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Finance and
Performance Committee
28 October
2015
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Budget review
File No.: CP2015/21916
Purpose
1. This report provides updates and
advice on the review of group budgets for the Annual Plan 2016/2017.
Executive
Summary
2. The 2015-2025 Long-term Plan
(LTP) sets out budgets for 2016/2017 which include a 3.2 per cent overall
average general rates increase. If the council wishes to make material or
significant changes to this budget, it will need to consult as part of the
Annual Plan 2016/2017.
3. Staff constantly review key
financial forecasting assumptions and targets for efficiency gains and the sale
of surplus property assets. At this stage, it appears unlikely that any changes
in these assumptions will materially change budgets for 2016/2017 compared to
the projections in the LTP.
4. The review of alternative
financing sources will be reported to this committee in November. The results
of the review will provide the council with options to improve the value it
gets from its assets. Because these changes are focused on the council’s
balance sheet and long-term financial performance, it is unlikely that any
changes will have a material impact on 2016/2017 operating budgets.
5. To materially reduce the rates
revenue requirement for 2016/2017 spending reductions (or increases to
non-rates revenue items such fees and charges) will be necessary. If the
committee wishes to consult on such changes, staff will require direction on
which activity areas should be targeted for spending reductions.
6. Staff have provided the
committee with budget trend information across all activity areas to help
improve understanding of the council’s finances and to support discussions
about potential spending reductions. Further information and advice will be
provided on specific areas based on direction from the committee.
7. The changes to local government
legislation mean that it is not necessary at the consultation stage to develop
a full draft budget or identify the precise budget movements. Rather the
requirement is to provide enough information for the community to understand
the type of impact the proposed changes may have.
8. A highly significant change,
such as significantly altering transport service levels, could trigger a need
to amend the LTP. This would increase the consultation requirements, require
audit review and put considerable pressure on the annual plan timelines.
9. In addition to any significant
or material budget changes that the council chooses to consult on to reduce the
rates requirement for 2016/2017, some potential changes to the capital
programme may also require consultation via the annual plan.
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Recommendation/s
That the Finance and
Performance Committee:
a) receive the report.
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Comments
Background
10. The 2015-2025 Long-term Plan sets
out budgets for 2016/2017 which include a $1.9 billion group capital
expenditure programme to look after existing assets while providing new assets
for a rapidly growing Auckland. This programme includes:
· Continuing
work on the CRL
· Continued
investment in sportsfield capacity enhancement
· Delivery
of the Westgate multi-purpose facility (library/community centre)
· Completion
of the new Albany Pool
· Further
investment in Wynyard Quarter
· Continued
work on AMETI
· Completion
of the Manukau Bus Interchange
· Continued
work on the Hunua No.4 water supply scheme
· Infrastructure
to support Special Housing Areas
11. The investment in new assets is
the primary driver of the council’s rising cost base and the need to grow rates
and other revenue each year. The key financial parameters of the 2016/2017
budget currently include:
· $3.7
billion group operating expenditure
· $1.8
billion of non-rates operating revenue
· $1.6
billion of rates revenue
· a
3.2 per cent overall average general rates increase
· an
interim transport targeted rate of $114 (including GST) for non-business
ratepayers and $183 (including GST) for business ratepayers.
12. On 25 June 2015, the Governing
Body resolved to review the level of the general rate and the Interim Transport
Levy as part of the annual plan process. Other resolutions were also passed
relating to rating policy and the composition of the Interim Transport Levy.
These matters are addressed in other reports on this agenda.
13. If the council wishes to make
material or significant changes to this budget, it will need to consult as part
of the Annual Plan 2016/2017.
14. Recent changes to local
government legislation mean it is no longer necessary to prepare a full draft
budget for consultation. Instead the requirement is to prepare a consultation
document that clearly and simply explains what budget changes might occur, what
options are being considered, and what the implications of those options are
likely to be for the community.
15. The review of alternative
financing sources will be reported to this committee in November. The results
of the review will provide the council with options to improve the value it
gets from its assets. Because these changes are focused on the council’s
balance sheet and long-term financial performance, it is unlikely that any
changes will have a material impact on 2016/2017 operating budgets.
Review of key forecasting assumptions
16. The New Zealand economy is
currently experiencing low inflation, particularly in terms of Consumer Prices
Index (CPI) inflation which looks at movements in the price of goods and
services purchased by households. However, most economic forecasters are
predicting this to be a temporary trend, with inflation returning to more
normal levels in 2016/2017. In the later stages of developing the LTP the
council’s inflation assumptions were reviewed and revised down to levels which
are generally consistent with the current economic forecasts. Therefore at
this stage, it is unlikely that reviewing inflation projections will have a
material impact on 2016/2017 budgets.
17. New Zealand interest rates have
fallen since the LTP assumptions were set. While this will have a favourable
impact on the council’s 10-year budgets, because the council uses interest rate
hedging instruments to effectively lock in its borrowing costs in the
short-term, these movements will not materially reduce the council’s interest
expense for 2016/2017.
18. Auckland’s rapidly growing
population is driving increased revenue from development contributions,
regulatory fees and rates paid by new rating units. A review of the latest
population forecasts and actual revenue trends has indicated that the
assumptions included in the LTP remain appropriate.
19. Dividend forecasts for Auckland
Airport and Ports of Auckland Limited have been reviewed against the LTP
projections. At this stage, there is a neutral outlook given current economic
forecasts, but staff will continue to monitor these projections.
20. Staff will continue to review
these forecasting assumptions over the course of this annual plan process until
final budget decisions are made in May next year. At this stage, it appears
unlikely that any changes in these assumptions will materially change budgets
for 2016/2017 compared to the projections in the LTP.
Review of financial targets
21. Staff will also constantly review
targets for efficiency gains and the sale of non-strategic surplus assets over
the course of this annual plan process. At this stage, staff consider that the
targets already included in the LTP budget projections represent an appropriate
stretch target for the organisation.
22. Property disposals are reported
to the Finance and Performance Committee on a monthly basis. Updates on
initiatives to achieve efficiency gains have already been and will continue to
be reported to this committee on regular basis, with some key examples
including:
· Efficiency
update – 20 August 2015
· New
core update – 20 August 2015
· Procurement
update – 17 September 2015
23. A current example of the ongoing
work to achieve efficiency gains is a new initiative to improve the management
of the council’s vehicle fleet which is expected to result in the fleet size
reducing by 200 vehicles and reduce costs by about $2.5 million per annum.
Potential spending reductions
24. To materially reduce the rates
revenue requirement for 2016/2017 spending reductions (or increases to
non-rates revenue items such fees and charges) will be necessary. As a rule of
thumb, reducing the overall average general rates requirement by 1 per cent
would require a reduction in net operating cost of $14 million. If the
committee wishes to consult on such changes, staff will require direction on
which activity areas should be targeted for spending reductions.
25. Staff have provided the committee
with budget trend information across all activity areas to help improve
understanding of the council’s finances and to support discussions about
potential spending reductions. Further information and advice will be provided
on specific areas based on direction from the committee.
26. As discussed above, it is not
necessary at the consultation stage to develop a full draft budget or identify
precise budget movements. Rather the requirement is to provide enough
information for the community to understand the type of impact any proposed
changes may have. If the council does not include any reference to a potential
budget change with significant impacts on the community in its annual plan consultation
material, it may be restricted in its ability to make decisions about that
budget change in May next year.
27. A highly significant change, such
as significantly altering transport service levels, could trigger a need to
amend the LTP. This would increase the consultation requirements, require audit
review and put considerable pressure on the annual plan timelines.
28. Once any potential areas of
spending reductions are identified, there is a choice about whether to consult
on options to reinvest the savings back into public infrastructure or other
programmes, or use the savings to reduce the level of general or targeted
rates.
Other potential budget changes
29. In addition to any significant or
material budget changes that the council chooses to consult on to reduce the
rates requirement for 2016/2017, there may be some material changes to the
capital programme that might require a council decision by May next year. Staff
will report to this committee in November on any capex changes that are likely
to trigger annual plan consultation requirements.
30. It is not anticipated that any of
these capital changes would have a material impact on the operating budgets or
rates requirements for 2016/2017. However, changes to the capital programme,
particularly in combination with any reduction in rates revenue, may have an
impact on the council’s prudential debt ratios. When there is greater clarity
about the likely extent of the budget changes, staff will advise on the
consequential impact on these ratios.
Process steps to agree 2016/2017
budget
31. The following table sets out the
key process steps to agree the budgets for 2016/2017.
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Timing
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Process step
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28 October
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Finance and Performance
Committee review budgets and consider changes to rating policy.
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19 November
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Finance and Performance
Committee agree to consult on any changes arising from the review the review
of alternative financing sources.
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27-30 November
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Governing Body discussion with
Local Boards
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8 December
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Mayoral Proposal on
consultation items for the annual plan presented to the Finance and
Performance Committee, including potential budget changes and their impact on
the community
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17 December
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Governing Body agree
consultation items
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10 February
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Governing Body adopt annual
plan consultation document
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Mid April
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Staff provide a budget update
report with the latest available information following a detailed review of
2016/2017 budgets by CCOs and council departments.
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Early May
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Staff provide the Finance and
Performance Committee with a report summarising the feedback from public
submissions.
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16 May
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Finance and Performance
Committee agree budgets for 2016/2017
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By 30 June
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Governing Body adopts annual
plan and sets rates for 2016/2017
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Consideration
Local
Board views and implications
32. Local Board views will be
considered as part of the annual plan process.
Māori
impact statement
33. Consultation and engagement with
Māori will occur as part of the annual plan
process.
Implementation
34. The annual plan process steps are
outlined above.
Attachments
There are no attachments for
this report.
Signatories
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Author
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Ross Tucker - Manager Financial Planning and Strategy
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Authorisers
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Matthew Walker - General Manager Financial Plan Policy
& Budgeting
Sue Tindal - Chief Financial Officer
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