To seek Council direction regarding the expected shortfall in the collection of Development Contributions.

Transcription

1 654 Council 20 September 2016 Development Contributions (DCs) Backlog DC No: 52 Purpose To seek Council direction regarding the expected shortfall in the collection of Development Contributions. Executive Summary 2. For several of the existing growth areas TCC is expecting to end up with a shortfall in the collection of Development Contributions (DCs). This is referred to as the backlog. 3. While this was originally addressed by Council in 2011, the currently budgeted transfers will not be sufficient to eliminate the backlog. 4. To address this matter Council should amend the transfer of DC funded debt to rates funded debt for the 2017/18 Draft Annual Plan and review the ongoing programme as part of the 2018/28 Long Term Plan. Recommendation/s That the Council: a) Include a $2,532,000 transfer from Development Contributions funded debt to loan funded debt in the 2017/18 Draft Annual Plan. b) Agrees to review the ongoing programme of reducing the backlog as part of the 2018/28 Long Term Plan. Background 5. TCC has been collecting Development Contributions (DCs) (either as Development Contributions (LGA) or as Financial Contributions (RMA)) since Over time these charges have increased considerably. In many instances we have found that the charges paid by developers in the past were too low, given the greater information we have available now. More detail on this can be seen in Attachment A. 7. The result is that when some urban growth areas are fully developed. Council expects to have a shortfall in the amount of DCs collected. This is referred to as the 'backlog'. Legally TCC cannot charge current or future developments more to recover this backlog. 8. Council first quantified this backlog in Figure 1 shows the movement in this backlog since then. Figure 1: Graph of DC Backlog

2 655 Total Local DC Backlog 45 J Over the last few years the backlog has been reducing. This is primarily the result of a decision made by Council in 2011 to start funding this backlog by transferring some of the backlog growth debt to rates funded debt. It is important to note that we cannot just look at the overall picture, but need to examine each element in each growth area individually. This is because gains in one area/ activity cannot legally be used to offset losses in another. A breakdown of the backlog as at 30 June 2016 is shown on Table 1 below. Table 1: DC Backlog forecast as at 30 June 2016 Total Water excluding Supply Wastewater Stormwater Transportation Reserves Bethlehem 388, ,147 1,139,314 3,063, ,533 Pyes Pa (155,497) (232,726) (114,337) (82,155) Ohauiti 1,392, , ,578 (117,507) 1,987,105 Welcome Bay 787, (61.707) (51,262) 1,415,593 Papamoa (296,292) (250,115) 6,113,659 2, ,897,050 Tauranga Infill ( ) 80,998 1,266, ,616 Mount Infill ( ) 1.671,277 1,513,834 West Bethlehem 1,229 (636,844) 12,453 36,200 (586,962) Pyes Pa West 194,627 (853,090) 2,158,268 4,146,727 5,646,532 23,936,146 Note 1: A number in brackets shows a surplus compared to where we expected to be and is a good position for Council. Note 2: The highlighted backlog figures are the funds Council has most concerns over. The Bethlehem and Papamoa figures highlighted are the funds to which the transfers to rates funded debt have been applied since Note 3: The projects are budgeted in LIPS jobs 2577 to In 2011/12 Council reviewed this backlog and determined that about $23 Million of it (at least) was very likely to be permanent and outlined a process of transferring this DC funded debt to rate funded debt. There have been some amendments to how these transfers have/ were expected to happen as set out in Table 2 below. Table 2: Funding of DC Backlog: Actual compared to original resolution DC52 - Report - Council -16 February Development Contributions Backlog (A ) TCC Ref: A

3 656 Financial Year 2012/ / / / / / / /23 Total Basis Actual Actual Actual Actual Budget Forecast Forecast Forecast Original Plan ($M) $7.5 M $2.7 M $5.7 M $2.8 M $0 M $0 M $4.3 M $0 M $23.0 M Actual / Budget ($M) $0 M $2.7 M $5.7 M $2.7 M $2.3 M $0.8 M $1.4 M $0.3 M $15.9 M Note: This excludes a separate write-off in relation to West Bethlehem. 11. These transfers were agreed on the basis of the following set of principles: There is certainty that the shortfall is permanent The amount of the shortfall is known and certain The projects that the shortfall relates to have been completed The amount that is transferred is treated as any other rate funded project would be for debt retirement purposes i.e. debt would be retired as per Council's Debt Retirement Funding Policy which is part of its Revenue and Financing Policy Elected members have approved the transfer. 12. For credit balances Council either has to identify legitimate uses for these funds within this area (and activity) or potentially return the excess funds to those who paid it (the development community). The next step (as part of the LTP review) is to review all of the past and future funding to ensure these have been completed correctly. Discussion 13. There is currently only a small amount of backlog to be funded in the 2017/18 financial year showing for the 2015/25 LTP ($800,000). It is an appropriate time to review this for inclusion in the 2017/18 Draft Annual Plan. 14. There is a potential for the backlog to change without debt transfers. An outline of the principle causes of these changes along with an assessment of the likelihood of these is included in Attachment A. 15. Council staff have made an estimate of what the potential backlog calculation would look like based on the current principles and the updated (to June 2016) Development Contribution backlog calculation. For 2017/18 a figure of $2,532,000 was determined. This is the figure recommended to be included in the Draft 2017/18 Annual Plan. 16. While Council could review its wider approach in relation to the backlog as part of the 2017/18 Annual Plan, it is recommended that this review would be more appropriately timed as part of the 2018/28 Long Term Plan. DC52 - Report - Council -16 Febnjary Development Contributions Backlog (A ) TCC Ref: A

4 65 V Options 17. The key options are outlined in Table 3 below. Table 3: Options in relation to the approach to the backlog for the 2017/18 Annual Plan. Option Description Advantages Disadvantages Option 1 Option 2 Option 3 Status Quo (leave current writeoff of $800,000 in place) Increase writeoff to a more historically consistent level ($2.5 M recommended) Complete a comprehensive review of policy as partof 2017/18 AP and determine 2017/18 contribution as part of this review. Simple Will have no impact on rates in short term (interest on transfers currently budgeted) Will mitigate future cost of capital impact Easy to implement Undertake to complete a comprehensive review of policy as part of 2018/28 LTP Establishes a longer term approach. Almost certain to require an increase in the ratepayer contribution in the future Risk that approach inconsistent with other outcome of the subsequent LTP process. Difficult timing (to complete before January 2017) due to election processes. Recommended Option 18. Council staff recommend that Option 2 is adopted. An amount of $2,532,000 has been determined using the current principles and methodology as outlined in Attachment A. This would form part of the Draft 2017/18 Annual Plan. 19. A comprehensive review should be undertaken as part of the 2018/28 LTP. This will ensure that the approach to future writeoffs is co ordinated with the update on future growth expectations and capital expenditure. Consideration Significance and Engagement 20. Under the Significance and Engagement Policv this matter is of low significance as it involves a rates impact of less than $95,000 on the 2017/18 Annual Plan. DC52 - Report - Council -16 February Development Contributions Backlog (A ) TCC Ref:A

5 658 Attachments No. Title Background on Growth Backlog Objective: ID: A Signatories Authors Frazer Smith, Manager: Strategic Finance and ^^ '^'^/C^2^\ ^^' Authorisers Paul Davidson; Chief Financial Officer DC52 - Report - Council -16 Febmary Development Contributions Backlog (A ) TCCRef: A

6 653 ATTACHMENT A BACKGROUND ON DEVELOPMENT CONTRIBUTIONS (DCs) BACKLOG AND ITS TREATMENT 1. What is the Development Contributions (DC) backlog and how is it calculated? The DC charge is calculated each year based on the best (latest) information available. Over time this tends to become more accurate, as more of the growth numbers and capital projects become actual figures. In many instances (particularly historically) project costs were higher than anticipated. This means that over time DC charges have increased. The Local Government Act does not allow Council to recoup this shortfall from future developers. The difference between the lower DC that was charged in the past and what the DC charge is today reflects the amount by which the reserve is likely to end up in a deficit when the growth area is full. Therefore the backlog is the difference between what the actual balance of each reserve is compared to the amount it should be. This backlog could be either: Permanent (eg cost of construction is much higher than estimated), or Temporary (eg a delay in the timing of growth that is expected to reverse) A worked example of this is included in Table 1 below. DC52 - Report - Council -16 February Development Contributions Backlog (A ) TCC Ref:A

7 Table 1: Methodology for Calculating the Development Contribution (DC) backlog Interest Rate Actual project costs and new dwellings 6.00% 6.00% 5.80% 5.80% 6.00% Current APYear ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ Estimated project costs and new dwellings 6.00% 6.25% 6.25% 6.25% 6.25% 6.25% Yearl Year 2 Year 3 Year 4 Year 5 Year 7 Year 8 Year 9 Year 10 Total Opening Balance Revenue Plus Interest Less Capital Expenditure Closing Balance 0 5,910 12,478 18,110 28,640 25,428 18,932 22,397 10,610 2,482 0 (4,262) (5,967) (10,230) (12,787) (12,787) (12,787) (12,787) (12,787) (8,525) (2,557) (95,479) ,318 1,575 I 1,292 1,252 1, ,479 10,000 12,000 15,000 22,000 8,000 5,000 15, ,000 5,910 12,478 18,110 28,640 25,428 (A) 18,932 22,397 10,610 2, Unit Rate Number of new sections Revenue , ,967 10,230 12, ,787 12,787 12,787 12, ,525 2, Historical Charge (Actual) Actual Reserve Balance Opening Balance Revenue Plus Interest Less Capital Expenditure Closing Balance 0 6,424 13,541 20,189 31,607 (3,763) (5,465) (9,303) (12,041) (12,688) , , ,000 1,460 22,000 1,756 8,000 6,424 13,541 20,189 31,607 28,675 (B) Under collection (Backlog) (B) - (A) 3,247

8 661 The model in Table 1 above is a simplified version of that used by TCC to calculate DC charges. The top section shows the expected movement in the DC reserve from its establishment until its expected completion. The model is balanced by amending the Unit rate charge until the closing balance at the end of year 10 is zero. As a by-product of this calculation the expected balance of the reserve is also shown (See A on Table 1). This can be compared to the actual balance of the reserve (see B on Table 1) to determine if we are ahead (in surplus) of where we expected to be or behind (in deficit) (ie B-A). As a growth area gets closer to the end of its life, the less likely it is for a significant surplus of deficit to be reversed. For a deficit this will need to be recovered from the ratepayer. An under collection can also be demonstrated graphically by reviewing a graph ofthe actual DCs charged against what 'should' have been charged. This is shown in Figure 1 below. The area between the two lines represents the under collection. Figure 1: Graphical representation of backlog Actual DC charge vs Recalculated charge \ \ \ Undercollection % 7s: w 76C \ Yearl Year 2 Year 3 Year 4 Year 5 Year 6 Year? Year 8 Year 9 ''^^^ 10 ^Aauai DC Charge ^9 RecuBted DC Charge 852.^ TCC Ref: A

9 What makes up the DC backlog? It is important to note that we cannot just look at the overall picture, but need to examine each element in each growth area individually. This is because gains in one area cannot be used to offset losses in another. While this can be broken down into individual growth areas the inclusion of growth areas that have a negative backlog (ie surplus money) make this difficult to make sense of. This can be seen on Figure 2. Figure 2: DC Backlog by growth area 40 c o = DC Backlog by Growth area 0 (10) ^^Bethlehem Pyes Pa < Ohauiti Welcome Bay ^ Papamoa "Tauranga Infill < IVlount Infill West Bethlehem 9 Pyes Pa West Tauriko Bus Estate- Wairakei 2.1. Generic Causes There are a number of generic causes of this backlog. Inflation (2007) and Cost of Capital (2008) were not originally included in the calculation of DC charges. This had the impact of increasing and then stabilizing the DC charges. Therefore most of the backlog was created in the early years of charging DCs where these important components were not included. This needs to be understood within the context of that time; Initially DCs were charged as Financial Contributions (PCs) Until the Local Government Act 2002 DCs were collected as Financial Contributions under the Resource Management Act (RMA). FC charges are very difficult to increase (main reason to change to DCs) When DCs were introduced there was significant opposition If Council had attempted to introduce concepts of Inflation and Cost of Capital into the mix at the same time as it changed to DCs this may have resulted in legal challenges, significantly delaying the implementation. TCC has been a 'lead' adopter of DCs TCC has been a leader in this area, both in terms of timing and methodology. While this has meant we have had to 'learn from our own mistakes' it has meant that TCC has collected millions of dollars from developers that would have been missed if we had delayed. TCC Ref: A

10 Specific Causes When Council reviewed the backlog in 2011 it identified three components of the backlog that were particularly significant. These parts are Papamoa Transportation, Papamoa Stormwater and Bethlehem Transportation. Figure 3 shows the movements for these components. Figure 3: Major components of Backlog Movennent in Largest 3 Backlog components Bethlehem Transportation ^ Papamoa Transportation > Papamoa Stormwater Papamoa Transportation This relates to the increase in costs of projects. In particular the Sandhurst Interchange was omitted from the list of projects in this growth area for many years. Papamoa Stormwater This relates to the huge increase in land prices from when DCs were originally charged up until the land purchases were actually made. While this impacted right over the city it was particularly impacted here due to Papamoa's proximity to the coast and Papamoa's reliance on open swales rather than pipe solutions (due to flatness ofthe land). Bethlehem Transportation This area has had impacts of both project cost and land price increases, without any individual project being large enough to stand out individually. Pyes Pa West (Stormwater and Transportation) have recently been added to the areas of concern for backlog monitoring. This is primarily as a result works in the Hastings Road and Kennedy Road sections of this growth area are coming in significantly above budgets. 3. Might the backlog change without the need for debt transfers? There are a number of potential influences on the Backlog. They key ones are outlined in Table 2 below. TCC Ref:A

11 664 Table 2: Potential Impacts on Backlog Impact Change Size of Impact Likelihood and Scope Positive Growth faster than expected Reduces future cost of capital. Unlikely to be significant Grov\/th estimates for older growth areas fairly aggressive. Unlikely for this to eventuate to a significant degree. Positive Future capital under budget or not required There is some sizeable capital expenditure to happen ($11.3M in Papamoa and $2.7M in Bethlehem.) Considered highly unlikely that there will be substantial budget savings on the remaining projects. Positive Additional Growth SHA's or intensive developments have been identified in Bethlehem and Ohauiti. Impact in Bethlehem estimated at $1.7M. No impact in Ohauiti as SHA offsets other landlocked growth. Highly likely to eventuate in Bethlehem (based on 180 lots for Smiths Farm). Little scope for SHA's not already undenway. Positive New alternative funding Council has received additional funding from NZTA for one project where growth less than budgeted. Agreement with WBOPDC for contribution on shared road. Unlikely to eventuate in the future. Certainly not to an extent that could be relied upon. Negative Growth slower than expected Increases future cost of capital. Could be significant, especially if no progress is made for a considerable period. Fairly likely to occur, especially where the majority of the remaining land is multiple owned Maori land (history suggests this land develops very slowly). Negative Future capital over budget or additional capital identified. There is some sizeable capital expenditure to happen ($11.3M in Papamoa and $2.7M in Bethlehem.) Considered unlikely that there will be substantial budget increases or new projects identified in the older growth areas. Some risk in Pyes Pa West. TCC Ref: A

12 66; Impact Change Size of Impact Likelihood and Scope Negative Reduction in developable area / density. The only landlocked developments have happened in Bethlehem and Ohauiti. Bethlehem has now been opened up and Ohauiti offset through a SHA. Council staff more aware of risk and newer growth areas have fewer developers, so risk is considered lower. Note Positive is good and creates a decrease in the backlog. Negative is bad and creates an increase in the backlog. Because of these uncertainties, the principles only provide for a funding adjustment to be made when there is virtual certainty of a significant backlog (by virtue of the size of the backlog and the number of sections still to be developed within the area. 4. What is not included in the DC backlog calculation? There are three main components not included in the DC Backlog calculation 4.1. Citywide DCs Citywide DCs are not included in the above analysis. This is because: Citywide DCs are generally in surplus (ahead of where we expected to be). See Figure 4 Unlike Local DC charges the area does not become full (although capacity may be all used up). This increases the opportunity to prevent an under collection. Figure 4: Total DC backlog, Including and Excluding Citywide DCs (BIFs) 50 I 40 ^ DC Backlog - Total DCs compared to Total Local DCs (SIFS) Total SIF Backlog m Total Backlog Incliding BIFS Reserve DCs When the DC backlog was first calculated a significant portion related to Reserves (both Local Purpose and Active Reserves). However in 2012/13 TCC changed its Level of Service in relation to Reserves. While the total amount of reserves required did not change, Council now allow 50% of this area to be achieved utilizing Stormwater Reserves and Coastal Reserves. This massively reduced the amount of TCC Ref:A

13 66b reserve land still required to be purchased and practically eliminated the backlogs relating to reserves. With some exceptions, TCC is generally not collecting reserve contributions any more Southern Pipeline DCs A backlog has not been calculated for the Southern Pipeline project. This is because: The project is not yet finished being completed. The final cost is not yet certain. It is difficult to project the final reserve outcome. Similar to Citywide DCs it is expected that DCs will be collected on the Southern Pipeline project for 40 years. Therefore the ability to predict a backlog is less certain. This difficulty is considerably increased due to the fact that the Southern Pipeline 'catchment' includes growth areas that do not yet exist. Council has resolved to consider refunds once costs on the Southern Pipeline have been finalized. How is Council minimizing the risk of a backlog developing in current growth areas? Council staff are well aware of the risk of future under-collection. This was reinforced by the growth in West Bethlehem being much slower than expected after most ofthe capital projects were completed. Some ofthe ways Council is addressing this risk is to: Move from using engineers' estimates for projects to standard rates that can be updated each year. Undertake a review of structure plans to ensure these are accurate Completed a peer review of big projects, such as Te Okura Drive Recent increase in resourcing in both growth management and infrastructure areas. Just in time approach to putting infrastructure in, only after we are sure the developer is committed to developing (as opposed to profiting from an uplift in value for serviced land through a bulk land sale). Identify land requirements earlier and consider earlier strategic acquisition. Earlier planning and cost estimation of projects. More specifically we have worked with developers to get them to complete works that would historically be funded through DCs. TCC Ref: A

14 667 In addition to this TCC have included a development viability step into the assessment of all future growth areas. For Wairakei this had the following advantages: Helped create a positive relationship with the developers Council comfortable that developer would undertake development as there was sufficient profit for them (rather than just try to resell large land blocks) Significant rationalization of infrastructure to be put in place Developer increased the amount of works the developer would complete (ie changed from DC funded to developer funded projects) TCC better able to stage DC funded capital projects. The net impact of this approach was a Local Development Contribution currently under $20,000 per lot (at 15 lots per ha) compared to an original figure of close to $50,000 per lot. Note: While TCC can reduce this risk the legislation prevents us from passing on all of the risks onto the developer. TCC Ref: A