Rates
32 The draft operating budget for 2024/25 shows overall rates revenue increasing by $35.588 million, which is 17.5% higher than 2023/24. It is also higher than the rate increase of 6.0% provided for in the 10 year plan.
There is also an increase in debt of $117.554 million on the 2023/24 Annual Plan which temporarily avoids a much higher rates increase of near 35% and gives the DCC another unbalanced budget.
CEO Overview Report – Annual Plan 2024/25
Department: Civic and Finance
EXECUTIVE SUMMARY
1 On 16 February 2024, the Water Services Act Repeal Act 2024 (the Repeal Act) was enacted. Given the significant changes to 3 Water reform, the Repeal Act provides the ability to prepare an enhanced Annual Plan for the 2024/25 year, rather than completing a 10 year plan 2024-34.
3 This report provides an overview of the budgets to be included in the draft 2024/25 Annual Plan (the draft Annual Plan). The draft Annual Plan is an update of year four of the 10 year plan 2021-31. Draft Income Statements are at Attachment A, and draft Funding Impact Statements are at Attachment B.
4 This report highlights the budget challenges the DCC faces with the current economic climate of high inflation and interest rates. Savings have been found across the organisation, but these have largely been offset by rising costs.
5 The draft budgets propose a rate rise of 17.5% for 2024/25 which is higher than the 6.0% provided for in year four of the 10 year plan, and higher than the Financial Strategy rate limit of 6.5%.
6 Budgeted staffing numbers have reduced from 903 FTE to 852 FTE – a reduction in 51 FTE positions. All other controllable costs have been reviewed and reduced where possible.
That the Council:
a) Adopts the draft 2024/25 operating budgets for the purpose of community engagement as shown / amended at Attachment A.
b) Notes that any resolution made during this meeting relating to the 2024/25 Annual Plan reports may be subject to further discussions and decision by the meeting.
BACKGROUND
7 Following the enactment of the Repeal Act on 16 February 2024, at its meeting on 27 February, Council approved taking up the option of preparing an enhanced 2024/25 Annual Plan for community consultation, rather than preparing a 10 year plan 2024-34.
8 This decision was made following consideration of factors such as the changing legislative environment (both recent and signalled), and our need for more information that will allow us to prepare a more robust and informed 9 year plan.
9 The Local Government Act 2002 provides that Council must prepare and adopt an annual plan for each financial year. Section 95 (5) sets out the purpose of an annual plan as follows:
The purpose of an annual plan is to –
(a) Contain the proposed annual budget and funding impact statement for the year to which the annual plan relates; and
(b) Identify any variation from the financial statements and funding impact statement included in the local authority’s long-term plan in respect of the year; and
(c) Provide integrated decision making and co-ordination of the resources of the local authority; and
(d) Contribute to the accountability of the local authority to the community.
10 The Repeal Act provides that an enhanced Annual Plan is to include information additional to the Local Government Act requirements. The additional information includes financial statements and statement of service performance information for each group activity. This information will be included in the 2024/25 Annual Plan document adopted in June 2024.
11 The draft Annual Plan for 2024/25 is an update of year four of the 10 year plan. Budgets for the 2024/25 year have been reviewed and budget update reports for each activity of Council have been prepared for consideration at this meeting.
DISCUSSION
13 We continue to have the pressures of high inflation rates, increased interest costs – both rate increases combined with increasing debt levels, and the impact of asset revaluation on our depreciation costs. Interest is estimated to be up $6.1 million (23.3% on 2023/24), and depreciation by $5.2 million.
14 Many of the cost increases we are experiencing are outside of the control of Council, e.g., increased energy costs to run our pools and other facilities, insurance costs, and new costs such as compliance monitoring to meet water quality standards.
15 A rate increase of 17.5% is proposed in the draft budgets. This increase in rates will maintain current service levels but also pay for an increased level of service for a new kerbside collection service. This new service, commencing in July 2024, replaces the black rubbish bag system. Of the 17.5% rate increase, 4.4% will cover the cost of this new service.
Significant forecasting assumptions
16 The 10 year plan sets out a number of Significant Forecasting Assumptions. Assumptions relating to inflation and interest rates have been updated for the draft budgets.
17 Key assumptions included in the preparation of the draft budgets will be further updated in May 2024 if required. This will include but not be limited to:
· Interest rates on borrowing – including the allocation of interest costs to each activity group.
· Forecast debt as at 30 June 2025.
· The impacts of inflation.
· The level of grant funding from NZTA Waka Kotahi (if available).
Rates breakdown at a high level
18 The summary below provides a breakdown of the main factors making up the rate increase:
3 Waters 5.4%
Increase in depreciation (excl. 3 waters) 4.9%
New kerbside collection service 4.4%
Interest (excl. 3 waters) 1.8%
All other costs 1.0%
Total rate increase 17.5%
19 The breakdown is relatively simplistic and does not take into account the impact of increases in other revenue but does highlight the three main drivers of the rates increase. Broadly this shows that costs have been absorb where they can be, and savings found in an attempt to control discretionary expenditure. Fees and charges have been reviewed more critically, and rather than apply a blanket increase across these, many have been modified to reflect the actual cost of the services provided.
20 The increase in 3 Waters includes increased regulation and compliance costs to meet water quality standards, such as for chemicals and laboratory testing.
21 The increase in depreciation reflects the revaluation of some assets and the budgeted capital programme.
22 The Kerbside collection rates are for the new service starting in July 2024, replacing the current black bag system.
Capital expenditure
23 The draft capital budget for the Annual Plan provides for replacing existing assets and infrastructure. Across the Council’s activities, the proposed budget is $207.357 million in the 2024/25 year, compared to $157.044 million provided for in year four of the 10 year plan.
24 One area of uncertainty is the amount of co-funding that may be received from NZTA Waka Kotahi for budgeted transport activities. The draft Government Policy Statement on land transport 2024-34 has now been released for consultation purposes. It sets out the Government’s priorities for land transport investment. Staff are reviewing the draft Statement to understand the impacts it may have on our assumptions around co-funding for transport initiatives. Our findings will be reported to Council before finalising the Annual Plan.
Operating budgets
25 The draft operating budgets provide for the day to day running of all the activities and services the DCC provides to its community. These include 3 Waters services, parks, galleries, libraries, pool, and roading.
26 The rate increase of 17.5% included in the draft budget does not deliver a balanced budget, but provides for a net deficit of $25.655 million.
27 The revaluation of three waters infrastructure assets in 2022/23 resulted in a significant increase in depreciation. Since this time, the depreciation charge has not been fully funded, and Council has been running an operating deficit budget.
28 As part of the development of the 9 year plan 2025-34, a financial strategy will be prepared that addresses the issue of ongoing deficits, and provide for balancing the budget before the end of the 9 year plan.
29 Expenses within our control have been reviewed and the operating budgets show that savings have been made in many of the group activities.
30 The biggest area of increase in operating budgets is in the Waste Management activity. This significant increase in operating budget is primarily due to new contracts for the new kerbside collection service and monitoring costs required in the consent for the new Smooth Hill Landfill.
31 Each of the groups of activities have updated year 4 of their draft operating budgets as provided for in the 10 year plan. The key changes in funding sources and expected costs of delivery are discussed in the group operating budget reports.
Revenue
Rates
32 The draft operating budget for 2024/25 shows overall rates revenue increasing by $35.588 million, which is 17.5% higher than 2023/24. It is also higher than the rate increase of 6.0% provided for in the 10 year plan.
External revenue
33 External revenue has increased by $5.405 million, 5.9%. The main changes to external revenue are:
· Waste Management – a net increase of $2.553 million reflecting an increase in landfill revenue due to an expected increase in tonnage because of the closure of a transfer station and an increase in landfill disposal charges to cover expected increases in waste levy and ETS charges. Offsetting these increases, revenue from the sale of black rubbish bags ceases.
· Property – an increase of $877k due primarily to an increase in community housing rental.
· 3 Waters – an increase of $647k due to increases in fees and charges, including water sales and trade waste.
· Regulatory – an increase of $499k in fees to recover increased costs of processing consents and licenses.
34 Fees and charges are discussed separately in the group budget reports. Rather than apply a fee increase of 3%, as has been done in past years, fee increases for some areas are reflecting the increase in costs from the 2023/24 year.
Grants
35 Grant funding received from NZTA Waka Kotahi for transport activities is based on the nature of the planned capital works, and their eligibility for funding. It is also dependent on how much funding assistance is available, noting that there has been a shortfall in the Funding Assistant Rate in recent years.
36 The 2024/25 draft budget shows operating grants and subsidies revenue is down $2.499 million. The main changes are as follows:
· 3 Waters – operating grant funding has decrease by $4.400 million. The Transition Support Package funded by the former Government, set up to contribute towards transitioning to the now repealed Water Services Entities has been discontinued. In addition, Government funding for the 3 Waters Strategic Work Programme has been replaced by Better off Funding.
· Governance – operating grant funding has increased by $2.559 million, being the Government’s Better Off Funding package. This funding is being used for various projects across Council.
37 Capital grants revenue is down $3.697 million. The main changes are as follows:
· Waste – capital grant revenue has decreased by $670k. In 2023/24 grant funding was provided from the Ministry for the Environment for the purchase of bins.
· Transport – capital grant revenue has decreased by $3.067 million, based on the proposed capital programme and estimated funding assistance from NZTA Waka Kotahi.
Expenditure
Staff costs
38 The draft budget provides for an increase in personnel costs of $2.667 million, 3.3%. This provides for a union negotiated salary increase for staff.
39 The 2023/24 budget did not provide for a salary increase, and the negotiated increase was absorbed within existing budgets.
40 This saving has been achieved by vacancy management and a slow-down in recruitment. Vacancy management and a thorough review of budgets has resulted in the budgeted headcount reducing from 903 FTE to 852 FTE – a reduction in 51 FTE positions. Management of vacancies continues to be a priority, along with careful recruitment and looking after existing staff.
Operations and maintenance costs
41 Operations and maintenance costs have increased by $12.706 million, 16.5%. The main changes are due to the following:
· Waste management – an increase of $10.158 million relates primarily to the new kerbside collection service, increases in ETS costs and Green Island landfill costs, and additional monitoring for Smooth Hill and the implementation of the Southern Black Back Gull management plan, both required under the resource consent.
· 3 Waters – an increase of $2.311 million relates to plant maintenance cost increases, chemical and laboratory cost increases. There is a reduction in contractor fees, as government funding for the 3 Waters Strategic Work Programme ends.
· Transport – an increase of $737k, with $486k relating to costal management work, and $234k for an increase in bus shelters (fully recoverable from the Otago Regional Council) and State Highway maintenance (fully recoverable from NZTA Waka Kotahi).
· Parks, Galleries Libraries and Museums, Community and Planning, Property, and Economic Development have all made savings in their operations and maintenance costs. Further details are provided in each of the group budget reports.
Occupancy costs
42 Occupancy and property related costs such as rates, insurance and fuel have increased by $3.150 million, 9.7%. These increases have largely impacted the Property activity with an increase of $1.780 million and 3 Waters with an increase of $1.005 million.
Consumables and general costs
43 Consumables and general costs have increased by $1.822 million. The main changes are due to the following:
· Waste Management – an increase of $870k due to an increase in waste levy costs at the Green Island landfill, reflecting an increased tonnage in materials entering the landfill, offset by a reduction in costs relating to communications and marketing of the new kerbside collection service.
· Governance – an increase of $970k largely due to increases in software licencing fees of $743k.
Depreciation
44 Depreciation expense has increased by $5.215 million, 4.5%, reflecting the valuation of assets at 30 June 2023 and the capital expenditure programme. The increase is reflected mainly in the Transport, 3 Waters, Property, and Parks and Recreation activities.
Interest
45 Interest expense has increased by $6.118 million, 23.3%, reflecting the increase in debt funding required to support the planned capital expenditure programme and an increase in interest rates.
46 The 10 year plan 2021-31 had an interest rate assumption of 2.85%. The DCC’s current interest rate applicable to its borrowing is 4.66% as advised by Dunedin City Treasury Limited. For the purposes of preparing the draft Annual Plan, an assumption has been made that the borrowing rate for the 2024/25 year will be 5%.
Funding impact statement
47 The budget for each group, and all of Council, includes a Funding Impact Statement, as provided at Attachment B. Funding Impact Statements differ from Income Statements because they:
· Remove non-cash items such as depreciation,
· Separate operating and capital funding
· Include how total funding will be used, i.e., capital expenditure
· Identify how any shortfall in funding will be financed, i.e., an increase in debt.
48 Ideally the available operating funding being “Surplus/(deficit) of operating funding (A-B)” plus “Subsidies and grants for renewal expenditure” will be sufficient to cover capital expenditure “to replace existing assets”.
| Funding Impact Summary | Budget 2023/24 $000 | Draft Budget 2024/25 $000 |
| Surplus/(deficit) of operating funding (A-B) | 59,579 | 71,707 |
| Subsidies & grants for renewals expenditure | 8,012 | 11,840 |
| Capex to replace existing assets | (138,077) | (101,139) |
| Increase in investment DCHL | (2,550) | (2,550) |
| Funding surplus/(deficit) | (73,036) | (20,142) |
49 The table above shows that we are borrowing $20.142 million in the draft budgets to fund renewals. While this is not sustainable long-term, this will be addressed in a review of the Financial Strategy that will be prepared for the 9 year plan 2025-34.
Debt
50 The Draft Forecast Financial Statements at Attachment C shows that by 30 June 2025, the estimated debt level will be $706.528 million which is 188.6% of revenue. The debt limit provided for in the current Financial Strategy is 250% of revenue. This is an increase in debt of $117.554 million on the 2023/24 Annual Plan.
OPTIONS
51 There are no options.
Signatories
| Author: | Sharon Bodeker – Special Projects Manager Carolyn Allan – Chief Financial Officer |
| Authoriser: | Sandy Graham – Chief Executive Officer |
Lee Vandervis - lee@vandervision.co.nz 