Agenda of Policy Committee Meeting

Policy Committee Meeting Agenda

4 March 2020

7 Business

7.1 Annual Plan 2020/21 - Draft 2020/21 Budget Options and Implications

File Number: A11287638

Author: Jeremy Boase, Manager: Strategy and Corporate Planning

Kathryn Sharplin, Manager: Finance

Christine Jones, General Manager: Strategy & Growth

Authoriser: Paul Davidson, General Manager: Corporate Services

Purpose of the Report

1. This report seeks the Committee’s direction on issues and options relevant to the draft 2020/21 Annual Plan budget prior to adoption of that draft document later in March.

Recommendations

That the Policy Committee:

(a) Receives report ‘Annual Plan 2020/21 - Draft 2020/21 Budget Options and Implications

(b) Notes that the Executive recommends that the Policy Committee approves an Annual Plan budget package in the mid to upper range of Options 3 and 4.

(d) Recognises the rates increase of x% is made up of:

(i) Business as usual general rate x%

(ii) Waters x%

(iii) Growth & transport planning x%

(iv) Debt management x%

(v) Other to reflect decisions made during the meeting to add operating expenditure x%

(e) Approves a further amendment to the rating structure by reducing the uniform annual general charge to 10% (over and above the reduction to 15% approved by Council in December).

(f) Agrees to assess and review further opportunities to address Council’s funding and financing challenges with central government, regional local government partners, and other growth councils.

Executive Summary

2. Since the December 2019 Council meeting when the draft 2020/21 Annual Plan was first considered, there have been a number of matters that have affected Council’s financial outlook. These matters include additional capital budgets, additional provisions for weathertightness claims, and the deferral of elder housing divestment revenues.

3. The cumulative effect of these matters is that the parameters for the draft Annual Plan that were adopted by Council in December are no longer financially sustainable or prudent. This affects both the short-term outlook as covered by the Annual Plan and the medium-term outlook that will be addressed in next year’s Long-term Plan.

4. While the matters listed above create the immediate need for this report, there are deeper underlying reasons for Council’s current financial situation. These include systemic issues in the financing and funding of major infrastructure to support population and industrial growth. These issues are shared by a number of growth-affected councils who are working collectively with central government on long-term solutions. These potential solutions, though, will not be available in time to help address the issues faced with the draft 2020/21 Annual Plan, and nor will they be a sufficient toolkit to address those issues and therefore further solutions are required.

5. The immediate actions required to address Council’s current financial situation are to:

· prioritise capital expenditure

· increase revenue, and

· pay down debt

while commencing engagement with the community and regional and national partners regarding the city’s and the Council’s ongoing fiscal challenges, and starting to develop a plan to investigate, evaluate and decide upon options for medium-term solutions.

6. To ensure that sufficient capital expenditure is budgeted to deliver on the growth and community needs of the city, and to ensure that a meaningful contribution is made to paying down debt, a significant rates increase is recommended.

7. To recognise the potential impacts of such a rates increase on the ratepayers of lower valued properties, it is also recommended that a further reduction in the uniform annual general charge (being the ‘fixed’ element of individual rates bills) be approved.

8. The matters addressed in this report will not be ‘solved’ through this Annual Plan process. Further work will be required through the 2021/31 Long-term Plan process that Council will commence once the 2020/21 Annual Plan is adopted.

Background – PART 1 – RECENT EVENTS

December Council report

9. On 10 December, staff presented the Annual Plan 2020/21 indicative budget for Council’s consideration. That report recommended an after-growth rates rise of 5.7% split across residential[1] and commercial[2] ratepayers while noting that this was ‘significantly less than the 8.2% planned in the Long-term Plan’ and that this lower-than-planned revenue ‘does not set a strong fiscal base for the Long-term Plan 2021-31 and future years’.

10. In addition, the December report also recommended that Council increase the contribution to the risk reserve from the budgeted $1m to $4.4m in order to more quickly move that reserve from its current deficit position.

11. In response to the December report, Council resolved as follows:

(a) Agrees to continue with year three of the rating structure changes to reduce the UAGC to 15% and increase the commercial differential to 1.2%.

(b) Endorses in principle the Annual Plan draft budget for capital and operations within the envelope of a mean residential rates increase for 2020/21 of no more than forecast inflation plus 2%

(i) Council to be provided with options to achieve this rating level, together with the pros and cons of these options.

(c) Notes that prior to finalising the draft budget a further budget report will be provided to the Policy Committee in February regarding:

(i) requests from Bay Venues Ltd; and

(ii) any budget updates that might arise from work currently underway.

12. The forecast inflation level for 2021 is 1.9% meaning that resolution (b) above results in a mean residential rate increase for 2020/21 of no more than 3.9%.

13. Council made no decision on the recommended increase in contributions to the risk reserve, instead resolving to leave the matter to ‘lie on the table’.

Events since December

Changes to capital expenditure budgets

14. Since the December Council meeting several updates have occurred which have implications for the 2020/21 budget. The most significant of these are briefly detailed below.

15. The total budget to deliver the Waiāri water supply project has increased impacting both the 2020/21 budget and future years’ budgets. The revised Waiāri budget was reported to the Projects, Services & Operations Committee on 18 February. The recommended Waiāri budget for 2020/21 is now $15.52 million more than it was in December.

	20/21 budget	Future years’ budgets	Total remaining budget
Reported to Council 10 Dec 2019	$53.29m	$23.30m	$76.59m
Budget as proposed now	$68.81m	$26.23m	$95.04m
Difference	+$15.52m	+$2.93m	$18.45m

16. Note that when combined to past years’ spending and the current year’s budget these figures represent a total project budget of $177m as reported to the Projects, Services & Operations Committee. This is the ‘P50’ budget, the budget where modelling shows there to be a 50% likelihood of the final project outcome being below the budget and a 50% likelihood of the final project outcome being above it.

17. The increased budget estimate for the Waiāri project results from market response to tenders and physical conditions encountered during the early stages of construction. The initial estimates were established following geotechnical testing, Monte Carlo risk and cost forecasting, and peer reviews by both Council-appointed external advisors and separately by Crown-appointed external advisors as part of the Housing Infrastructure Fund process.

18. Weathertightness claims have been reviewed and have increased potential costs to Council. The extent of such claims was confidentially reported to the Finance, Audit and Risk Committee on 25 February. A significant increase to Council’s provision for future payments has been included in the revised draft budget. This provision, while not capital expenditure, is debt funded and therefore negatively affects debt capacity.

19. Bay Venues Limited presented its plans for changes to its capital and operational budgets to the Policy Committee on 19 February. The Committee resolved to include, for the purposes of prioritisation at this meeting, an increase in new capital budgets of $1.05m, an increase in renewal budgets of $1.31m, and an increase in the rates-funded operating subsidy of $150,000 (together with increases in user fees).

20. Additional work on the planning of wastewater reticulation in the western corridor has identified an accelerated need for additional infrastructure to service zoned and committed land, including that on which the recently announced Winstone Wallboards factory is proposed to be built. This programme of works has been estimated at $26m, including $6.1 million in 2020/21 with the remaining costs spread over the subsequent two years. This work will also provide interim solutions for the next stages of industrial and residential land zoning in the area.

21. The 2020/21 budget for the completion of the Harington Street carpark has been increased from $5.9m to $10m. This reflects updated estimates for the practical cost of remediation.

22. Other notable increases in capital budgets since December include:

(a) Bringing forward from 2021/22 $3.7m related to the development of the Papamoa East Interchange

(b) A new project providing additional capacity from the Oropi water treatment plant ($2.16m)

(d) Additional land purchase for the western corridor ring road ($1.0m).

23. A number of other projects have seen budgets reduced or deferred since December, though these do not offset the increases listed above.

24. In addition to the items above which have a direct impact on the 2020/21 budget, early planning for the 2021/31 Long-term Plan indicates significant increases to capital expenditure budgets for growth areas, for resilience, and for social and community infrastructure. Some of these growth-related water and wastewater increases have already been reported to the Urban Form & Transport Development Committee.

Potential expenditure items not yet included in the draft budget

25. In addition to the items above, which have all been incorporated in the revised draft budget, there are a number of items where staff are aware of potential funding requests. These potential funding requests have not yet been included in the revised draft budget. For instance:

(a) The Tauranga Art Gallery Trust has informally submitted a request for additional operating funding of $259,000 relating to Mana Moana 2020, a significant new programme celebrating our place in the Pacific. It will create a major city centre/waterfront destination to stimulate business and foot traffic.

(b) Budgets are being prepared for additional stakeholder engagement costs, subject to the outcome of an informal briefing later in March.

(d) A large group of key stakeholders and practitioners are currently working together to develop a Sub-Regional Homelessness Strategy. The action plan that is being developed alongside that strategy, including prioritisation, will be delivered to all key stakeholders, including Council by the end of March 2020. However, there is no budget currently allocated to the delivery of any of the outcomes the strategy is planned to address. Therefore, it is recommended that the Committee put aside a bulk amount as part of the Annual Plan process to fund and drive key initiatives that are prioritised through the development of the Western Bay of Plenty Sub-Regional Homelessness Strategy.

(e) A potential street ambassador function and resourcing for bylaw enforcement was approved in principle by Council at its meeting of 27 February 2020 and referred to this 2020/21 Annual Plan prioritisation process.

(f) A range of upcoming land purchases are required to facilitate the development of zoned growth areas and to progress the readiness of future growth areas. This is particularly so in the Pyes Pa / Tauriko area where projects such as the western corridor ring road, southern connection to the Tauriko Business Estate from SH29, interim access for Tauriko West from SH29, and improvements to the Cambridge Road / SH29 intersection are being planned and progressed. There is currently significant uncertainty around the timing and quantum of some of these purchases. The approach that staff have taken in these instances for the proposed annual plan capex budget is to include some relatively small holding budgets. If additional budgets are required in the 2020/21 financial year, they would be addressed on a case by case basis through a report to Council.

Other budget changes that impact on Council’s debt capacity

26. There are two other changes that have been made since December that affect Council’s budgeted debt levels and therefore its capacity to incur further debt.

27. The first of these is the removal of the budgeted revenue from the divestment of Council’s elder housing portfolio. This reflects the reasonable doubt that the divestment (which is consistent with decisions made in the 2018/28 Long-term Plan process) will be completed by the end of the 2020/21 financial year. The sale had been budgeted to generate $23 million in 2020/21. The later timing of the divestment will enable potential purchasers to utilise the provisions in the upcoming residential intensification City Plan change to redevelop, creating higher density on sites and therefore providing more housing stock. A separate report on the elder housing divestment process is being prepared for Council in April 2020.

28. The second change is the reduction of the ‘capital adjustment’ or ‘smoothing’ project from the budget. This was a $35 million ‘negative’ project in the capital works schedule to recognise the estimated amount of work that Council budgets for but is unable to complete in the year. This can arise for reasons such as difficulty over land purchases or access, project delays at planning or construction stage, or other matters beyond Council’s control such as weather conditions or unforeseen ground conditions. The recommended options later in this report include a reduced $20 million capital adjustment to recognise the perceived greater certainty over the projects retained in this year’s budget.

Impact of events since December

29. The cumulative impact of additional capital budgets, additional provisions for weathertightness claims, the removal of elder housing divestment revenues, and the reduction in the capital adjustment is an increase in projected debt of approximately $90 million. Combined with the December resolution supporting a reduced mean residential rate increase, this results in a draft Annual Plan budget that is not financially sustainable or prudent.

30. The key ratio of Council’s debt to its revenue nears its limit set both by Council and its financiers. As is detailed later in this report, this situation is not tenable.

31. Further, this issue is not restricted to the draft 2020/21 Annual Plan budget. Early modelling (using 2018/28 Long-term Plan budgets and known increases required in future years) shows the 2021/31 Long-term Plan to be financially unsustainable across multiple years.

32. This modelling indicates, over the period of the next Long-Term Plan, a gap between the necessary capital expenditure and Council’s ability to finance and fund that capital expenditure of between $500 million and $1 billion.

background – part 2 – how we got here

Systemic issues

33. There is a broad acknowledgement from independent analysts that the system of local government funding, and particularly as it applies to high-growth councils such as Tauranga, is not optimal.

34. In supporting the introduction of the Infrastructure Funding and Financing Bill to Parliament in December 2019, Infrastructure New Zealand noted:

“The biggest obstacle to adequate land supply, and therefore affordable housing, in New Zealand’s cities is that our growth councils have insufficient funding for this (roading and waters) local infrastructure.”^{^[3]}

35. Earlier, in a report titled Building Regions, Infrastructure NZ summarised the planning and funding challenges between central and local government as follows:

“… an institutional system arrangement which misaligns roles, responsibilities and resources across the public service.

“Central government entities with national objectives are performing functions with localised impacts. Local government entities without scale or resources are providing services with regional and national impacts. Neither are optimised to respond to the communities they are affecting and no one is delivering regional outcomes.

“Two of the most powerful governing responsibilities have been separated and isolated. Planning is almost completely delegated to local government. Fourteen out of every fifteen tax dollars is collected by central government. Central organisations cannot plan and invest long term. Local organisations can plan, but with little funding have no certainty as to whether plans can be delivered. Neither are able to see the world through the same lens. Disagreement and mistrust are pervasive.”^{^[4]}

36. In a series of reports relating to housing, urban planning, and local government funding^{^[5]}, the Productivity Commission has recommended additional funding tools be made available to help local government ensure that ‘growth pays for growth’.

37. The Commission’s 2019 report into Local government funding and financing recognises the issue thus:

“The failure of high-growth councils to supply enough infrastructure to meet demand is a serious social and economic problem. Councils’ failure to adequately accommodate growth has been a significant contributor to the undersupply of development capacity for housing in fast-growing urban areas. This in turn has been a major driver of rapid and harmful house price increases in New Zealand since around 2000.

“Councils have funding and financing tools to make growth “pay for itself” over time by deriving revenue to fund the infrastructure for new property developments from new residents rather than burdening existing ratepayers. However, the long time it takes to recover costs, debt limits and the perception that growth does not pay are significant barriers.”^{^[6]}

38. The Commission then provides the following suggestions:

“For funding and financing growth, the recommendations are to:

· give councils the ability to levy some form of value capture using targeted rates on property values associated with growth and infrastructure investment. This has the potential to be a significant additional revenue source for high-growth urban councils;

· enhance councils’ ability to charge for road congestion, and wastewater (by volume); and

· complete policy work on and implement an enhanced version of Special Purpose Vehicles to help high-growth councils nearing or at their debt limit to finance investment in infrastructure to meet demand for growth.”^{^[7]}

Government response

39. The Government recognises the existence of systemic funding and financing issues and has introduced initiatives that attempt to address them.

40. In 2016 the Government launched the Housing Infrastructure Fund (“HIF”), a billion-dollar fund intended to accelerate the supply of new housing by providing interest-free loans (for ten years) to councils in areas of high housing need. This Council successfully sought HIF financing for the Waiāri water supply project, the Te Tumu development, and the Te Maunga wastewater treatment plant upgrades.

41. Note, however, that the effect of the HIF was to lower interest rates on specific growth projects but that there was no beneficial impact on overall debt levels or ratepayer costs. In fact, because of changes to interest rates over time, the practical implementation of the HIF has created a detrimental impact on rates. This resulted in the Finance, Audit & Risk Committee resolving in November 2019 to:

“Approve that no further HIF drawdowns are undertaken for the remainder of the 2019/20 financial year or the 2020/21 Annual Plan unless a satisfactory conclusion is made in relation to discussions with the Government.”

42. The draft 2020/21 Annual Plan has consequently been prepared in accordance with the above resolution.

43. In December 2019, the Government introduced the Infrastructure Funding and Financing Bill to Parliament. The purpose of the Bill is:

“to provide a funding and financial model for the provision of infrastructure for housing and urban development, that—

(a) supports the functioning of urban land markets; and

(b) reduces the impact of local authority financing and funding constraints; and

(c) supports community needs; and

(d) appropriately allocates the costs of infrastructure.” (emphasis added)

44. Council’s proposed submission to the Infrastructure Funding and Financing Bill is to be considered by the Policy Committee on 4 March 2020.

Cumulative revenue deficits

45. The 2018/28 Long-term Plan proposed significantly higher rates increases in year 2 and 3 than were set through the 2019/20 Annual Plan and which were proposed by Council for 2020/21 at its 10 December meeting. The lower revenue achieved directly impacts Council’s capacity to borrow to pay for new capital investment.

46. The cumulative impact of setting rates lower than proposed in the Long-term Plan can be seen below in two graphs, one assuming a 5.1% average rates increase (Option 1 later in this report) and one assuming a 7.6% average rates increase (Option 2 later in this report):

47. The cumulative impact over just two years since the Long-term Plan was adopted (based on a 5.1% average rates increase for 2020/21) is more than $21 million less income, while the similar figure based on a 7.6% average rates increase is more than $17 million.

48. All Long-term and Annual Plan processes require a trade-off between providing for future investment, retaining debt headroom to respond to unforeseen risks, and delivering rates increases that are affordable and acceptable to the community. These issues have been raised by both the Executive and the mayor and councillors through formal Council reports and through community engagement on formally approved budgeting and planning documents. A small sample of examples are included below.

49. The 2010/11 Annual Plan consultation document demonstrates the ongoing pressure that this Council has faced for many years:

“Growth demands continue to place significant pressure on the Council to find ways to fund our city’s needs. It has created a funding problem, as affordability restricts the Council from increasing rates sufficient to meet the full costs of providing the infrastructure required. Long-term debt, used to help minimise the impact on today’s ratepayers, will soon reach its prudent maximum level.”

50. In preparing for the 2011/12 Annual Plan, a report to Council^{^[8]} addressed the debt and debt-to-revenue ratio issues thus:

“While an expected net debt to operating revenue ratio of less than 260% is now projected for the end of the 2011/12 financial year staff recommend that Council take decisive action to meet the financial ratios within existing Treasury Policy limits. The key reasons for doing this are:

· Ensure the fiscal position of Council is not weakened further; and

· Provide some flexibility to respond to the medium to long term fiscal issues which Council will face through the development of the 2012 – 2022 Ten Year Plan.”

51. More recently, in preparing for the 2017/18 Annual Plan, a report to Council^{^[9]} includes the following, which is very similar to the situation this year:

“Since the development of the 2015-2025 Long Term Plan, levels of growth have occurred that are significantly higher than were assumed in the LTP. Infrastructure pressures from continued high levels of growth will put significant pressure on Council’s balance sheet capacity in the 2017/18 and future years.

“In addition, a number of external factors have resulted in a greater level of risk for Council in managing its financial position going forward. Examples include the greater risk around exposure for leaky home claims. Council needs flexibility in its balance sheet. This can be attained through maintaining a risk reserve together with debt headroom. Funding a risk reserve also ensures that some risk is funded by existing ratepayers rather than transferring significant risk to future ratepayers.

“TCC is currently within its financial strategy limits for debt and the debt to revenue ratio. However, the increase in debt to fund infrastructure earlier than in the LTP means the 2017/18 debt level and debt to revenue ratio are higher than they were in the LTP. On current assumptions, without intervention, it would exceed some of its limits in the early years of the next LTP.”

52. Similar statements to the above can be identified in most Annual Plan and Long-term Plan processes over the past decade.

Debt funding operating expenditure

53. In general, operating expenditure is funded from operating revenue. This is consistent with the Local Government Act requirement that “a local authority must ensure that each year’s projected operating revenues are set at a level sufficient to meet that year’s projected operating expenses” (section 100(1)).

54. Section 100(2) provides for some exceptions to this rule, but the principle is clear.

55. Council’s Revenue & Financing Policy mirrors the general principle of section 100(1) and states that:

“Loans will not be used to fund operating expenditure, unless it is otherwise resolved by Council. Council may resolve to use loans to fund operating expenditure where the expenditure provides benefits outside the year of operation, such as community grants for assets.”

56. In recent years, Council has resolved to finance a number of significant operating projects through rate-funded loans. This has the effect of spreading the rating burden of these projects across a number of years. In terms of Council’s debt-to-revenue ratio, compared to rate-funding in the year costs are incurred, it has the effect of increasing debt and reducing revenue. Both of these implications have a negative effect on the ratio and consequently Council’s ability to debt-fund other projects in the future.

57. The recommended options detailed later in this report seek to reverse these earlier decisions to debt-fund operating expenses. If supported, this will increase revenue and reduce debt.

Tauranga is not unique

58. While the specific circumstances covered in this report relate to this Council, we are aware that other councils are facing similar pressures.

59. For instance, Thames-Coromandel District Council (“TCDC”) are proposing a 9.98% average rate increase this year, which it attributes to “higher than anticipated costs”. TCDC also note that “This proposed rating increase is not enough to cover the total increase in operating costs, so will require additional funding by borrowing which is achievable with a short-term loan to reduce the rates increase and spread it out over subsequent years, to lessen the burden on ratepayers.”^{^[10]}

60. The following table compares the overall average rates cost (commercial and residential combined) of the major metro councils.

Council	Total rates 2019/2020 (Incl. GST)	Average rates per rating unit
Dunedin	$ 180,194,300	$ 3,186
Christchurch	$ 598,990,150	$ 3,449
Tauranga	$ 205,471,650	$ 3,521
Hamilton	$ 229,812,344	$ 3,871
Auckland	$ 2,188,954,942	$ 3,889
Wellington	$ 373,296,251	$ 4,717

61. These figures include water rates (including water-by-meter where applicable) with the exception of Auckland where both water and wastewater are charged through Watercare. Also note that Auckland is a unitary authority with a consequently different cost base to the other metros. Tauranga is the only metro shown here without a kerbside waste collection in its cost structure. Adding approximately $300 per rating unit would create a reasonable comparator.

62. For several years, Council has been working with the other high-growth councils of Auckland, Hamilton and Queenstown-Lakes regarding funding and financing challenges.

63. The growth councils have sought to identify commonalities in growth challenges and potential solutions. Through this forum the growth councils have engaged directly with senior staff of the Ministry of Housing and Urban Development, the Ministry of Transport, the New Zealand Transport Agency and the Department of Internal Affairs. These discussions have been constructive, resulting in a common understanding of the challenges and practical realities of managing growth and leading to early conversations on potential solutions.

64. The engagement and commitment of central government in the “Growth Councils’ Initiative” is acknowledged and valued. There is a need to build on this goodwill and move this work forward with a sense of pace and urgency.

65. In response to their own funding challenges in the transport area, Auckland Council has successfully lobbied the government for an additional fuel tax of 10 cents per litre of petrol and diesel sold in the region. This raised $156 million in the year to 30 June 2019.

66. Meanwhile, Queenstown-Lakes District Council has been working closely with central government on a proposed visitor levy (or ‘bed tax’) set at 5% of overnight accommodation costs. This is projected to raise $22.5 million per annum to invest in the infrastructure needed to support the tourism industry in the district. A non-binding referendum in mid-2019 saw 80% of local voters supporting the proposal. Enabling legislation has yet to be introduced to Parliament.

background – part 3 – Prudent financial management

Council’s debt thresholds

67. As part of each Long-Term Plan, Council adopts its financial strategy. Within the financial strategy are a number of quantified limits and targets for rates and borrowing.

68. One of these limits relates to the level of external debt to annual operating revenue. Council has established a maximum limit of 250% for this ratio. This is the same level that is set as a maximum by the body from which Council secures the majority of its debt finance, the Local Government Funding Agency (“LGFA”).

69. Because there are serious implications should Council breach the 250% limit, in previous Long-term Plans Council has set itself a lower limit of 225%. The reasons why this approach was not taken in the 2018 Long-term Plan are set out in the financial strategy thus:

“Maintain debt headroom. In the previous LTP, the maximum debt to revenue ratio was set below the Treasury policy maximum at 225% to allow some debt headroom in the event of unforeseen events and to provide capacity for expected high levels of capital expenditure outside the ten years. For this LTP the lower limit is not maintained because it is not possible to achieve the infrastructure requirements in the middle and later years of the LTP within this limit. However, the Treasury limit of 250% is maintained as an upper limit. The debt to revenue ratio throughout the LTP remains below the maximum providing a level of debt headroom should unforeseen events occur. Over time, it is prudent to aim for further reduction to ensure debt capacity for renewals of existing assets and to provide capacity for unforeseen events.”

70. It is the opinion of staff that a return to a self-imposed upper limit of 225% demonstrates prudent financial management. As such, the options outlined later in this report assume a maximum budgeted debt to revenue ratio of 225%.

Consequences of breaching the LGFA threshold

71. In the event that Council breaches the LGFA limit of 250% the consequences are significant.

72. In short, Council would be in breach of its borrowing covenants. Those covenants provide a brief period to allow Council to rectify the breach, but if Council were unable to so rectify then the LGFA would require repayment of all of its debt issued to Council. This would require Council to refinance over $500 million of debt almost instantly.

73. The direct costs of refinancing Council’s debt would be reflected in the interest rates charged and the available terms of debt from other lenders. Council’s treasury staff advise that the interest rates and, in particular, the terms of loans would be significantly disadvantageous to Council if refinancing was required. The additional cost of financing if the limits were breached is estimated at a more than 1% increase of rates initially, increasing as debt increases.

74. The indirect costs of refinancing Council’s debt portfolio reflect the reputational and governance risks associated with expulsion from the Crown-supported LGFA model. These costs are difficult to measure but would also be significant for the organisation and thus the city.

Risk reserve

75. As noted above, at its 10 December meeting Council considered and then resolved to leave ‘lie on the table’ the matter of its risk reserve.

76. The key points made in the December report relating to the risk reserve were:

· Council maintains a risk management fund (risk reserve) to fund unforeseen events that occur in the city that are not covered by insurance. The risk reserve also helps council manage financial risk.

· As of 30 June 2019, the fund was $15.5m in deficit. This is largely a result of Bella Vista recovery costs and provisions relating to weathertight homes claims.

· The deficit is not a cash deficit but reflects Council’s expected exposure in the medium term.

· To build the reserve (or rebuild it given it is currently in deficit), Council currently adds around $1 million per year to the reserve.

· If no further events occur that need to be funded from the risk reserve, this means that the ‘reserve’ will be returned to a zero balance in 15 years.

· The level of funding in the reserve has been identified as a critical risk on the corporate risk register.

77. The December report recommended that the contribution to rebuilding the risk reserve should be increased from the budgeted $1 million in 2020/21 to $4.4 million. This increase equated to a 2% increase in rates.

78. Since December, and as noted earlier in this report, Council’s exposure to weathertightness claims has increased. Consequently, the revised draft budget for 2020/21 assumes borrowing will be higher to fund weathertightness liabilities next year.

79. The issue of the risk reserve has been raised by staff over a number of years. On occasions Council has decided, against staff advice, to decrease contributions into the reserve. For example, the 2018/28 Long-Term Plan saw zero contribution to the risk reserve, with the following explanation in the document (page 23):

“Maintain a risk reserve. A risk reserve is maintained to provide annual revenue to manage potential risks and response to unforeseen events. In year 1 there is no contribution to risk reserve but a contribution has been included from year 2 onwards. The contribution to this risk reserve has been reduced from current levels, recognising that other risk tools are being utilised. In particular, ratepayers are being required to fund unusually high investment in new assets and services and placeholder budgets for resilience have been included. Further investigations of resilience will allow for a more targeted approach in managing the risks.”

80. The recommended options detailed later in this report address the challenges of the risk reserve and the need to obtain debt headroom to address unforeseen costs in the future such as those that arise from extreme weather events. We recommend a significant increase in the contribution to the risk reserve. This approach has the impact of both increasing Council’s revenue and decreasing its debt.

Council’s operational cost structure

81. Council’s operating expenditure in the draft 2020/21 Annual Plan budget is $284 million. Within this, a large proportion of costs are the direct result of past decisions (for example, debt servicing and depreciation costs) or are ‘locked in’ via long-term contracts (such as for repairs and maintenance on roads or water networks) or are directly related to the delivery of agreed service levels to the community.

82. Note that some of these costs have had significant year-on-year increases reflected in the draft budget. For example, the electricity budget has increased 12.7% from $5.95 million in 2019/20 to $6.71 million, while the insurance budget has increased 43.2% from $1.96 million to $2.81 million.

83. As such, the level of operating costs that is influenceable on a year-by-year basis is considerably less than the $284 million. The following table illustrates this point:

	2020/21 draft budget
Personnel expenses	$69.6m
Depreciation & amortisation expenses	$63.5m
Finance expenses (interest)	$25.6m
Contracts (e.g. repairs & maint.)	$32.7m
Electricity	$6.7m
Insurance	$2.8m
	$200.9m

84. The remaining costs in the draft budget are under regular review by the Executive. While potential reductions in some operating budgets have been identified for consideration later in this report, in totality the operating budgets are considered to be prudent and necessary for the delivery of services to the community. Changing operational budgets is therefore not considered to be a significant lever in attempting to address Council’s financial position.

background – part 4 – The city’s future

85. While much of this report understandably deals with budgeted costs, revenues, and debt (the Annual Plan process is, after all, a resource allocation and cost-recovery process), the key question that underlines the discussion has to be What do we want our city to be?

86. Engagement processes, including the recently-completed Vital Update survey, consistently tell us that the city’s communities share aspirations for a ‘better’ city. Whether this involves improved transport solutions, increased social amenity, enhanced protection and development of natural features, or a range of other interventions by Council or other agencies, there is invariably a cost attached.

87. To prosper as a city we need financial support, both from our current residents and, in the medium-term, from other partners.

88. This financial support, particularly from our current residents, highlights another underlying question, being What level of contribution is affordable for our communities?

89. As previously advised a programme is underway to create a city-wide vision and supporting actions plan in collaboration with key partners and communities. A first step in the programme has been to complete a Vital Update survey in partnership with Acorn Foundation, TECT and BayTrust. This survey was conducted from mid-November 2019 to mid-February 2020 and resulted in over 5,000 respondents.

90. The draft and interim results may assist the Mayor and Councillors in prioritising Council investment through the Annual Plan. It is intended that further work will be undertaken to more meaningfully inform the Long-term Plan decision making process.

91. Key interim results from the survey include:

· ‘Main reason you love living in Tauranga”; 42% love nature and being close to the beach and consider Tauranga a beautiful place to live

· “If you could change on thing about Tauranga what would it be?”; 42% noted less congestion, better roading infrastructure and better parking in the CBD and the Mount

· “Is there anything in Tauranga that needs to be preserved/protected for the city to continue to thrive in the next 10 years?”; 42% say protecting and providing more green spaces, natural environment, reserves and having more trees

· “Do you have any other comments about the future of Tauranga?”; Better roading infrastructure (27%), public transport (13%), and stronger leadership (14%) are the most important topics identified.

92. There is strong alignment between the survey findings and Council’s 2018/28 Long-term Plan. The Long-term Plan identified moving around the city (transportation) and increased environmental standards (protecting and caring for our natural environment) as two of the city’s biggest challenges. The other two key challenges addressed through the Long-term Plan are resilience and land supply / urban form.

proposed approach

93. In considering the issues raised in the sections above, this report recognises that the 2020/21 Annual Plan, in whatever final form, will not provide all of the solutions. Instead, this report recognises that there are short-term responses that need to be taken through the Annual Plan and then further consideration of the same issues through a medium-term lens via next year’s Long-Term Plan.

94. Critical to this two-step process is that short-term actions through the Annual Plan should support the necessary ‘direction of travel’ for the medium-term responses through the Long-Term Plan.

Short-term – 2020/21 Annual Plan

95. For the Annual Plan, the immediate actions to consider include:

(a) Prioritising capital expenditure by deciding what it is that needs to be delivered in the coming year, conscious of the impacts of not delivering other projects that are deferred or otherwise prioritised out

(b) Increasing revenue whilst being conscious of the impact on those providing the revenue

(d) Commencing engagement with the community and with regional and national partners regarding the city’s and Council’s ongoing fiscal challenges, noting that Council’s credibility in such engagements will at least in part be dependent on the choices it makes on items (a) to (c) above

(e) Commencing development of a plan to investigate, evaluate and decide upon options for medium-term solutions.

Medium-term – 2021/31 Long-Term Plan

96. For the Long-Term Plan, the likely actions include:

(a) A continuation of the budgeting actions initiated through the Annual Plan

(b) Further development of engagement with regional and national partners on alternative funding and financing approaches that help enable the city to prosper

(d) Continuing engagement with the community on the future of the city and the financial and delivery tools needed to realise that future.

97. The options presented in this report relate to the 2020/21 Annual Plan only. However, as noted above, it is recommended that these options are considered in light of the wider discussion around the city’s form, funding and relationships that will occur through the Long-Term Plan process. The impact of short-term decisions on potential long-term partnership opportunities should be a consideration in decision-making.

Options Analysis - framing

98. The following section provides four core options or scenarios for consideration. The nature of decision-making regarding budgets means that there are countless other scenarios that may be considered and as such the four options are presented as examples for the purpose of a simpler decision-making process.

99. In creating these options a four-step process was identified. The Committee may find it useful to follow the same four-step process, being:

(a) First determine what needs to be delivered (predominantly in the capital expenditure sphere given the importance of the debt-to-revenue ratio)

(b) Then determine the appropriate debt-to-revenue ratio (to both demonstrate prudent financial management and to ensure that Council’s financial positioning entering the Long-Term Plan process is acceptable)

(c) Then determine operational areas of priority and assess potential increases and potential decreases to operating expenditure in light of those priorities (this may include some of the items noted in the ‘Potential expenditure items not yet included in the draft budget’ section earlier in this report)

(d) Then identify the revenue and the split of revenue sources to deliver on (a) to (c) above. If Council considers the resultant revenue level is not appropriate, it will need to identify the change required and review the capital and operational areas of priority.

100. In regard to the split of revenue sources, a separate set of options regarding the rating model is presented for consideration.

Capital expenditure prioritisation

101. In preparing the options, staff and the Executive have prioritised capital expenditure in three categories of expenditure (being renewals, growth, and level of service investment) and into three categories for decision-making purposes, being:

(a) Projects and initiatives included in the draft 2020/21 capital budget

(b) Projects and initiatives recommended for political consideration before inclusion in the draft 2020/21 capital budget

102. The criteria for making these assessments is outlined graphically in Attachment 1 to this report.

103. The total value of the current draft 2020/21 capital expenditure budget is $207 million. The summarised list of capital projects and programmes is included as Attachment 2 to this report.

104. The projects recommended for political consideration before inclusion in the draft 2020/21 capital expenditure budget total $5 million and are listed in Attachment 3 to this report.

105. The projects originally intended for the 2020/21 budget but subsequently recommended to be deferred total $36 million and are listed in Attachment 4 to this report.

106. It is recognised that there are many projects on both the ‘for consideration’ and ‘deferred’ lists for which there are valid and arguably compelling reasons for inclusion in the draft 2020/21 Annual Plan. This is the crux of the issue. Even with significant revenue increases Council does not have the financial capacity to do all that it would like to do.

107. Each of the four options assumes a ‘capital adjustment’ or ‘smoothing’ project of $20 million to recognise the likelihood of not all budgeted projects being delivered in the year planned. This is a reduced level from prior years in recognition of the fact that the capital budgets have been closely reviewed to ensure that only deliverable projects are included.

Preferred debt-to-revenue ratio

108. In considering Council’s current and expected financial state, the Executive recommends reverting to a target for the debt-to-revenue ratio of 225%. This:

(a) Will ensure financial ‘headroom’ to allow Council to borrow for unforeseen circumstances without risking breaching LGFA covenants; and

(b) Is consistent with a ‘direction of travel’ that is likely to be recommended as Council commences the Long-Term Plan process.

109. As such, each of the options presented below includes a presumption of a 225% limit for the debt-to-revenue ratio.

Operating expenditure levels

110. As noted earlier in this report, the operating expenditure budget has been the focus of considerable attention by staff and the Executive. The current budget is considered by the Executive to be ‘fit-for-purpose’.

111. If the Committee wishes to pursue an approach of reducing operating expenditure, the Executive has prepared some options to achieve this. However, none of these options for reductions have yet been incorporated into the draft budget.

112. Likewise, there are several potential increases to operating budgets that have been identified elsewhere in this report for consideration. These have yet to be included in the budget. Should the Committee decide to include some or all of these items then that will naturally have an impact on the financials under each option.

Revenue levels

113. With the operating and capital expenditure (and therefore debt) figures established, and with a preferred debt-to-revenue maximum set, the required revenue figure (and therefore the rates requirement) is calculated as a consequence for each option.

114. The exception to this approach is Option 1 whereby the limiting factor is the permissible revenue levels which then consequently restricts the level of capital expenditure and debt.

Structural Options to address Funding & Financing Challenges

115. There are a number of challenges facing growth councils given the need to invest in significant infrastructure to support the supply of serviced residential and employment land, to provide an effective functioning transport network, and to build strong communities. The key issues include:

· The current funding and financing model does not align incentives i.e. capital infrastructure costs sit with local government while the bulk of the tax revenue generated by the growth in economic activity goes to central government.

· Recent initiatives have been taken to boost the toolkit (including Housing Infrastructure Fund, Infrastructure Funding & Financing legislation), however multiple solutions are needed as these do not provide sufficient financial capacity on their own.

· Sub-regional and regional outcomes will be impacted if this investment is curtailed and therefore we need to work sub-regionally and regionally as part of the solution.

· Housing affordability, economic activity and employment will be detrimentally affected through the inability of Council to deliver growth infrastructure in a fiscally sustainable manner. This is occurring. The pace and scale at which the issue can be responded to will determine the size and timeframe of impact.

116. It is proposed that a comprehensive package of solutions be explored with our key regional and national partners, with viable options progressing into the 2021/31 Long-term Plan process. This will include an assessment of opportunities to leverage TCC’s existing assets and funding sources.

options analysis – capex, debt and revenue models

117. The following section sets out the four options that have been developed. Following the narrative section, a table is included that summarises the key financial characteristics of the options.

Option 1 – Consistent with December resolution

118. This option responds to Council’s decision in December to provide for a mean residential rate increase of no more than inflation (projected to be 1.9%) plus 2%.

119. By maintaining an overall rates increase of 5.1% (which is consistent with a mean residential rates increase of 3.9% and a larger mean commercial rates increase), this option requires removal of approximately $33 million of capital expenditure from the current recommended budget (and naturally no inclusion of additional projects from the ‘for consideration’ list).

120. Under this Option the Committee would need to identify the projects it wishes to be removed from the draft Annual Plan.

121. This reduction of the capital expenditure budget (depending somewhat on the specific projects that the Committee determine should be removed) is likely to negatively impact on:

(a) The delivery of infrastructure to currently zoned development areas

(b) Consequently, the availability of new housing

(d) Other amenity projects.

122. In addition, in order to prepare a balanced budget this option requires a reduction in operating expenditure of approximately $4.3 million.

123. The Executive commenced a project in late 2019 seeking realistic budget savings across the organisation that did not result in significant impacts on service delivery. That list totals approximately $950,000 and is included as Attachment 5 to this report.

124. If all of these opportunities are accepted, the Committee would need to work with staff and the Executive to agree a further $3.3 million of operational expenditure reductions. This will undoubtedly have a direct negative effect on services to the community either in the short-term or the long-term.

125. This option is not recommended.

Option 2 – Constrained capital expenditure

126. This option also reduces the capital expenditure budget but by a lesser amount than Option 1 ($24 million rather than $33 million). This option is still of a scale likely (depending on the projects that the Committee choose to remove) to negatively impact on:

(a) The delivery of infrastructure to currently zoned development areas

(b) Consequently, the availability of new housing

(d) Other amenity projects.

127. This option allows for the operating expenditure budget to remain as is, but doesn’t currently provide for any of the ‘not yet budgeted’ items listed earlier in this report. The Committee would need to specifically resolve to include any such items as it sees fit.

128. With regards to the rating impact, this option keeps the ‘business as usual’ average rates increase at 3.9% but separately recognises the distinct cost pressures in two key areas of Council’s operations. These are:

(a) Transport and urban planning and delivery, and

(b) Water and wastewater planning and delivery.

129. The beyond-business-as-usual impact of these two workstreams contribute to general rate rises of approximately 1.5% and 2.2% respectively. As such, the total rates increase under this option equates to 7.6%.

130. This option contributes nothing directly to debt retirement.

131. This option is not recommended.

Option 3 – Prioritised capital expenditure plus limited debt management

132. This option allows for full delivery of the proposed capital expenditure programme and the ‘for consideration’ list, but only provides minimal scope ($6 million) for the inclusion of projects currently included on the ‘deferred’ list.

133. While this is preferable to the constrained delivery under Options 1 and 2, it is still a level of capital expenditure delivery that is considered to be the ‘bare minimum’ to provide for growth and for community needs. There will remain projects on the ‘deferred’ list that will not be able to be delivered next year when in other circumstances delivery would be expected. Note that for this and for Options 1 and 2, the deferral of necessary projects in one year invariably makes for more difficult budgeting and prioritisation decisions in future years.

134. As with Option 2 above, this option recognises the business-as-usual average rates increase at 3.9% and separately recognises the beyond-business-as-usual impact of transport and urban planning and delivery (1.5%) and water and wastewater planning and delivery (2.2%).

135. In addition, this option contributes a combined 5% rate increase to debt retirement. This takes two forms. Firstly, an additional direct contribution to the risk reserve of 2.5% as was recommended in the December report. This starts to rebuild that ‘reserve’ which is currently showing a significant deficit.

136. Secondly a contribution to the retirement of debt incurred where specific operating expenditure has been funded (via Council resolution) by debt rather than operating revenue in the year incurred. Examples of projects where debt-funding could be replaced by rates funding (thereby repaying the debt incurred) include:

(a) the Urban Form and Transport Initiative and SmartGrowth costs

(b) the Tauranga System Plan for transport

(d) City Plan plan change projects

(e) Operational costs related to transport network and asset management projects.

137. A 2.5% rates increase would remove the debt associated with these projects.

138. As with Option 2, as currently proposed this option provides for the existing operating budget but does not incorporate additional operating expenditure relating to any of the ‘not yet funded’ items listed earlier in this report. The inclusion of such items would require separate resolution.

139. Overall, this option results in a total rates increase of 12.6%.

140. This option, which enables capital delivery (albeit at a minimum level needed to provide for growth and community needs), maintains a 225% debt-to-revenue ratio, and provides a stepped increase in revenue, is considered to be a minimally prudent approach.

Option 4 – Prioritised capital expenditure plus debt management

141. This option provides for full delivery of the proposed and ‘for consideration’ capital programme and allows for approximately $32 million of the $36 million of deferred projects to be added back into the final budget. As such it is the option which does the most in terms of providing a capital expenditure budget for 2020/21 to deliver on the growth and community needs of the city.

142. This option creates a strong financial base by paying down debt and markedly increasing revenue sources. This sends a strong message to central government and regional and city partners that the city, through the Council and its rating base, is prepared to contribute significantly to addressing the fiscal situation.

143. This option builds on Option 3 with the same 2.5% rates increase to accommodate the retirement of debt on the listed operating projects which have been funded by debt. It also increases the contribution to other debt retirement (be it into the risk reserve specifically or into general debt retirement) by a further 5%.

144. Overall, this option provides for a 17.6% rates increase.

145. As with Option 3, this option recognises the need to deliver necessary capital projects while maintaining a prudent debt-to-revenue ratio and providing a stepped increase in revenue. Option 4 is considered to be financially prudent and a strong position from which to commence the Long-Term Plan planning and discussions with national and regional partners.

Summary of options and recommendation

146. The table below identifies key financial aspects of the four options provided.

Option	1	2	3	4
Basis	December resolution	Constrained capital investment	Prioritised capital investment plus limited debt management	Prioritised capital investment plus debt management
Sustainable capex assuming $30m carryforward (at 225% D:R)	$149m	$158m	$188m	$214m
Capex projects capacity with a $20m capital adjustment and accruals	$179m	$188m	$218m	$244m
Prioritised capex (included plus ‘for consideration)	$212m	$212m	$212m	$212m
Capex required to be removed from the ‘included’ and ‘for consideration’ lists	$33m	$24m	-	-
Capex that can be added back from the ‘deferred’ list	-	-	$6m	$32m
Impact on Operating Expenditure Budget	$4.3m of reductions to be agreed	Nil	Nil	Nil
Debt at year end	$661m	$671m	$691m	$709m
Debt-to-revenue ratio at year end	225%	225%	225%	225%
Total rates increase after growth	5.1%	7.6%	12.6%	17.6%
Median / mean residential rate increase	3.2%median 3.9% mean	5.7% median 6.6% mean	10.8% median 11.8% mean	14.9% median 16.1% mean
Debt management element of rates	nil	nil	5%	10%

147. It is recommended that the Policy Committee approve an Annual Plan budget in the mid to upper range of options 3 and 4. This is a prudent approach and provides a pathway towards a more fiscally sustainable future.

Options analysis – increase rates only

148. Each of the above options includes a combination of managing capital expenditure, managing debt, and increasing revenue.

149. In preparing this report, a fifth option was considered, that being to leave capital expenditure and debt as per the original budget and to use rates increases as the only lever to effect change. This is the ‘rate your way out of the problem’ approach.

150. This analysis showed that to service known capital expenditure budgets, the necessary rates increases for the coming years are as follows:

2020/21 – 17.6% (being the same as Option 4 above)

2021/22 – 26.8%

2022/23 onwards – approx. 5%

151. Note that these calculations are based on the expenditure budgets currently included in the planning system. There are significant known (and likely to be even more significant currently-unknown) increases to capital budgets in later years yet to be included in that planning system.

152. This option is considered to be unaffordable for the community and has not been pursued further.

Options analysis – rating model

153. During its 10 December meeting, Council confirmed the final stage of the implementation of the changes to the rating structure that were proposed through the 2018-28 Long-term Plan. These involved a move to a uniform annual general charge (“UAGC”) of 15% of total rating revenue (from 20% in the 2019/20 year) and a move to a commercial differential of 1.2:1 (from 1.134:1 in the 2019/20 year).

154. Since that time, events outlined in this report may result in the Committee wishing to reconsider the rating model.

Matters to consider – UAGC

155. Tauranga has the highest UAGC of any metropolitan local authority. This high UAGC disproportionately impacts on affordability for ratepayers of lower value rating units (assuming that, broadly, rating affordability is commensurate with property value, and accepting that this isn’t always the case).

Local Authority	Level of UAGC in the current year
Tauranga City	$600
Hamilton City	$348
Auckland City	$424
Dunedin City	No UAGC
Christchurch City	$130
Wellington City	No UAGC

156. The changes to wastewater budgets through this Annual Plan process have resulted in the proposed wastewater uniform annual charge (“UAC”) increasing by 10% from a 2019/20 base of $934 per property. As with the UAGC, the uniform nature of the wastewater UAC means it has a disproportionate impact on affordability for ratepayers of lower value rating units.

157. In effect, the 10% increase in the wastewater UAC more than cancels out the gains for ratepayers of lower value properties that were intended by Council when choosing to reduce the UAGC.

158. Under section 101(3)(b) of the Local Government Act 2002, Council is required to consider the impacts of the aggregate proposed funding sources in the Revenue and Financing Policy on the community. Taken together, the aggregate impacts of the increased wastewater UAC and the reduced-to-15% UAGC still have a negative effect on ratepayers of lower valued properties.

Option R1 – Reconfirm the reduction in the UAGC from 20% to 15% of total rating revenue

159. This option reconfirms the decision made in the 2018-28 Long-term Plan and confirmed by Council in December 2019.

Option R2 – Further reduce the UAGC from 20% to 10% of total rating revenue

160. This option changes the proposed rating model to provide additional relief for ratepayers of lower valued properties. This ensures that the principle of Council’s decision through the 2018-28 Long-term Plan (that Council’s rating system should, overall, be less regressive than was the case) is maintained despite the significant increase to the wastewater UAC this year.

161. In contrast, ratepayers of higher valued properties (both residential and commercial) will face an increased rating burden.

162. The impact on some sample properties of this proposal (compared to Option R1) are shown in the following tables:

Residential rates impact		Option 1 Consistent with December resolution	Option 2 Constrained capital expenditure	Option 3 Prioritised capex plus limited debt mgmt	Option 4 Prioritised capex plus debt mgmt
Option R1 - UAGC 15%	Mean property (66%)	3.9%	6.6%	11.8%	16.1%
	Median property (50%)	3.2%	5.7%	10.8%	14.9%
	1st Quartile (25%)	2.1%	4.3%	9.1%	13.0%
	Lowest residential (1%)	-0.1%	1.7%	6.1%	9.4%

Option R2 - UAGC 10%	Mean property (66%)	3.4%	6.0%	11.2%	15.5%
	Median property (50%)	1.8%	4.3%	9.3%	13.4%
	1st Quartile (25%)	1.8%	1.6%	6.2%	10.0%
	Lowest residential (1%)	-5.5%	-3.6%	0.4%	3.6%

Commercial rates impact
Option R1 - UAGC 15%	Mean property (66%)	12%	15%	20%	25%
	Median property (50%)	10%	12%	17%	21%
	1st Quartile (25%)	6%	8%	12%	15%

Option R2 - UAGC 10%	Mean property (66%)	17%	20%	26%	30%
	Median property (50%)	12%	15%	19%	23%
	1st Quartile (25%)	4%	6%	10%	13%

163. Option R2 is recommended.

164. It should be noted that the Long-term Plan approach to progressively move the UAGC from the then level of 30% to 15% was subject to a significant engagement and consultation exercise. If the Committee accepts the above recommendation, a similar engagement and consultation process should be considered.

Matters to consider – commercial differential

165. As noted in paragraph 153, Council has previously resolved to move the commercial differential to 1.2:1 (from 1.134:1 in the 2019/20 year). This is giving effect to the last year of a three-year transition approved through the 2018/28 Long-term Plan.

166. Staff recommendation is to undertake a complete review of the rating model as part of the 2021/31 Long-term Plan process. Matters to be assessed through such a review would be the extent to which the proportionate benefits and costs to the commercial sector, compared with the wider community, are reflected in the differential.

167. It is not recommended to amend the commercial differential through this Annual Plan beyond that previously consulted.

Statutory Context

168. In accordance with the Local Government Act 2002 (“LGA”), Council is required to produce and adopt an Annual Plan by 30 June 2020.

169. The purpose of this Annual Plan is to identify variations from the financial statements of the third year of the current Long-Term Plan.

170. Developing an Annual Plan requires consultation on changes that are significantly or materially different from the Long-Term Plan. If there are no such changes, Council is not required to consult.

Consultation / Engagement

171. The matters considered within this report and which, if recommendations are adopted, will be reflected in the draft Annual Plan demand community input. It is therefore proposed that the Annual Plan is presented to the community for consultation.

172. The proposed updates to the User Fees and Charges and to the Development Contributions Policy will also require consultation.

173. Consultation will take place between late March and late April 2020. The respective consultation documents for the User Fees and Charges and the Development Contributions Policy will require Council approval in March.

Significance

174. Tauranga’s Significance and Engagement Policy determines whether a matter is significant. In making the assessment against this policy, there is no intention to assess the importance of this item to individuals, groups, or agencies within the community and it is acknowledged that all reports have a high degree of importance to those affected by Council decisions. Materiality is defined in the LGA as being something that would influence the decisions or assessments of those reading or responding to the consultation document.

175. In terms of the Significance and Engagement Policy the financial matters raised and the budget adjustments identified and recommended through this report are deemed to be significant. It is therefore proposed that the Annual Plan is presented to the community for consultation.

Next Steps

176. Following Council’s decisions relating to this report, staff will prepare the following documentation for approval and adoption by the Policy Committee on 24 March 2020:

(a) Draft Annual Plan including the financial supporting information

(b) Consultation document for the Annual Plan

(d) Statement of proposal for the Development Contributions policy.

Attachments

1. Capital diagram - A11287211 ⇩

2. 2021 Annual Plan Capex recommended to be prioritised in - A11287194 ⇩

3. 2021 Annual Plan Capex New projects recommended to be prioritised in - A11287203 ⇩

4. 2021 Annual Plan Capex recommended to be prioritised out - A11287204 ⇩

5. Opex Savings Options - A11287189 ⇩

Policy Committee Meeting Agenda

4 March 2020

Residential Development Capacity Review

(DC 121)

Urban Form and Transport Development Committee

Date of meeting: 11/06/2019

Objective ID:

A10095632

Executive summary

Recommendation	That the Urban Form and Transport Development Committee: a) Receives Report DC121 titled Residential Development Capacity Review including Appendix A, the “Western Bay Sub-Region Urban Development Capacity Review” prepared by Veros Property Services in May 2019. b) Notes the significant projected shortfall in dwelling and subdivision capacity in the short term (1-3 years) and medium term (4-10 years), and its potential broad implications for the Council and our community. c) Notes the urgency of addressing these matters in partnership with the other SmartGrowth Partners and the Government by enabling large-scale new residential development capacity in the City and broader Western Bay sub-region as quickly as possible.
Summary of issue	This report provides an update to current and projected residential development capacity in Tauranga City following the report provided to the Committee in March 2019 (DC49). Development capacity has been a long-held concern of TCC planning staff going back a number of years before the 2016 SmartGrowth decisions to progress planning of Te Tumu and Tauriko West followed by the Tauriko Business Estate extension and Keenan Road. These decisions were a response to the concerns being raised. In March 2019 it was reported by TCC staff that there was currently around 6 years of theoretical residential development capacity in Tauranga, with only around 4 years of sub-dividable land available as at 1 January 2019. However, it was noted that the realistic supply that would be delivered (especially in the short term over the next 1-3 years) was much lower than this because of factors such as: · Staged development of large blocks · Large development blocks allocated to long-term retirement village projects · Infrastructure constraints · Complications associated with Maori Land. · Land-banking In summary, staff were concerned that significant supply shortages would emerge in the short-term. At the March Committee meeting representatives of the development and building companies in the sub-region (the Developers group) communicated their view that there was less than 18 months realisable supply. TCC staff concurred with the view that realisable supply is significantly less than theoretical supply. Following the March Committee meeting, Veros Property Services were commissioned to undertake an independent review of remaining residential capacity in the Western BOP sub-region. The findings of the Veros review validates the views of both TCC Staff and the Developers group. It confirms that the realisable supply of residential development capacity, particularly capacity for new residential titles through subdivision, is insufficient to meet projected growth rates for housing development in Tauranga and the Western Bay sub-region in the short-term and into the medium term. The Veros report estimates that in the short-term 1-3 year period there will be an undersupply of nearly 1,000 new dwellings and this will get much worse in the medium term until new supply is zoned and enabled for development. The impending supply shortage has been discussed with Minister Twyford who oversees the housing & urban development and transport portfolios, as well as officials from the Ministry of Housing & Urban Development and NZTA. There is a willingness to work collaboratively to address these matters and a need to ensure that responses align with the Government’s broader Urban Growth Agenda. The City and sub-region will only be able to resolve the short-term housing supply challenges set out in this report by enabling large scale new projects, especially Te Tumu, Tauriko West and Omokoroa Stage 3. As previously reported these projects all face a range of significant delays and risks. There are opportunities to potentially bring forward development of Tauriko West from 2023 if an interim package of transport improvements and an efficient process to rezone the area can be agreed with the government. There may also be opportunities to bring forward development in Te Tumu ahead of 2023, especially if access challenges through Maori Land can be resolved quickly. The intensification plan changes / Te Papa spatial planning also have a key role to play in aligning development opportunities with the Government’s Urban Growth Agenda and enabling the redevelopment of the city’s social housing stock. The TCC-owned Smiths Farm site also provides housing opportunities but on a more moderate scale. Planning for Welcome Bay & Ohauiti as well as Keenan Road should also continue, however these are not options for providing additional residential growth in the short term due to the early stage of planning, known challenges, infrastructure costs and timeframes associated with the necessary planning processes.
Broader benefit/impact	Provision of sufficient development capacity is important to: · Allow land and development markets to operate in a reasonably efficient manner · Enable population and dwelling growth projections to be accommodated · Meet requirements for development capacity under the National Policy Statement for Urban Development Capacity · Reduce risks associated with further house price inflation and further decline in housing affordability. Sufficient development capacity is also important to ensure that economic and job growth remains positive in Tauranga especially across sectors that are directly or indirectly affected by land development and house building. Further, sufficient development capacity is fundamental to the health of Council’s overall financial position including being essential in ensuring that: · Council’s development contributions revenue stream is not compromised · Debt servicing costs associated with growth funded projects like the southern pipeline and the Waiāri water treatment plant remain manageable · Forecast growth in rateable properties can be maintained, such that forecast increases in Council’s operating budgets can in part be offset by having more rateable properties to spread costs across.
Strategic context	The provision of development capacity and supporting infrastructure to meet growth demand is a priority strategic issue for Tauranga City. Responsibility for addressing the increasing urgency to release further development capacity rests with Tauranga City Council as well as with the wider SmartGrowth Partnership. However achieving this requires partnership with Government especially in respect of transport investment and appropriate tools to enable land to be rezoned and developed in a timely manner. The government has recently reconfirmed that SHAs are no longer a tool in fast-tracking development.
Next steps	Staff will: · Continue progressing planning for the following projects with urgency: o Tauriko West o Te Tumu o Smiths Farm o Intensification plan changes / Te Papa spatial plan. · Work with NZTA to develop an agreed programme of interim transport investments to enable development of Tauriko West to commence. · Consider the merits of available planning pathways that may enable land to be rezoned more efficiently than the standard RMA Schedule 1 plan change process. · Support processes in Te Tumu to enable access and services to be provided through Maori Land. · Support WBOPDC in its aspirations to rezone Omokoroa Stage 3, including a package of appropriate and timely transport interventions. · Continue engagement with the government and its officials.

Discussion

Purpose of independent review

1. The purpose of the Veros review was to:

· Provide an independent assessment of remaining capacity for new subdivision and housing in the Western Bay sub-region.

· Confirm whether this remaining capacity is sufficient to meet current and projected growth rates until new capacity is enabled.

2. The review focused on Tauranga City. For the Western Bay District, an assessment of Omokoroa, Katikati and Te Puke was undertaken, primarily to determine whether any potential short-term capacity shortfall in Tauranga could be accommodated by transferring more growth into the Western Bay District.

3. The independent review report is attached as Appendix A.

Key findings of independent review report

4. The key findings from the independent report are set out in the table below and graph on the following page.

	Short Term Capacity			Medium Term Capacity
	Required	Forecast	Difference	Required	Medium	Difference
New Sections	2793	2198	-595	6517	2353	-4164
Retirement Village	399	708	309	931	474	-457
Multi Units	600	0	-600	1400	1234	-166
Intensification	198	174	-24	462	406	-56
Total Dwellings	3990	3080	-910	9310	4467	-4843

5. The table and graph indicate:

· An under-supply of dwellings approaching 1,000 units in the 1-3 year period.

· An undersupply of dwellings close to 5,000 dwellings in the 4-10 year period (if new supply is not enabled).

· That most of the under-supply is driven by a lack of large greenfield subdivision and development opportunities, combined with insufficient ability for other dwelling types to respond to this shortfall.

6. The report also concludes that additional capacity does not exist in the Western Bay District to accommodate the short-fall in subdivision and dwellings in Tauranga due to a combination of existing agricultural and horticultural uses of land, along with infrastructure limitations and the under-lying growth occurring in the Western Bay District that needs to be accommodated.

7. In summary the independent assessment validates a serious shortfall in residential development capacity and constrained supply.

Delivery of new development capacity

8. Additional development capacity has been projected to come online through three main factors:

· New major greenfield areas at Te Tumu and Tauriko West, as well as Omokoroa Stage 3 in the Western Bay District.

· Enabling more opportunity for intensification within the existing urban area.

· Provision for Special Housing Areas under the Tauranga Housing Accord.

9. As reported to the Committee in March 2019 (DC49) the Housing Accords and Special Housing Areas Act (HASHAA), and thereby the Tauranga Housing Accord, will not be extended beyond September 2019. This removes one of the major, and potentially the quickest and most flexible, means of enabling new development capacity in the short term. Following the March Committee meeting the government has reconfirmed that HASHAA will be repealed in September this year.

10. The government is however open to using other processes available under the RMA such as the streamline plan change process. This would not nearly be as fast as establishing a SHA, however it would be quicker and potentially less risky than a standard RMA Schedule 1 plan change process. Staff will report back separately on planning pathway options as part of the intensification and greenfield planning projects.

Update on new development capacity

11. The SmartGrowth partnership continues to work towards delivering new capacity across the sub-region as per the agreed settlement pattern. To assist with addressing and progressing the integration of the sub-regions transport programme and settlement pattern with the new Government Policy Statement on Land Transport, transport funding constraints and the direction of the Government’s Urban Growth Agenda, the UFTI project is a key project and is predicated on a partnership approach.

12. Staff are currently working with NZTA on the development of an initial package of transport improvements to enable development to Tauriko West to proceed.

13. Tauranga City Council has largely completed structure planning for the Te Tumu area and is undertaking the technical work to prepare for rezoning. A key factor for Te Tumu is working alongside the Maori land trusts to unlock multiply-owned Maori land for essential enabling infrastructure and development.

14. In respect of enabling further opportunities for intensification in the existing urban area of Tauranga City, the Tauranga City Council has full support from the SmartGrowth Partnership to deliver the work programme as outlined in the DC34 – City Planning Quarterly Update reported to the Committee in March 2019 and addressed in further detail in April 2019. A significant component of this work is addressing how natural hazards will be managed to allow intensification to occur in appropriate locations.

15. Additional development capacity in the northern corridor is also planned for Omokoroa and Katikati, with limited capacity currently remaining in these towns respectively. This work is being led by the Western Bay of Plenty District Council. Uncertainty as to the timing of transport capacity improvements in the northern corridor poses a challenge to these areas as well but are also being considered through the UFTI work.

16. All of the above work to enable new development capacity needs to progress as quickly as possible given the significant shortfall projected in the short term. Only once development of these areas is enabled will the SmartGrowth councils be in compliance with the requirements of the NPS-UDC in terms of having sufficient development capacity to meet demand and allow development markets to operate efficiently.

Significance and engagement

17. The matters outlined in this report are likely to be of moderate to high significance and public interest, being they relate to the capacity of the City to meet growth demand and highlight that there are real challenges in this regard.

Appendices

No.

Title

Western Bay Sub-Region, Residential Development Capacity Review, Veros Property Services, May 2019

Objective ID: A10121422

Signatories

Authors

Ayv Greenway – Senior Strategic Planner

Andrew Mead – Manager: City & Infrastructure Planning

Authorisers

Christine Jones – General Manager – Strategy & Growth

Enterprise approach and collaboration

Name	Title/department	Response
Doug Spittle	Principal Strategic Advisor	Report review and input into Veros development capacity assessment

[3] Infrastructure New Zealand, media release, 12 December 2019

[4] Building Regions – A vision for local government, planning law and funding reform, Infrastructure New Zealand, August 2019, page 3

[5] Housing affordability, 2012; Using land for housing, 2015; Better urban planning, 2017; Local government funding and financing, 2019

[6] Local government funding and financing, Productivity Commission, 2019, page 10

[10] TCDC website, Latest News, dated 11 February 2020


AGENDA Policy Committee Meeting Wednesday, 4 March 2020
I hereby give notice that a Policy Committee Meeting will be held on:
Date:	Wednesday, 4 March 2020
Time:	9am
Location:	Tauranga City Council Council Chambers 91 Willow Street Tauranga
Please note that this meeting will be livestreamed and the recording will be publicly available on Tauranga City Council's website: www.tauranga.govt.nz.
Marty Grenfell Chief Executive

As at 30 June 2019	Current Population projection	Current Dwelling Projection		Modified Population projection	Modified Dwelling projection
As at 30 June 2019	Current Population projection	Dwellings Required	Dwelling Shortfall	Modified Population projection	Dwellings Required	Dwelling Shortfall
Short term (3 years)	6,720	3,990	-910	7,080	3,680	-600
Medium Term (4-10 years)	13,175	9,310	-4,843	19,406	7,967	-3,500
Total	19,895	13,300	-5,753	26,486	11,647	-4,100