Part 5: Uncommon aspects of some long-term plans

Matters arising from the 2012-22 local authority long-term plans

5.1
In this Part, we consider some local authorities with uncommon aspects to their LTPs. We have considered the context in which these local authorities have prepared their LTPs and the risks they might face as a result of the approach they have taken.

5.2
These local authorities might sometimes fall outside the normal range when assessed against our set of indicators (see Part 4), but that is not why we focus on them in this Part. We focus on them because of the issues they face or the approach they have taken in their LTPs.

5.3
We chose to discuss these local authorities' situations because:

  • Auckland Council is a large entity, structured in a new way. It is so dominant when sector information is consolidated that it warrants separate consideration.
  • Queenstown-Lakes District Council's 2009-19 LTP audit report included a qualified opinion because the LTP was not financially prudent. We describe what this local authority has done to address this in its 2012-22 LTP and the issues it faces.
  • Timaru District Council was the only local authority to receive qualified opinions in audit reports on each of its LTPs, for failing to adjust its forecasts for inflation. We examine the risks that not doing this poses to the Council. Timaru District Council is also the only local authority that does not revalue its assets for financial reporting purposes.
  • We also carried out a preliminary analysis of local authorities based on their population size, looking for insights into the differences and similarities that such an analysis might reveal.

Auckland Council

5.4
Auckland Council is substantially larger than any other local authority in New Zealand. It faces significant challenges to address the needs of its community because of unco-ordinated investment in the past and high levels of expected growth in the future.

5.5
Although Auckland Council is very different in scale from other local authorities, there are aspects of its approach to the challenges of long-term planning that are relevant for the wider local government sector as a whole.

Context

5.6
The Local Government (Auckland Council) Act 2009 created the largest local authority in New Zealand. The change brought seven territorial authorities and one regional local authority together, with the goal of better meeting the needs of the large and growing population of Auckland (forecast to be 1.7 million people by the end of the 2012-22 LTP period). The new legislation provided a platform for the Mayor to set out a clear vision for Auckland to be the world's most liveable city.

5.7
The Auckland Transition Authority was tasked with bringing into one document the 2009-19 LTPs of the amalgamated local authorities. That document served to guide the Auckland Council until it prepared its own LTP for 2012-22.

5.8
The scale of Auckland Council makes it unique among local authorities. Here we set out the important aspects of Auckland Council's 2012-22 LTP, including:

  • the link to the Auckland Plan;
  • the preparation of a group LTP;
  • the financial picture;
  • important focus areas of the financial strategy, particularly the use of debt; and
  • the opinion we issued on the LTP.

The Auckland Plan

5.9
Section 79 of the Local Government (Auckland Council) Act 2009 requires Auckland Council to prepare a spatial plan. The goal of the spatial plan, known as the Auckland Plan, is to set the strategic direction for Auckland – defining its shape in 30 years' time and providing a guiding path during that period.

5.10
The Auckland Plan sets out seven outcomes that describe what Auckland will be like in 2040 and six transformational shifts that are required to achieve the outcomes and the Mayor's vision.

5.11
The Auckland Plan was the clear driving force for the LTP. The LTP seeks to operationalise the goals of the Auckland Plan for the first third of its life cycle. Likewise, as Auckland Council starts to prepare a unitary plan to define its resource management approach, the spatial plan is the foundation for that work.

First group LTP

5.12
Auckland Council's LTP is the first to be prepared on a group basis. The group approach was used because of the significance and economic substance of activities provided through the Council's council-controlled organisations. The LTP explains that because of:

... the relevance and importance of information related to these activities for Auckland ratepayers, the council has decided to prepare its LTP 2012-2022 on a full group basis. The group comprises the ultimate parent entity, being the Auckland Council and its subsidiaries, associates and joint ventures. ... The council considers that full group information enhances the transparency of information about the cost of services provided to Auckland ratepayers and enables ratepayers to make more informed decisions about the impact of delivering on the Auckland Plan.35

A summary of the financial forecast for Auckland Council

5.13
Auckland Council's LTP for 2012-22 has forecast:

  • total rates revenue of $19.7 billion during the period;
  • total operating revenue of $44.7 billion during the period;
  • total operational expenditure of $38.7 billion during the period;
  • total capital expenditure of $20 billion during the period;
  • total gross debt increasing from $4.8 billion to $12.5 billion during the period; and
  • total assets of $58.2 billion at 30 June 2022.

5.14
Auckland Council's rates comprise 34% of New Zealand's total rates during the 2012-22 period. Its closing debt comprises 68% of total local authority debt, and it holds 37% of all local authority assets.

5.15
Although Auckland Council forecasts very large increases in debt, its financial strategy limits are not out of alignment with the rest of the sector. Also, the limits are not breached during the LTP period (see Figure 17).

Figure 17
Comparison of Auckland Council's financial strategy limits and forecast highs and lows

Financial strategy limits* Lowest value during LTP period Highest value during LTP period
Net debt to total revenue is less than 275% 164.1% (2012/13) 225% (2019/20)
Net interest to total revenue is less than 15% 9.2% (2012/13) 13.6% (2020/21)
Net interest to rates income is less than 25% 15.9% (2012/13) 22.5% (2020/21)

* Auckland Council, Long-term plan 2012-22, Volume 3, Section 2.5, page 36, Notes to the financial statements. We note that Auckland Council's debt and interest limits are set on a net basis, taking into account any financial assets the Council is able to offset against gross debt and interest balances when calculating results against these limits.

5.16
Gross debt is $4.8 billion in 2011/12 and peaks at $12.5 billion in 2021/22. Excluding the debt of Watercare Services Limited (Watercare), the council-controlled organisation responsible for water in Auckland, the Council's debt is $3.5 billion in 2011/12, increasing to $8.9 billion in 2021/22. Auckland Council calculated the statistics in Figure 17 with Watercare's debt excluded because Watercare does not rely on Auckland Council to fund its operations.36

5.17
Auckland Council's debt is primarily being raised to fund growth and transformational projects. Auckland Council has access to several different debt facilities, including local retail bonds, LGFA, and an offshore debt programme. Unlike other local authorities, Auckland Council is allowed to borrow in foreign currencies.

5.18
Auckland's population is forecast to increase by 15.6% (235,800 people) during the next 10 years,37 which means that there will be a need for 99,000 new dwellings. In turn, this is forecast to lead to 14% growth in industrial and commercial floor areas. This growth will require $4.5 billion of capital expenditure and $2.3 billion of operational expenditure by the Council to provide for the population growth and necessary land use changes. The growth is not evenly spread over the 10 years, so the Council will need to incur costs ahead of the increase in the rating base to ensure that essential services are available when the population needs them.

5.19
Forecast population and economic growth are key drivers of Auckland Council's spending through the LTP period. This is typical for a metropolitan area. The lack of ability to reach investment consensus before amalgamation now sees the region in catch-up mode, particularly in transport infrastructure, which adds to the forecast growth challenge for Auckland.

Main focus areas of Auckland Council's financial strategy

5.20
The LTP contains a substantial number of projects, with the largest projects for investment in new assets. The Mayor describes the main focus areas within the LTP as projects to address the region's transport issues, projects to increase economic activity (focused on job creation), fiscal prudence through careful financial management (primarily linked to savings and efficiencies gained through the amalgamation process), and changing to a unified rating system.

5.21
The approach to achieving these projects includes a financial strategy focused on balancing the budget; investment in new assets generally funded by borrowing, changing during the next 13 years to fully funding depreciation;38 and limiting average general rate increases to 4.9% each year.

5.22
The other important component of the Auckland Council's financial strategy is the assumption that central government will provide $1.2 billion for the City Rail Link project (which has a total cost $2.86 billion, after allowing for the sale of surplus land) and that $344 million of funding for transport projects will come through sources not currently used (and some that are currently not allowed by legislation). At the time the LTP was completed, there was no final agreement with central government on either of these assumptions, which are disclosed extensively in the LTP as high-risk assumptions.39

5.23
Auckland Council has a credit rating of AA, based on the forecasts set out in the LTP. This is a higher credit rating than the major domestic banks have. The LTP forecasts assume that Auckland Council will retain its AA rating.

Our audit opinion on Auckland Council's LTP

5.24
Our audit report on Auckland Council's LTP drew attention to the significant uncertainty associated with the forecasting assumptions for the City Rail Link project (see Appendix 3). We drew attention to the assumptions based on the size and cost of the project and the significance for the Council's whole transport and economic development strategy if the assumptions on which the forecasts are based are not realised.

5.25
The main risks to the City Rail Link project are that central government will not agree to provide direct funding nor enable Auckland Council to access alternative funding sources.

Queenstown-Lakes District Council

5.26
Queenstown-Lakes District Council faces a significant challenge to address the effect of growth in its district. This is not a new problem, and the Council's successive 10-year planning documents have outlined this challenge and its implications.

5.27
The Queenstown-Lakes district was the fastest growing area in New Zealand between 2001 and 2006. This is expected to continue, with Statistics New Zealand's recently released projections showing that the Queenstown Lakes district is expected to grow at a faster rate than Auckland between 2006 and 2031.

5.28
The Council's LTPs have forecast significant increases in expenditure, both capital and operational, to accommodate the anticipated growth in the district. This growth includes not only resident population growth, but also the effect of tourists and visitors to the district on peak days, such as New Year's Eve. Determining how to fund this expenditure has been a challenge for the Council.

5.29
To deliver a financially prudent LTP, the Council has had to consider the accuracy of its growth forecasts and anticipated expenditure, and then determine the best way to fund it.

Growth forecasts

5.30
Growth forecasts are necessary to determine the size of population that will need services and the timing of the ongoing programme of investment.

5.31
Queenstown-Lakes District Council derives its growth forecasts using a methodology prepared in 2004, which it has refined over time. Growth forecasts incorporated into the 2012-22 LTP incorporate historical growth trends, projections from Statistics New Zealand, census data (where appropriate), tourism statistics, and the Council's own knowledge of the district.

5.32
Queenstown-Lakes District Council uses two different approaches for the Wakatipu and Wanaka areas because it considers that different factors drive the growth in those areas.

5.33
In Queenstown-Lakes District Council's 2006-16 LTP, projections showed that, on peak days (when visitor numbers are highest) in 2026, the number of people in the district would rise from 75,000 to 148,800.40 Figure 18 compares the Council's 2009-19 and 2012-22 growth projections.

Figure 18
Comparison of QLDC's 2009-19 and 2012-22 population growth forecasts

Measure 2009 LTP 2012 LTP Difference
2011 2021 2011 2021 2011 2021
Usually resident population 27,150 35,649 28,440 35,905 1,290 4.8% 256 0.7%
Average day population 41,889 55,463 46,612 56,517 4,723 11.3% 1054 1.9%
Peak day population 89,785 114,547 89,346 108,970 (439) (0.5%) (5577) (4.9%)

5.34
Projections in the 2012-22 LTP showed that the average day population would rise from an estimated 46,612 in 2011 to 56,517 in 2021. In 2021, the peak day population is expected to be 108,970.41

5.35
Queenstown-Lakes District Council also has to understand where growth is likely to occur. Residential growth is predicted using a dwelling capacity model that looks at consents issued for residential housing and their effect. The Council also has to understand industrial and commercial growth. New businesses require a workforce, for their construction and future operations, and the workforce needs both somewhere to live and access to services.

Anticipated expenditure

5.36
In its LTP for 2006-16, Queenstown-Lakes District Council reported that it was well placed to provide the necessary infrastructure for growth.

5.37
In its LTP for 2009-19, Queenstown-Lakes District Council noted that its challenge to address growth in the district had not changed. However, to establish its financial forecasts and determine the level of investment required, the Council reviewed its infrastructure network. It concluded that there was a need to complete more work than anticipated in the 2006-16 LTP to ensure that assets were not used past their capacity to deliver services without risk of failure.

5.38
New projects were also forecast in the 2009-19 LTP. They included new investment in infrastructure to enable Queenstown-Lakes District Council's assets to meet new water standards and quality standards for sewerage discharge, as well as investment in new facilities. The Council forecast $832 million of capital expenditure between 2009 and 2019.

5.39
Queenstown-Lakes District Council's capital expenditure forecast of $552 million for the 2012-22 period was much lower than the previous forecast ($832 million for 2009-19). To find savings in the capital programme proposed in the 2009-19 LTP, the Council carried out much work and revised its AMPs, factoring in the latest growth projections.

5.40
The decrease in forecast capital expenditure is a result of Queenstown-Lakes District Council reviewing every item of expenditure and revisiting its "must do" projects, and an anticipated decrease in the rate of growth. Spending on community services has been restricted to what the Council can afford.

5.41
The forecast decrease in growth has enabled Queenstown-Lakes District Council to spread the timing of its capital expenditure work over a longer period of time. However, it is the Council's review of its anticipated spending that has had the largest effect. The Council was able to remove about $70 million of forecast expenditure from its 2009-19 plan based on better knowledge and cost restraint.

5.42
Furthermore, Queenstown-Lakes District Council has a list of projects that are directly related to growth. If the growth does not happen, the projects will not proceed.

Effect on funding

5.43
The investment in facilities and infrastructure to accommodate the anticipated growth in the region, as well as the requirement for Queenstown-Lakes District Council to meet increased standards for water and sewerage discharges, has posed significant funding questions for the Council.

5.44
In its 2006-16 LTP, the debt levels of Queenstown-Lakes District Council were forecast to rise to $129 million. The Council had a policy that the costs of growth were to be placed on those that created the demand (that is, developers), so much of the debt was forecast to be repaid through development contributions.42

5.45
In its 2009-19 LTP, Queenstown-Lakes District Council maintained a policy that the cost of growth should be met by those who created the demand. However, when projects were built, the Council would fund the initial expense. The Council's policy, like those of many local authorities, was to borrow for this investment, which would be repaid over time through development contributions. The Council was forecasting to borrow a large amount to accommodate the significant infrastructure renewal and new development to respond to the district's growth. However, the Council stated that the forecast debt level was not a realistic proposition; nor did it have any alternative sources of funding.

5.46
Although debt can be repaid through other sources of income, such as development contributions, ratepayers will have to bear the cost if that income is not forthcoming. Queenstown-Lakes District Council's interest and debt indicators anticipated in its 2009-19 LTP were significantly higher than levels generally seen in the sector.

5.47
The financial projections in Queenstown-Lakes District Council's 2009-19 LTP reflected the borrowing forecast matching the capital expenditure programme, but it was the Council's and the auditor's view that the plan was not financially prudent.

5.48
We expressed a modified opinion on the Council's 2009-19 draft and final LTP. We drew the readers' attention to the fact that the community faced a fundamental issue in the Council's ability to fund its forecast capital expenditure over the long term. The Council needed to balance the requirement to deliver services that accounted for the anticipated level of growth and to fund that growth in a financially prudent manner, specifically in years four to 10 of the plan.

5.49
Queenstown-Lakes District Council noted that it would consider the situation it faced in its 2012-22 LTP, which it did. As noted above, the Council revised its AMPs and, with the combined decrease in growth and anticipated spending, was able to prepare a financially prudent LTP. Figure 19 shows a comparison of forecast interest expense and debt indicators between Queenstown-Lakes District Council's 2009-19 and 2012-22 LTPs.

Figure 19
Comparison of QLDC's forecast interest expense and debt indicators between the 2009-19 and 2012-22 LTPs

Debt indicators 2009-19 2012-22
Interest expense as % of total expenditure 14% 10%
Interest expense as % of total income 11% 8%
Interest expense as % of rates 22% 15%
2009/10 2018/19 2012/13 2021/22
Debt as % of total assets 12% 24% 13% 12%

5.50
In the 2009-19 LTP, the net borrowing position was forecast to peak in 2013/14, when the net debt position would have increased by $67 million. The level of debt repayment was forecast to consistently increase from 2015/16 onwards, but Queenstown-Lakes District Council expected to remain a net borrower through to the end of 2018/19.

5.51
In the 2012-22 LTP, Queenstown-Lakes District Council's debt as a proportion of total assets is expected to peak in 2015/16 before decreasing gradually. It is 13% in 2012/13 and forecast to reach 16% in 2015/16 before decreasing to 12% in 2021/22. Although debt repayments are forecast during the 2012-22 period, the Council expects to remain a net borrower during the period of the LTP, forecasting an increase in net debt position of $56 million.

5.52
This is not surprising, because Queenstown-Lakes District Council still has a large capital expenditure programme to complete during the next 10 years. As outlined in its 2012-22 LTP, the Council expects to fund a large portion of this programme through debt, at least in the first instance.

5.53
The level of debt and the ratios proposed in the 2012-22 LTP provide a plan that, in our view, is financially prudent. We did not modify the opinion in our audit report. However, this does not mean that Queenstown-Lakes District Council does not face any risk. The LTP is compiled using assumptions, including growth and expenditure forecasts. If there is a negative effect on these forecasts, such as an infrastructure system failure or a growth spurt, then the Council will need to manage this carefully.

Queenstown-Lakes District Council compared with other local authorities

5.54
Larger metropolitan local authorities are expecting to hold the highest levels of debt. Queenstown-Lakes District Council has a high debt increase. We considered the level of debt in relation to population and found that, along with Auckland Council, Queenstown-Lakes District Council is an outlier. The Council has 16% higher debt per head of population than the local authority with the next highest level of debt per head of population.

5.55
When we calculate debt in relation to population, Queenstown-Lakes District Council is an outlier for several indicators:

  • The Council's forecast rates are above the trend line of other local authorities.
  • Operational and capital expenditure is higher compared with other local authorities.
  • Much of the operational and capital expenditure is so the district can accommodate expected growth. The increase in rates might reflect an increase in levels of service in particular activities, but much of the increase is for servicing debt.

5.56
Although residents have higher average incomes, Queenstown-Lakes District Council knows that it needs to manage the affordability of its rates, especially because the rates each person pays are already higher than the rates paid elsewhere.

Timaru District Council

5.57
Timaru District Council is unusual compared to all other local authorities because it:

  • makes no inflation adjustment to the financial forecasts in its LTP beyond the first year of the plan; and
  • records its fixed assets at deemed cost in its forecast and historical financial statements.

Inflation

5.58
In our view, LTPs should be based on best estimates and a complete set of assumptions about the foreseeable future. This gives the reader the best information on the estimated cost to, and funding implications for, the community.

5.59
LTPs are future-focused documents and everything in the document is a projection. We accept that there will always be unexpected reasons why individual costs might rise faster or slower in a particular year.

5.60
Given that LTPs incorporate 10 years of financial information, it is widely accepted that inflation is an important assumption in preparing the best estimate of costs. Inflation generally refers to the rate of price increases. The sector has used generally accepted estimates of inflation in local government costs, produced by Business and Economic Research Limited, since 2006.

5.61
Inflation is significant. In our view, excluding inflation from financial forecasts could distort decisions made by the local authority to save, borrow, and invest in the long term.

5.62
It could also distort ratepayers' interpretation of the level of rates that the local authority is forecasting to collect.

5.63
Timaru District Council has a different view. The Council applied inflation in its LTP for only the 2012/13 year. Although the Council acknowledges that inflation is inevitable, it lists the following reasons in its LTP for not including inflation in its financial estimates beyond the first year:

  • the inherent unreliability of inflation predictions
  • the ability in individual years to more transparently expose the impact of inflation on the base costs of Council services
  • the ability to show the cost of increases in service levels in individual years, without distortion by an inflation component
  • improved transparency for the community on the impact of inflation
  • the ability to achieve efficiencies in delivery of Council services to mitigate the effects of inflation
  • achieving better and tighter financial management that is not obscured by an inflation component
  • the belief that it is more fiscally prudent not to apply inflation beyond Year 143

5.64
Timaru District Council has taken this approach when preparing all of its previous LTPs. As we did for previous LTPs, we issued a modified audit opinion on the Council's latest LTP (see Appendix 3). The audit opinion referred to the requirement for the Council to prepare its forecast financial information using the best information available at the time of determining the assumptions. We do not consider an assumption of no inflation after 30 June 2013 to be based on the best information available or to be reasonable and supportable.

5.65
In our view, however, the Council's approach does not comply with section 111 of the Act, which requires the forecast financial information to be prepared in accordance with generally accepted accounting practice. This means following the requirements of Financial Reporting Standard 42: Prospective Financial Statements to adjust its forecasts for inflation.

5.66
We note that other local authorities had concerns that the application of inflation, particularly in the later years of the LTP, can make it more difficult for readers to identify service level and new capital expenditure changes. However, all other local authorities apply an inflation adjustment in recognition that price level change is a reality.

Risks to the Council and how these are being managed

5.67
If Timaru District Council were setting its funding requirements based on the financial forecasts in the LTP, there would be a risk of a funding shortfall for the Council's activities. This is because funding would not be sought for the inflation component of the financial forecasts, except for the first year of the plan. However, the Council holds the view that it manages this risk by setting its rates, and considering its other funding streams, through its annual plan.44 The Council's annual plans consider the effect of inflation.

5.68
In taking this approach and revisiting its budgets each year, Timaru District Council is managing its short-term cash flow requirements. In the Council's view, this helps to drive efficiencies in delivery of services and achieve better and tighter financial management. The Council told us that its community supports this approach. It is our view that there are risks in such an annualised approach.

5.69
This approach is contrary to the intentions of the Act, which requires local authorities to prepare a 10-year forecast plan and, in particular, to signal to the community through that plan the rating implications of the forecast activity.

5.70
We considered the actual financial results for Timaru District Council for the years ended 30 June 2006 to 2012, compared with the results forecast in its 2006-16 and 2009-19 LTPs and the annual plans it has produced. Timaru District Council's actual financial results often closely matched the financial forecasts in the annual plans. Annual plans include forecast financial information for only one year, as opposed to the 10-year nature of LTPs. There were several large variances between the actual results and what Timaru District Council had forecast in its LTPs. However, it is unclear whether this is from not providing for inflation beyond the first year of the LTP or because of other changes to the forecasts.

Long-term focus of the LTP

5.71
The Act notes that, among other requirements, the purpose of the LTP is to provide a long-term focus for the decisions and activities of the local authority.

5.72
We have acknowledged that Timaru District Council is managing its funding requirements in the short term. It is also important to note that a large portion of the Council's spending and associated funding is on infrastructure assets, for which the Council has good AMPs to support decisions to invest in its long-term infrastructure. The Council discloses supplementary financial information in its LTP that incorporates the effect of inflation on the core financial statements.

5.73
Despite this, we consider that Timaru District Council is not providing its readers with transparent information about the level of funding required, particularly the level of rates the Council is proposing to collect during the LTP period. Nor is the Council preparing a plan based on the best estimate of costs during this period.

Deemed cost valuation of fixed assets

5.74
Timaru District Council accounts for most of its fixed assets at deemed cost. Deemed cost is an estimate of cost at a given date. For Timaru District Council, this date is 1 July 2005.

5.75
All local authorities began preparing their financial statements in keeping with New Zealand equivalents to International Financial Reporting Standards (NZ IFRS) for the year beginning 1 July 2005.

5.76
In changing to NZ IFRS, local authorities had the option to use either deemed cost or fair value to account for their fixed assets. Previously, Timaru District Council had regularly revalued most of its assets, but on the transition date the Council decided to use deemed cost. After 1 July 2005, Timaru District Council has recognised new assets and renewal expenditure at cost.

5.77
We understand that there were two main reasons for this decision. The first was to avoid the cost of regular revaluations. The second reason was that some councillors consider that, if debt is used to fund capital expenditure and if depreciation is used as a measure of how much to provide for future asset replacement based on revalued assets, it could be argued that current ratepayers are paying twice. Timaru District Council is the only local authority to choose this option. All other local authorities revalue most of their assets regularly and record this value in their financial statements.

Risks to the Council and how these are being managed

5.78
Although Timaru District Council has avoided the cost of regular revaluations, using this approach has other implications. Without revaluations, the Council is likely to be understating the true value of its assets. It is important that the Council understands the value of its assets so its depreciation charge, and its funding for depreciation, is fair – which means that those using the asset are paying for its use.

5.79
Under the current approach, users of Timaru District Council's services are probably not paying the full costs of some of the services they receive. This could defer costs to future users and increase the funding challenge when the assets need to be replaced.

5.80
Figure 20 shows the implications of the deemed cost and fair value models, using an asset with a deemed value of $300,000 and a useful life of 10 years (after which it has to be replaced).

Figure 20
Comparison of accounting treatment of an asset under the deemed cost model and the fair value model

Year Deemed cost model Fair value model (with revaluations every three years)
Opening value
$000		 Depreci-ation
$000		 Closing value
$000		 Opening value
$000		 Depreci-ation
$000		 Revaluation movement*
$000		 Closing value
$000
1 300 30 270 300 30 0 270
2 270 30 240 270 30 0 240
3 240 30 210 240 30 60 270
4 210 30 180 270 45 0 225
5 180 30 150 225 45 0 180
6 150 30 120 180 45 45 180
7 120 30 90 180 45 0 135
8 90 30 60 135 45 0 90
9 60 30 30 90 45 10 55
10 30 30 0 55 55 0 0
Total 300 415 115

* Revaluations are assumed at the end of the financial year and are for illustration purposes only.

5.81
Under the deemed cost scenario, assuming the local authority has provided for the depreciation expense each year, it will have raised $300,000, plus interest earned, to fund the replacement of the asset during the 10 years. However, it is unlikely that the cost of replacing the asset in year 11 will be the same as the cost in year one. In fact, under a regular revaluation model that takes account of inflation and market movements, we can see that the value of the asset has increased over time. This is the funding challenge or risk that Timaru District Council could face.

5.82
Under a revaluation model, and again assuming the local authority has funded the depreciation expense each year, the local authority will have funded $415,000, plus interest earned, towards the asset's replacement.

5.83
Under NZ IFRS, local authorities can use either a deemed cost or fair value model. However, a deemed cost approach increases the risk that, if a local authority is using depreciation as a proxy of the funds required to replace the asset in the future, it will not have raised adequate funds. This could contribute to an additional burden for future ratepayers.

5.84
It is unclear whether Timaru District Council has been adequately rating for the anticipated cost of replacing assets. If it has not, future ratepayers in Timaru will be faced with a funding shortfall or could be forced to accept a decrease in the level of service they receive.

Observations by size of local authorities

5.85
In this section, we provide some analysis and observations on differences and similarities between local authorities in different size groups.

5.86
We have grouped the local authorities into six size groups, by population. We excluded Christchurch City Council because it did not prepare an LTP this year, Wairoa District Council because its data was not available when we did this analysis, and Chatham Islands Council because it is very small compared with the other local authorities. Although Auckland Council is significantly larger than other local authorities, we included it for some but not all of the analysis to minimise distortions.

5.87
The six groups, along with the categories Local Government New Zealand uses to distinguish their nature, are:

  • Group 1 – Smallest 11 (population less than 10,000, all rural, and would have normally included Wairoa District Council and Chatham Islands Council);
  • Group 2 – Next 12 (population 10,000-20,000, all rural);
  • Group 3 – Next 13 (population 20,000-35,000, one rural and 12 provincial);
  • Group 4 – Next 12 (population 35,000-50,000, seven provincial, three unitary, and two metropolitan);
  • Group 5 – Next 9 (population 50,000-80,000), one metropolitan and eight provincial); and
  • Group 6 – Largest 8 (population greater than 80,000, all metropolitan, would have normally included Christchurch City Council).

5.88
We compared the LTP data with separately obtained information on population size,45 area,46 and personal income.47 Our comparisons are based on the whole population, not just ratepayers.

5.89
An important assumption in our analysis is that local authorities' forecasting offers a reasonably reliable guide to their actual results. The analysis earlier in this report suggests that there is some variation in the quality of forecasting, and capital expenditure tends to be at lower levels than forecast. Given our audit work on LTPs, we consider that the forecasts reflect the best estimates available at the time the LTP was adopted.

5.90
One of our more significant observations is that there is more variation between individual local authorities than there is between the six size groups. In other words, when comparisons are made, there are likely to be significant outliers in any one group that overlap with other groups.

5.91
When comparisons are made by size group, much clearer trends emerge (see Figures 21 and 22).

Operating revenue and expenditure

5.92
There is little correlation between individual local authority population sizes and personal incomes (see Figure 21).

Figure 21
Average personal income and local authority size

Figure 21 - Average personal income and local authority size.

Note: Auckland Council and Wellington City Council are excluded from this graph for clarity, but make no material difference to the result.

5.93
The most significant high outliers are Queenstown-Lakes District Council and Wellington City Council (which has been excluded from the graph for clarity), with average personal incomes much higher than $35,000.48 Opotiki District Council, Horowhenua District Council, Far North District Council, and Dunedin City Council are distinctive low outliers in Groups 1, 3, 5, and 6 respectively, with incomes 15% to 25% below the group averages.

Figure 22
Average personal income by group size

Figure 22 - Average personal income by group size.

5.94
When local authorities are put into size groups, a clear trend emerges. Average incomes of individuals in the two smallest rural groups are $28,000 (2006 data), 7% or $2,000 lower than the averages of the three middle-sized groups, and a further $4,000 (in total, 21%) lower than Group 6, the large metropolitan local authorities.

5.95
On average, each person in smaller local authorities pays higher rates, so an even higher proportion of their personal income is needed to pay rates. There is an increase in rates for each person between the three smaller and the three larger groups, with the smaller local authorities rating at about $1,400 per person on average during 2012-22, and the larger local authorities rating 18% lower at an average of about $1,150 per person.

5.96
Thames-Coromandel District Council, Queenstown-Lakes District Council, Waitomo District Council, and Wellington City Council are well above the average in rates charged when this is considered on a per head of population basis. We expect this to be primarily attributable to growth, except for Waitomo District Council (where the Council is addressing past financial issues). In the case of Wellington City Council, a large proportion of its total rates income is collected from the commercial sector.

5.97
Trends in rates charged for each person during the 10 years of the 2012-22 LTPs are broadly consistent between size groups, but the smaller local authorities start from a slightly higher base (see Figure 23). Group 4 has the highest growth trend (particularly in the early years), because it includes some non-metropolitan areas experiencing growth, such as Selwyn District Council, Upper Hutt City Council, Nelson City Council, Tasman District Council, Waimakariri District Council, and Kapiti Coast District Council.

Figure 23
Trends in average rates per head of population, by group size

Figure 23 - Trends in average rates per head of population, by group size.

5.98
When we adjust for GDP growth, which is our best proxy for growth in income, the trend reverses. Figure 24 discounts rates by increases in GDP, and shows a flat or downward trend in all but Group 4 (and even Group 4 is flat after the first year). In other words, rates might not take up an increasing proportion of personal income during the LTP period.

Figure 24
GDP-adjusted trend in rates, by group size

Figure 24 - GDP-adjusted trend in rates, by group size.

Note: This Figure deflates rates using BERL's 2011 GDP growth forecasts, adjusted for Statistics New Zealand's 2012 population growth forecasts.

5.99
These trends are similar regardless of the growth patterns of the local authorities, where there is a significant difference between the smaller and the larger groups. Figure 25 shows that the two smallest groups are predicted to have negative population growth during the planning period, with Group 4 and the large metropolitan local authorities (dominated by Auckland Council) having the most growth.

5.100
It is important to note that local authorities have taken local population trends into account when preparing their LTPs, and should not be caught by surprise by either depopulation or rapid growth.

Figure 25
Population change by group size

Figure 25 - Population change by group size.

5.101
Our analysis shows that the operating expenditure of local authorities and groups is broadly consistent with rating patterns. This is also consistent with the fact that public equity in local authorities is increasing rather than decreasing. In other words, local authorities are not spending more than they earn.

Fixed assets and debt

5.102
The most important long-term assets local authorities hold are fixed assets (property, plant, and equipment), rather than investments or other assets. Fixed assets are more than 90% of the total value of non-current assets in all but five local authorities, and no local authority holds less than 84%. Most fixed assets held by local authorities are infrastructure assets.

5.103
Per head of population, smaller local authorities hold higher levels of fixed assets than larger local authorities. It is unclear why this is so. In our view, it is likely to relate to the need for multiple schemes to service more widely dispersed populations in rural areas and large roading networks to join dispersed communities. A likely consequence of this is that servicing costs per head of population will also be higher, and this may contribute to the higher levels of other operating expenditure.

5.104
Overall levels of, and trends in, capital expenditure per head of population are largely consistent between groups (excluding Auckland Council, which is significantly higher). However, smaller local authorities are spending proportionately less on improving services and meeting additional demand than the larger authorities (see Figure 26).

Figure 26
Types of capital expenditure by group size

Figure 26 - Types of capital expenditure by group size.

5.105
There is no correlation between assets and debt at an individual local authority level, but Groups 1 and 2 (rural local authorities) and Group 5 (the large provincial local authorities) show a significantly lower debt base and trends than the other local authorities (see Figure 27).

Figure 27
Trend in debt per head of population, by group size

Figure 27 - Trend in debt per head of population, by group size.

Concluding comment

5.106
Our analysis indicates that there are differences between groupings of local authorities based on their population size, caused by the various influences and pressures they face. The initial insights that these observations provide warrant further exploration by the sector as part of the wider debate we encourage on sector performance.

35: Auckland Council, Long-term plan 2012-22, Volume 3, Section 2.5, page 17, Notes to the financial statements.

36: Auckland Council's approach to exclude Watercare debt from debt calculations is unique in the sector. It could be argued that this approach could be applied by other local authorities where repayment of debt is funded on a user-pays basis. The issue of debt segmentation for financial monitoring purposes requires further consideration by the sector.

37: Auckland Council, Long-term plan 2012-22, Volume 3, Chapter 4. The significant forecasting assumptions at pages 84 to 92 note a population growth rate beginning at 1.57% in 2012/13 and decreasing to 1.34% by 2021/22, and growth in the rating base of between 0.73% and 1.85% each year.

38: The net financial position inherited from the former councils funded only about 63% of depreciation. Auckland Council considers that funding 100% of depreciation is preferable to raising operating revenue to cover the cash cost of replacing assets as they fall due, because asset renewal costs tend to spike in certain years while depreciation is smoother over time. For more information, see Auckland Council, Long-term plan 2012-22, Volume 1, Chapter 2, Section 2.4, page 35.

39: Auckland Council, Long-term plan 2012-22, Volume 3, Chapter 4, pages 84 and 87.

40: Queenstown-Lakes District Council, Council Community Plan 2006/2016, page 4.

41: Queenstown-Lakes District Council, 10-Year Plan 2012-2022, page 10.

42: Queenstown-Lakes District Council, Council Community Plan 2006/2016, page 4.

43: Timaru District Council, Long Term Plan 2012-22, page 29.

44: In the years that the Council does not prepare an LTP, it prepares an annual plan.

45: Based on Statistics New Zealand projections for 2012.

46: Based on Local Government New Zealand's Contacts directory for 2010/11.

47: Based on Statistics New Zealand census data from 2006.

48: The average personal income of individuals in the Queenstown-Lakes District Council area is $37,000, and in the Wellington City Council area it is $43,000.

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