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Expenditure
Control and Procurement Committee
21 March 2023
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Discretionary
spend
File No.: CP2023/02292
Te take mō te
pūrongo
Purpose of the report
1. To
define the scope of discretionary spend and advise on options for managing or
controlling discretionary spend, while the impacts of the
recent flooding and cyclone events are assessed and quantified.
Whakarāpopototanga matua
Executive summary
2. On
23 February 2023, the Governing Body resolved to encourage the council group to
closely scrutinise and manage any spending and, where possible, consider
stopping or limiting new discretionary expenditure. The Governing Body also
requested staff to report to this committee on defining the scope of
discretionary spend, options for managing or controlling discretionary spend
and any implications of stopping or limiting such spend.
3. Discretionary
expenditure is inherently difficult to define as it is situational and
subjective in nature. Non-discretionary or essential expenditure is defined
with reference to the service prioritisation framework “must do”
category, and also to the essential services defined during the Covid level 4
lockdowns. These activities primarily relate to the provision of essential
infrastructure and legislatively prescribed services such as civil defence and
regulation. All other expenditure could be considered discretionary, however a
practical approach to maintaining service levels and upholding contractual
obligations is what has been put in place.
4. There
are already expenditure savings targets and actions in place to reduce spend,
such as recruitment and purchasing controls. Further actions undertaken to
reduce discretionary expenditure include a directive from the Group Chief
Financial Officer to all people leaders, a review of purchasing card holders
and expenditure, and a further tightening of procurement controls. Capital
expenditure is also subject to these controls and, in addition, is currently
undergoing a prioritisation process as part of the Annual Budget 2023/2024
process.
Ngā tūtohunga
Recommendation/s
That the Expenditure Control and
Procurement Committee:
a) tuhi
ā-taipitopito / note the discretionary spend control measures being
progressed by management prior to the next annual budget.
Horopaki
Context
5. At
its meeting on 23 February 2023, the Governing Body passed the following
resolution when considering agenda item 7 (Chief Executive and Chief Financial
Officer monthly update):
Resolution number GB/2023/11
d) tono
/ request staff to report back to the next meeting of the Expenditure Control
and Procurement Committee on defining the scope of discretionary spend, options
for managing or controlling discretionary spend and any implications of
stopping or limiting such spend.
6. This
resolution was created within the context of the financial burden the council
will face following the recent flooding and cyclone events. An update was
provided to the Governing Body on 15 March 2023 via memo indicating that while
still uncertain, initial estimates suggest the cost of the council
group’s operational response and recovery from these events could cost
between $900 million and $1.2 billion over a number of years. These estimates
include some short-term impacts on revenue, operational costs such as immediate
cleaning, maintenance and repairs, as well as capital costs to renew damaged
assets. The costs in the current financial year will largely be addressed
through reductions in other expenditure, insurance recoveries, and some
increase in debt compared to the outlook prior to the weather events. The
council group is continuing to assess the impacts of these events and estimate
the associated costs. It is noted that subsequent to the 23 February Governing
Body decision, the council has received a request from City Rail Link Limited
for an increased funding commitment to the City Rail Link project adding to the
council’s financially constrained context[1].
7. Given
the weather event driven costs are largely unbudgeted, the Governing Body
resolved to request advice on managing or controlling discretionary expenditure
as an interim measure to create some additional financial capacity within the
already constrained council finances.
8. In
addition to resolution d) above, the Governing Body also passed a resolution
encouraging the Chief Executive, local boards and council-controlled
organisations (CCOs) to closely scrutinise and manage any spending, and where
possible consider stopping or limiting new discretionary expenditure.
Tātaritanga me ngā
tohutohu
Analysis and advice
Defining discretionary spend
9. In
determining what is discretionary spending, one approach is to first establish
what is essential or non-discretionary spending. The Merriam Webster Dictionary
defines essential as something basic, necessary, indispensable or unavoidable.[2] Essential or non-discretionary
expenditure therefore refers to spending considered to be critical for basic
needs or that is mandatory.
10. The service
prioritisation framework adopted during the Annual Budget 2022/23 outlines a
category of activities that council must do due to a legislative requirement
(see Figure 1).
Figure 1: Auckland Council
Service Prioritisation Framework
11. Another
method for defining essential services would be to rely upon the definition of
essential services during the Covid pandemic which identified those services
which staff could leave self-isolation to deliver. Expenditure on these
services and assets combined with those that we are required by law to
deliver could therefore be defined as essential or non-discretionary spending
and are set out in the following table:
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Storm water infrastructure
repair and maintenance and water treatment
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Resource management and environmental
planning and monitoring
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Waste collection and
management services
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Governance activities
(including co-governance)
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Auckland Emergency Management
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Official information and
privacy
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Cremation and burial services
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Obligations to Māori
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Animal welfare management
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Employer obligations
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Hazard monitoring and
resilience
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Health and Safety compliance
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Biosecurity
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Financial planning and
compliance
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Building and resource
consenting
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Rates and property valuations
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Licencing and regulatory compliance
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12. Discretionary
spending by contrast may be defined as activities paid for that are not
considered completely necessary, or money spent on these things.[3] A discretionary expense is a
cost that a business or household can survive without if necessary; a want
rather than a need.
13. The above
enables an objective definition for what are essential/legislated activities
but the distinction between other non-discretionary (such as contracted
services or critical asset maintenance and renewals) and distinctly
discretionary activities is more subjective. It varies depending on the
specific situation. In this respect, both the uncertainty about the financial
impact of the weather events and the time period over which we are looking to
control or manage discretionary spend provide important context.
14. The time
period is relevant because some spend can be paused for a short period of time
without significant implications, however if it was paused for a longer period
or stopped entirely that would have a larger impact. For example, a short-term
pause of staff training would have minimal effect, however over the longer term
it would affect staff retention and capability. The relevant timeframe is until
the end of the current financial year, after which the Annual Budget 2023/2024
(incorporating the appropriate budget for storm recovery and mix of financial
levers to balance the budget) will be in place. Usual controls around
compliance with and monitoring of that budget can resume.
15. Also relevant
is the context that council has a role to deliver a certain set of minimum
public services to the community. Defining that set is the subjective part. In
the absence of any directive from the Governing Body or local boards,
temporarily stopping or curtailing services we provide to the community in
order to reduce expenditure has not been considered (e.g. operation and
maintenance of our parks and community facilities).
16. There will
also be other circumstances where it is considered appropriate or prudent even
within the current context to continue with expenditure such as:
· non-essential
services and activities with contractual obligations where there would be
significant cost implications for stopping or pausing
· critical
asset maintenance and renewals
· response
and recovery to the flooding and cyclone events
· necessary
expenditure to ensure the operation and maintenance of our parks, community
facilities and corporate buildings
· to
continue a major project when putting it on hold would significantly jeopardise
the overall delivery of the project or that of other interdependent major
projects or a key strategic priority
· property
transactions that are due to settle
· externally
funded projects/programmes where the funder has directed that the project is to
continue
· works
about to commence where contract or funding agreements or award letters commit
us to proceeding now and/or start date cannot be deferred
· spend
that supports revenue generation if revenue would be jeopardised
· expenditure
necessary to deliver the substantial savings programme in the annual budget
consultation document
· support
services required to support and enable essential services to continue (e.g.
payroll, ICT, communications, corporate property, customer call centres, etc.).
17. Even if an
activity is not discretionary, council could reduce the scope or service level
of that provision for a period of time in order to reduce expenditure.
Decisions about whether or not to provide services will be considered as part
of the long-term plan process utilising the service prioritisation framework.
Existing processes in place to manage expenditure
18. Each year the
annual budget sets the activities, services and investments that council and
the CCOs should deliver and the amount of money allocated for those purposes.
Items that are unbudgeted or are outside the Chief Executive’s delegation
are brought back to the Governing Body for approval.
19. Monthly
financial reporting processes are in place to monitor spending against budget
and take action on areas of concern. Financial reports outlining performance
against approved budget are provided to the Governing Body at its monthly
meetings.
20. Staff have
been continuing the process in place for achieving the current $90 million
savings target, with $76.3 million achieved at 28 February 2023. Initiatives
include:
· contract
procurement cost reductions through working with contractors to identify the
most cost-efficient way to perform a project
· locking
in capital contracts early and arranging the pre-purchasing of required
components
· simplification
and automation of processes to improve efficiency and reduce cost, for example
in building consenting for private swimming pools
· additional
Finance approvals for contracts over $300,000 to challenge value for money
· zero-based
budgeting to identify and reduce budget that has been underspent and may not be
needed
· a
revenue project to identify and implement additional revenue opportunities,
such as additional fees for services and advertising at council facilities.
21. In light of
the financial challenge, the organisation has already been taking additional
steps to improve the situation in advance of the next financial year.
Additional scrutiny and restrictions on recruitment have been in place since
late October 2022. A review of contractors is in progress to determine whether
savings can be achieved by bringing/using resource in-house or whether it is
discretionary and can be paused or stopped. The executive leadership team
undertook management reviews and stopped or reduced some activities, for
example the printing of OurAuckland magazine and reduction in corporate
strategy work. Staff advice on additional areas of cost reduction for the
2023/2024 budget was presented to the Governing Body in October 2022 and since
then many of those initiatives have been progressed, including vehicle fleet
reduction, holding staff vacancies and sub-leasing vacant property space.
Further actions for controlling/managing discretionary spend
22. Since the
size of the weather event challenges has become clearer, the following actions
have been undertaken to further manage spend:
· communication
from the Group Chief Financial Officer to all people leaders, to further reduce
our spending until 30 June 2023 (when the new FY24
budget will come into effect) including the following restrictions:
o staff
training to only meet minimum role requirements
o stop
non-essential spend such as travel, catering and entertainment
o no
new spend on professional services or from unallocated fund budgets e.g.
Business Change Fund
o not commencing any new
opex and pausing projects where spend is not yet contracted (excluding local
board Locally Driven Initiative (LDI) and Asset Based Services (ABS) budgets)
o not
commencing any new capital expenditure projects (including lower priority asset
renewals) and pausing projects where spend is not yet contracted (excluding
local board LDI and ABS budgets).
· initiated
a review of purchasing cards (“P-cards”) to consider whether the
policy and process is still fit-for-purpose. Various options will be
considered. An immediate action is underway to re-assess whether current P-card
holders meet the current policy criteria (council employees who make regular
low-value purchases; travel regularly on council business; make frequent
one-off purchases; or need to make purchases outside normal business hours).
· Any
spend requests (e.g. purchase orders and contract requisitions), which do not
conform to the exceptions outlined in the communications from the Group Chief
Financial Officer, are subject to checking by the Procurement team. Confirmation of whether or not expenditure should go ahead is sought
from an appropriate staff member (for example, Commercial Finance Manager or
General Manager) before being able to proceed.
23. It would be
possible to further tighten purchasing and procurement controls by requiring
additional reviews and approvals. There is a trade-off between the use of staff
time to perform these controls, which is onerous and diverts time from other
initiatives, and the amount of additional expenditure they may prevent.
24. Regarding
capital expenditure, there is already a process underway to
reprioritise/reassess the capital programme in light of the recovery required
from the flooding and cyclone events. This information will be workshopped with
the Governing Body in May as part of the annual budget process. However, as
part of our efforts to further reduce spending, staff have been instructed not
to commence any new capex projects (including lower priority asset renewals)
and pause projects where spend is not yet contracted (excluding local board LDI
and ABS budgets). Exceptions can be agreed with the
relevant Executive Leadership Team member where the circumstances
are considered appropriate or prudent to continue such as those listed in
paragraph 16.
25. Where funding
is ring-fenced for specific work programmes such as the Māori outcomes
fund and targeted rates (water quality; natural environment), staff have been
asked to reconsider the existing programme and whether this is the best use of
the budget when it is possible that changes or deferring some funding to FY24
may better support the recovery required from the weather events if required.
26. In addition,
the following material has been provided to support the Expenditure Control and
Procurement Committee with identifying savings during February and March:
· an
update on the service prioritisation framework and a case study to demonstrate
its use
· a
current state review of all council services that are delivered by the Auckland
Council Group
· budgeted
expenditure data for FY23 and FY24 and historical expenditure actuals for
FY19-FY22 within a user-friendly tool to provide members with context and an
easy interface.
27. Staff will
continue to review services and investigate savings opportunities suggested by
the committee and report these back to enable direction and decisions around
potential savings.
Tauākī whakaaweawe
āhuarangi
Climate impact statement
28. Projects or
activities with a positive climate impact may be affected by the current
spending controls. Targeted rate spend including the climate action targeted
rate should continue as it is required to be spent on the specific purpose for
which it was collected. However advice to staff is that this should be subject
to review to consider whether the current programme best addresses the needs
following the recent weather events.
Ngā whakaaweawe me
ngā tirohanga a te rōpū Kaunihera
Council group impacts and views
29. On 23
February, the Governing Body also resolved:
Resolution number GB/2023/10
c) tuhi
ā-taipitopito / note the financial situation facing Council in light of
the forecast $295 million operational budget shortfall and recent severe
weather events and ongoing economic uncertainty
d) whakaae
/ agree to encourage the Chief Executive, Local Boards and Council Controlled
Organizations to closely scrutinise and manage any spending and, where
possible, consider stopping or limiting new discretionary spending
30. CCOs have
been informed of the Governing Body’s 23 February resolution for
consideration. CCOs are already managing existing internal savings targets for
FY23 and are progressing internal saving and efficiency initiatives to be
implemented for FY24. In addition, CCOs are considering opportunities to
contribute to the further $12.5 million savings target that the Expenditure
Control and Procurement Committee have been tasked with identifying.
Ngā whakaaweawe
ā-rohe me ngā tirohanga a te poari ā-rohe
Local impacts and local board views
31. Local boards
have responsibility for decision-making and oversight of decisions on local
activities (including but not limited to, local community development and
facilities, local libraries, local recreation facilities and initiatives, local
parks, local environmental management, local arts and culture activities, local
events, and business area planning). It therefore follows that in order to stop
or pause any planned expenditure in relation to these activities, the approval
of the relevant local board would be required.
32. Local boards
have been informed of the Governing Body’s 23 February resolution for
their consideration. In addition, people leaders have been asked through the
communication from the Group Chief Financial Officer, to re-check with local
boards before commencing any local board projects or non-essential spending
relating to local activities.
Tauākī whakaaweawe
Māori
Māori impact statement
33. Whilst there
is no direction to pause or stop spending on projects and programmes funded by
the Māori Outcomes Fund, staff have been asked to reconsider the existing
programme and whether this is the best use of the budget when it is possible
that changes or deferring some funding to FY24 may better support the recovery
required from the weather events if required.
Ngā ritenga
ā-pūtea
Financial implications
34. The purpose
of the report is to reduce expenditure on discretionary activities while the
impacts of the recent flooding and cyclone events are assessed and quantified.
In identifying and implementing actions to control discretionary spending,
management have been mindful of the trade-off between the use of staff time to
perform these controls, which could be onerous and divert time from other
initiatives, and the amount of additional expenditure they may prevent.
35. It is
difficult to determine the quantum of savings that can be achieved through the
spend control measures that have been implemented or are being progressed,
however, applying a level of restraint until the next annual budget is in place
is a prudent step to create some additional financial
capacity within the already constrained council finances. The savings made
would be reported as part of the wider savings achieved for FY23 in the quarter
four performance report reported to the Governing Body.
Ngā raru tūpono me
ngā whakamaurutanga
Risks and mitigations
36. There are
risks associated with pausing or stopping operational and capital expenditure
such as cost increase implications, impacts to revenue generation or impacts to
delivery of other interdependent projects. In determining whether to pause or
stop discretionary operational and capital expenditure, staff are managing
these risks carefully by considering whether the circumstances are appropriate
to make an exception.
Ngā koringa ā-muri
Next steps
37. Staff will
continue to implement spend control measures until the end of the current
financial year, after which the Annual Budget 2023/2024 (incorporating the
appropriate budget for storm recovery and mix of financial levers to balance
the budget) will be in place. Usual controls around compliance with and
monitoring of that budget can resume.
Ngā tāpirihanga
Attachments
There are no attachments for
this report.
Ngā kaihaina
Signatories
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Authors
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Kerri Foote - Executive Officer : CFO Division
Nicola Mills - General Manager Financial and Business
Performance
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Authoriser
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Peter Gudsell - Group Chief Financial Officer
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