Auditor-General’s overview

In their long-term plans, local authorities set out their forecast growth, proposed land use, and the infrastructure that might be needed in at least the next 10 years. In December 2012, I published a report discussing matters arising from our audits of those long-term plans. In this discussion paper, my staff have reviewed how five local authorities use “growth charges”, such as development contributions and financial contributions, to fund the assets that they will need for the growth they expect.

Funding growth is expensive. In the 10 years to 2021/22, the 77 local authorities have forecast that they will collect more than $3.4 billion in development contributions and financial contributions, and spend more than $7.0 billion to create assets to meet additional demand.

Growth charges enable local authorities to get developers to contribute up-front for the costs of developing the associated infrastructure services. Developers may carry these charges until sections are sold, and the charges are then passed on to the buyers of the developed land.

A financial strategy of using growth charges is a matter of local authority judgement. A local authority may choose to recover all, some, or no growth-related costs from developers, or to fund them in other ways (such as from existing ratepayers).

Local authorities that have high growth are more likely to use growth charges to fund their growth-related assets. The rationale that local authorities use is that growth should pay for growth – those who cause the need for the new infrastructure and services should pay, rather than the existing community. However, it is not always that simple – sometimes, the existing community also benefits from the new infrastructure and services.

Economic and population growth drives the need for new capital expenditure to meet that growth. It is essential for local authorities to have good growth forecasting models because they are the basis for forecasting future revenue (rates, growth charges), finance costs (debt, debt servicing), and capital expenditure required to meet the additional demand and asset renewals.

According to the five local authorities discussed in this paper, it is essential that their planning policies align with their funding policies. Although the five local authorities had some views and practices in common, it was also clear that practices and interpretations vary. Discussions on areas such as calculating the total cost of capital expenditure, non-residential development charges, and refunds of money or land would help to improve the application and understanding of development contributions and financial contributions as funding tools. These matters warrant consideration by the local government sector and other stakeholders interested in the use of such funding tools.

Other matters, such as managing levels of services and cost, and apportionment of capital costs relating to growth, are opportunities for local government managers to reflect on current practices and compare them with other local authorities to see whether improvements could be made.

I thank the five local authorities that contributed or provided information to this discussion paper.

Lyn Provost
Controller and Auditor-General

7 August 2013