Item 7: Adoption of the
Draft Financial Strategy
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Council
18 February 2021
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REPORT R22545
Adoption
of the Draft Financial Strategy
1. Purpose
of Report
1.1 To
adopt the draft Financial Strategy as part of the Long Term Plan 2021–31
(LTP) process.
2. Summary
2.1 Council
must, as part of the LTP, prepare and adopt a financial strategy for all of the
consecutive financial years covered by the LTP.
2.2 Section
101A of the Local Government Act 2002 sets out that the purpose of the
financial strategy is to:
2.2.1 Facilitate
prudent financial management by the Council by providing a guide for the
Council to consider proposals for funding and expenditure against; and
2.2.2 Provide
a context for consultation on the Council’s proposals for funding and
expenditure by making transparent the overall effects of those proposals on the
Council’s services, rates, debt and investments.
3. Recommendation
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That the Council
1. Receives the report Adoption
of the Draft Financial Strategy (R22545) and its attachment (A2533099); and
2. Adopts the Draft Financial
Strategy (A2533099).
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4. Background
4.1 The
key aspects of the amended Financial Strategy have been discussed with elected
members at LTP workshops in October and December 2020 and January and February
2021.
4.2 A
number of amendments have been made to the Financial Strategy. These are
represented in red in Attachment 1: A2574126
5. Discussion
Council needs to
consider requirements of section 101
5.1 Council
needs to consider the requirements of s101 of the LGA 2002 which requires that
Council “manage its revenues, expenses, assets, liabilities, investments,
and general financial dealings prudently and in a manner that promotes the
current and future interests of the community.”
5.2 Council
includes consideration of these matters through its usual decision making
processes, including the table on important considerations for decision making
appended to reports.
5.3 Council
must also make adequate and effective provision in its Long Term Plan to meet
the expenditure needs identified in the Plan. The proposed Financial Strategy
does this through its revenue and debt limits.
Multiple years
for budget recovery following COVID-19
5.4 Council
resolved in July 2020 to have a net zero rates increase and set an unbalanced
budget for 2020/21 given the COVID-19 pandemic and its effects on the local
economy and ratepayers. This was to enable the planned levels of services to continue.
5.5 It
was acknowledged during this process that Council’s finances would not
immediately recover in the following year. This is due to the effect that this
would have on rates and ongoing lower Council revenue streams. It was also
noted that any decrease in rates in one year would typically increase the
percentage increase in the following year, unless there was a permanent change
to levels of service.
Impact of
COVID-19 recognised
5.6 COVID-19
is one of the biggest challenges Council has had to face. A new paragraph has
been added to the Strategy to demonstrate that while this is an ongoing
situation, COVID-19 and the effects it has had on the community have been taken
into account throughout the document.
Three Waters
assumption added
5.7 An
addition of an assumption about the Three Waters Reform Programme (that there
will be a continuing provision of water services by Council) has been added.
Central government’s work programme proposed new entities be established
to manage the local government Three Waters’ assets. While this, once
implemented, will have a significant impact on Council’s Financial
Strategy, the detail of this work programme is not yet known and therefore it
is prudent to reflect this is in the Strategy.
Changes to
depreciation to spread costs of revaluations
5.8 Assets
are required to be revalued every two years under Council’s Accounting
Policies. As at 30 June 2020, a revaluation was performed and Council assets
increased in value by $130.5 million. The three water assets made up $105
million of this increase and Transport assets $24.3 million, with the remaining
$1.2 million being Flood protection and Solid Waste.
5.9 The
increase in rates funding of depreciation for the revaluation of these assets
is 3% on rates. Given COVID-19, other pressures on Council funding and
community affordability of increases in rates, it is proposed that Council
departs from its usual practice of funding depreciation from revaluations
commencing the year following the revaluation.
5.10 It
is proposed that the increase in depreciation costs be spread and phased in
over Year 2 to Year 6 of the LTP. The draft Strategy has been written to
reflect this change in practice.
Net debt,
debt/revenue ratio, rates and rate cap
5.11 Due
to the increasing levels of capital expenditure, as outlined in the
Infrastructure Strategy, Council is proposing to increase its debt to revenue
ratio limits to 175% from 150%, to fund the investment. The capital expenditure
programme includes social and community infrastructure such as libraries and
other community facilities, transport and Three Waters infrastructure.
5.12 In
order to keep debt at lower levels than it would otherwise be, and under the
Debt to Revenue ratio of 175%, it is proposed to set annual rates increases at
the new rates cap of LGCI + 2.5% (previously LGCI + 2%), except for Year 1. In
Year 1 the overall rates increase is proposed to be 5.7% vs LGCI + 2.5% of
6.3%.
5.13 The
net debt, debt to revenue, rates and rate cap figures have been updated to
include the latest financial information. This is outlined on pages 7 and 8 of
the Strategy.
Forecasted
increase for capital and operational expenditure
5.14 The
ten year forecast capital expenditure was $462 million (including inflation,
excluding vested assets and the joint business units) in the 2018 LTP of which
$144 million is for renewals. This has been increased to $631 million for the
draft LTP 2021-2031, of which $230 million is for renewals. Overall capital
expenditure has increased by $169million.
5.15 The
forecast 10 year operational expenditure has increased from $1,254 million in
2018 to $1,522 million in 2021.
Shortfall funded
through the Emergency Fund
5.16 At
the Extraordinary Meeting held on 23 April 2020, Council agreed to address the
2020/21 Annual Plan unbalanced budget by drawing down against the Emergency
Fund (previously named the Disaster Recovery Fund). The fund was projected to
be $4.3 million overdrawn at 30 June 2021.
5.17 To
respond to the ongoing financial impacts of COVID-19 and to spread the impacts
of rate movements, Council proposes to draw down a further $5.1 million from
this fund in the first four years of the Long Term Plan. In years 5-10, Council
will contribute $30.3 million to the fund, resulting in a projected balance of
$20.9 million at the end of the ten year period.
Contingency
Funding
5.18 Council
builds contingency funding into capital expenditure projects. Contingency
funding manages the risk of cost escalations and covers potential cost estimate
shortfalls which may arise as a result of unexpected delays or complexities.
Contingency funding is used to improve our financial stability and our ability
to fund projects within their budgets. When projects go through their
lifecycle, and as the designs are refined, the need for contingency funding is
reduced.
5.19 Council
has made an overall downward adjustment to the total capital programme of
approximately 10% per year. This adjustment acknowledges that Council is
unlikely to use the full amount of contingency in the programme for every
project and enables Council to avoid overfunding the activities.
6. Options
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Option 1: Adopt the proposed
policy (Recommended)
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Advantages
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· Reflects
Council’s view in prudent financial management
· Ensures
a clear governance position on financial matters is available for auditors
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Risks and Disadvantages
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· No
significant risks or disadvantages
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Option 2: Do not adopt the
proposed policy (Not recommended)
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Advantages
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· None
known
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Risks and Disadvantages
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· Lack
of clarity about the governance view of appropriate financial management
· Fails
to fulfil statutory requirements to adopt a Financial Strategy for the LTP
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7. Next
Steps
7.1 The
Strategy will be updated if necessary to reflect any changes through the audit
process and will form part of the supporting documents for the LTP 2021-31
consultation process.
Author: Clare
Knox, Manager Finance
Attachments
Attachment 1: A2533099
- Long Term Plan 2021-31 - Draft Financial Strategy ⇩
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Important
considerations for decision making
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1. Fit
with Purpose of Local Government
Section 101A of the Local Government Act 2002
requires Council, as part of the Long Term Plan, to prepare and adopt a
Financial Strategy.
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2. Consistency
with Community Outcomes and Council Policy
The Financial Strategy aligns with the LTP
Consultation Document supporting documents and adoption of the Financial
Strategy supports all of the community outcomes.
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3. Risk
There is a
risk that some in the community may not support changes to the Financial
Strategy. However, the public have an opportunity to submit on the Strategy
as part of the LTP consultation process.
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4. Financial
impact
Adoption of the Financial Strategy will determine
the level of funding, rates, rates cap, funding of depreciation and other
financial impacts. The Strategy needs to cover the ten years of the LTP.
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5. Degree
of significance and level of engagement
This matter is of high significance as it determines
the financial strategy of the Council for the next ten years. As a LTP
supporting document, the public will be consulted as part of the wider LTP
consultation process. The Strategy is reviewed every three years.
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6. Climate
Impact
The impacts on the climate have been considered as
part of the development of the Activity Management Plans and Infrastructure
Strategy. The information from this and other processes has been checked for
consistency with the Financial Strategy limits and policy.
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7. Inclusion
of Māori in the decision making process
No engagement with Māori has been undertaken in
preparing this report, although the LTP and Financial Strategy has been
discussed in broad terms at the Iwi-Council partnership hui.
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8. Delegations
The Council has the responsibility for development
of the Long Term Plan and its related processes.
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