of Q3.

	1 July 2020 – Opening Balances			31 March 2021 – Closing Balances
	Capital Protected Balance	Undivested Funds Available	Total Fund Balance	Capital Protected Balance	Undivested Funds Available	Total Fund Balance
	$000	$000	$000	$000	$000	$000
FIF	46,584	(964)	45,620	47,286	1,475	48,726

2020-21 Year to Date Performance Summary

46. The following table shows investment income to date against the 2020-21 Annual Plan.

Income	Annual Plan 2020-21	YTD Ann. Plan	YTD Q3 Actuals	Variance to YTD Ann. Plan
	$000	$000	$000	$000
Other financial assets	4,195	3,146	8,345	5,199
Managed Funds	3,567	2,675	8,321	5,646
Other Interest*	628	471	24	(447)
Investment property	2,343	1,757	1,487	(270)
Endowment leasehold land	1,502	1,127	851	(276)
Wellington Leasehold land	841	631	636	5
Dividends	5,369	4,777	9,158	4,381
PONL Dividend	3,000	3,000	5,500	2,500
Managed Fund	2,369	1,777	3,658	1,881
Total	11,907	9,680	16,729	9,310

* Includes Interest budgeted to be earnt on scheme reserves.

47. The $9.3m favourable YTD performance should be considered cautiously. There is still a significant ‘point in time’ factor that could potentially reduce this variance significantly over the last quarter, particularly when considering the performance of the managed funds. It would be prudent to expect that the future returns will continue to equalise over the next remaining quarter. If performance does equalise, it could be expected that the full year performance will be ~$8.0m ahead of budget.

48. The other material significant change which may arise is Napier Port paying HBRIC an interim dividend in June 2021. For this to have a fiscal impact for Council, HBRIC’s Board would need to consider its requirements and then to agree to any funds being passed to Council. Unlike the managed funds, this would continue to improve the actual performance when compared to the 2020-21 Annual Plan

Decision Making Process

49. Council and its committees are required to make every decision in accordance with the requirements of the Local Government Act 2002 (the Act). Staff have assessed the requirements in relation to this item and have concluded:

49.1. The agenda item is in accordance with the Finance, Audit and Risk Sub-committee Terms of Reference, specifically “The Finance, Audit and Risk Sub-committee shall have responsibility and authority to (2.4) monitor the performance of Council’s investment portfolio”.

49.2. As this report is for information only, the decision making provisions do not apply.

Recommendation

That the Finance, Audit and Risk Sub-committee receives and notes the “Quarterly Treasury Report for 1 January - 31 March 2021” and confirms that the performance of Council’s investment portfolio has been reported to the Sub-committee’s satisfaction.

Authored by:

Geoff Howes

Treasury & Funding Accountant

Bronda Smith

Chief Financial Officer

Approved by:

Jessica Ellerm

Group Manager Corporate Services

Attachment/s

1 ⇩

HBRC Treasury Reporting - March 2021