The Joint Funding Project what do we know about the national picture

1. The Joint Funding Project � what do we know about the national picture? Mike Reid, Local Government New Zealand Fiona Illingsworth, Department of Internal Affairs

2. Phase one � 2004/05 Joint project to look at: Magnitude/nature of fiscal pressures facing LG sector Drivers of fiscal pressure Sustainability for communities Extent existing legislative tools assist LG to meet any fiscal pressures Options to resolve any problems identified

3. Phase one report found little evidence of a systemic funding problem across the LG sector. In particular: Little evidence of increase in rates exceeding increases in last 10 years Local authorities with high levels of rates and debt are most likely to face fiscal pressures

4. The Phase one report found no statistically significant relationship between: population levels and rates population growth and rates Level of non-rateable land and level of rates Some significance between population density and rates was found.

5. In Summary Local authorities most likely to face funding pressures are ones with high levels of rates and debt - 5 local authorities in this situation. Analysis in phase one was based on transitional LTCCPs and not all expenditure may have been included

6. Post Phase One Research 9 case studies Updated the funding indicators based on 2006-2016 LTCCPs Compiled information on the capital expenditure programmes Tested the draft statement of issues against results of case studies

7. Developed a set of criteria for assessing alternative funding sources Considering the merits of various alternative funding sources against the criteria and the problem definition

8. Funding Indicators Update Points to note: Used final 2006-2016 LTCCPs except 3 (not available) Rates estimates are GST inclusive Some methodological issues, such as lack of income data at territorial authority level

9. Average rates 2005/2006 average level of rates per household is estimated at $2246 per household $1988 for territory authority rates and $258 for regional council rates Projected rates increases are greater in the first five years

10. Average level of rates increase for metropolitan local authorities is projected to be 67% over 10 years National average in 2005/2006 of rates to income ratio is 5% and this increases to 6.2% by 2015-2016 Based on phase one criteria - 14 local authorities are �high rates� authorities

11. There will be a very significant increase in local authority borrowing. Forecast to increase from around $4.0 billion to $8.2 billion (105%). Increase should be viewed in context of increases in asset values from $78 billion to $116 billion.

12. Debt 17 councils will have a high level of debt relative to the sector in 2006/2007 1 local authority�s debt has been called �unsustainable� by the Office of Auditor-General. Findings support suggestion that more use of debt as a tool for spreading costs could occur

13. Government assistance for local authorities continues to be fastest growing source of revenue for local government (13%) Year to June 2005 local government received $661.4 million from central government (excluding drinking water subsidies and various land tranpsort projects added since June 2005)

14. Capital Expenditure Programme $30.8 billion in capital expenditure is planned for the period 2006-2016. Expenditure peaks in year three and then decreases steadily $22.4 billion (73%) for network infrastructure (roads, wastewater, water etc). $5.6 billion (18%) on community infrastructure (libraries, pools etc).

15. Metropolitan sector tends to spend less on network infrastructure and more on community infrastructure

16. Case Studies To identify the cost drivers placing pressure on current rating levels To develop a comprehensive picture of the extent of these drivers over different communities Distinguish between mandatory and discretionary activities

17. Consideration of funding pressures in 7 specific local authorities (DIA and LGNZ) 2 case studies to consider pressures related to drinking water and libraries (LGNZ)

18. LA case study findings Affordability Few indications of �council wide� sustainability issues in 6/7 councils Most expecting rates increases of 1-2 % per annum more than Phase one. One expected rates to decrease Affordability issues, where they exist, are likely to be at the level of individuals and ratepayers groups

19. Use of debt Divided in use of debt 4 out of 7 could take on more debt (with 3 more substantially) One is anticipating 1 dollar in 3 of rate income will be servicing debt interest by 2015/2016

20. Growth Population growth 3 facing rapid population growth others are encouraging people to come or stay in the area 5 councils making some use of development contributions Overall, growth is a significant driver of many, but not all, expenditure programmes

21. Expenditure Major infrastructural development phase Capex plans are greater than preceding 10 years 7 case study councils plan to spend $3.941 billion on capital works for 2006-2016 For most of case studies capital expenditure is expected to double

22. Infrastructure Network infrastructure makes up the majority of capex programmes Road and water infrastructure account for 2/3rds of capital programmes in case studies Roading is the single biggest item of capex for 6 out of 7 case study councils

23. Growth is a major driver for many but not all infrastructure programmes Provision for depreciation increases substantially over 2006-2016 Most are planning capital programmes to improve drinking water

24. Density Density not a significant issue for 4 local authorities Low density played a role for 2 local authorities - especially with road networks Providing infrastructure for scattered communities seems to be a significant issue for the large rural districts

25. Non-rateable land Most case study local authorities had low levels of non-rateable land For most local authorities non-rateable land does not appear to be a cause of affordability issues

26. Governance and Management Improvements in LTCCPs since transitional LTCCPs Most showed some improvement in asset management but some issues were identified: service levels not well developed Information on the condition of infrastructure was incomplete Reliance on commercially produced templates obscured important information

27. Improvements in asset management indicate issues with deferred maintenance and renewal � esp. underground reticulated infrastructure Majority of local authorities have room for more debt (from a financial standpoint) or to use other financing tools �Pay as you go� approach still prevalent

28. Funding tools Little use of targeted rates Most local authorities in case studies agreed could make more use of development contributions, especially around community facilities Use of demand management strategies varied across case studies

29. Assets Most had one or more revenue generating assets Not all assets were generating significant returns There may be scope for councils to reconsider ownership objectives for some assets

30. Case Study - Libraries Councils provide 273 library buildings and 18 mobile libraries Regarded as part of the social infrastructure Rates fund 80-97% of public library services Expenditure ranges between 1% and 9% of council operating expenditure

31. Libraries � funding pressures Population growth (major pressure) Information communication technology Increase in formal and informal lifelong learning Increased role to promote business competitiveness Central government's e-government & digital strategy Increased popularity of libraries� recreational role.

32. Case Study � Drinking Water 36 councils surveyed for project Unlike libraries there is a legal obligation to supply Overall forecast shows that councils are able to fund operating expenditure over 10 years Depreciation accumulates at a constant rate but expenditure is lumpy � depreciation lagging behind.

33. Drinking Water Significant drop in upgrades and renewals in year 5 & 6 Unusually high levels of expenditure in first 4 years due to possibility of mandatory standards Smaller rural councils facing infrastructure deficit Population growth a major driver.

34. Financial Governance Work Stream To assess the overall standard of financial governance in local authorities and, if necessary, to develop proposals to address areas where performance can be enhanced Scope includes: Defining the notion of financial governance Understanding the current standard of financial governance

35. Elected member understanding of asset management planning Guidance around the relative merits of different funding and rating choices Guidance around the relative merits of different rating systems Understanding depreciation Understanding debt and inter-generational equity

36. Process Inter- agency working group Officials and elected members Two meetings held Target LG Conference 2007 to launch elected member training modules October 2007 for officials� training

37. Perceptions of LG (& rates) Project LGNZ funded project to determine how New Zealanders� perceive rates Phase 1 focus groups (urban/rural/metropolitan) Phase 2 National survey based on focus group responses.

38. What ratepayers want from council Good communication (timely, interesting and relevant) Early input into decisions that affect them personally News of events happening in their area Less rules and regulation, or more flexibility within these A review of the rating system (rural ratepayers)

39. Perceptions of Local Council Local council and local councillors are perceived differently Councillors = politicians �they come and go� Council = an entity �the council does its own thing�

40. Perception of Local Councillors

41. Factors that influence rates perceptions

42. Perceptions of Rates (Residential) Ranges from �just another bill� to feeling �ownership� and connection with their city/region Manageable for some � but the elderly singled out as unfairly burdened (houses they have lived in for years have increased in value) Rates bills are increasing at a higher rate than inflation �Why? I don�t understand � something must be wrong� Is Council paying themselves more / trying to do too much / wasting money? Justified as �things cost more and you have to keep up maintenance and infrastructure otherwise it is more expensive in the long run�

43. Perceptions of Rates (Rural) Rural farmers perceive the rating system to be unfair because: They do not feel represented as well as �townies� by local councillors and see their needs as �invisible� to council There are less of them, so they have less �voting power� and are disregarded in decisions about spending priorities Services such as swimming pools, libraries are less accessible to them (as they live out of the urban areas) They pay proportionally more than residential ratepayers and get fewer services They do not consider themselves �wealthy landowners� as their land is often passed on through generations. There land value is �virtual� rather than �realised�

44. What have we learnt or confirmed since Phase One Rates will continue to increase over the next 10 years It is likely to be at individual ratepayer level where issues of affordability occur Local government is not heavily indebted Today�s ratepayers appear to be subsidising the benefits received by future ratepayers

45. Providing infrastructure is the driver of future expenditure needs Past governance decisions and lack of asset management means a period of infrastructure expenditure Little evidence compliance costs from legislative changes are a significant driver of costs Population change is driving some plans.

46. Most local authorities could make more use of development contributions as a tool for recouping development-related costs Population density (or lack of) is a driver of costs in some rural communities, particular for the provision of network infrastructure Removing rating exemptions is unlikely to have a significant benefit for the majority of local authorities

47. Rates are highly visible tax and willingness to pay issues are likely to arise because of their coercive nature and the invisibility of some services (e.g. stormwater disposal). Local government sector could take the opportunity to promote the value ratepayers receive. Standard of financial management and government is improving.

48. Room for improvement The importance of strategic planning is not always appreciated Some local authorities have not made clear judgements regarding their role in community Some local authorities are unwilling to decline requests or make trade-offs Asset management planning still needs more attention

49. Asset management concepts are not well understood by some elected members and council staff Key funding/financial principles and concepts are not well understood (e.g. intergenerational equity) Some local authorities do not use the opportunities the 2002 legislation offers, such as targeted rates.

50. Where are we at? Things have moved on significantly since the last report in August 2005 Rates certainly made the news Increases generally about correcting consequences of past underinvestment Government is finalising terms of reference for an inquiry on rating matters

51. Phase two continues Is looking at: Enhancing the standard of financial governance and management Tools and techniques to help local government promote the value of money spent on rates Possible changes to the development contributions regime Considering Crown contributions in lieu of rates on non-rateable Crown land Examining the local authority petroleum tax

52. To conclude There is a lot of useful information provided from both phases of the project which will assist the Inquiry There is more work to do