The Council implemented its Financial Strategy during the long term plan last year, this strategy intends to guide the decisions we make now and in the future to deliver a financially sustainable city in the long term. One in which its citizens can afford to live in the near future, and also in 50 and 100 years from now. In many ways, our strategy formalised our current practice and compliments our existing financial policies. The Financial Strategy is founded on the following five guiding principles:
The strategy outlines how we will balance investment in our city strategy with prudent and sustainable financial management of the Council’s resources. The Council currently has a sound financial position; however we are facing significant financial challenges because of the costs of earthquake strengthening our assets and our weathertight homes liabilities.
Through setting limits on our rates and borrowings we will require prioritisation of expenditure decisions together with review of existing services and their delivery. A Financial Sustainability Working Party was established to aid in this process. The parameters we are setting for our rates levels and rates increases are:
|Rates increase target3||2.5%|
|Rates increase limit4||3.1%|
|Rates limit ($’000)5||248,386|
The annual plan rates increase target of 2.5% has been achieved. This is an improvement on the long term plan where the projected rates increase for 2013/14 was 0.3% higher than the budgeted rates increase target.
We have set targets and limits separately to be clear about our intentions. Targets are the level that is intended to be achieved. Limits are the level it is not intended to be breached.
The parameters we have set for borrowings and capital expenditure are:
|Borrowings limits:||Operating Targets||Prudential Limits|
|Net borrowing as a percentage of equity||<10%||<10%|
|Net borrowing as a percentage of income||<105%||<150%|
|Net interest as a percentage of income||<15%||<15%|
|Net interest as a percentage of annual rates income||<20%||<20%|
|Liquidity (term borrowing committed loan facilities to 12 month peak net borrowing forecast)||>110%||>110%|
|Borrowings funded capital expenditure target||$45 million over legislative Council triennium|
|Borrowings funded capital expenditure limit||$60 million over legislative Council triennium|
Operational expenditure provides for all of our day-to-day operations and services, from waste disposal, water supply and maintaining our roads, to issuing building consents, running our recreational facilities and maintaining our parks and gardens.
The Council plans to spend $376 million on operational expenditure across our seven strategy areas in 2013/14.
67 percent of our operational expenditure is funded from a combination of general rates (paid on all properties) and targeted rates. The remainder is funded from user charges, ground and commercial lease income, dividends and other revenue such as grants and government subsidies. A small portion is not funded.
The following graph to the right shows how our operational expenditure is being funded in 2013/14
Detailed information on all of our rating mechanisms is included on page 87 of the plan.
For 2013/14, our total rates will increase by 3.0 percent before allowing for growth in our ratepayer base. After allowing for expected growth, our total rates will increase by 2.5 percent.
Rates on the average residential property (valued at $526,940) are to increase by 3.1 percent to $2,021 in 2013/14. An average rates increase of around 1.9 percent for commercial properties, including the impact of increases in metered water charges in 2013/14.
Our total rates revenue is split between general rates and targeted rates.
General rates are used to fund activities where the Council is unable to clearly identify a specific group of ratepayers who receive the benefit of that activity, or where is it not possible or appropriate for that group to be targeted to pay. There are two categories of general rates: the base sector general rate (residential) and the commercial sector general rate. The Council has a rates differential in place that decides how the general rate is shared between the residents and businesses in each category.
In 2013/14, the commercial sector general rate per dollar of capital value is to be 2.8 times higher than the base sector general rate for a residential property of the same value. During the Annual Plan we reviewed the differential and agreed it was appropriate to retain it at 2.8 as the relative share projected to be paid by each sector was consistent
Targeted rates are used to fund activities where the Council is able to clearly identify a specific group of ratepayers who receive the benefit of the activity, and where it is appropriate that this group be targeted to pay. The Council sets targeted rates to fund costs associated with the Council’s water, sewerage and stormwater systems. Separate targeted rates are also set for our base (residential) sector, commercial sector, downtown commercial sector, Marsden Village and Tawa driveways.
Your total rates bill will be made up of the general and targeted rates that apply to your property.
The Council sets the total amount of rates required to fund its expenditure based on the budgeted costs included in this annual plan. For the majority of its rates the Council then uses property valuations as the basis to distribute the total rates requirement proportionally across all properties in Wellington by setting a rate per dollar of capital value on your property.
The Council is on a 3-yearly valuation cycle and for the 2013/14 rating year the September 2012 valuations will be used to distribute the total rates requirement across all properties in Wellington. Over the last year the average residential property capital value has increased by 0.8 percent from $522,570 in 2012/13 to $526,940 in 2013/14.
The current property valuation will be will be used to distribute the total rates requirement for the 2013/14, 2014/15 and 2015/16 rating years.
It is important to note that your rates bill does not automatically change when your property value changes. Your rates bill will only be impacted by the change in your property’s capital value relative to the change the in capital value for the entire city. The final rates bill for an individual property will depend on:
The following table shows the indicative residential property rates exclusive of GST for properties without a water meter for 2013/14:
|Capital Values||2013/14 Total Rates||Increase over 2012/13|
The following increases to our targeted water rates ensure the cost increases in the associated water activity are appropriately recovered:
|Targeted Water Rating Mechanism||2012/13 |
|Water consumption charge for properties with a water meter||$1.730 per cubic metre||$1.797 per cubic metre|
|Annual administrative charge for properties with a water meter||$103.25||$107.50|
|Annual fixed charge for base (residential) sector properties without a water meter||$127.25||$132.25|
|New connection charges for new residential properties||$61.50||$63.50|
|New connection charges for new commercial properties||$205.00||$211.00|
When we’re deciding how to fund an activity, we consider a wide range of factors including:
Our Revenue and Financing Policy outlines how we propose to fund our activities. In 2013/14 we are to make no changes to how our activities are funded in our Revenue and Financing Policy:
For 2013/14, we are to increase user charges in some areas. The majority of these increases are minor and reflect cost pressures on the underlying service provided by the Council. Increasing fees by a little each year ensures that ratepayers are not over-subsidising services the Council provides and helps to avoid larger catch up increases in future. Our fees are set in accordance with our Revenue and Financing Policy. Areas where we are proposing to increase fees include:
Areas where changes to fees and charges are associated with new revenue streams include:
Parking charges at Freyberg Pool
The level and extent of proposed fee increases vary and are outlined in greater detail in the appendices of this plan.
The Council is forecasting a net operating surplus of $35.6 million in 2013/14. The majority of this surplus arises from cash funding received for capital purposes (Crown grants for housing, development contributions, NZTA subsidies and bequests). This income flows through to the net operating surplus to be available to fund capital expenditure. Offsetting this are some depreciation costs on assets which we have resolved not to fund.
We’re continuing to invest in our city’s infrastructure while focussing on city resilience.
Capital expenditure pays for purchasing, building or developing the Council’s assets (e.g. pipes, roads, libraries, swimming pools). Our capital expenditure (excluding carry forwards and loans to other organisations) is forecast to be $158 million in 2013/14.
The graph to the left shows where this operational expenditure will be spent by strategy in 2013/14:
Sources of operational funding
We fund capital expenditure from depreciation, borrowings, NZ Transport Agency subsidies, grants and development contributions. For asset renewals, the main funding source is depreciation. For new assets and upgrades, the main funding sources are borrowings, subsidies and grants. The following graph to the left shows how our operational expenditure is being funded in 2013/14
Total borrowings are forecast to be $376 million at the end of 2013/14 increasing to. Over the same period our forecast asset base totals $7.1 billion in 2013/14.
As borrowings are a consequence of capital expenditure, our financial strategy set a ‘borrowings funded capital investment target’ of $45 million for each three yearly Council Triennium, and a ‘borrowings funded capital investment limit’ of $60 million for each three yearly Council Triennium. This will ensure our debt levels remain sustainable and affordable for years to come.
Wellington City Council currently holds an AA credit rating from Standard and Poor’s. This credit rating should result in lower borrowing costs for the Council and greater access to debt markets.
The Council only owns property assets that are necessary for public works or another purpose aligned to Council strategies. Property assets falling outside of this will be considered for sale or redeployed.
Reflected in the 2013/14 plan is $2 million worth of property asset disposals, with proceeds being used to reduce Council borrowings.
Any specific proposed property asset sale will be publically consulted upon as per the standard Council process.
Each year we review the underlying assumptions and costs that make up each activity. For each activity we consider the impact of a number of factors including:
This means that the costs for each activity may differ from those we had originally forecast in the 2012/22 Long-term Plan.
Further information is provided in the ‘2013/14 Activity Programme’ section.