Part D: ​Financial information

Financial Strategy – Investing for Growth
Our 10-year plan

A CHANGING FINANCIAL LANDSCAPE

In 2012 the Council’s Financial Strategy was underpinned by fiscal restraint, recognising the organisation’s big financial challenges, including earthquake strengthening, leaky buildings and rising insurance costs. Confidence in the economy was low and ratepayer expectations were for rates increases in line with inflation. The strategy conformed to existing practice and complemented existing financial policies. It set an annual rates increase target for 2012/13 equal to the Local Government Cost Index, lowering to CPI (around 2.5%) in subsequent years and planned for debt ratios significantly lower than all other metropolitan cities in New Zealand. But growth forecasts were low. The strategy was not sustainable and risked service cuts and minimal new offerings unless rates increased above the strategy’s forecasts.

We have since reviewed how we deliver our services and consolidated our council-controlled organisations and implemented regional shared services in water, IT and procurement programmes. These and similar initiatives are expected to deliver savings in excess of $50 million for Wellington ratepayers over the next 10 years – though this is not enough to fund the increasing expectations that we, our residents and businesses have for the city.

Rates increases equal to or lower than CPI (household inflation) are not sustainable in the long-term without cutting services. This would not be enough to fund what we provide now and meet ratepayer expectations for improved services.

Rather than risk cuts to services and a stagnating city, our new Financial Strategy provides a platform for the Council to invest and support economic growth, which in turn will create jobs, grow our ratepayer base and increase prosperity. We will achieve this by prioritising proposals for funding and expenditure that:

WORKING FROM A POSITION OF FINANCIAL STRENGTH

Wellington City Council is in a strong financial position. Our debt to income ratio is currently less than 100%. This compares favourably with other metropolitan councils whose equivalent ratios range from over 175% to around 275%. The Council also holds investments in Wellington Airport and a substantial ground lease portfolio that are valued at more than our $384 million in borrowings. So the Council could theoretically sell these assets and have no debt at all.

In its 2014 review of the Council’s credit rating, the independent credit rating agency Standard & Poor’s judged Wellington City’s stand-alone credit profile to be the highest of local government in New Zealand, and even higher than the Government’s, but have capped it at the central government level. S&P’s assessment that the Council has ‘very strong financial management and budgetary flexibility, strong budgetary performance and liquidity and low contingent liabilities’ supports our view that our credit strength and institutional framework will allow higher debt burdens as we progress our strategy to invest in projects to grow the Capital City’s economy.

The Council uses debt to spread the cost of buying assets and services across those who will benefit from use of the asset over its life. This means we also need to consider the impact of servicing debt on the affordability of rates. In formulating our Financial Strategy we have ensured that the cost of servicing and repaying borrowing for each asset is catered for with proposed rating limits.

Rates forecasts and limits

Our ‘invest to grow’ strategy provides to limit average rate increases at 4.5% over the first three years of the LTP and an average of 3.9% across the 10-year Plan.

If we keep going as we are

 

If we invest for growth

3.1%

 

3.9%

Rates would increase by 3.1% on average annually over the next 10 years.

And would be limited to 4.1% annually, on average, over the next three years.
  Rates increases will be limited to 3.9% on average after growth annually over the next 10 years. 

​And to 4.5% annually, on average, over the next three years.

The 3.9% average annual rates increase limit proposed within this strategy compares favourably with the average increase of 4.1% over the last 15 years.

Rates forecasts and limits.

Debt forecasts and limitsTop

We are forecasting debt across the period of this LTP to peak at about 135% of operating income. The limit to the amount of debt the Council will take on over the period of this strategy is 175% of operating income. This limit provides some contingency for the Council to respond immediately to an unplanned emergency or natural disaster. The cost of servicing the forecast debt, and the assets we build or buy, is built into our forecast rates increases.

If we keep going as we are

 

If we invest for growth

130%

forecast

 

135%

forecast

150%

limit

 

175%

limit

Council debt will be capped at a maximum of 150% of annual income – the same as a household earning $50,000 a year having a mortgage of $75,000.   Council debt will be capped at a maximum of 175% of annual income – the same as a household earning $50,000 a year having a mortgage of $87,500.

Debt forecasts and limits.

Challenges and opportunitiesTop

In the pages that follow we explain how we propose to manage the financial challenges, opportunities and risks the city faces to enable the Council to deliver on this strategy in a financially prudent manner.

Population, land use, and rating base growth

Since 2010 Wellington City has had slow population growth of 0.7% per year (0.2% below the national average). The 2015 population is estimated at around 203,000 people. It is expected to increase by about 12,000 to around 215,000 by 2024, a modest 0.6% average growth rate per year. Limited changes to land use are forecast, however the Council’s Northern Growth Management Plan provides for the conversion of open space to residential development. The capital cost to provide for these changes over the 10 years is forecast at around $75 million and the associated operating cost about $9 million.

In the past five years, the ratepayer base has grown at an average rate of just 0.4%. History shows that Council investments can be a catalyst for economic growth. This was evident in the last significant growth spurt, when our rating base growth peaked at around 2.2% per annum in the early 2000s on the back of game-changing projects like Te Papa, Westpac Stadium and development of the waterfront.

This Financial Strategy aims to create the capacity to invest in initiatives that act as a catalyst for growth in the economy and the city’s rating base. Our LTP includes a number of key investment projects that we expect will accelerate growth in our ratepayer base, which we conservatively expect to peak at around 1.8%, an average of 1.2% over 10 years. The larger rating base is expected to generate a $37 million boost for existing ratepayers by 2024/25, a cumulative benefit of more than $205 million across the 10 years – and this benefit will continue to accumulate in subsequent years.

The financial benefit, or return, that the Council receives from prudent investments can be re-invested in the city. We call this the ‘virtuous circle’.

A strategic approach to asset investment

This plan is different in direction and approach to the past. The emphasis is strategic and long-term with a focus on short-term delivery.

The first three years of the plan is detailed and reflects a work programme that is realistically deliverable in the timeframe. A rolling three-year forecast provides flexibility for the Council to respond to unanticipated changes and to consider new opportunities.

We’ve done a lot of work to better understand the quality of our assets. They are generally in good condition and we have a robust asset renewal programme in place. Continuing to improve the quality of asset information, particularly for our network infrastructure, means we can get more value from our assets without exposing the Council or the community to undue risk. We have used updated information to better plan and make decisions about assets that need renewing over the 10 years of the LTP. Our Infrastructure Strategy expands this timeframe out to 30 years and gives us confidence that we have the financial capacity to maintain our existing infrastructure in the longer term.

The expected capital costs for the network infrastructure required to maintain existing levels of service, and meet additional demands, is as follows:

A strategic approach to asset investment.

Significant projects to upgrade or improve services include expanding the cycling network, building a new library in Johnsonville and improving the resilience of the city’s water supply. We also plan to continue to improve earthquake resilience, including the strengthening of the Town Hall, Central Library and civic offices.

There is less certainty, however, around the details, costing and timing for a range of potential new economic growth initiatives. While these initiatives will all be subject to robust business cases and public consultation, it’s also important that we demonstrate the Council’s capacity to invest in projects such as an international film museum, indoor music arena, extending the airport runway and urban development initiatives.

We have used an ‘envelope budgeting’ approach to reflect the capacity that the Council has within its financial strategy to fund ‘invest to grow’ economic initiatives in years 4 to 10 of the LTP.

Managing investment expectations

Annual surveys and benchmarking data show that service levels for social, recreation and community infrastructure are high in Wellington. However, over the last 10 years there has been an expectation in the community that the Council will continue to increase service levels in these areas.

It is also recognised that during this period investment to support the broader Wellington economy and the city’s rating base has been low.

This Financial Strategy recognises the importance of investment in the economy to grow the city and increase the rating base to provide the financial capacity to continue to invest in our infrastructure. In turn, this provides the resources for the Council to deliver on recreation, social and cultural services, amenities and events. The risks of not doing so are summarised in the diagram below.

Continuing to do the basics well

There is a risk that, in investing to improve the economic resilience of the city, we could compromise the delivery of core services. We will manage this risk by providing capacity within our rates and debt limits to ensure that we can continue to provide the services we do now. We will increase the emphasis on improving utilisation of the assets and services we currently provide. To ensure we maintain high levels of service delivery we will continuously drive operational efficiencies within the organisation. We will also focus on shared services and improved customer service – for example the merging of CCOs to create the Wellington Regional Economic Development Agency, shared IT infrastructure and a range of procurement and contract-related initiatives.

Our plan is to continue to deliver the full range of services we currently offer.

Continuing to do the basics well.

Continuing to do the basics well.Continuing to do the basics well.

The graphs above show that in our Financial Strategy we will continue to fund and invest in the full range of services we currently provide.

Maintaining an affordable and prudent balance between service, rates and debt

Our Financial Strategy sets a framework for investment decision-making by:

There is a risk that in attempting to maintain or increase service levels the Council could compromise the funding principles that underpin its robust and prudent financial management. This risk is mitigated by continuing to make provision in our Financial Strategy to:

This strategy also allows the Council to maintain a reasonable balance between services, rates and debt. Increases in service levels will be generally restricted to those services that are expected to provide an increase in the rating base, reducing the impact on existing ratepayers. Where debt funding is required to spread the cost of an investment across a number of years, we will focus on those investments that provide a return to reduce the impost on ratepayers.

Strategic partnering

We will develop a more focused and strategic approach to partnering with central government and the private sector. To reflect this we have assumed that in addition to the $1.7 billion of asset investment proposed in the 2015–25 LTP, some investments to which we contribute will be undertaken by other organisations. To reflect this we have assumed that as part of our economic growth funding envelope we will provide sufficient grant funding to service $90 million of investment by an external party, but transfer the capital risk and not hold the associated debt on the Council’s balance sheet.

We will also continue to investigate the philosophy of ‘earn/back’ with central government. When ratepayer/funded Council investment results in improved economic performance of the city and a higher tax take, we believe the Council should receive a portion of the financial benefit accrued by the Government.

Rates affordability

In developing our financial strategy we have been very conscious that our rates are affordable. Our strategy is underpinned by an assumption that affordability will be maintained.

Wellington residents have significantly higher incomes than the national average.

We know there are small pockets of deprivation in Wellington City. We will continue to manage this factor by providing rates remission and rates postponement policies. The central government/funded rates rebate scheme can also be used in hardship cases that result in difficulty paying rates.

Residents fund about 55% of total rates. As Wellingtonians have significantly higher average incomes that the national average, our average rates equates to about 2.7% of average Wellington household income. Throughout the period of this LTP we intend to keep this below 3.5%, significantly lower than the 5% affordability threshold identified in the 2007 Local Government Rates Enquiry.

Commercial ratepayers fund 45% of total rates. Generally rates are a relatively small proportion of total business income, varying between 0.1% and 0.4%, depending on the sector.

Factors such as increased insurance and earthquake resilience costs are putting additional pressure on the likes of the not-for-profit sector and heritage property owners. While many not-for-profit organisations already receive lower rates under legislation, the Council is cognisant of the pressures on owners of earthquake-prone buildings and has initiated a rates remission policy to help.

Earthquake and weather/tightness risk

The Council’s 2012 Financial Strategy highlighted earthquakes, weather/tightness and increasing insurance costs as key risks which warranted a conservative fiscal approach. The Council’s own financial exposure to these risks is now better understood – all are catered for within this strategy and specifically budgeted for within the 2015–25 LTP. We have made provision to strengthen the Town Hall, the Central Library and Civic Square administration buildings. We will fully repay the borrowing taken out to cover the Council’s contribution to leaky building costs over the period of this LTP and will utilise recent reductions in insurance premiums to replenish our self/insurance reserves and increase our level of cover.

Delivering on the strategy

This Financial Strategy supports and enables an ambitious plan to invest in the city. We have been conservative in our growth assumptions, but there is still a risk that the investment projects we propose will not deliver the economic and rating base increases we are forecasting. We will manage this risk by conducting detailed business cases for each investment to assess their cost/effectiveness and economic contribution. We will consult with the community before deciding whether to proceed. We will also measure and report on our performance against this strategy annually and review the strategy every three years.

Our view is that there is significantly greater risk in not investing to support the city’s economy, making it more difficult for us to compete nationally and internationally, a loss of businesses, jobs, cuts in services and higher long/term rates for the ratepayers that are left behind.

Current service’ strategy Invest to grow’ strategy
No/or very limited new offering New offerings to reinvigorate the city and its economy
Renewing assets based on a depreciation profile rather than asset quality Greater ability to reprioritise capex renewals and upgrades based on improved asset information
Limited ability to respond to opportunities Enhanced ability to respond to opportunities
Limited ability to respond to growth, economy and ratepayer expectations ‘Envelope’ budgeting to provide for economic
Minor reprioritisation of capex renewals (only) based on improved asset information Flexibility to adjust ‘envelope’ in response to growth, economy and ratepayer expectations
No opportunity to grow business and community confidence through investment in the city Opportunity to significantly grow business and community confidence
Growth in rating base will be low – fluctuating in response to economy – limited ability to influence 

Potential cuts to services
Elevated growth in rating base support long/term sustainability and vibrancy of the city ($200 million cumulative direct ratepayer benefit over 10 years plus city/wide benefit)
Slightly lower rates increases in the short/term (4.1% over 3 years, 3.1% over 10 years) Slightly higher rates increases in the short/ medium term (4.5% over the first 3 years of the plan, average of 3.9% over the full 10 years)
Lower investment = lower borrowing levels, but no improvement to ratepayer equity in the city More investment = higher borrowing levels, but maintain ratepayer equity in the city
Risk of stagnation Opportunity for the city to grow and flourish