Tuesday, 4 April 2017

LG Funding: A Big Picture

Any discussion on local government funding needs a big picture to help keep all the bits and pieces straight. As the picture below shows, councils  get their money from many sources. And those funds take different pathways through a council. This map applies mostly to territorial authorities not regional councils although the rules are the same for both.

Council budgets and accounts are structured into operating and capital components. The operating budget pays for supplies (maintenance contractors, energy, insurance etc), staff, payment of interest, and depreciation of assets. The capital budget pays for new and replacement assets as well as upgrades. These assets are both the public assets (roads, pipes, libraries etc) as well as internal assets (such as council buildings, IT, vehicles etc).


1. Local Government uses standard accounting

All council accounting practices comply with NZ accounting standards. Some councils go even further and sign up to International Financial Reporting Standards. This means their accounts can be read in exactly the same way as Spark's or Fonterra's.

2. Local Government budgets backwards

Unlike central government, councils work out what they need to spend then work backwards to calculate how much they need to raise by way of rates and debt to fund the programme.

3. The Operating Surplus

The Local Government Act requires councils to balance their operating budgets and, as a rule, they do not budget for a profit or surplus. The surplus they do generate comes mostly from depreciation of assets. So this is the money they "put aside" to replace assets when they wear out. In practice they do not route the money through a reserve account and it goes straight to the capital expenditure accounts. If an activity does not need all that money for asset replacement in any one year then the capital surplus goes to the capital reserves. So I show a direct link from operating surplus to capital budget.

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