The Authority, a body corporate, was established under the Local Government Finance Authority Act 1983 (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 operating 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.
Operations for the year resulted in an operating profit before income tax of $3.6 million ($4 million).
Reserves increased by $1.5 million to $43.5 million.
Total assets decreased by $36.5 million and total liabilities decreased by $37.7 million.
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 1999-2000 specific areas of audit attention included:
interest income, other income and expenses;
council loans, advances, and deposits;
investments and investment income;
administrative expenses including payroll;
borrowings and derivatives;
budgetary control and management reporting.
During the year a letter communicating issues arising from the audit was forwarded to the Chief Executive Officer 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. However the review also identified a number of issues which could result in an improved control environment.
The main issues related to the need for the Authority to:
ensure compliance with the Treasurer’s Instructions;
formalise its risk policy and distribute to staff responsible for its administration and compliance;
utilise the new Quantum Treasury Management system implemented during the year to develop system processes and procedures to meet the needs of its risk policy management reporting requirements;
The Authority has indicated that action will be taken to address the issues raised by Audit.
The Authority implemented a new Quantum Treasury Management system in June 2000. A preliminary review of the new system was performed by Audit as part of the 1999-2000 audit. The audit identified the need for the Authority to establish adequate physical and logical access controls.
A detailed review of Quantum will be undertaken as part of the audit coverage in 2000-01 and Audit will access the developments with respect to the establishment and implementation of system controls.
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 an operating profit before tax of $3.6 million ($4 million) and made appropriations of $2.6 million ($3 million) from profit available for appropriation.
The operating profit and principal distributions from the total profit available for appropriation for the past five years are presented in the following table:
The operating result was achieved within the context of similar reductions experienced in operating revenues (decreased by $7.9 million from the previous year) and in operating expenses (decreased by $7.5 million). The decreases in operating revenues and expenses were mainly attributed to the cancellation of a series of promissory notes and a 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 and Wholesale Sales 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 $1.3 million.
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 1999-2000, a provision for a bonus payment of $1.050 million was made which was consistent with amounts paid in previous years.
The Statement of Financial Position shows assets of $366.9 million and liabilities of $323 million at 30 June 2000 compared with corresponding amounts of $403.4 million and $360.7 million at 30 June 1999.
The reduction in assets and liabilities was due mainly to the part maturity of a structured finance deal between the Authority, South Australian 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 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 1997-98 to 1999-2000. 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 promissory notes and deposits from Councils to fund the Authority’s lending activities.
In the past, the Authority had principally relied on back-to-back borrowings (that is a specific borrowing for an individual loan) to finance loans to Councils. To reduce borrowing costs, the Authority during 1993-94 implemented the issuing of short-term promissory notes to fund long-term borrowings to Councils. 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. Interest rate exposures are hedged through the use of interest rate swap agreements and futures contracts.
The Authority appropriated $1.5 million from total profit available for appropriation to the General Reserve, resulting in a balance as at 30 June 2000 of $43.5 million.
Total equity of the Authority amounted to $44 million as compared to total assets of $366.9 million. The equity comprises a General Reserve of $43.5 million, and Retained Profit of $0.5 million. In relation to the General Reserve, the foregoing table entitled Operating Profit and Distributions demonstrates the policy of regularly appropriating a significant portion of the operating profit to that reserve ($10.5 million over the five years to 30 June 2000).
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 $38 million. The main contributing source for this inflow was from funds received from the South Australian Government Finance Authority following 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 $40.4 million. The main cash outflows in financing activities were the repayment of promissory notes $30.6 million and repayment of inscribed stock of $12.6 million.