Our financial strategy sets the direction for the Council’s finances for the next 10 years and beyond. We have some challenges ahead as we play catch up, while also restoring our reserves. We have had to use our reserves over the last few years to bring in the new waste and recycling service, deal with the impacts of COVID-19 and to meet the increase in general costs. This plan also resets our anticipated capital programme by removing significant projects such as the Aquatic Development and Aquarium Expansion, and resetting the timing of the Napier Library Civic Precinct. However, this means we are needing to spend money on the upkeep of the existing facilities. At the same time, we haven’t been saving enough for future replacements.
To keep rates affordable, while also working towards achieving a balanced budget (income and expenditure balance), requires us to fund asset maintenance, and renewals by using our reserves but also with loans over this LTP. This is to address the shortfalls we face because we haven’t set aside enough funding for renewals over the years. At the same time renewals are now costing more than what we forecast, meaning even if we had put enough money aside we would still have a shortfall, although not as much as we have now.
Note: Councils are required to submit a balanced budget in their LTPs, unless they believe it is financially prudent not to. We have resolved to use loans to achieve a balanced budget by year 10 to cushion the impact on the ratepayer of the cost of our capital renewal programme.
Depreciation is money that we take out of our operating budget and put aside for when we need to replace assets. The amount of money we budget for this is based on the value of each of our assets and how much longer the asset will last. Depreciation costs start as soon as you buy or build something and continue over the life of the asset. Depreciation costs change if the value of an asset changes. Our assets are valued every three years, with some valued annually.
Ideally, the full cost of depreciation would be covered by our income. However, even then, the cost of replacements or building when you actually need to do the work is often more than what has been set aside, and that’s when shortfalls happen. Our asset valuations have increased meaning we need to collect more for when our assets need replacing.
When it comes time to build or replace an asset, Council must decide whether or not to proceed. The replacements that are now due have all been considered, and some have been included in this 10 year plan. We have had to make some tough calls about what is in and what is out. Part of the problem is that replacements have been delayed and we have a lot due at once.
We want to do more than we have before to reduce this bubble of work and avoid getting into this situation again. To fund this, we are proposing to loan-fund our renewal shortfall in the first few years of our plan (year 1-5). Then we will increase the money we put aside for renewals from rates in the second part of our plan.
This contributes to the rates increases we are proposing in the second five years of our plan. At the end of our 10 year plan, we will be fully funding depreciation which will be $63.6 million per year.
Our approach of keeping rates increases low has had an impact on our finances. It means we have not built up enough income over the years and we have delayed work on our assets, as well as not putting enough money away for replacements needed. We haven’t used loans in the same way other councils have, which is a way of spreading the cost of capital work over time – just like taking out a mortgage on a house. It is all catching up on us now. We are resetting our financial strategy so that we can still achieve what is needed for our city while we are also borrowing within our means.
We are still very committed to keeping our rates affordable and even with our proposed rates increases over the next 10 years we will still enjoy some of the lowest rates in the country. We don’t think it is reasonable to increase the rates in one big hit. So, we are proposing to increase them gradually over the next 10 years by taking out loans to fund renewals. This means we will achieve a balanced budget in 2031.
In 2018/19, we did not meet the balanced budget benchmark due to an increase in expenditure relating to weather tightness claims. In 2019/20 we also did not achieve a balanced budget due to COVID-19 impacts on revenue received. Historically, we have been working hard at keeping rates increases to a minimum through efficiencies and the use of reserves.
Prior to 2018/19, we had consistently achieved a balanced budget. For the 2021-31 LTP we are faced with the challenges because our rates total is low overall. Part of the reason why our base is low is because of low increases over the years, the ability to use reserves to top us up and last year’s low rate increase due to cushioning the COVID-19 impacts for our community. We also face a very substantial increase in our depreciation expense following the June 2020 asset revaluations. We continue to be mindful of our community’s ability to pay, so we are proposing to gradually lift rates income to address the imbalance between operating income and operating expenses.
We have chosen to run an unbalanced budget for years 1-9 of the LTP. This means we are collecting approximately $71 million less from ratepayers than we would have if we had a balanced budget over 10 years of the plan. We could have used this rates income to fund capital expenditure. But to make it more affordable for the ratepayer we are instead taking advantage of low interest rates and the headroom on our balance sheet and using debt. This softens the impact on ratepayers while we move towards a balanced budget in year 10. We believe this is the best fiscal (financial) and sustainable outcome for our community.
|Ongoing rates impacts||Year 1 2021/22||Year 2 2022/23||Year 3 2023/24||Year 4 2024/25||Year 5 2025/26||Year 6 2026/27||Year 7 2027/28||Year 8 2028/29||Year 9 2029/30||Year 10 2030/31||TOTAL impact over LTP|
|Option 1 (proposed)||0.01%||0.22%||0.30%||1.52%||0.83%||0.92%||0.48%||0.17%||0.31%||0.32%||5.07%|
|Ahuriri Regional Park|
|Option 1 (proposed)||0.00%||0.00%||0.00%||0.00%||0.00%||0.00%||0.00%||0.00%||0.16%||0.56%||0.72%|
|Option 2 (proposed)||0.00%||0.00%||0.00%||0.27%||0.53%||0.62%||0.28%||0.29%||0.30%||0.31%||2.60%|
|Option 1 (proposed)||0.00%||0.16%||0.16%||0.17%||0.18%||0.21%||0.22%||0.23%||0.27%||0.29%||1.90%|
|Option 1 (proposed)||0.46%||0.22%||0.08%||0.15%||-0.07||0.15%||-0.14%||0.10%||0.55%||0.00%||1.49%|
|Option 1 (proposed)||0.00%||0.65%||0.00%||0.00%||0.00%||0.00%||0.00%||0.00%||0.00%||0.00%||0.65%|
|Option 1 (proposed)||0.00%||0.03%||0.00%||0.00%||0.00%||0.00%||0.00%||0.00%||0.00%||0.00%||0.03%|
We have increased our rates cap to 8% in year one and 6.5% plus LGCI (Local Government Consumer Index – an inflation tool), for the rest of our 10 year plan, so we can maintain our levels of service and deliver on the key priorities of our plan. The table below shows how the rates are forecast over the next 10 years.
|Total rates limit (including LGCI)||8.3%||10.4%||9.7%||9.3%||9.3%||9.3%||9.3%||9.4%||9.5%||9.5%|
|Proposed rates increase to existing ratepayers||8.0%||7.0%||7.0%||7.0%||9.0%||9.0%||9.0%||9.0%||9.0%||8.0%|
|Plus growth in the rating base||0.3%||0.3%||0.3%||0.3%||0.3%||0.3%||0.3%||0.3%||0.3%||0.3%|
|Increase in rates revenue||8.3%||7.3%||7.3%||7.3%||9.3%||9.3%||9.3%||9.3%||9.3%||8.3%|
Note: rates limit excludes water by meter, rates remissions and rates penalties
When commercial and residential buildings are developed in areas that require additional infrastructure (e.g.water connections), we charge the developer a fee that contributes towards the cost of us providing the infrastructure needed. We are currently reviewing these fees, and how they are applied.
To give feedback on this policy go to - Financial Contributions.
We have raised the limit for the amount of debt we can carry in comparison to the amount of income we will receive. We need to ensure we are able to pay our loans, so we have set our limit to 230%. The limit is set higher than we have forecast because we need to have some leeway to increase our debt if our plan needs to change, and we have expenditure that we haven’t anticipated. Another measure of debt is the proportion of what we pay in annual interest compared with our annual income. We joined the LGFA (Local Government Finance Agency) last year. This is a collective of councils who band together to get good loan deals. This means the interest we pay will remain low, making borrowing money very affordable. Because of the increase in proposed capital expenditure and because we want to smooth rates increases for people, our overall debt will significantly increase.
We are investing significantly to replace assets and create new assets that respond to our growth projections and increasing quality standards. Just under half ($404m) of our total capital spend will be on three waters infrastructure which is driving the capital works programme compared with our last LTP.
Examples of the impact of rating proposals for 2021/22 are shown in the following table:
|Differential Category||Land Value||Capital Value||Rates 2020-21||Rates 2021-22||Change $||Weekly Change $||Change %|
|Average Value & Land
|Average Value - above average
|Low Value Residential||128,000||425,000||1,489||1,846||357||6.86||24.0%|
|Te Awa Residential||290,000||740,000||2,511||2,474||-37||-0.70||-1.5%|
|Bay View Residential||284,200||614,300||1,964||2,248||283||5.45||14.4%|
|Ex Rural Residential (City fringe)||668,600||1,389,800||2,811||3,375||564||10.85||20.1%|
|Other Commercial Average||553,900||1,148,300||5,990||7,375||1,385||26.62||23.1%|
|Bay View Average Commercial||473,500||855,500||1,931||3,585||1,654||31.81||85.7%|
|Rural Average Commercial||457,200||1,610,600||1,527||2,523||995||19.14||65.2%|
|Bay View Average||375,400||782,700||1,853||2,076||223||4.30||12.1%|
|Other Rural Residential in
|Other Rural Residential outside
The three yearly revaluation for the city for rating purposes was undertaken in 2020 and those new valuations apply as the basis for setting the rates for 2021/22.
Council’s total rates revenue for 2021/22, excluding rate penalties and water by meter charges, will increase by 8.30% which is an average increase of 8.00% for existing properties after an allowance of 0.3% is made for new properties added since last year.
Council has recently consulted on changes to differential categories and differential factors. The changes are being phased in over three years which impacts all properties, in particular on properties previously rated in the Rural and Bay View categories.
Property values directly affect the level of general and targeted rates charged (either land or capital value). Recent changes in property valuations mean that the rates increase will be greater or less than the proposed 8% average rates increase (per rateable property) for some individual properties, particularly commercial and industrial properties which may see an increase in rates. To find out more about the impact of the revaluations go to - Revenue and Financing.
All figures in this document are inflated against Berl LGCI forecasts.
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