Agenda of Audit and Risk Subcommittee Meeting

HASTINGS DISTRICT COUNCIL

Audit and Risk Subcommittee MEETING

Monday, 20 February 2017

VENUE:

Landmarks

Ground Floor

Civic Administration Building

Lyndon Road East

Hastings

TIME:

10.00am

A G E N D A

1. Apologies

At the close of the agenda no apologies had been received.

At the close of the agenda no requests for leave of absence had been received.

2. Conflict of Interest

Members need to be vigilant to stand aside from decision-making when a conflict arises between their role as a Member of the Council and any private or other external interest they might have. This note is provided as a reminder to Members to scan the agenda and assess their own private interests and identify where they may have a pecuniary or other conflict of interest, or where there may be perceptions of conflict of interest.

If a Member feels they do have a conflict of interest, they should publicly declare that at the start of the relevant item of business and withdraw from participating in the meeting. If a Member thinks they may have a conflict of interest, they can seek advice from the Chief Executive or Executive Advisor/Manager: Office of the Chief Executive (preferably before the meeting).

It is noted that while Members can seek advice and discuss these matters, the final decision as to whether a conflict exists rests with the member.

3. Confirmation of Minutes

Minutes of the Audit and Risk Subcommittee Meeting held Wednesday 7 December 2016.

(Previously circulated)

4. Health and Safety Risk Report 5

5. Treasury Activity and Funding 45

6. General Update Report and Status of Actions 55

7. Strategic Risk Management Update 59

8. Additional Business Items

9. Extraordinary Business Items

10. Recommendation to Exclude the Public from Item 11 81

11. Cash Handling Internal Audit

File Ref: 16/1349

REPORT TO: Audit and Risk Subcommittee

MEETING DATE: Monday 20 February 2017

FROM: Health and Safety Advisor

Jennie Kuzman

SUBJECT: Health and Safety Risk Report

1.0 SUMMARY

1.1 The purpose of this report is to provide an update to the subcommittee in regards to the management of health and safety risks within Council.

1.2 This issue arises due to the introduction of new legislation in relation to health and safety, and the requirement of that legislation for elected members to exercise due diligence to ensure that Council complies with its health and safety duties and obligations.

2.0 BACKGROUND

2.1 At its June 2016 meeting, Council accepted the recommendations from the Audit and Risk Subcommittee in relation to health and safety reporting. The recommendations were:

a) Monthly reporting in the form of a ‘high level dashboard report’ to Council

b) Quarterly reporting at a more detailed level to Council and

c) Quarterly reporting on health and safety risk management to the Audit and Risk Subcommittee.

2.2 This report forms the first quarterly report on health and safety risk management.

3.0 CURRENT SITUATION

3.1 Review of Council’s Health and Safety Systems

3.2 Council engaged IMPAC services, a risk and safety management consultancy, to undertake a strategic review of current health and safety management and performance, with the aim of providing an independent view on the current state, positives and areas for improvement along with a set of recommendations. A copy of the full report is attached (attachment one).

3.3 Following receipt of the IMPAC report in November 2016, an action plan has been developed to address the recommendations in the report. A copy of this action plan is attached (attachment two).

3.4 Dan Davis, the Health and Safety Specialist from IMPAC services who undertook the strategic review, will provide a summary of the report findings to the subcommittee at this meeting.

3.5 Identification of Critical Health and Safety Risks

3.6 In order to ensure that officers are focusing attention on critical health and safety risks, a preliminary list of critical organisational health and safety risks was identified by the Health and Safety Advisor in mid-2016.

3.7 These risks were reviewed by Dan Davis during the IMPAC review and confirmed as appropriate for the organisation.

3.8 The list of these identified critical risks was reported to the Audit and Risk Subcommittee in September 2016 and are detailed again in no particular order below.

3.9 Organisational Critical Health and Safety Risks:

· Risk of fatality from exposure to plant and machinery

· Risk of fatality from exposure to a moving vehicle

· Risk of fatality when working in confined spaces

· Risk of fatality when working in excavations

· Risk of fatality when working at height, resulting from a fall from height or a falling object

· Risk of serious health and/or safety effects from manual handling of loads or repetitive or forceful movements

· Risk of serious health effects from exposure to asbestos

· Risk of fatality from loss of containment and/or exposure to a hazardous substance

· Risk of fatality or serious health effects from exposure to harmful levels of noise, vibration, dust, or biological hazards

· Risk of serious health effects from exposure to factors causing stress

· Risk of serious health and/or safety effects from fatigue and working while fatigued

· Risk of adverse physical and mental health effects from exposure to aggression, physical violence and verbal abuse from members of the public and service users

3.10 These risks are currently being analysed by officers using “Bow Tie” risk evaluation methodology (explained below) and the outcome of this process will provide a comprehensive overview of Council’s management of organisational health and safety critical risks.

3.11 “Bow Tie” is a risk evaluation method which allows development of a diagram to effectively communicate how critical risks should be managed. A Bow Tie diagram is able to give an overview of multiple plausible scenarios and how they can be prevented and mitigated in a single diagram.

3.12 The picture on the following page (Figure 1) provides a simple example of the structure view of a Bow Tie diagram.

3.13 It is expected that analysis of the risks identified and listed above in 3.9 will be completed by May 2017.

Figure 1 - Structure view of a Bow Tie diagram

4.0 SIGNIFICANCE AND ENGAGEMENT

4.1 This report does not trigger Council’s Significance and Engagement Policy and no consultation is required.

5.0 RECOMMENDATIONS AND REASONS

A) That the report of the Health and Safety Advisor titled “Health and Safety Risk Report” dated 20/02/2017 be received.

Attachments:

1	Health and Safety Review of Hastings District Council - 22 July 2016 - IMPAC Services	HR-03-01-17-191
2	Action Plan - IMPAC Health and Safety Review 2016 (signed)	HR-03-01-17-193

File Ref: 17/61

REPORT TO: Audit and Risk Subcommittee

MEETING DATE: Monday 20 February 2017

FROM: Manager Strategic Finance

Brent Chamberlain

SUBJECT: Treasury Activity and Funding

1.0 SUMMARY

1.1 The purpose of this report is to update the Subcommittee on treasury activity and funding issues.

1.2 The Council is required to give effect to the purpose of local government as prescribed by Section 10 of the Local Government Act 2002. That purpose is to meet the current and future needs of communities for good quality local infrastructure, local public services, and performance of regulatory functions in a way that is most cost effective to households and businesses. Good quality infrastructure means infrastructure, services and performance that are efficient and effective and appropriate to present and anticipated future requirements.

1.3 This report concludes by recommending that the report on treasury activity and funding is received.

2.0 BACKGROUND

2.1 The Hastings District Council has a Treasury Policy which forms part of the 2015-25 Long Term Plan and a Treasury Management Policy. Under these policy documents responsibility for monitoring treasury activity is delegated to the Audit and Risk Subcommittee.

2.2 Council is provided with independent treasury advice by Stuart Henderson of PricewaterhouseCoopers and receives weekly and monthly updates on market conditions.

2.3 Under the Treasury Policy, formal reporting to Council occurs quarterly and regular more in depth treasury reporting is provided for the Audit and Risk Subcommittee.

3.0 CURRENT SITUATION

3.1 Council’s debt portfolio is managed within the macro limits set out in the Treasury Policy. It is recognised that from time to time Council may fall out of policy due to timing issues as debt moves closer to maturity and shifts from one time band to another. The treasury policy allows for officers to take the necessary steps to move Council’s funding profile back within policy in the event that a timing issue causes a policy breach.

3.2 The following table sets out Council’s overall compliance with Treasury Management Policy as at 31 December 2016:

Measure	Compliance	Actual	Minimum	Maximum
Liquidity	ü	118%	110%	170%
Fixed debt	ü	81%	55%	95%
Funding profile: 0 – 3 years 3 – 5 years 5 years +	ü ü ü	21% 23% 55%	10% 20% 10%	50% 60% 60%

3.3 The current total core net external debt remain is $55.7m as at 31 December 2016. This is supported by the Debt Status Report as at 31 December 2016 (Attachment 1). Core external debt increased in December with $5m of short term borrowing from LGFA for 90 days at 2.21%.

3.4 The graph below shows the Council’s position for funding risk with $65 million of financing facilities as at 31 December 2016. The Council will need additional facilities before the 30 June 2017 and is planning to use the next Local Government Funding Agency (LGFA) bond tender (15 February 2017) to raise additional debt to meet its current and future requirements. The current liquidity ratio of 118% is well within the policy band of 110% - 170%. Council’s current debt profile is within policy, with good treasury management practices in place.

3.5 On the advice of Council’s Treasury advisors, Officers have advised the LGFA that HDC will participate in the February 15^th tender with the following:

$5m through to April 2023 (6 years)

$5m through to April 2025 (8 years)

Officers are currently working on an interest rate strategy with PWC to take into consideration the current over hedged position and also the expected growth in forecasted debt. Details of this strategy will be discussed at the meeting.

3.6 The chart below shows the key drivers of the expected movement in borrowings between 31 December 2016 and 30 June 2017. This is based on projects that have started already, or are highly likely to commence before 30 June 2017.

The chart identifies the major development projects underway, however the renewal projects have been aggregated into the “Other” heading. These include Parks and CBD renewals ($1.3m), Stormwater ($0.8m design work and improvements to Davis and Chambers Streets), Sewer ($1.6m renewals and Pump Station Flow monitoring work), Roading ($1.4m), Water ($3.7m Brookvale Filter and UV treatment, Heretaunga Street, Te Mata, Frimley Bore and Pump Station upgrades), and other sundry projects.

3.7 Any new debt will be considered along with Council’s working capital requirements and liquidity ratios.

3.8 The following graph shows the level of interest rate cover in place based on the projected debt requirement for the next 12 months is 81% with full policy compliance in the bands. The projected external debt requirement for the next 12 months is forecast at $75m.

3.9 Officers are actively managing the interest rate and funding risk and currently there is adequate interest rate cover in place based on the projected funding requirements.

3.10 The following graph shows Council’s fixed debt (including forward start swaps) is within the policy minimum and policy maximum set out in Council’s Treasury Management Policy. This graph also incorporates Council’s forecast debt over the long term. The projected external debt requirement for the next 12 months is forecast to increase which will provide Council with the opportunity to take advantage of funding longer term debt at historically low levels of interest.

Fig: Interest Swap Profile

3.11 Council’s weighted average cost of debt is 5.14% as at 31 December 2016 (5.3% as at 30 September 2016). Officers continue to actively manage the swap portfolio.

4.0 MARKET COMMENTARY

4.1 The Reserve Bank of New Zealand (RBNZ) has held the Official Cash Rate at 1.75% in February 2017. The RBNZ stated;

“The recovery in commodity prices and more positive business and consumer sentiment in advanced economies have improved the global outlook. However, major challenges remain with on-going surplus capacity in the global economy and rising geo-political uncertainty.

Global headline inflation has increased, partly due to rising commodity prices. Global long-term interest rates have increased. Monetary policy is expected to remain stimulatory, but less so going forward, particularly in the US.

New Zealand’s financial conditions have firmed with long-term interest rates rising and continued upward pressure on the New Zealand dollar exchange rate. The exchange rate remains higher than is sustainable for balanced growth and, together with low global inflation, continues to generate negative inflation in the tradables sector. A decline in the exchange rate is needed.

Economic growth in New Zealand has increased as expected and is steadily drawing on spare resources. The outlook remains positive, supported by ongoing accommodative monetary policy, strong population growth, increased household spending and rising construction activity. Dairy prices have recovered in recent months but uncertainty remains around future outcomes.

Recent moderation in house price inflation is welcome, and in part reflects loan-to-value ratio restrictions and higher mortgage rates. It is uncertain whether this moderation will be sustained given the continued imbalance between supply and demand.

Headline inflation has returned to the target band as past declines in oil prices dropped out of the annual calculation. Inflation is expected to return to the midpoint of the target band gradually, reflecting the strength of the domestic economy and despite persistent negative tradables inflation. Longer-term inflation expectations remain well-anchored at around 2 percent.

Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain, particularly in respect of the international outlook, and policy may need to adjust accordingly.”

4.2 Following the RBNZ OCR announcement the ASB chief economist Nick Tuffley said unless there was a negative shock to the economy, it was unrealistic to expect interest rates to stay at stimulatory levels indefinitely.

"We continue to view OCR increases as a long way off, towards the end of 2018. In contrast, [financial] market pricing favours [a] late 2017/early 2018 [increase]" Tuffley said.

4.3 PWC Treasury Advisory Team state that “New Zealand long term swap rates have also unwound with the 10 year swap rate down six basis points to 3.54%. Global risk sentiment turned slightly negative over the past week with heightened investor uncertainty driven by political risks in Europe and the United States. The Federal Reserve meeting was somewhat of a non-event with little impact on financial markets, while economic data in the US continues to print strongly. We maintain a bias higher for the long end of the NZ interest rate swap curve over the next 12 months, while acknowledging there are numerous risks to this outlook, particularly around Trump’s policies.”

	90 Day BB (%)	3 yr Swap (%)	5 yr Swap (%)	10 yr Swap (%)
Dec-15	2.73	2.97	3.26	3.74
Jan-16	2.71	2.67	2.91	3.41
Feb-16	2.6	2.43	2.62	3.03
Mar-16	2.37	2.26	2.49	3.07
Apr-16	2.38	2.3	2.5	2.97
May-16	2.42	2.34	2.51	2.92
Jun-16	2.4	2.22	2.31	2.65
Jul-16	2.4	2.22	2.31	2.65
Aug-16	2.4	2.02	2.1	2.41
Sep-16	2.27	1.99	2.07	2.38
Oct-16	2.18	2.19	2.38	2.74
Nov-16	2.1	2.41	2.73	3.22
Dec-16	2.03	2.69	3.03	3.45

5.0 FUNDING FACILITIES

5.1 Attachment 2 shows details of Council’s current debt facilities together with details of expiry dates and margins.

5.2 Council’s liquidity ratio of 118% at 31 December 2016 (based on net external debt of $56m and total debt facilities of $66m) is within policy (policy 110% - 170%). Officers are comfortable with this ratio because of continued uncertainty on debt forecasts and the ability to increase debt from the LGFA at relatively short notice.

6.0 Recommendations

That the report of the Manager Strategic Finance titled Treasury Activity and Funding dated 20/02/2017 be received.

Attachments:

1	Debt Status Report as at 31 December 2016	CG-14-6-00007
2	Current Debt Facilities	CG-14-6-00010

File Ref: 17/62

REPORT TO: Audit and Risk Subcommittee

MEETING DATE: Monday 20 February 2017

FROM: Manager Strategic Finance

Brent Chamberlain

SUBJECT: General Update Report and Status of Actions

1.0 SUMMARY

1.1 The purpose of this report is to update the Subcommittee on various matters including actions raised at previous meetings.

1.2 The Council is required to give effect to the purpose of local government as prescribed by Section 10 of the Local Government Act 2002. That purpose is to meet the current and future needs of communities for good quality local infrastructure, local public services, and performance of regulatory functions in a way that is most cost–effective for households and businesses. Good quality means infrastructure, services and performance that are efficient and effective and appropriate to present and anticipated future circumstances.

1.3 This report concludes by recommending that the report titled “General Update Report and Status of Actions” from the Chief Financial Officer be received.

2.0 BACKGROUND

2.1 The Audit & Risk Subcommittee members requested that officer’s report back at each meeting with progress that has been made on actions that have arisen from the Audit & Risk Subcommittee meetings. Attached as Attachment 1 is the Audit & Risk Subcommittee Action Schedule as at 20 February 2017.

3.0 CURRENT SITUATION

3.1 Central Government / Local Government 60:40 Split

It is expected that cabinet will be discussing the discussion paper prepared by Treasury next week with a potential release of the discussion document early in 2017. The discussion paper reviews the current funding split between central and local government in the event of a major catastrophe.

3.2 Review of Financial Report Templates for Council Reporting

The Management Accounting Team have been working on developing a new Financial Reporting Template to be used for Council reports that ultilises dashboards and KPI’s in addition to the traditional financial tables. This is in an effort to make the Council’s financials easier to read for non-accountants. A draft of the proposed quarterly report to Council will be tabled at the meeting for consideration.

4.0 SIGNIFICANCE AND ENGAGEMENT

4.1 This report does not trigger Council’s Significance and Engagement Policy and no consultation is required.

5.0 RECOMMENDATIONS AND REASONS

That the report of the Manager Strategic Finance titled “General Update Report and Status of Actions” dated 20/02/2017 be received.

Attachments:

Status of Action Sheet

CG-13-7-00121

File Ref: 17/99

REPORT TO: Audit and Risk Subcommittee

MEETING DATE: Monday 20 February 2017

FROM: Business Services Manager

Regan Smith

SUBJECT: Strategic Risk Management Update

1.0 SUMMARY

1.1 The purpose of this report is to update the Subcommittee about the status of risk management with Council and adopt the revised risk management policy.

1.2 This issue arises from a regular review of the Council’s current risk management policy and framework.

The Council is required to give effect to the purpose of local government as prescribed by Section 10 of the Local Government Act 2002. That purpose is to meet the current and future needs of communities for good quality local infrastructure, local public services, and performance of regulatory functions in a way that is most cost–effective for households and businesses. Good quality means infrastructure, services and performance that are efficient and effective and appropriate to present and anticipated future circumstances.

1.3 This report concludes by recommending that the Council adopt the revised Risk Management Policy and Framework, and confirm the Council’s strategic risk register is a fair representation of high level risks Council must manage.

2.0 BACKGROUND

2.1 The Audit & Risk Subcommittee adopted the current Risk Management Policy and Framework in November 2011. The policy included the need for regular review of the policy.

2.2 The Risk Management Policy and Framework provides guidance for implementation of risk management at strategic and operationally levels. Risk management is then put in place by each group through management level risk registers and incorporation of risk assessments in projects plans and business cases.

3.0 CURRENT SITUATION

3.1 A workshop with the Chair of the Audit & Risk Committee, Mr J Nichols and the Council Leadership Management Team was held to review current risk management practices.

3.2 This workshop identified opportunities for improvement to the risk management approach and identified 16 key strategic risks facing the organisation.

3.3 As a result the following documents are tabled for the Subcommittee’s consideration:

· Two case studies illustrating how risk management has been applied by Council. The purpose of these case studies is to present the terminology used in the following risk register and risk management policy in real life examples.

· A strategic risk register outlining the key issues facing the organisation. These risks are presented as high level descriptions of the threats that need to be managed, with an outline of the measures Council has in place to minimise the risk. These items, listed below, are a combination of issues identified by the executive team and additional detailed added after the recent workshop.

Health & Safety
Health and safety incident resulting in serious harm.

Environmental Change
Climate change effects impacting community wellbeing and rating capability.

Fraud
Fraud incident resulting in loss of funds, loss of assets or reputation damage.

Demographic Change
Change in community demographics that impacts Council service demand or capacity to afford services.

Civil Defence Emergency
Major disaster or emergency causing damage to Council and community assets.

Infrastructure Failure
Infrastructure failure resulting in loss, or compromised operation, of essential services causing harm to the community.

Investment Failure
Failure of Council investment resulting in loss of funds.

Information Services Security
Failure of information services security resulting in loss of information or reputation damage.

Business Interruption
Business interruption caused by some unexpected event impacting service delivery.

Retention of Key Staff
Loss of key staff impacting service delivery

Ability to Meet Regulatory Requirements
Failure to meet legislative/regulatory requirements resulting in suspension of Council services.

Facility Failure
Facility failure resulting in loss of community service.

Procurement
Poor procurement practices results in poor expenditure decisions.

Legislative Change
Legislation change that places additional demand on Council resources.

Staff Negligence
Staff negligence or poor competence resulting in litigation, reputation damage or harm.

Business as Usual Performance
Failure to deliver services to normal business levels.

· An updated version of the Council Risk Management Policy and Framework. The main changes to the document include:

- Overview of risk management updated to reflect ISO 31000 standard definition of risk.

- Roles and responsibilities, and conflict of interested included in Policy section.

- Guiding principles from the ISO 31000 standard included in risk framework.

- Need for risk management to be integrated in to all business activities reinforced throughout the policy.

3.4 Once the strategic risks have been confirmed an internal and external audit programme will be developed to confirm that the operational controls are in place and working effectively.

4.0 SIGNIFICANCE AND ENGAGEMENT

4.1 While risk management is a significant administrative practice, the Risk Management Policy and Framework does not trigger Council’s Significance and Engagement Policy and no consultation is required.

5.0 RECOMMENDATIONS AND REASONS

A) That the report of the Business Services Manager titled “Strategic Risk Management Update” dated 20/02/2017 be received.

B) That the Audit and Risk Subcommittee endorse the updated Risk Management Policy and Framework for adoption by Council.

C) That the Audit and Risk Subcommittee confirm the strategic risk register as a fair representation of strategic risks Officers need to manage, and that the register be submitted to Council with the updated Risk Management Policy and Framework.

With the reasons for this decision being that the objective of the decision will contribute to meeting the current and future needs of communities for good quality local infrastructure and local public services in a way that is most cost-effective for households and business by:

i) Ensuring strategic risks are effectively managed, and

ii) Assisting Council to successfully achieve its goals through proactive management of risk.

Attachments:

1	Risk Management Case Study 1 Transfer Station Refuse Tip Face Pit Fall	PMD-03-81-17-67
2	Risk Management Case Study 2 Information Technology IT Security Breach	PMD-03-81-17-68
3	Strategic Risk Register	PMD-03-81-17-69
4	Hastings District Council Consequence Scale and Risk Matrix	PMD-03-81-17-71
5	HDC Risk Management Policy and Framework V2.0	PMD-03-81-17-70

Hastings District Council

Lyndon Road East, Hastings