Financial Strategy

Transcription

1 Financial Strategy

2 Quality Information Document Ref 2 Financial Strategy Date 30 June 2015 Prepared by Peter Till, Chief Executive Reviewed by Approved by Peter Till, Chief Executive Revision History Version 1 - Draft for Audit - 2 December 2014 Description Prepared by: Group Manager/Reviewed by: Chief Executive/Approved Name Pam Bicknell Name Peter Till Name Peter Till Signature Signature Signature Version 2 - Audit - 17 February 2015 Description Prepared by: Group Manager/Reviewed by: Chief Executive/Approved Name Pam Bicknell Name Peter Till Name Peter Till Signature Signature Signature Version 3 - To Council for Consultation - 10 March 2015 Description Prepared by: Group Manager/Reviewed by: Chief Executive/Approved Name Pam Bicknell Name Peter Till Name Peter Till Signature Signature Signature Version 4 - To Council for Audit - 13 May 2015 Description Prepared by: Group Manager/Reviewed by: Chief Executive/Approved Name Pam Bicknell Name Peter Till Name Peter Till Signature Signature Signature Version 5 - Adopted by Council 30 June 2015 Description Prepared by: Group Manager/Reviewed by: Chief Executive/Approved Name Pam Bicknell Name Peter Till Name Peter Till Signature Signature Signature

3 3 Contents 1 Introduction Introduction Council Direction What is Driving the LTP Capital Expenditure? Local Government Act Statement of Intent Funding Sources Local Government Cost Index (LGCI) Rates Rates (Increases) Affordability Rates (Income) Affordability Debt Affordability Benchmark Debt Servicing Benchmark Asset and Capital Development Essential Services Benchmark Balanced Budget Benchmark Consultation Challenges Growth and Demographic Change Natural Disasters Financial Policies Summary of Key Limits... 11

4 4 1 Introduction 1.0 Introduction 1.1 Council Direction The Financial Strategy outlines the way Council intends to manage its finances over the next ten years The sustainability and affordability of the District is of the utmost importance to Council, which has to balance this with the maintenance and renewal of its infrastructure. Some of Council s infrastructural assets are nearing the end of their lives, making renewal important. Council uses the opportunity, when doing renewals, to increase Levels of Service (LOS) where necessary or desired. Increases in LOS are often dictated by legislation and regulations Council uses debt to account for Intergenerational Equity. This means that Council does not consider that today s ratepayers should pay the full cost of services and infrastructure for future users. The use of loan funding for infrastructure allows Council to spread the cost. 1.2 What is Driving the LTP Capital Expenditure? Growth Growth in demand for services or capacity is a small part of the capital expenditure and this is mainly funded through development contributions and subsidies, with the intention that those who are driving growth pay for the growth part of the infrastructure Renewals Renewals are where we replace assets (or parts of assets) as they start to age and fail. This is funded through depreciation funding. Council is planning to do $91m of renewals over the ten year period. This will maintain our current infrastructure. Renewals are the largest part of the capital expenditure and enable Council to keep its infrastructure and services to the current level, but does not allow for improvements Levels of Service LOS is the most problematic area for Council. Community expectations and the expectations of visitors and residents, have driven changes to LOS. The effects of the growing tourism industry have put pressure on some infrastructure (notably Water Supply in the Waimarino area), the disposal of refuse and recycling and increased needs for carparks (cycleways) and public toilets. Council debt funds increases in LoS and applying for subsidies when they become available. The Planning Assumptions in Part 4 of the LTP talks about the anticipated declining population challenges facing our communities. In keeping these assumptions, Council chooses not to fund depreciation on some assets that are unlikely to be replaced.

5 5 1.3 Local Government Act The Local Government Act 2002 sets out specific financial management requirements for local authorities. Section 100, the Balanced Budget, requires each year s operating revenue to meet that year s expenses. The Act provides local authorities with some flexibility to run an annual deficit or surplus if it is prudent to do so. Council uses operational surpluses to pay off loans Section 101, Financial Management, means the local authority must take into account the current and future needs of the community and apply funding tools appropriate to each activity This Financial Strategy will be updated three yearly to coincide with the development of the Long Term Plan Council has spent some time considering the direction and affordability of its Long Term Plan and the financial impact of this. It is important that both sustainability and affordability are considered, alongside the need to maintain current infrastructure and to improve on it. 1.4 Statement of Intent The goal of Council s Financial Strategy is the prudent and sustainable stewardship of Council s resources on behalf of current and future ratepayers This entails consideration of Council s financial performance and position, balancing the current affordability of rates with fairness for future ratepayers. Through its Financial Strategy, Council seeks to maintain existing levels of service, ensure that costs are kept under tight control and that rates increases are kept as low as realistically possible, while at the same time maintaining a strong Balance Sheet and affordable levels of debt. 1.5 Funding Sources Council uses the following funding sources: Rates. Grants and Subsidies. Fees and Charges/Development Contributions. Other (Interest, Dividends, Petrol Taxes, etc). Loans (Capital Expenditure only) Council funds some activities on a District-wide basis and some on a community basis More detail is available in the Revenue and Finance Policy and the Funding Impact Statement. 1.6 Local Government Cost Index (LGCI) The LGCI is forecast by BERL Economics for all of Local Government. It is well proven that costs to Local Government move at a different rate to the standard Consumer Price Index so the Society of Local Government Managers (SOLGM) commission BERL to provide well researched economic indicators of the price increases Council is likely to face over the coming ten years. BERL s predictions for the Annual Average increase in prices are shown below. Annual Average % pa Year Ending Capex Opex LGCI June % 1.95% 2.00% June % 2.16% 2.24% June % 2.33% 2.45% June % 2.43% 2.53% June % 2.57% 2.61% June % 2.71% 2.75% June % 2.85% 2.90% June % 2.99% 3.04% June % 3.13% 3.19% June % 3.27% 3.36% June % 3.41% 3.53% Capex = Capital Expenditure Opex = Operating Expenditure LGCI = Combined Local Government Cost Index. 1.7 Rates Rates and the incidence of rates are set out in the Revenue and Financing Policy Council has set a limit for the maximum rates increase year on year at the Local Government Cost Index (LGCI) plus 2%. 1.8 Rates (Increases) Affordability This gives Council a benchmark to measure its rates increases against which Council is required to report on each year in its Annual Report. Council will have met its benchmark if its planned rates increase are equal or less than the quantified limit on rates increases.

6 Council s ten year budgets give the following planned results for the rates increases affordability benchmark. Rates Increases (%) Rates (Increases) affordability Quantified Limited on rates increases Proposed rates increases (exceeds limit) Proposed rates increases (at or within limit) Note that 2017 rates increases are likely to be subject to an Annual Plan. 1.9 Rates (Income) Affordability Council is also required to set a quantified limit on the rates income for which it plans to rate. This is the rates income for the whole of Council. Council has set this benchmark at a maximum increase, year on year, of no more than LGCI plus 2%. Rates Income ($'000) 40,000 30,000 20,000 10,000 0 Rates (Income) affordability Quantified Limited on rates income Proposed rates income (exceeds limit) Proposed rates income (at or within limit) Note that 2017 rates increases are likely to be subject to an Annual Plan Debt Affordability Benchmark Council has set a limit on borrowing with the maximum debt to be no more than twice the rates income The graph below shows the planned debt measured against double the planned rates. $000's Debt affordability benchmark Proposed debt (at or within limit) Proposed debt (exceeds limit) Quantified Limited on debt 1.11 Debt Servicing Benchmark Council has chosen to use the Debt Servicing Benchmark as defined in the Local Government (Financial Reporting and Prudence) Regulations The graph below displays Council s planned borrowing costs as a proportion of planned revenue (excluding development contributions, financial contributions, vested assets, gains on derivative financial instruments, and revaluations of property, plant, or equipment). Because Statistics New Zealand projects the Council s population will grow more slowly than the national population is projected to grow, Council will meet the debt servicing benchmark if its planned borrowing costs equal or are less than 10% of its planned revenue. Debt Servicing Borrowing Costs / Revenue (%) 12% 10% 8% 6% 6% 6% 6% 6% 6% 6% 6% 5% 5% 5% 4% 2% 0% Benchmark Met Debt Servicing Benchmark 1.12 Asset and Capital Development Council currently has investment properties and infrastructure assets worth $396 million and, during the next ten years, is planning to undertake additional capital development of approximately $132 million to renew, develop or build assets Council has Asset Management Plans for each of its assets and these are the key planning tools for the maintenance, renewal and additional assets required to meet future levels of service Council has developed the asset programme assuming that all projects will be completed in the year identified in the plan. However, past experience shows that external factors (eg, obtaining resource consents) can delay projects. Therefore, Council must review its plans year by year Renewals are the replacement programme for the existing assets. Levels of service improvements relate to when Council thinks that the current level of service is too low or a community wants, and is willing to pay for, a higher LOS or it is driven by Government demand Renewals are generally funded from rates through the Depreciation calculation. Level of service and growth expenditure is usually funded from debt, subsidies, development contributions and/or reserves.

7 Land Transport is the largest asset area. However, there are some other large capital projects that may require investment by Council in the future, eg, the Waimarino Plains Water Supply. It is also possible that Council may be unaware of future needs within the ten year life of the Plan. A good example of this was the advent of the National Cycleways project in 2009, after the development of the LTP Essential Services Benchmark The following graph displays Council s planned capital expenditure on network services as a proportion of expected depreciation of network services. Council meets the essential services benchmark if its planned capital expenditure on network services equals or is greater than expected depreciation of network services Balanced Budget Benchmark Section 100 of the LGA 2002, and its amendments requires Council to balance its budget. The Benchmark measures this The graph displays Council s planned revenue (excluding development contributions, financial contributions, vested assets, gains on derivative financial instruments, and revaluations of property, plant, or equipment) as a proportion of planned operating expenses (excluding losses on derivative financial instruments and revaluations of property, plant, or equipment). Council meets the balanced budget benchmark if its planned revenue equals or is greater than its planned operating expenses. Capital expenditure / depreciation (%) Essential services benchmark Benchmark Met Benchmark not met

8 8 2 Consultation 2.1 Public consultation will be undertaken each year. This gives the community the opportunity to influence capital expenditure and may result in higher or lower than expected expenditure and debt.

9 9 3 Challenges 3.1 Growth and Demographic Change Over the next decade Council s long term growth projections suggest the usual resident population of Ruapehu will continue to decline. Over the same period, the number of holiday home owners is expected to grow by approximately 1.3% each year. To provide services to this growing community, Council has assumed that the cost of providing its services will increase The number of visitors also challenges and puts pressure on Council s assets. See the Growth Assumptions for more information. Council needs to take into account the visitor industry when setting its levels of service and assets development. 3.2 Natural Disasters Council needs to take into consideration the impact of any possible natural disaster, eg, lahar, floods, earthquake and other possible civil defence incidents. The Financial Strategy needs to be flexible to allow for these types of incidents.

10 10 4 Financial Policies 4.0 Financial Policies 4.1 Council s objectives for holding and managing financial investments are outlined in the Investment Policy. 4.2 Council s Policy for borrowing and debt are managed through its Liability Management Policy. 4.3 Council uses operational surpluses to repay debt and then draws down debt to fund capital expenditure. These operational surpluses are budgeted for by funding depreciation. This creates cash surpluses which are then used to pay down debt. When an asset is replaced, new debt is drawn down to fund replacement of the asset. This is, effectively, enabling Council to roll over debt. 4.4 Council does not fund depreciation on all assets. While depreciation is a mechanism to ensure current and future generations pay an equitable share of the cost of assets, Council has some assets which are unlikely to be replaced, such as community halls and pensioner housing It some financial years, Council s asset values experience a sharp increase, often driven by the international marketplace for commodities such as oil. The flow-on effect of these sharp increases in valuation is a sharp increase in depreciation, which would cause a sharp increase in some rates. These increases are unpalatable to our ratepayers. In years when Council experiences a sharp increase that is caused by international factors or exchange rate impacts that Council believes is temporary, Council chooses not to fund all of the depreciation increases. Similarly, when valuations decreased markedly, rates are held at higher levels and debt is repaid There is risk around Council making assumptions that these valuation increases are temporary and unlikely to reverse in future years The lower depreciation that is funded by rates means there is less cash available for debt repayment. 4.5 Council operates an internal accounting system that maintains loans and reserve balances by activity and, in the case of activities that are rated by area, by location within that activity. Interest is charged and paid to these activities, based on the carrying balances. This is designed to support the Revenue and Financing Policies benefit and exacerbator principles. 4.6 The following policies also form part of the overall financial direction of Council. In the LTP and available on Council s website, or on request: Revenue and Financing Policy. Available on Council s website, or on request: Investment Policy. Liability Management Policy. Rates Remissions Policies. Rates Postponement Policy. Rates Remission (Maori Freehold Land Policy). Development Contributions Policy.

11 11 5 Summary of Key Limits Measure Rate Charges Rates Income Debt Debt Affordability Essential Services Balanced Budget Limits Rates increase less than LGCI Opex plus 2% over ten years Limits reviewed every three years. Rates income not to increase by more than LGCI Opex plus 2% from the previous year. Less than twice the annual rates bill. Council s borrowing costs to be less than 10% of planned revenue (see definition above). Council s investment in renewal of capital assets is equal to or exceeds depreciation. Council s revenue exceeds operating expenditure as defined in the Local Government (Financial Report and Prudence) Regulations 2014.