Proposal 2: Balancing the budget

Balancing the budget


LET'S TALK MONEY

We are continuing to grow as an organisation, to provide more for the community and our environment. With growth comes increased funding requirements and this impacts on the next 10 years. It’s essential that we have a clear and prudent approach to aligning our expenses with our income, which includes rates. This is called a balanced budget and looks out 10 years.

Our growth and the decision by our councillors, at your request, to defer a general rates increase during the national COVID-19 lockdown in 2020 has required us to carefully consider what is needed to achieve a balanced budget.

We need to check in with you on what you think about our preferred option for achieving a balanced budget.

THE FUNDING CHALLENGES

We face a significant financial challenge over the next 10 years. Our planned expenditure has grown substantially compared to our previous Long-term Plan (LTP).

Our operating expenditure is proposed to increase by $20M in year 1 of the LTP in regional planning, environmental monitoring, science and regulatory activities. This includes an unplanned component of expenditure needed in 2020 to quickly respond to central government direction on freshwater management. It also builds on last year’s expenditure increase of $10M consulted publicly in the 2020-21 Annual Plan.

COVID-19 complicated matters and our councillors heard loudly from you and voted to fund $4.9M of the above $10M increase with a ‘general reserve offset’ (think of it as a loan). This means we used our financial reserves to avoid a general rates increase during the height of the crisis. The problem is that we can’t keep using our reserves to subsidise our operational work – we need a sustainable and enduring source of funding.

So, to break it down – to fund the unplanned work and the COVID-19 general reserve offset equates to a 44% increase to general rates. That’s before any new LTP funding is even factored in.

We’ve looked at other funding sources to reduce the rates requirement, including increased dividends from our investments, using reserves, and using external debt, which we haven’t historically done.

Despite this, a significant increase in rates is still required in year 1 to meet the immediate increase in operating expenditure so that we have a balanced budget.

While the proposed increase in rates is large in percentage terms, the dollar amount of rates, particularly general rates collected, is relatively small. The average general rates paid in Otago is currently $107 and the average total rates bill is $259.


So, how are we proposing to solve this funding issue?

There are two options to consider:


Option 1 (PREFERRED)

Increase total rates to achieve an immediate and sustainable funding source for our operational expenditure.

This is our preferred option. It would mean increasing total rates immediately in year 1 (47.5%) with smaller increases in years 2 (17.0%) and 3 (10.6%), before maintaining rates with minimal increases thereafter (an average of 3.5%).

The total rates increase comprises general rates increases of 73.2%, 15.7% and 6.8%, and targeted rates increases of 29.3%, 18.2% and 14.2% in years 1 to 3 respectively.

This ensures funding sources are increased to the sustainable level required by the time we fully review this Long-term Plan in three years and it doesn’t continue into future LTPs.

Graph showing the proposed total rates and increases over the next 10 years under option 1. In year 1 it shows an average rates increase of 47.5% or total rates charged being $39,762,000, comprising of $19,364,000 in general rates and $20,398,000 in targeted rates. Year 2 shows an average rates increase of 17% or total rates charged being $46,519,000, comprising of $22,407,000 in general rates and $24,112,000 in targeted rates. Year 3 shows an average rates increase of 10.6% or total rates charged being $51,460,000, comprising of $23,920,000 in general rates and $27,539,000 in targeted rates. Year 4 shows an average rates increase of 3.8% or total rates charged being $53,812,000, comprising of $23,847,000 in general rates and $29,965,000 in targeted rates. Year 5 shows an average rates increase of 4.4% or total rates charged being $56,155,000, comprising of $23,248,000 in general rates and $32,908,000 in targeted rates. Year 6 shows an average rates increase of 2.6% or total rates charged being $57,606,000, comprising of $23,415,000 in general rates and $34,191,000 in targeted rates. Year 7 shows an average rates increase of 5.2% or total rates charged being $60,575,000, comprising of $24,316,000 in general rates and $36,259,000 in targeted rates. Year 8 shows an average rates increase of 1.8% or total rates charged being $61,670,000, comprising of $24,646,000 in general rates and $37,024,000 in targeted rates. Year 9 shows an average rates increase of 2.9% or total rates charged being $63,457,000, comprising of $25,128,000 in general rates and $38,329,000 in targeted rates. Year 10 shows an average rates increase of 3.2% or total rates charged being $65,504,000, comprising of $26,022,000 in general rates and $39,483,000 in targeted rates.


For this option, the general rate component of the total rates bill in year 1 will increase on average from $107 to $186. This is an increase of $79 for the year.

The total amount paid will vary across the region and increase as the capital value of your property increases.

Examples of the general rates payable in year 1 under Option 1 are:

TABLE Under Option 1, a property in Central Otago with a capital value of $350,000 would pay general rates of $103.30, a capital value of $700,000 would pay $157.67, a capital value of $1,000,000 would pay $204.27, and a capital value of $4,000,000 would pay $670.33. The median capital value in Central Otago is $550,000 which gives a median rate of $134.37. In Clutha a property with a capital value of $350,000 would pay general rates of $105.54, a capital value of $700,000 would pay $162.16, a capital value of $1,000,000 would pay $210.69, and a capital value of $4,000,000 would pay $696.00. The median capital value in Clutha is $300,000 which gives a median rate of $97.45. In Dunedin a property with a capital value of $350,000 would pay general rates of $126.57, a capital value of $700,000 would pay $204.22, a capital value of $1,000,000 would pay $270.78, and a capital value of $4,000,000 would pay $936.37. The median capital value in Dunedin is $450,000 which gives a median rate of $148.76. In Queenstown Lakes a property with a capital value of $350,000 would pay general rates of $101.69, a capital value of $700,000 would pay $154.46, a capital value of $1,000,000 would pay $199.69, and a capital value of $4,000,000 would pay $652.00. The median capital value in Queenstown Lakes is $900,000 which gives a median rate of $184.62. In Waitaki a property with a capital value of $350,000 would pay general rates of $102.25, a capital value of $700,000 would pay $155.58, a capital value of $1,000,000 would pay $201.28, and a capital value of $4,000,000 would pay $658.37. The median capital value in Waitaki is $350,000 which gives a median rate of $102.25.


Option 2

Use a ‘general reserve offset’ (reserves), meaning smoother rates increases over the next 10 years to sustainably fund our operational expenditure. We'd need to borrow money to achieve this and then repay it; it's deferring the impact of our increased expenses.

While this will reduce the immediate rates burden, it will defer the funding of current operating expenditure until later years.

Although this option avoids a large rates increase in year 1 (as per Option 1), it still requires the same amount of rates funding over the 10 years of the LTP.

It also means that a significant level of debt (associated with the general rate offset balance) is built up until rates increase to a point where this begins to be repaid. So, it’s delaying the year 1 increase to a later period, a bit like ripping the sticky plaster off slowly.

There is more risk to the community in this funding option.

As we saw in the 2020-21 year, with COVID-19 and changes in central government requirements, future spending and funding requirements are uncertain and may change. If this happens, it may become challenging to repay the ‘loan’ and future service delivery may be seriously compromised.

Under this option, we wouldn’t be able to permanently fund the 2020-21 general rates offset with our reserves as these are required to reduce future rates increases. Once our reserves eventually run out, we'd look to external sources to loan us the funds to carry out the work required of us.

Over the 10 years of the LTP a general rates increase of 13.5% would be required every year.

Our deferred funding balance would increase over years 1-5 to a maximum of $34M, at which point it would begin to be repaid.

Targeted rate increases remain the same as Option 1 so the total rate increase in year 1 drops to 22.7%. Years 2 (16.4%) and 3 (13.9%) are similar to Option 1 but increases thereafter are significantly higher than Option 1, with increases from 7.0% to 11.2%.

Graph showing the summary of rates, increases and the deferred funding debt over the next 10 years under Option 2. In year 1 it shows an average rates increase of 22.7% or total rates charged being $39,763,000, comprising of $19,365,000 in general rates and $20,398,000 in targeted rates. There is a deferred funding balance of negative $11,564,000. Year 2 shows an average rates increase of 16.4% or total rates charged being $38,503,000, comprising of $14,391,000 in general rates and $24,112,000 in targeted rates. There is a deferred funding balance of negative $19,580,000. Year 3 shows an average rates increase of 13.9% or total rates charged being $43,866,000, comprising of $16,327,000 in general rates and $27,539,000 in targeted rates. There is a deferred funding balance of negative $27,173,000. Year 4 shows an average rates increase of 10.3% or total rates charged being $48,398,000, comprising of $18,524,000 in general rates and $29,874,000 in targeted rates. There is a deferred funding balance of negative $32,195,000. Year 5 shows an average rates increase of 11.2% or total rates charged being $53,829,000, comprising of $21,016,000 in general rates and $32,813,000 in targeted rates. There is a deferred funding balance of negative $34,115,000. Year 6 shows an average rates increase of 7.6% or total rates charged being $57,938,000, comprising of $23,844,000 in general rates and $34,094,000 in targeted rates. There is a deferred funding balance of negative $33,364,000. Year 7 shows an average rates increase of 9.1% or total rates charged being $63,210,000, comprising of $27,052,000 in general rates and $36,158,000 in targeted rates. There is a deferred funding balance of negative $30,294,000. Year 8 shows an average rates increase of 7.0% or total rates charged being $67,612,000, comprising of $30,692,000 in general rates and $36,920,000 in targeted rates. There is a deferred funding balance of negative $23,903,000. Year 9 shows an average rates increase of 8.0% or total rates charged being $73,043,000, comprising of $34,822,000 in general rates and $28,221,000 in targeted rates. There is a deferred funding balance of negative $13,853,000 Year 10 shows an average rates increase of 8.0% or total rates charged being $78,879,000, comprising of $39,508,000 in general rates and $39,371,000 in targeted rates. There is no deferred funding balance this year.


For this option the general rate component of the total rates bill in year 1 will increase on average from $107 to $122. This is an increase of $15 for the year. The total amount paid will vary across the region and increase as the capital value of your property increases.

Examples of the general rates payable in year 1 under Option 2 are:

TABLE In year 1 under Option 2, a property in Central Otago with a capital value of $350,000 would pay general rates of $65.90, a capital value of $700,000 would pay $99.75, a capital value of $1,000,000 would pay $128.77, and a capital value of $4,000,000 would pay $418.95. The median capital value in Central Otago is $550,000 which gives a median general rate of $85.24. In Clutha a property with a capital value of $350,000 would pay general rates of $69.62, a capital value of $700,000 would pay $107.20, a capital value of $1,000,000 would pay $139.41, and a capital value of $4,000,000 would pay $461.52. The median capital value in Clutha is $300,000 which gives a median general rate of $64.26. In Dunedin a property with a capital value of $350,000 would pay general rates of $86.95, a capital value of $700,000 would pay $141.86, a capital value of $1,000,000 would pay $188.93, and a capital value of $4,000,000 would pay $659.57. The median capital value in Dunedin is $450,000 which gives a median general rate of $102.64. In Queenstown Lakes a property with a capital value of $350000 would pay general rates of $63.59, a capital value of $700000 would pay $95.14, a capital value of $1000000 would pay $122.18, and a capital value of $4000000 would pay $392.60. The median capital value in Queenstown Lakes is $900000 which gives a median general rate of $113.17. In Waitaki a property with a capital value of $350,000 would pay general rates of $66.60, a capital value of $700,000 would pay $101.16, a capital value of $1,000,000 would pay $130.78, and a capital value of $4,000,000 would pay $426.99. The median capital value in Waitaki is $350,000 which gives a median general rate of $66.60.


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