FINANCIAL AND GENERAL ASSUMPTIONS

Transcription

1 FINANCIAL AND GENERAL ASSUMPTIONS In developing the Hauraki Long Term Plan, the council must make assumptions about the future and take positions on various issues, as they may or may not affect the council s ability to meet required levels of service. In this long term plan, assumptions are split into two categories: financial assumptions financial and economic assumptions for example, valuations, inflation, interest rates. This section details significant forecasting assumptions and risks underlying the financial statements. and general assumptions - assumptions that can be applied across all the work we do for example, climate change These assumptions have underpinned the development of all aspects of the Hauraki Long Term Plan and its associated strategies and policies. 1 P a g e

2 FINANCIAL ASSUMPTIONS Topic Forecasting Assumption Risk 1. Inflation The forecast financial information includes That inflation will be provision for inflation. The Council has used significantly higher or lower forecasts of price level changes prepared than forecast. specifically for the Local Government sector by Business and Economic Research Limited (BERL) to calculate the inflation rate for each year of the Hauraki Long Term Plan. The BERL forecast inflation rates were set in September/October 2014 and are listed in Figure 1 below. In year one of the Hauraki Long Term Plan there has been no inflation applied to operational costs (with the exception of salaries). This is considered appropriate given that the year one budget has been prepared within six months of commencement of spend. Inflation is affected by external economic factors. The Council s costs and the income required to fund those costs will change by the difference between the actual rate of inflation and the rate of inflation used in the forecast. The Council has relied on the current parameters the Reserve Bank is required to operate under in terms of inflation being held within the range of 1% to 3%. A 1% increase in inflation would increase annual expenditure by approximately $310,000 and capital expenditure in 2015/16 by approximately $120,000. The inflation rates used for years in the 30 Year Infrastructure Strategy are the average of the rate used in the Hauraki Long Term Plan for that activity over the next 10 years. 2. Growth Because of the low population growth forecast for the District and the available capacity in the Council infrastructure, no universal growth factor has been applied to all operational expenditure. Where growth is anticipated that will create greater demand on services additional expenditure has been budgeted. 3. Interest Interest on Term Debt is calculated at between 5.4% in 2015/16 and 6.0% in 2024/25. This is the Council s expected cost of borrowing and is based on market interest rate expectations taking into account the proportion of the Council s debt that is covered by fixed interest rate instruments. 4. New Zealand Transport Agency (NZTA) The Funding Assistance Rate (FAR) (government roading subsidy) is forecast to range from 56% in 2015/16 to 60% in 2024/25. This is based on projections supplied by NZTA (the government funder of roading). That growth will be significantly higher or lower than forecast. That the interest rates will be significantly different from those used in the calculations. That the rate of subsidy will be lower than the rates budgeted. High The Council s costs and the income required to fund those costs will change by the difference between the actual rate of growth and the rate of growth used in the forecast. The Council s current consent activity supports the assumption. Interest rates are influenced by international economic factors. The Council will manage this through interest rate risk management instruments authorised in the Liability Management Policy for external debt, and by using internal borrowing as much as possible. A 1% reduction in the FAR subsidy rate would amount to a reduction in subsidy income of approximately $60, P a g e

3 Topic Forecasting Assumption Risk 5. Carbon credits and liabilities Implementation of NZTA s proposed One Network Road Classification (ONRC) may affect the Council s subsidy income. A high percentage of the Council s roads are low-volume local roads for which the ONRC is expected to prescribe a lower level of service than is currently provided by the Council, with a corresponding reduction in the amount of expenditure that is subsidised. It is assumed that the Council will not have to purchase carbon emission units (NZUs) under the New Zealand Emissions Trading Scheme. No budget for the purchase of NZUs has been provided. Furthermore, the Council assumes that it will continue to replant its forestry lots which currently earn NZUs. 6. Revaluation of assets It is assumed that the value of the assets will be consistent with the valuations conducted. That the Council will have to purchase carbon emission units. That the cost of construction/replacing assets will be significantly higher or lower than forecast by the valuations. The Government s future direction with regard to carbon tax and/or carbon credits is unclear. Given that during the life of the Hauraki Long Term Plan there are several election cycles, it can be assumed that the Government s approach to carbon emissions may change. As there has been no provision for such expenditure, the requirement to purchase carbon emission units would likely result in additional cost to the Council. The Council periodically re-values its assets. This is set out in more detail in the Accounting Policies and the Council s Infrastructure Strategy. Land was last revalued as at 30 June Buildings and Utility Assets were last re-valued as at 1 July Roading Assets were last re-valued as at 30 June The projections provide for changes in asset valuations every three years based on capital works, retired assets and the amount of inflation over that period of time. 7. Vested assets The Council has forecast that it will receive a minimal, but certain level of vested assets. The Council also assumes that the impact of vested assets will be neutral, in that the costs associated with the additional assets will be offset by a proportionate increase in rates revenue. That the Council will have more assets vested thereby increasing the depreciation expense in subsequent years that is not offset by a proportionate increase in rates The value of the Council s assets and subsequent depreciation expense may change as a result of changes in valuation methodologies or cost changes being significantly different to those projected. This could lead to an increase in rates. Vested assets can fluctuate considerably from year to year but the impact is ordinarily offset by a proportionate increase in rates revenue. It is highly unusual that the Council would enter into an arrangement with a developer where the ongoing costs 3 P a g e

4 Topic Forecasting Assumption Risk revenue. associated with the vested assets are disproportionate to the increase in rates revenue. 8. Funding sources Sources of funds will be obtained as per the Revenue and Financing Policy. The Revenue and Financing Policy also includes the sources of funds for future replacement of significant assets, and both operational and capital expenditure (the latter of which is primarily through borrowing). 9. Capital expenditure On average, costs of major capital works will not vary significantly from costs estimated at the concept stage, and subject to general inflation trends. 10. Asset life It is assumed the useful lives of assets as recorded in the Council s Asset Management Plan approximate reality. That the Council will not be able to fund its planned work programme. That some capital project costs turn out greater than estimates resulting in increased debt levels. That an asset will fail or wear out significantly earlier than its estimated useful life. in years one to three but higher further out. An example of where a vested asset may increase cost to the Council is where land is bequeathed to be maintained as a reserve, or similar. There is little risk that sources of funds will not be achieved given the Council s ability to collect rates. The main risk concerns capital expenditure, as that is primarily funded through borrowing. If the Council isn t able to borrow to the levels forecast than this could affect the timing or viability of its capital works programme. The Council has a higher level of confidence regarding the costs of capital projects in the short-term but less certainty in the longer term due to possible fluctuations in the economy, growth patterns, consent conditions, etc. Asset life is based upon estimates by engineers and valuers and is therefore considered reasonably accurate. 11. Unfunded replacement of non-council owned community run assets NB: Asset lives are also detailed in the Council s Accounting Policies and also the Council s Infrastructure Strategy. It is assumed that the Council will not be called upon to replace the following community-owned assets, therefore the Council does not fund the depreciation on these assets: Kaihere Hall Karangahake Hall Netherton Hall Kaiaua Bowling Club Hall Kopuarahi Hall Patetonga Hall Waikino Hall Waitakaruru Hall. That the Council will be called upon to replace assets that it does not currently own, or fund depreciation on. In the event of early expiration of assets, capital projects could be brought forward which would affect interest costs. Depreciation expense may also increase. The Council does not fund depreciation on these halls as it does not own these assets. Further, they are run externally from the Council. The chance of being called upon to assist with replacement in a loss event is considered medium given the number of halls and level of community interest in these assets. The financial impact is difficult to determine as in the event of loss, it is unclear whether they would be replaced at all and/or what the most appropriate course of action would be. 4 P a g e

5 Topic Forecasting Assumption Risk 12. Unfunded replacement of It is assumed that the Council will not be called That the Council will be called Council owned but upon to replace the following assets, therefore upon to replace a community community-run assets the Council does not fund the depreciation on asset that is does not currently these assets: fund depreciation on. Kerepehi Hall Mangatarata Hall Turua Hall All monuments and statues. The Council also does not fund depreciation on the Hauraki Rail Trail as it is assumed that the costs associated with replacement would not be borne by local government. The Council has chosen not to fund depreciation on these listed halls and on all monuments and statues as it is not expecting to be called upon to replace them. The chance of being called upon to replace one of these halls in the event of loss is considered low given the number of halls. The financial impact is difficult to determine, as in the event of loss, it is unclear whether they would be replaced at all and/or what the most appropriate course of action would be. With regard to monuments and statues, in the event of loss or damage, external funding or insurance may be sought should replacement of the monument or statue be required. 13. Development Contribution and/or Financial Contribution revenue Given that the Council is projecting low growth, the potential revenue from Development Contributions and/or Financial Contributions is considered immaterial. To provide more certainty to rates, no Development Contributions and/or Financial Contributions revenue is forecast. 14. Infrastructure insurance That the Council has sufficient insurance to replace its infrastructure assets in the event of a disaster. That Development Contributions and/or Financial Contributions will be material in size. The risk is that in the event of a natural disaster the Council does not receive the insurance claim revenue necessary to replace its infrastructure assets. For the Hauraki Rail Trail, at the time of preparing this Hauraki Long Term Plan there is a lease arrangement in place for approximately 18 years on the rail corridor. The arrangements beyond the term of the lease are unclear. Recent trends indicate a low level of Development Contributions and/or Financial Contributions revenue. In the unlikely event that the Council receives a considerable Development Contribution/Financial Contribution the revenue would be positive. The council manages the financial risk associated with natural disasters through the provision of insurance cover for 40% of the likely damage, along with the 60% from the Central Government under the National Civil Defence Emergency Plan. Figure 1: BERL Forecast Inflation Adjustors % per annum change 5 P a g e

6 Year Ending Road Property Water Energy Staff Other Earthmoving Pipelines Private Sector Wages June June June June June June June June June June June June P a g e

7 GENERAL WORKING ASSUMPTIONS Topic Forecasting Assumption Risk 1. Population growth The population of the District will remain stable during the life of the Hauraki Long Term Plan. That population growth is higher than anticipated, caused by an increase in births, a decrease in deaths, or a change in migration. That population growth is higher than anticipated due to other outside influences which could include growth in economic development opportunities. That population growth is lower than projected, caused by increased deaths, decreased births or net migration. Population projections have been based on historic trends seen in the Hauraki District and rating unit growth research. The financial effect would be as outlined below. There are non-demographic factors (active economic development programmes, rezoning of land, possible land use changes) that may have an influence on the future projected population of some Wards and/or settlements. These would take a number of years to significantly affect growth. In addition, the trend towards commuting could see increased migration into the District. The financial effect would be the need for more infrastructure, to be paid for by increased rates and Development Contributions. There is a chance that the assumptions used to project births, deaths and migration may be incorrect. Should the population decline, this may have an effect on income for the Council. The financial effect would likely mean a rise in rates due to a smaller number of rateable units. 2. Household size Actual average household sizes have decreased from 2.50 persons in 2006 to 2.39 in It is considered likely that this trend will continue and further decrease to 2.26 for the life of the Hauraki Long Term Plan. That the trend continues at a higher rate, putting more pressure on infrastructure due to additional rateable unit growth or uptake. Statistics show that average household sizes are decreasing at a slower rate than previously; it is therefore expected that this trend will slow down and be nominal for the life of the Hauraki Long Term Plan. If the rate of household size did decline faster than that anticipated, this would likely result in more infrastructure costs, which would be offset by additional rating units. That the trend does not continue, and household sizes increase. The financial effect would be a decrease in the rating unit growth and potentially an increase in rates. Page 7 of 13

8 Topic Forecasting Assumption Risk 3. Demographic age distribution for the District Hauraki District is likely to have an increasingly ageing population with potentially up to 31% of the District population being over 65 by 2025, and a further increase up to 47% by The table below shows previous and projected age-distribution: Age yrs 22% 19% 18% 13% 15-39yrs 26% 23% 22% 15% 40-64yrs 35% 34% 29% 25% 65+yrs 17% 24% 31% 47% 4. Rating Unit Growth It is assumed that that the growth in the number of rateable units will likely be 0.4% per annum. That the demographics of the District are significantly different than that anticipated That the growth in the number of rating units will vary significantly to what is predicted. Ageing population trends continue to be forecast by Statistics NZ and have been confirmed over time. These projections could prove incorrect in the future and/or may be exacerbated by migration and higher or lower birth and death rates. The financial effect would be on community services and likely to be minimal. Rating unit growth is driven by the economy, population growth and changes in demographics and lifestyle patterns. The main financial impacts are Development Contributionsincreased/decreased rate funding from extra units. 5. Levels of Service It is assumed that demand for Council services, and community expectations regarding the levels of service that the Council provides, will not significantly change. 6. Range of services The Council s current range of services will remain unchanged. That there are significant changes in the community s demands for levels of service. That Central Government will allocate responsibility for additional services to local government. The Council undertook a significant review of its levels of service as part of the Long Term Council Community Plan processes. There was a thorough consultation process involved, and therefore the Council believes it has determined to its best ability the wishes of its community. There has been no indication through annual satisfaction surveys of any demand for change. Nor has any demand for change been apparent through thehauraki Long Term Plan or Annual Plan processes. Since the 1989 reforms, councils have been required to undertake additional services, some of which had previously been operated by Central Government. In recent times Central Government has been handing more social responsibility issues to councils, for example gambling and 8 P a g e

9 Topic Forecasting Assumption Risk drug and alcohol policies. This is expected to be a trend that continues. 7. Resource Consents Conditions of resource consents held by the Council will not be altered significantly. 8. National Environmental Standards (NES) National Environmental Standards will continue to be drafted and adopted by Central Government. That Central Government will reduce the range of services required to be carried out by the Council through legislation. That conditions of resource consents are altered significantly when being renewed. That sections of the reviewed District Plan will need amending in the short term and on an ongoing basis. That amendments will be required to the Council s other planning documents. The financial effect of these types of central government delegations are hard to determine, but could be significant to the Council in terms of policy development and licensing processes. Central Government s current trend is to increase rather than decrease services required to be performed by councils. It is unlikely that this will change over the life of the Hauraki Long Term Plan. Although there are increasing community expectations regarding the environmental performance of Council facilities, Waikato Regional Council is aware of the significant costs involved with upgrading infrastructure and has agreed to provide advanced warning of likely changes. Resource consents are normally granted for long periods (e.g. 20 years) and are usually anticipated well in advance. Although some impacts may be significant in the longer term, financial effects are difficult to predict. There are likely to be significant time and cost implications for having to carry out reviews of the relevant District Plan sections, and to carry out Plan changes and other amendments as necessary, in terms of staff time/cost, public consultation, and administration support. The time and cost will depend on the number of NES adopted and their content. 9. National Policy Statements (NPS) National Policy Statements will continue to be drafted and adopted by Central Government. That additional responsibilities will be allocated to councils. That sections of the reviewed District Plan will need amending It is difficult to predictwith any certainty the additional responsibilities likely to be allocated to councils pending the adoptions of new NES. The financial effect could be the cost of additional staff or implementation of new Standards. There are likely to be significant time and cost implications for having to carry out 9 P a g e

10 Topic Forecasting Assumption Risk in the short term and on an ongoing basis. That amendments will be required to the Council s other planning documents. reviews of the relevant District Plan sections, and to carry out Plan changes and other amendments as necessary, in terms of staff time/cost, public consultation, and administration support. The time and cost will depend on the number of NPS adopted and their content. 10. Operating Environment There will be no significant changes to the Council s operating environment which have not already been planned for. 11. Method of Service Delivery Services will continue to be delivered at the same cost (inflation-adjusted). That additional responsibilities will be allocated to councils. That there will be event(s), e.g. natural disasters, requiring work that cannot be funded out of normal budgetary provisions. That there will be significant asset losses. That the service may not be able to be delivered in the same manner, which could impact the cost of providing the same level of service. It is difficult to predict with any certainty the additional responsibilities likely to be allocated to councils pending the adoptions of new NPS. The financial effect would be the cost of additional staff. Due to climatic variation there is an increased chance of extreme weather events in Hauraki District. However the Council has faced unexpected events in the past, and coped adequately. There are risk management plans in place for some activities and an Operative Emergency Management Plan. Assets are unlikely to be lost other than through planned end of life renewal. Therefore the financial effect is difficult to predict, but the Council does carry comprehensive insurance cover on infrastructural and community assets. Refer to the Financial Assumptions,above. External influences may impact upon the way/method that a level of service is delivered (for example a skilled labour shortage or staff turnover). Alternatively a more efficient method of delivering the same level of service may become available. That costs are increased significantly by commodity prices or economic conditions such as recession. / If the cost to provide the level of service was to change significantly then the Council would review the timing and amount of work programmed and undertaken. The financial effect is difficult to predict, however the Council has made an allowance for costs escalation and inflation. 10 P a g e

11 Topic Forecasting Assumption Risk 12. Waihou and Piako River Catchments Post- Treaty Settlement Co- Governance Entity. It is expected that the Hauraki Collective Treaty Settlement Deed will include provision for a co-governance entity responsible for developing a strategic vision and direction for water issues in the Waihou and Piako River catchments. 13. Asset Information Performance data for assets is assumed to be accurate. 14. Sustainability The Council will act in a sustainable way when making decisions on major assets and activities. That services are centralised and no longer operated by the Council. That the Settlement Deed does not provide for this. That the Treaty Settlement provides for a wide ranging role for this co-governance entity. Asset data results over-estimate or under-estimate the need for renewal or replacement and its cost. That the Council does not act in a sustainable manner when making decisions. There is continued debate within Government on local government reorganisation. This debate centres on merging smaller councils and the possibility of Unitary Authorities. Although this is a medium risk, it is unlikely to happen within the next three years. The financial effect could potentially bring savings to the community due to increased purchasing power. The Council will need to make additional funding commitments to allow it deal with five separate Iwi on catchment issues. The Council would need to make additional funding commitments to meet its share of the co-governance costs and there may be additional policy/service delivery costs over time. At the time of preparing the Hauraki Long Term Plan the legal status of the co-governance entity is unknown. The forecast financial information is based on current Asset Management Plan information. When any new information comes to hand, forecast financial information will be changed. The net effect overall may not be significant. In performing its role the Council must take a sustainable development approach as prescribed by the Local Government Act, P a g e That in the course of choosing sustainable options, costs incurred are greater. It is unlikely that this will change as a result of amendments to the Act. If it were to change, the financial effect would be hard to judge until the change was known. Often, when considering options for asset or infrastructural work, an analysis of impacts will require an alternative and more expensive solution to ensure mitigation of matters such as environmental effects. This can often end up being a more expensive option for the Council but necessary to meet the needs of future generations.

12 Topic Forecasting Assumption Risk 15. Commodity Prices The Gross Domestic Product (GDP) of the District is significantly dependent on the commodity prices for pastoral farming products and gold. That commodity prices are subject to a long period of low returns. Commodity prices are generally subject to cyclical highs and lows that are a result of international demand at the time. A sustained period of low returns depresses economic growth and increases rate affordability issues. 16. Climate Change Temperature in Hauraki District will likely rise 2.5ºC during the 21 st century years, although will most likely not alter significantly during the life of the Hauraki Long Term Plan. That the temperature will change significantly during the life of the Plan. A cycle of low commodity prices has an ongoing effect on the local service industries that cater for the commodity producers. There are currently 35 separate climate change scenarios that are being used and developed by the International Panel on Climate Change. All of these scenarios show that the global warming of the planet will happen slowly, and not overnight. Rainfall will be likely to decrease by 10mm in the Plains, 20 mm in Waihi and 10mm in Paeroa as an annual average during the 21 st century. During the life of the Hauraki Long Term Plan, there is likely to be little change. That there is a significant change in annual rainfall. If the temperature were to increase dramatically there would be large financial impacts due to a change in the level of service needed, particularly with regard to water supply for changing land use and also for land drainage. There are currently 35 separate climate change scenarios that are being used and developed by the International Panel on Climate Change. Both the increase and decreased rainfall projections would likely occur over a period of 100 years, and not within the next 10. Major rainfall intensity will be likely to increase by 20% during the 21 st century in Hauraki District. This will be a gradual increase, and only minor effects will be likely during the life of the Hauraki Long Term Plan. That rainfall intensity increases dramatically during the life of the Plan. If rainfall was to dramatically increase or decrease in the next 10 years, there would likely be a large financial impact due to increases in the levels of service needed for stormwater, drainage and water supply. There are currently 35 separate climate change scenarios that are being used and developed by the International Panel on Climate Change. Increased storm intensity projections would likely occur over a period of 100 years, and not within the next 10. If storms were to dramatically increase in the 12 P a g e

13 Topic Forecasting Assumption Risk Sea Level is likely to rise by 0.5m during the 21 st century. There is likely to be little change seen during the life of the Hauraki Long Term Plan. That sea levels rise faster than the anticipated 100 year projection. That current predictions are incorrect and may be altered. / next 10 years, there would likely be a large financial impact due to increases in the levels of service needed for stormwater, drainage and water supply. It is globally recognised that sea level will rise around the world. New Zealand is expecting a rise of 0.5m over the next 100 years, and has seen a rise of 0.16m during the 20 th century. Sea level rise is a gradual occurrence and is not likely to happen overnight. Sea level rise will affect financial systems with regard to assets. Sea defences and coastal protection would most likely need increased funding requirements. The Ministry for the Environment (MFE) has indicated that sea level rise will be 0.5m over the next 100 years, however there has been heated debate about this prediction, and even the possibility of increasing it up to 0.8m. The Council has resolved to go with the midline projections of MFE, therefore leaving the uncertainty of change at a medium level. The financial effect of this would be significant as it would amend all design specifications for the District and the District Plan. 13 P a g e