TO: Committee of Council
MEETING DATE: 26 May 2022
TITLE: 2022/23 Annual Budget - Moving Forward
Presented By: Steve Paterson, Strategy Manager - Finance
APPROVED BY: Cameron McKay, Acting Chief Financial Officer
1. That Council receive:
a. the Engagement Summary (Attachment 1).
b. the Summary of Submissions (Attachment 2).
c. Officer Comments to the Summary of Submissions (Attachment 3)
2. That Council instruct the Chief Executive to prepare a draft of the final Annual Budget document for consideration by the Committee of Council at its meeting on 15 June 2022 and that it incorporate:
a. The proposed amendments to the rating system to further moderate impacts of the rating revaluation entitled – “Rating incidence & proposed changes to the rating system” (Attachment 4: Schedule A)
b. The proposed options for funding operating programmes from the 2021/22 operating surplus entitled “Schedule of one-off operating programmes” (Attachment 5: Schedule B);
c. Proposed operational budget changes entitled “Annual Budget 2022/23 Schedule of Proposed Budget Changes” (Attachment 6: Schedule C);
d. Prioritised capital programme (Attachment 7: Schedule D)
e. The proposed programme carry forwards entitled “Annual Budget 2022/23 – Schedule of Proposed Carry Forward Capital Programmes” (Attachment 8: Schedule E);
f. The proposed amendments to the capital expenditure programme entitled “Annual Budget 2022/23 - Schedule of Proposed Amendments to Capital Expenditure Programmes” (Attachment 9: Schedule F)
3. That Council agree the change to interest rate assumption.
1. ISSUE
This report is the vehicle through which the Council formally considers submissions to the Annual Budget. It is also the mechanism by which the Committee, in light of community consultation, provides direction to enable officers to prepare a draft of the final Annual Budget.
2. BACKGROUND
2.1 Community Engagement
The Council decided to consult on the Annual Budget and in doing so sought feedback on the direction, budget and programmes proposed and the changes proposed to the rating system to help moderate the effect of the revaluation on rates incidence.
Process Used for Community Engagement
Due to the uncertainties of the Covid protection framework it was planned that most of the community engagement process would be undertaken on-line.
An engagement summary is attached for information.
Results:
Submissions
The public had the option of making a submission and speaking to a Council Hearings Committee. 340 submissions were received (317 online, 12 emails, 76 letters, 2 via telephone and 1 petition of 568 signatures).
Elected members have received copies of all submissions, including those received after the closing date.
A Summary of Submissions (attached) groups submissions into key themes.
Council’s Consultation Document sought specific feedback on the following three questions:
· What do you think of our proposed budget?
· What changes would you make?
· Do you have any other feedback?
Submitters made comment on a number of other issues, with the most popular being:
· the discomfort around the proposed rates increase,
· the issue of a capital based rating system vs land value,
· “Planter Box” Cycle Lane Barriers,
· a petition consisting of over 500 signatories to improve the road on Vogel Street
· staff remuneration, and
· Streets for People.
Hearings
26 of the 340 submissions were presented by people or organisations at the six hearing sessions. To assist the Committee, minutes from these hearings held as meetings on 10, 12 and 13 May 2022 are included with this Agenda.
2.2. Proposed further changes to the annual budget
Since consultation on the proposed annual budget, there have been a number of issues that have arisen that need to be considered in addition to the public feedback, when finalising the budget and setting the rates. These are outlined in summary below and in more detail in the attached schedules.
2.2.1 Inflation Assumption
In the draft annual budget Council factored an overall inflation increase of 2.4%. This is based on BERL’s Local Government Cost Index (LGCI) that is updated annually in September.
The current CPI forecast is 6.7% and has been trending upwards at a rate not seen for some decades. The inflation assumption applied within the Annual Budget is the BERL LGCI.
This means that if a sustained period of inflation continues during the next financial year, it is possible that costs Council incurs as part of delivering its services could increase beyond the inflation assumption provided for in the budget.
2.2.2 Adjustments to debt assumptions and interest cost provisions
Council’s 10 Year Plan assumption was that an average interest rate of 2.8% on Council’s term debt would be appropriate. This assumption was changed to 3.1% for the proposed annual budget. Financial markets internationally and locally have been volatile and there has been more significant increases in interest rates than previously assumed. Although some of Council’s debt portfolio is fixed there is still a significant portion that is floating and subject to the latest market rates.
The most recent assessment is that the average cost of funds for the debt portfolio (taking into account the portion that is at fixed rates) is more likely to be approximately 3.4% than the current provision of 3.1%.
It is therefore recommended the budget assumption for the average cost of funds be increased from 3.1% to 3.4%. The proposed budget assumed a total interest expense of $6.47m. Increasing the interest rate, without making any other changes would increase this expense by $615K. Having said that, it is expected that there will be reductions to the forecast opening debt balance and that these adjustments will mean it will be possible to accommodate increasing the interest rate without increasing the interest expense or increasing the rates income requirement.
2.2.3 Rating incidence & proposed changes to the rating system
The Consultation Document and supporting information contained a number of assumptions about the rating system for 2022/23. In addition to those about the levels of the fixed charges for services, it was also assumed there would be changes to the differential surcharges and that the Uniform Annual General Charge (“UAGC”- fixed charge) would be $300. These changes were proposed in an effort to moderate the impacts of the latest city revaluation on the incidence of rates.
Despite our best endeavours to highlight that the changes in the level of rates for individual properties would vary widely as a consequence of the revaluation, many people expressed concern at the extent to which their increase was higher than the 8.3% increase in the Council’s overall rates requirement. Although the Council’s rating system is relatively simple (in national terms) it is still difficult to understand for most. Although rates are a tax many people view it as a charge for services and so if the rates on their property increase significantly, they expect there to have been commensurate increases in the services they receive. The Council needs to be confident the rates being assessed represent fair value for the Council’s services and facilities that are provided.
The three yearly revaluation is the occasion when the base for calculating rates is reset to represent the changing circumstances. This is a legislative requirement of the Rating Valuations Act with the new values audited by the Valuer-General as required under this Act. As such the new valuations must legally be used as the rating base from 1 July 2022.
Although a number of scenarios for moderating the impact of the revaluation were considered prior to the adoption of the proposed budget, further analysis has since been undertaken in an effort to provide elected members with a better understanding of the position and some options for moving forward.
It is possible for the Council to determine it is appropriate to adopt an option where the differentials and the UAGC are different from those assumed in the proposed budget. However, consideration must be given as to whether the option being adopted is so different from that consulted on that it would need an additional period of public engagement, acknowledging that such changes will favourably impact some ratepayers, and have a negative effect on others.
An option for consideration is contained in Attachment 4: Schedule A, which increases the commercial/industrial surcharge from the proposed 180% to 200%, thereby further moderating the impact of the revaluation on residential properties. Further adjustments to the UAGC and/or the differentials were modelled but not considered due to the significance of the change it causes to the rating system.
There is insufficient time before the 30 June budget adoption deadline available for further engagement.
2.2.4 Potential use of cash operating surplus from previous year
It has been Council’s policy to borrow externally only as required to fund capital expenditure. Council then limits borrowing during the year if the Council is operating with cash surpluses. That is the case this current year although there are indications the operating cash surplus is likely to be larger than usual. This has been as a result of Covid-19 lockdowns and restrictions in the red settings on Council delivering its activities.
An option to moderate the effects of the rating revaluation is to effectively utilise the cash surplus from the current year and by doing so reduce the cash required from rates in the new year. This option reduces the amount of surplus available to limit external borrowings.
If this option is exercised and rates revenue is held artificially low by utilising the current years cash surplus it is important to acknowledge the following considerations:
· This should be only be used for one-off operating programmes to avoid Council being hit with the need in the following year to increase rates to make up for the shortfall – this will exacerbate the size of any rates increase for that succeeding year.
· To be financially sustainable over the longer term in an environment where Council is investing heavily in new capital development, revenue needs to increase by an appropriate amount each year. This is measured through the use of the net debt to revenue ratio.
· There is a legislative requirement (s.100 of the Local Government Act) that a local authority must ensure that each year’s projected operating revenues are set at a level sufficient to meet that year’s projected operating expenses. In certain circumstances the Council is permitted by resolution to set income at a lower level if, having regard for the criteria in the legislation, it believes it is prudent to do so.
· Any ring fencing of funds will mean the level of borrowing required in 2022/23 will increase as it will limit the amount of surplus to be applied to debt repayment in 2021/22.
Officers have identified items that this funding approach could be applied against and these are attached in Attachment 5: Schedule B.
2.2.5 Government’s “Better-off” funding
At the time of the adoption of the draft Budget, there was insufficient information regarding the criteria and process required to be used by Council to access any of the first tranche (approx. $8.1m) of ‘better-off’ funding. Therefore, an assumption was made to not include this potential funding in the draft budget and to reassess the assumption as part of finalising the 2022/23 budget.
In April the criteria and process to be followed for applying for ‘better-off’ funding was released. This involves a significant process to determining what will be able to be applied for (including iwi involvement). Council has until the 30 September 2022 to lodge a funding proposal, resulting in the outcome of our application not being known in time to be able to inform the Annual Budget.
2.2.6 Proposed adjustments to other budgets
As part of reviewing the draft budget, officers have made the following adjustments based on updated assumptions and new Council recommendations since the preparation of the draft budget:
1. As per Planning & Strategy Committee Meeting recommendations of 9 March 2022, Council agreed (31-22) that an operating programme for a Traffic and Parking bylaw review be brought forward to 2021/22- 2022/23. $30K has been allocated to 2022-23 (#2143-Traffic and Parking Bylaw review).
2. Updated the remuneration budget and allocation of staff costs between activities based on the latest staffing position. This results in little change overall however some variation at individual activities.
3. The waste levy that Council receives from the Ministry for the Environment has now been confirmed as increasing by a further $288K. The budget has been updated to reflect this increase.
4. Other minor budget corrections based on revised assumptions.
The following recommendation from Play, Recreation & Sport Committee Meeting of 27 April 2022 is noted here for debate. It has not been included in the budget at this stage.
1. That the funding for tree planting in programme 1099 be brought forward from years 4-10, to a maximum of $40,000 each year, and that this be referred to the annual budget deliberations.
Officers have also considered further options and implications of reducing the operating programme in response to submissions on the discomfort of proposed rates increases. These are itemised in Attachment 6: Schedule C for Elected Member consideration.
2.2.7 Progress with the 2021/22 capital expenditure programme and impact on proposed 2022/23 programme
Officers reforecast the capital programme for 2021/22 in February, based on the deliverability review. This included looking at any work that was not yet procured, for design and for construction for both the 2021/22 year and for the 2022/23 year. Changes were made, allowing a robust time frame for design and consenting and procurement, as well as a robust timeframe for delivery. For some larger or more complex projects, this spread the design and delivery from one 10 Year Plan year to be across two years to be realistic. The revised forecast also took into account any known market constraints for delivery. We also specifically identified growth programmes, as they are constrained by when the developers want them. Growth programmes had made up approximately 20% of our capital new programme. These have now been carried forward over two years to be more realistic about COVID and other market impacts on development.
Whilst this highlighted the need to order materials and equipment early, and moved a few budgets forward, in the main this cautious analysis resulted in identifying 2022/23 projects to be carried forward to 2023/24, and resulted in moving some 2021/22 carry forwards out two years rather than one year.
This was presented to Elected Members at the start of the annual plan process, to demonstrate that officers were being realistic about what could be delivered. At time of consultation, the 10 Year Plan sum for 2022/23 of $74.2m had been reduced to $37m comprising $32.6m programmes and $4.4m growth. Capital new has now increased from $37m to $42m. The change relates to an increase in growth programmes to account for Custom Street being moved back into the 2022/23 programme from where it had been moved to 2023/24 in February.
The deliverability review last year resulted in work being undertaken to secure our supply chain to give Council more certainty of delivery. The design panel will give more security of design delivery in a timely matter, which then significantly increases predictability of construction procurement and delivery.
Attachment 10: Schedule G shows the proportion of work including carry forwards made up by large contracts or under procurement which enables officers to focus on their delivery. This gives confidence that staff will be able to deliver the programme of new works through more comprehensive planning and early design.
The proposed budget made an assumption that $27m of capital programmes would need to be carried forward to 2022/23, made up of $24.5m new and $2.5m renewal. This assumption has now been reviewed to show the impact that the pandemic had on delivery through February to May 2022.
Attached as Attachment 8: Schedule E is an updated schedule of proposed carry forward assumptions highlighting where there is a difference from the assumption in the proposed annual budget released for consultation. Proposed carry forwards now amount to $36m ($4.2m for renewals, $29.0m for capital new & $2.7m for operating).
In summary the updated capital programme is recommended to be as follows (may be subject to change):
|
|
10YP 2021-31 (2022/23) |
Proposed Annual Budget for Consultation $m |
Updated recommendations $m |
|
Capital new programmes: |
74.2 |
37.0 |
40.2 |
|
Programmes |
45.6 |
32.6 |
32.6 |
|
Growth
|
28.6
|
4.4
|
7.6* Custom street |
|
Capital renewal programmes |
30.2 |
28.6 |
28.3 |
|
|
|
|
|
|
Capital New - Carry forward from 2021/22 to 2022/23 |
- |
24.7 |
29.0 |
|
Programmes |
- |
23.0 |
25.7 |
|
Growth |
- |
1.7 |
3.3 |
|
Capital Renewal - Carry forward from 2021/22 to 2022/23 |
- |
2.5 |
4.2 |
|
Grand Total |
104.4 |
92.9 |
101.8 |
Officers have developed a programme categorisation matrix to help Elected Members with decision making on further prioritisation. This matrix is shown below with programmes categorised in Attachment 7: Schedule D.
Decision Matrix / Programme Categorisation
The table below provides a summary of the proposed capital programme by programme categorisation:
|
Category |
Capital New $m |
Capital Renewal $m |
|
0 – Already Under Contract |
15.9 |
5.0 |
|
1 – Safety/Legislative requirements |
14.9 |
12.7 |
|
2 – Risk of failure or increased costs if not done |
3.4 |
10.2 |
|
3 – Community engaged/requested |
1.5 |
0.0 |
|
4 – Other |
4.4 |
0.3 |
3. NEXT STEPS
Direction provided by the Committee of Council will assist officers to prepare a draft of the final Annual Budget. This will be discussed by the Committee of Council at its meeting on 15 June prior to Council adopting the final Annual Budget on 29 June 2022. Rates for 2022/23 will also be formally set at that meeting.
4. Compliance and administration
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Does the Committee have delegated authority to decide? |
No |
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Are the decisions significant? |
No |
|
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If they are significant do they affect land or a body of water? |
No |
|
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Can this decision only be made through a 10 Year Plan? |
No |
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Does this decision require consultation through the Special Consultative procedure? |
No |
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Is there funding in the current Annual Plan for these actions? |
Yes |
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Are the recommendations inconsistent with any of Council’s policies or plans? |
No |
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The recommendations contribute to Goal 5: A Driven & Enabling Council |
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The recommendations contribute to the achievement of action/actions in (Not Applicable) |
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Contribution to strategic direction and to social, economic, environmental and cultural well-being |
Adopting the Annual Budget is an essential part of the process of facilitating the achievement of the Council’s strategic direction.
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1. |
Engagement Summary ⇩ |
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2. |
Summary of Submissions ⇩ |
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3. |
Officer Comments to Summary of Submissions (attached separately) |
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4. |
Schedule A - Rating Incidence & Proposed Changes to the
Rating System ⇩ |
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5. |
Schedule B - One-off Operating Programmes ⇩ |
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6. |
Schedule C - Proposed Operating Budget Change (attached separately) |
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7. |
Schedule D - Prioritised Capital Programmes ⇩ |
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8. |
Schedule E - Carry Forwards from 2021-22 ⇩ |
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9. |
Schedule F - Proposed Amendments to Capital Programmes ⇩ |
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10. |
Schedule G - Work contracted and in procurement (attached separately) |
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