Key dates: Adoption of the Long Term Plan: 3 July For more on Council’s preliminary decisions go here

Key dates:

Our financial challenges

The rates for the year ahead section outlines the impact in year one of the plan – but this is a ten year plan.

Our Financial Strategy is a key part of that plan, because it helps provide direction and transparency around how we manage the district’s finances. This section summarises some of the key financial challenges outlined in that strategy.

The emerging impact of three waters on our finances

Central government have confirmed that the three waters reform programme will not proceed – but at this stage, the tougher regulations remain in place, requiring significant upgrades to our assets and services over the coming years in order to comply. The following graphs illustrate just how dominant three waters costs are when we are planning ahead for the next ten years. Regulators like Taumata Arowai determine the minimum standard that Council must achieve, so we have very little choice over our spending in this area.

The emerging dominance of the three waters has prompted several changes or considerations in our proposed Financial Strategy for the next 10 years of this LTP.  These include:

  • Increasing our limit on borrowing.  The scale of the capital work required for three-waters means that we have had to increase our limit on borrowing (read more under “Managing our debt”)

  • Consideration of the sustainability of debt related to three-waters beyond the 10 years of this LTP.  Our lenders measure the reasonableness of our debt based on our ability to repay it over time, and we fund these repayments from rates. They have set a limit on our overall debt of 175%.  On an overall basis, we project that we can manage within the increased limit of 175%. What the projections do reveal however, is that when we drill down and look at the proposed level of debt for just our three-water activities alone, compared to the revenue for these activities over the next 10 years, the ratio gets as high as 416%. 

Forecast three waters debt compared to three waters revenue

Annual Plan 2023/24 $000

2024/25 $000

2025/26 $000

2026/27 $000

2027/28 $000

2028/29 $000

2029/30 $000

2030/31 $000

2031/32 $000

2032/33 $000

2033/34 $000

Debt

35,727

70,009

98,022

113,046

120,130

117,172

110,481

104,307

98,434

87,152

94,310

Revenue

18,791

22,598

24,672

27,177

28,867

30,242

31,168

31,841

32,151

32,270

32,768

Debt to revenue ratio

190%

310%

397%

416%

416%

387%

354%

328%

306%

270%

288%

This made us question, is that level sustainable?  Does the debt of the three water activities unfairly reduce the ability for Council to meet other needs and wants of the community? Given the infrastructure needs that lie beyond the 10 years of this plan (as outlined in the 30 year Infrastructure Strategy) how are our funding decisions within this 10 year plan going to leave us placed to deal with the following 10 years and beyond?    

And how can we address this issue?  There are two ways – reducing debt or increasing revenue.  All of Councils' proposed three-waters capital work is considered MUST DO projects, so Council’s ability to reduce debt is limited, leaving increasing rates as the most likely solution.  However, with so much uncertainty around the three waters space at this time, and our overall debt manageable within the limits, Council does not think it would be prudent to rush into hiking rates to resolve this now.  Instead, we’ve provided for a small additional increase in three-waters revenue of 1.5% over the last 4 years of the plan, which will put us in a better position to address the debt position post 2034.  And being aware of this issue, it is something we can continue to monitor over future LTPs and as the future becomes clearer from the Governments position on three-waters, regulation and potential future funding sources.   

  • Setting limits on three-water rates separately from rates for all other activities.  Council has very little discretion in the three-waters space, and the rates we have proposed are what we consider to be the minimum required to meet the increased requirements.  Council has more discretion around our general rate funded activities, and other targeted rate areas, so we have set separate limits on rate increases for each.  See more in the section “Proposed rates for the next 10 years”.

Proposed unbalanced budget

Under the Local Government Act 2002, local authorities are required to set ‘balanced budgets’, where operating revenue (income) is equal to expenditure. Council can only operate an unbalanced budget if this can be shown to be financially prudent.  We’re proposing to have an ‘unbalanced budget’ in all 10 years of this plan.  This means that the revenue received each year will be less than the expenses for that year. 

We resolved that this decision is financially prudent and that we will be able to manage operating and capital expenditure and our debt – but we will be closely monitoring and reviewing our risks over this time. 

We are not planning to take steps to achieve a balanced budget during this 10-year period. If any of our key assumptions do not eventuate as expected (for example, if our stormwater assets require replacement sooner than we expected), there is a risk that our activities may be left short-funded.  Any short-funding would need to be addressed either by externally borrowing the shortfall or increasing rates.  Although this approach is aimed at keeping rates low now, it could hold risk for the future. With each LTP cycle we will re-assess our financial position. We foresee that an unbalanced budget will likely continue past the 10-year period due to similar reasons as stated below for this cycle.

There are three reasons for this:

  • To manage the level of rates increases over the next 10 years by keeping them affordable and avoiding significant fluctuations. Our capital programme is heavily dominated by infrastructure projects. This is influenced by regulation, particularly around three-waters, Government funding for roading and maintaining critical assets. Non-infrastructure activities are where we have more discretion and this is where we are planning the biggest trade-off with our improvement programme to keep rates as low as possible. We are limiting our discretionary projects to those that have already been committed to. This means that we cannot progress as many improvements as we would like.

  • We are proposing to not fund the total asset depreciation expense each year. Annual depreciation, which is reflected as an expense in each year, provides a guide on the amount of money that should be collected each year to fund the replacement of assets at the end of their life. Asset replacements are funded directly from rates. Asset lives are based on estimates and in general there is a low level of uncertainty. However, there is greater uncertainty related to the asset lives of stormwater assets. We don’t believe it is necessary to collect the total depreciation expense each year where:

    • we don’t intend to replace some of our community buildings in the future (reducing rates by an average of $141,000 per year)

    • we expect to continue to receive Government subsidy to fund almost half of the asset replacements for roading (reducing rates by an average of $3.2 million per year)

    • for stormwater, we expect over a 30 year period that we can fund all planned asset replacements by collecting only 25% of the depreciation amount (reducing rates by an average of $908,000 per year).

  • We are planning to remove wastewater biosolids (sludge) from Morrinsville and Te Aroha over a 5 year period at a cost of $8.5 million, but to fund this work over a 15 year period. We need to address the sludge that has accumulated over decades at our wastewater treatment plants. While the work is expected to take 5 years, it will give us increased capacity in our ponds for a very long time, so in this case we think it is prudent to borrow the money up-front to get the job done, and spread the cost out over a longer 15 year period to smooth the impact for ratepayers.  This will mean for the first 5 years we will spend around $1.7 million per year, but only $660,000 will be funded from rates, with the balance being borrowed, and repaid over 15 years.  The alternative would be to increase rates for each of the first five years of the plan by $1.04 million. 
    Except for the wastewater sludge removal projects, there is not expected to be any impact on our borrowing as a result of the unbalanced budget beyond this 10 year period.   The proposed budget is based on a number of assumptions, with the risk of uncertainty and impact of which in some cases is high.  A full understanding of these assumptions and risks is presented in the Long Term Plan.  You can also read about these proposals in more detail and why we believe the unbalanced budget is still a financially responsible approach in the Financial Strategy

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Long Term Plan interactive tool

In this Long Term Plan Council has chosen to focus on affordability - which has meant some tough decisions on which projects to include, and where we should cut back. This website highlights some of the big changes compared to our last Long Term Plan. Keen for more detail? Check out our interactive tool for a more detailed view of what projects we're proposing to keep and what projects we are proposing to remove from the draft Long Term Plan.


+ Check out LTP interactive tool