Revaluation of Roads is not best practice
Please see a media release from Kapiti Mayoral Candidate plus supporting documents in the following email trail.
Revaluation of Roads is not best practice - Office of the Auditor General
Mayoral candidate Gavin Welsh is calling on Kapiti Coast District Council to revoke the decision to revalue the land under roads in light of information received from the Office of the Auditor General.
The Mayor and Councillors on the Corporate Business Committee (CBC), chaired by Councillor Ross Church, recently unanimously voted to revalue the land under roads and footpaths.
Within a Council press release following the decision, Councillor Church was quoted as saying;
"The policy all CBC members agreed to this morning was about best accounting practices and not about borrowing more money".
Advice was provided to Council that it may take six months to a year to obtain clarity from the Office of the Auditor General, in order that they may make an informed decision, however it was decided by the Mayor and Councillors that this would be too long to wait and the vote was taken.
Two phone calls and a few emails provided Mr. Welsh with the following statement from the Office of the Auditor General:
"There's a cost to carrying out revaluations regularly. In our view, the benefits of doing regular revaluations of land under roads are questionable, particularly given there's no agreed methodology for valuing such land.
Therefore, we don't consider it best practice for local authorities to revalue land under roads."
"The ramifications surrounding this advice will not only affect Kapiti Coast District Council, but all other Councils who are currently regularly re-valuing their land under roads may have to think again" Mr. Welsh said.
Councillor Church was also quoted within the press release as saying,
"This is not, and I emphasise not a move to allow Council to borrow more money than has been laid down in the Long Term Plan"
What then is the explanation behind the following exert from the KCDC 2013 Pre-election Report?:
The next revaluation is due in 2013/14. If the equity does not increase to the levels projected in the LTP then the debt/equity ratio will be higher than the forecasts. In that case, the council may have to consider reducing its capital programme to ensure the ratio of net debt to equity remains below 20%.
Current equity figures include the value of land under roads. In accordance with Council’s Accounting Policy these land values have not been reviewed since 2002. In mid-August the Corporate Business Committee will be considering a proposal to change the Accounting Policy and carry out revaluations of land under roads every three years on the same basis as all of Council’s other assets. If this change is approved the debt to equity ratio would be expected to reduce in the order of 3%.
If the change to the Accounting Policy is not approved, Council will have little flexibility to undertake additional capital expenditure (beyond that already planned in the LTP) until that ratio starts to decrease in 2019/20.
"This decision has been railroaded under the inadequate leadership of the Mayor and the Chair of the Corporate Business Committee, Councillor Ross Church." Mr. Welsh said. "Council has again failed to provide the necessary checks and balances that are required to ensure that decisions are made on sound and current advice. I call on the Mayor and Councillors to reverse their decision, and I call on the community to elect a more astute and responsible Council in the approaching local body elections."
From Office of the Auditor-General:
Apologies for my delay in responding. Please see below the response to your query, prepared by our office.
For many years (since about 2002) local authorities have included land under roads as an asset in their financial statements to comply with financial reporting standards. At the time that local authorities first included land under roads in their financial statements, the amount at which the land was recorded was likely to have been based on one of a number of methodologies for valuing such land. However, unfortunately there's not an agreed methodology for valuing land under roads.
Although land under roads is required to be recorded as an asset, it doesn't need to be revalued. If an entity decides to revalue land under roads, financial reporting standards require the entity to carry out valuations with sufficient regularity to ensure the land is recorded at an amount that does not differ materially from its fair value.
There's a cost to carrying out revaluations regularly. In our view, the benefits of doing regular revaluations of land under roads are questionable, particularly given there's no agreed methodology for valuing such land.
Therefore, we don't consider it best practice for local authorities to revalue land under roads.
Press release from KCDC:
In pursuit of best accounting practices
Thursday 15 August 2013
The land under public roads in Kapiti will be re-valued every three years to bring the process in line with other councils and modern accounting practices.
"This is not, and I emphasise not a move to allow Council to borrow more money than has already been laid down in the Long Term Plan," said Councillor Ross Church, chair of the Corporate Business Committee of Council.
"The LTP containing debt schedules for the next 20 years was agreed to only after considerable debate and consultation and we are not planning to add to it."
The Corporate Business Committee today unanimously agreed to change Council's Accounting Policy so land under roads will be re-valued with work starting this November and updated at June 30, 2014.
Committee members also voted to send a letter to Local Government New Zealand and the Auditor General's office requesting consensus on how local authorities across New Zealand value land under roads.
Most local authorities re-value the land under their roads but do so at varying times. Porirua City, Tauranga, Western Bay of Plenty, South Taranaki and Dunedin re-value the land under their roads every three years when all properties in their areas are re-valued.
Kapiti last re-valued land under roads in 2002.
Councillor Church said Council's current position was inconsistent with good accounting practices.
"We re-value the land under public buildings and water reservoirs, and re-value public utilities such as water and waste water pipes, but we don't do this on a regular basis with land under roads while many others do."
Councillor Church said the re-valuation move had nothing to do with Council's debt levels.
"When it comes to debt, lenders take a particular interest in our debt-to-revenue ratio i.e. our ability as a Council to pay off debt, much more so than our debt-to-asset ratio.
"It's the same situation for a couple living on a limited income. The couple may wish to borrow $100,000 against the value of their property but the bank manager will want to know first and foremost whether they have a cash flow that can support repayments. It's the same issue for a Council.
"The policy all CBC members agreed to this morning was about best accounting practices and not about borrowing more money."
• The press release quoting the Chair of the Corporate Business Committee
• Pre- election report
• The advice given as to how long clarity would take to obtain from the OAG
• The simplicity of obtaining the information
(and the clear indication that this advice was given to 'railroad' the decision through.)
• The advice to Council that this was best practice
• The Evidence to conclude that it is not best practice.