Part 7: The rates postponement consortium
7.1
In this Part, we:
- describe the rates postponement consortium;
- describe the consortium’s management and funding flows; and
- give our view on the rates postponement consortium.
Structure of the rates postponement consortium
Consortium member councils
7.2
The six original councils are:
- Far North District Council;
- Rodney District Council;
- Thames-Coromandel District Council;
- Western Bay of Plenty District Council;
- Gisborne District Council; and
- Environment Waikato (Waikato Regional Council).
7.3
The eight new councils are:
- Ashburton District Council;
- Kapiti Coast District Council;
- Marlborough District Council;
- Masterton District Council;
- Nelson City Council;
- Queenstown-Lakes District Council;
- Rotorua District Council;
- and South Wairarapa District Council.
7.4
Each individual council is responsible for administering rates postponement for
their ratepayers. They customise and distribute promotional material, receive and
process applications, answer queries, and administer the accounts of ratepayers
who have postponed their rates.
The Joint Committee and subcommittee
7.5
The Joint Committee consists of two elected representatives from each of the six
original councils (which we refer to as Joint Committee councils).
7.6
The Joint Committee is responsible for:
- approving the applications of new councils to join the consortium and setting the joining fee;
- agreeing to admit new councils either as members of the Joint Committee or as “additional councils” that do not hold voting rights on the Joint Committee;
- negotiating with the management company where necessary;
- agreeing to the annual budget for the management company;
- agreeing to the expense budget for the Joint Committee and subcommittee; and
- directing the application of any surplus funds that are generated by the scheme.
7.7
The Joint Committee of elected representatives is expected to meet only once at
the beginning of each council term to delegate its responsibilities and functions
to a subcommittee of staff representatives from each Joint Committee council. This subcommittee makes decisions under delegated authority on behalf of the
Joint Committee. Although we refer to the Joint Committee in this report, in
practice it is the subcommittee of staff that meets and makes the operational
decisions about managing the consortium.
7.8
Any individual council can choose to withdraw from the consortium at any time. After withdrawing, councils cease to be liable for any further costs incurred by the
consortium.
Administering council
7.9
The Joint Committee appoints an administering council that oversees the
administration of the Joint Committee, including collecting and holding joining
fees and paying invoices on behalf of the Joint Committee.
7.10
This position was initially held by Western Bay of Plenty District Council, but Far
North District Council has recently been appointed as the administering council
for the next three years. It is envisaged that this role will move around among the
Joint Committee councils.
Additional councils
7.11
New councils may be admitted to the consortium either as Joint Committee
councils or as additional councils. Additional councils may attend meetings of the
Joint Committee, but do not have voting rights.
7.12
All of the eight new councils that have joined have been admitted as additional
councils.
R P Scheme Managers Limited
7.13
R P Scheme Managers Limited (R P Scheme Managers) is a wholly owned
subsidiary of McKinlay Douglas Limited (MDL), which was set up to manage the
rates postponement scheme. The company draws on the resources of MDL to
provide its contracted services to the Joint Committee.
7.14
The Joint Committee contracts R P Scheme Managers to manage consortium
business. R P Scheme Managers are responsible for activities such as:
- consortium support – generic work for the consortium, such as attending Joint Committee meetings, working on promotional material for councils to use, and monitoring relevant legislation as required;
- council support – drafting policies for new councils and briefing council staff;
- promoting the scheme to new councils; and
- managing contracts and relationships with outside parties, such as the actuary, the decision facilitation provider, and stakeholders.
McKinlay Douglas Limited
7.15
MDL is a Tauranga-based consultancy with a history of involvement in local
government issues as well as an interest in home equity conversion.
7.16
MDL manages R P Scheme Managers, and provides the personnel, expertise, and
other resources that R P Scheme Managers needs to provide its services to the
Joint Committee.
7.17
Figure 3 shows the structure of the consortium, including the agreements that
govern the relationships between the members.
Consortium management and funding flows
Joining fees
7.18
Each of the six original consortium member councils paid $26,000 to the Joint
Committee as a joining fee.
7.19
Some of this money has been used as a part-payment to MDL for time spent
developing the rates postponement scheme. The balance of the money has been
spent on other expenses – in particular, legal fees and costs for developing the
actuarial model.
7.20
New councils will pay a similar joining fee, which will be used to pay expenses but
will not be used to make further payments to R P Scheme Managers or MDL.
Figure 3
Structure of the rates postponement consortium
The management agreement between the Joint Committee and R P Scheme Managers Limited
Term
7.21
The management agreement has a term of 15 years from November 2005. R P Scheme Managers and MDL have the right to extend the term of the
management agreement by seven years if they wish. The Joint Committee may
terminate or renegotiate the agreement if the payments made to MDL exceed the agreed repayment cap (see paragraph 7.33). The Joint Committee may also
terminate the agreement if R P Scheme Managers or MDL are in default of the
provisions set out in the agreement, or if the ownership of either company
changes by more than 25%.
Scope of business
7.22
The management agreement limits R P Scheme Managers’ scope of business to
specified activities, unless the Joint Committee gives written authority for other
activities to be undertaken.
Budget and resources
7.23
R P Scheme Managers works within a budget that is set by the Joint Committee
each year. This budget is proposed by R P Scheme Managers, based on an
assessment of the work required for the year and the number of days it will take
to complete. R P Scheme Managers is entitled to be paid for the number of days
agreed in the budget, regardless of whether the actual work done for the year is
over or under that amount. If the budget exceeds the value of the management
fee for that year, as is currently occurring, R P Scheme Managers will carry the
deficit forward.
The 1% management fee
7.24
The management agreement stipulates that each council makes a six-monthly
payment to R P Scheme Managers to the value of 0.5% of the current total of
postponed rates owed to that council. The councils recoup this money by adding a
1% annual management fee to individual ratepayers’ postponed rates.
7.25
R P Scheme Managers is not entitled to any other payments from the Joint
Committee or any participating councils, except for reimbursement of expenses
such as travel.
7.26
The six-monthly payments to R P Scheme Managers are applied according to the
following formula:
- First, to pay R P Scheme Managers for the work it has undertaken for the Joint Committee in accordance with the agreed budget for the current financial year.
- Secondly, to pay any deficit for previous years in which the payments received by R P Scheme Managers from the councils were less than provided for in R P Scheme Managers’ agreed budget.
- Thirdly, if all the money owing to R P Scheme Managers to date has been paid, the surplus funds will be split between MDL and the Joint Committee. Of the surplus, 25% will go to MDL (subject to the repayment cap discussed below) and 75% to the Joint Committee.
7.27
There will need to be a significant growth in uptake of the scheme before R P
Scheme Managers’ deficits are cleared and there is surplus money available for
distribution to MDL and the Joint Committee councils.
Financial Risk
7.28
The management agreement is structured so that MDL carries most of the risk
of the investment in developing the scheme being more than will be recoverable
through management fees. Because R P Scheme Managers’ income and MDL’s
return on investment are generated directly from postponed rates, councils are
not exposed to having to pay these fees without being able to recover the costs
from ratepayers.
Intellectual property
7.29
The management agreement provides for each of the parties to retain ownership
of any intellectual property they develop, but they are also required to grant all
other parties the right to use that intellectual property. When the management
agreement expires or is terminated, the ownership of intellectual property in the
scheme held by MDL or R P Scheme Managers will pass to the Joint Committee.
Surplus management fees
MDL’s share of the surplus management fee
7.30
Before the Joint Committee and R P Scheme Managers were formed, MDL
was directly involved in developing the optional rates postponement scheme. Working initially with Western Bay of Plenty District Council and then with the
other consortium councils, MDL did research and development work for the
generic optional rates postponement policy, and oversaw the completion of the
consortium arrangements.
7.31
The Joint Committee has made a partial payment to MDL for this work. There is
still an amount outstanding.
7.32
This outstanding amount represents MDL’s initial investment into the rates
postponement consortium. MDL hopes to recoup this initial investment, plus a
reasonable return, through its 25% share of the surplus management fee.
7.33
The total amount that MDL can receive from collecting its 25% share of the
surplus management fee is capped at a figure that represents repayment of the
initial investment, a return on this investment, and an allowance for inflation. This
cap was calculated assuming a 15-year repayment period.
7.34
The Joint Committee councils received independent advice to establish the
appropriate level for this repayment cap.
7.35
If this repayment cap is reached, MDL will no longer be entitled to any share of
any surplus management fees generated by the rates postponement scheme. All
revenue not owed to R P Scheme Managers for ongoing work will be returned to
the Joint Committee councils. The Joint Committee councils’ share of the surplus management fee
7.36
The management agreement states that the Joint Committee’s 75% share of the
surplus management fee will be returned to each of the Joint Committee councils,
in equal shares.
7.37
The Joint Committee agreement states that all funds received from the
management company (that is, the surplus management fees) will be held by the
administering council on behalf of the Joint Committee.
7.38
The Joint Committee agreement states that these funds may be applied to:
- expenses incurred by the Joint Committee; and/or
- projects of benefit to local government.
7.39
According to the Joint Committee agreement, if the surplus management fee
is not required for these purposes, it is to be distributed to all the consortium
councils in proportion to their share of the total outstanding postponed rates.
7.40
In addition, it was suggested to us that the Joint Committee councils’ share of the
surplus management fee could be used for some or all of:
- recouping the costs of councils that made a substantial investment of time and resources in the development of the scheme – for example, Western Bay of Plenty District Council, which was involved in early research and development, and Far North District Council, which is creating the database for use by consortium councils;
- paying for further development of the scheme; and
- remitting all or part of the management fee charged on outstanding balances to the ratepayers who have postponed their rates.
7.41
Figure 4 shows the consortium’s funding flows.
Our view on the rates postponement consortium
7.42
MDL and the six Joint Committee councils pioneered optional rates postponement
in New Zealand. Optional rates postponement is a complex policy, and required
extensive work to formulate. MDL and the consortium councils undertook a
significant amount of preparatory work to devise the structure and management
of the rates postponement consortium.
Figure 4
Funding flows of the rates postponement consortium
7.43
Overall, the structure and management of the consortium is reasonable and
appropriate for the nature of the arrangement. The Joint Committee has
appropriate control over decision-making regarding the rates postponement
scheme, and over the budget and activities of R P Scheme Managers.
7.44
In our view, there are three areas that will need to be developed or refined. We
discuss these areas further below.
The development of performance indicators
7.45
The management agreement states that the annual budget of R P Scheme
Managers will include performance indicators that will be reported against in R P
Scheme Managers’ annual report to the Joint Committee.
7.46
We examined the 2005-06 budget presented to the Joint Committee. The budget
states the nature of the work that will be undertaken during the year, and
estimates the time required. However, it does not include performance indicators.
7.47
Performance indicators and regular monitoring of performance against these
indicators will allow the Joint Committee to determine whether R P Scheme
Managers is delivering on the work plan agreed in the budget. Regular monitoring
will also provide an opportunity for R P Scheme Managers to inform the Joint
Committee about any difficulties that may prevent them from delivering the
agreed work.
Estimating resources for consortium management
7.48
The 2004-05 budget authorised R P Scheme Managers to undertake 49 days of
activity for the rates postponement consortium. Actual activity for the year was
24.5 days. In view of the substantial difference between the budgeted days and
the actual days worked in 2004-05, R P Scheme Managers have offered the Joint
Committee a 25% discount on their fees for the 2005-06 year.
7.49
According to R P Scheme Managers, the unavailability of council personnel to
consult on and confirm decisions was the main reason the company did not
undertake the full amount of work budgeted for and complete its planned work
programme.
7.50
Councils do not directly bear the cost of paying R P Scheme Managers. The money
to meet this cost will come from the 1% management fee paid by ratepayers
who postpone their rates. However, while this arrangement has been agreed as
acceptable to the consortium, it means that ratepayers will pay for management
services that did not eventuate.
7.51
We also note that none of the four consortium councils we audited included inhouse
staff time in their analysis of the costs of joining the rates postponement
consortium.
7.52
The rates postponement consortium should endeavour to ensure that the actual
days worked by R P Scheme Managers approximates the agreed budget.
7.53
In addition, councils considering joining the rates postponement consortium
should take into account demands on staff time.
The surplus management fee
7.54
Section 88(2) of the Local Government (Rating) Act 2002 states that councils
that postpone rates may charge a postponement fee. However, this fee may
not “exceed the administration and financial costs to the local authority of the
postponement”.
7.55
As noted in paragraphs 7.37-7.38, the Joint Committee agreement states that all
funds received from the management company will be held by the administering
authority on behalf of the Joint Committee and may be applied to:
- expenses incurred by the Joint Committee; and/or
- projects of benefit to local government.
7.56
In our view, it is unlikely that funding projects “of benefit to local government”
could be considered “administration or financial costs” of rates postponement.
7.57
The Joint Committee agreement further provides that, if the surplus management
fee is not required for these two purposes, it is to be distributed to all the
consortium councils (Joint Committee and additional) in proportion to their share
of the total outstanding postponed rates.
7.58
In our view, it would be appropriate for councils to retain their share of the surplus
management fees only if they are applying it to administration or financial costs
associated with the rates postponement scheme that are not otherwise covered
by other fees. Otherwise, we consider that it would be appropriate for councils
to remit their share of the surplus management fee to the ratepayers concerned. This would effectively reduce the management fee to reflect the actual cost of
management of the rates postponement consortium.
7.59
We understand that councils that have made substantial initial investment into
the rates postponement scheme may wish to recoup this investment before
the Joint Committee’s share of the surplus management fee is distributed to all
councils. This would be reasonable, provided the costs they are recovering are
clearly recorded and itemised.