The Authority, a body corporate, was established under the Local Government Finance Authority Act1983 (the Act). It is managed and administered by a Board of Trustees. In accordance with the Act the Board consists of seven members and up to two co-opted additional members.
The functions of the Authority, as specified in subsection 21(1) of the Act, are to develop and implement borrowing and investment programs for the benefit of Councils and prescribed local government bodies; and to engage in such other financial activities as are determined by the Minister, after consultation with the Local Government Association, to be in the interest of local government.
In addition, subsection 21(2a) of the Act provides that the Authority must not make a loan, other than one to a Council or prescribed local government body; make an investment; or enter into a partnership or joint venture or form a company, except with the approval of the Treasurer.
Liabilities incurred or assumed by the Authority in pursuance of the Act are guaranteed by the Treasurer pursuant to subsection 24(1) of the Act. As a result of this guarantee the Authority pays an annual guarantee fee to the Treasurer.
The net profit (in total or in part) of the Authority may be distributed amongst the Councils and local government bodies with which the Authority has entered into financial arrangements. Distributions are described as bonus payments in the Accounts.
Subsection 33(2) of the Local Government Finance Authority Act 1983 specifically provides for the Auditor-General to audit the accounts of the Authority in respect of each financial year.
The audit program covered all major financial systems and was directed primarily towards obtaining sufficient evidence to enable an audit opinion to be formed with respect to the financial statements and internal control.
During 2000-01 specific areas of audit attention included:
During the year a letter communicating issues arising from the audit was forwarded to the Chairman of the Authority and a written response was received. Further details relating to these issues are contained in ‘Audit Findings and Comments’ hereunder.
The review of the internal control structure of the Authority concluded that an adequate system of internal control, including segregation of duties and an independent checking activity, was in place and operating effectively.
The Authority implemented a new Quantum Treasury Management System in the previous financial year. A review of Quantum was undertaken as part of the audit coverage in 2000-01. The review covered controls over system recording and reporting, computer access and system information security.
Controls were assessed and tested and it was concluded that they were adequate, in place and operating effectively.
In addition to the scope of audit previously mentioned, a review was conducted of the investment and loan provided by the Authority to the Ecouncils e-commerce venture, which commenced operations during 2000-01. It was noted that Board approval was given for the Authority to participate in this venture. Approval was also obtained from the Minister for Local Government and the Treasurer, as involvement in the e-commerce proposal constituted an investment of a nature which required approval under the Local Government Finance Authority Act1983.
In monetary terms, the Authority has $50 000 invested in the unit trust which owns LGCS Pty Ltd (LGCS), the company trading as Ecouncils, and a convertible cash advance debenture facility for $700000 has been approved for LGCS of which $660 000 has been drawn. This results in a total exposure to the LGFA of $710000. As LGCS has no assets as such, this cash advance debenture is effectively unsecured (unlike council loans which are secured over general revenue of the council). As there is no effective security for the loan, this would indicate a risk as to the recovery of the loan which is dependent upon the success of the venture.
Given the degree of risk inherent in this venture, it was recommended that the Board of the Authority closely monitors the financial position of LGCS Pty Ltd in order to assess its ability to make interest payments and to repay its debt when it becomes due. It was further recommended that should recovery be doubtful, then consideration be given to either writing down the loan, or establishing a provision for doubtful debts.
In response to the matter raised, the Chairman advised that the Board of the Authority was well aware of the risks involved when the decision was made to participate in the venture. Participation was supported on the basis that Ecouncils is effectively providing procurement services to councils and that direct support for the venture was warranted. In addition, on the basis that the Tax Equivalent Payment made each year eventually assists Local Government, direct financial support for assistance to councils by providing a procurement service was justified.
Audit will continue to monitor developments as to the security of the investment and recovery of the loan made.
As required by subsection 36(1)(a)(iii) of the Public Finance and Audit Act 1987,the audit of the Local Government Finance Authority included an assessment of the controls exercised in relation to the receipt, expenditure and investment of money, the acquisition and disposal of property and the incurring of liabilities. The assessment also considered whether those controls were consistent with the prescribed elements of the Financial Management Framework as required by Treasurer’s Instruction 2 ‘Financial Management Policies’.
Audit formed the opinion that the controls exercised by the Local Government Finance Authority in relation to the receipt, expenditure and investment of money; the acquisition and disposal of property; and the incurring of liabilities, were sufficient to provide reasonable assurance that the financial transactions of the organisation were conducted properly and in accordance with the law.
The Authority achieved a profit from ordinary activities before tax of $4million ($3.6million) and made appropriations of $2.6million ($2.6million) from profit available for appropriation.
The profit and principal distributions from the total profit available for appropriation for the past five years are presented in the following table:
The profit from ordinary activities before tax result was achieved within the context of similar increases experienced in revenues from ordinary activities (increased by $3.5million from the previous year) and in expenses from ordinary activities (increased by $3.1million). The increases in revenues and expenses were mainly attributed to general increases in interest rates (refer Note 22) and revenue generated from a final part maturity of a structured finance deal.
As from 1 June 1996, the Authority came under a Taxation Equivalent Payments System and is required to make payments equivalent to Company Income Tax. The amounts are paid into an account established with the State Treasurer entitled the ‘Local Government Taxation Equivalents Fund’ and the funds are then available for local government development purposes as recommended by the Local Government Association of South Australia and agreed by the Minister for Local Government in accordance with section 31A of the Local Government Finance Authority Act 1983. For this financial year, the amount payable for income tax equivalent was $1.4million.
Under subsection 22(2) of the Local Government Finance Authority Act 1983, the Authority has discretion to make distributions from the surplus for the year to Councils and local government bodies. These distributions are recorded as bonus payments in the financial statements. In 2000-01, a provision for a bonus payment of $1.1million was made which was slightly higher than amounts provided in previous years.
The Statement of Financial Position shows assets of $329.4million and liabilities of $283.9million at 30June2001 compared with corresponding amounts of $366.9million and $323million at 30June2000.
The reduction in assets and liabilities was due mainly to the final part maturity of a structured finance deal between the Authority, the South Australian Government Financing Authority and other counter parties involving promissory notes. This repayment was met by a reduction in the asset - payments due from the South Australian Government Financing Authority. (Refer Notes 9 and 15 to the Financial Statements).
The following table displays the variations in the composition of major liabilities over the period 1998-99 to 2000-01. Accrued interest payable, provisions and other liabilities have been excluded from the analysis.
Analysis of Liabilities
The table highlights the trend in the composition of the Authority’s liabilities. In recent years reliance is being placed on short term money market borrowings and deposits from Councils to fund the Authority’s lending activities.
During recent years, the Authority has moved towards placing more reliance on the funding of loans to Councils via deposits lodged by Councils, this being more cost effective than issuing short-term promissory notes. Put simply, the Authority borrows short term to take advantage of low interest rates and lends long term. Interest rate exposures are hedged through the use of interest rate swap agreements and futures contracts.
The Authority appropriated $1.5million from total profit available for appropriation to the General Reserve, resulting in a balance as at 30June2001 of $45million.
Total equity of the Authority amounted to $45.5million as compared to total assets of $329.4million. The equity comprises a General Reserve of $45million, and Retained Profit of $0.5million. In relation to the General Reserve, the foregoing table entitled Profit and Distributions demonstrates the policy of regularly appropriating a significant portion of the profit to that reserve ($9million over the five years to 30June2001).
The total equity is invested in financial securities covering a range of investments and in loans and advances. Equity has no corresponding cost of capital and generates investment returns. These returns provide a buffer for the Authority against unforeseen unfavourable impacts on revenues and expenses.
The Statement of Cash Flows shows that the main inflow was from investing activities which provided cash inflows of $35.9million. The main contributing source for this inflow was from funds received from the South Australian Government Financing Authority following final part maturity of a structured finance deal that partly involves that institution as previously discussed. Inflows from investing activities were used to fund financing activities which had total cash outflows of $39.6million. The main cash outflows in financing activities were the repayment of promissory notes $31million and repayment of inscribed stock of $9.6million.