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AGENDA
Extraordinary Finance, Audit and Risk Committee Meeting Tuesday, 28 April 2020 |
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I hereby give notice that an Extraordinary Finance, Audit and Risk Committee Meeting will be held on: |
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Date: |
Tuesday, 28 April 2020 |
Time: |
9am |
Location: |
Tauranga City Council By video conference |
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. |
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Marty Grenfell Chief Executive |
Terms of reference – Finance, Audit & Risk Committee
Common responsibilities and delegations
The following common responsibilities and delegations apply to all standing committees.
Responsibilities of standing committees
· Establish priorities and guidance on programmes relevant to the Role and Scope of the committee.
· Provide guidance to staff on the development of investment options to inform the Long Term Plan and Annual Plans.
· Report to Council on matters of strategic importance.
· Recommend to Council investment priorities and lead Council considerations of relevant strategic and high significance decisions.
· Provide guidance to staff on levels of service relevant to the role and scope of the committee.
· Establish and participate in relevant task forces and working groups.
· Engage in dialogue with strategic partners, such as Smart Growth partners, to ensure alignment of objectives and implementation of agreed actions.
Delegations to standing committees
· To make recommendations to Council outside of the delegated responsibility as agreed by Council relevant to the role and scope of the Committee.
· To make all decisions necessary to fulfil the role and scope of the Committee subject to the delegations/limitations imposed.
· To develop and consider, receive submissions on and adopt strategies, policies and plans relevant to the role and scope of the committee, except where these may only be legally adopted by Council.
· To consider, consult on, hear and make determinations on relevant strategies, policies and bylaws (including adoption of drafts), making recommendations to Council on adoption, rescinding and modification, where these must be legally adopted by Council,
· To approve relevant submissions to central government, its agencies and other bodies beyond any specific delegation to any particular committee.
· To appoint a non-voting Tangata Whenua representative to the Committee.
· Engage external parties as required.
Finance, Audit & Risk Committee
Membership
Chairperson |
Mr Bruce Robertson |
Deputy chairperson |
Cr Tina Salisbury |
Members |
Cr Jako Abrie Cr Larry Baldock Cr Kelvin Clout Cr Bill Grainger Cr Andrew Hollis Cr Heidi Hughes Cr Dawn Kiddie Cr Steve Morris Cr John Robson |
Non-voting members |
Tangata Whenua representative (TBC)
A maximum of two external appointments may be made by Council on recommendation from the Committee |
Quorum |
Half of the members physically present, where the number of members (including vacancies) is even; and a majority of the members physically present, where the number of members (including vacancies) is odd. |
Meeting frequency |
Six weekly |
Role
· To ensure that Council is delivering on agreed outcomes.
· To ensure that Council is managing its finances in an appropriate manner.
· To ensure that Council is managing risk in an appropriate manner.
Scope
· Monitor financial and non-financial performance against the approved Long Term Plan and Annual Plan (Note: Council cannot delegate to a Committee the adoption of the Long Term Plan and Annual Plan).
· Oversee the development of the council’s Annual Report.
· Oversee the development of financial and treasury management strategies and policies.
· Consider and approve external audit arrangements and receiving Audit reports.
· Consider the outcome of internal and external audit reviews.
· Advise Council on matters of finance and provide objective advice and recommendations for its consideration.
· Advise Council on matters of risk and provide objective advice and recommendations for its consideration.
· Consider matters which are related to quality assurance and internal controls in council and ensure the financial management practices and processes comply with the Local Government Act 2002, other relevant legislation and Council’s own policies.
· Consider, monitor and recommend (where appropriate) in respect to Council’s financial interest in CCOs.
· Consider all matters regarding the Local Government Funding Agency (LGFA).
· Monitor key activities, projects and services (without operational interference in the services) in order to better inform the members and the community about key Council activities and issues that arise in the operational arm of the council.
Power to act
· To make all decisions necessary to fulfil the role and scope of the Committee subject to the limitations imposed.
· To appoint a non-voting Tangata Whenua representative to the Committee.
· To establish working parties and forums as required.
· For the avoidance of doubt, this Committee has not been delegated the power to:
o make a rate;
o borrow money, or purchase or dispose of assets, other than in accordance with the Long Term Plan.
Power to recommend
· To Council and/or any standing committee as it deems appropriate.
Extraordinary Finance, Audit and Risk Committee Meeting Agenda |
28 April 2020 |
4 Confidential Business to be Transferred into the Open
6 Declaration of Conflicts of Interest
7.1 Financial Update - COVID-19
Extraordinary Finance, Audit and Risk Committee Meeting Agenda |
28 April 2020 |
7.1 Financial Update - COVID-19
File Number: A11407268
Author: Kathryn Sharplin, Manager: Finance
Mohan De Mel, Treasurer
Authoriser: Paul Davidson, General Manager: Corporate Services
Purpose of the Report
The purpose of this report is to:
1. Set out the latest understanding of the short-term financial impacts of COVID-19 through to June 30, 2020.
2. Update Council on scenarios for the 2020-21 annual plan and any government actions or other strategic responses that influence those scenarios and financials.
3. Identify and regularly monitor key areas of financial risk and proposed mitigation over the next few months.
This report will form the basis of regular updates to this committee on the financial situation as a result of COVID-19 and any other significant funding and financing outcomes.
That the Finance, Audit and Risk Committee: (a) Receives Report COVID-19 Financial Update (b) Recognises the need to significantly recast capital and operational expenditure budgets in the absence of financial support prior to the end of May 2020. (c) Recognises the need to reconsult with the community based on any significant changes to the annual plan due to financial support being provided by government or in the absence of such support.
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Executive Summary
Financial impacts for the 2019-20 year
4. COVID-19 has had a significant and immediate impact on the final quarter of the 2019-20. Key points are as follows:
a. Council has already collected 98% of its rates requirement for the year, so the year-end result for rates and debt is expected to be close to budget
b. The short-term impact of COVID-19, as a result of the lockdown and expected move to Alert Level 3, has been a significant loss of user fee revenue for the last three months of the year of $10m (including Bay Venues Limited (BVL))
c. Delayed delivery of our capital programme for 2019-20 of $30-$50m unspent budget. This capital expenditure is expected to be undertaken in 2020-21
d. The lower expenditure on capital more than offsets lower revenue, including operating and capital revenue, so the net debt at year end is expected to be $525m which is less that the $544m budgeted in the annual plan
e. Our forecast debt to revenue ratio at 30 June is 211% (199% including BVL).
For the 2020-21 Annual Plan Year
5. There are a number of financial considerations that will form part of the annual plan process:
a. A range of COVID-19 based scenarios along with expectations of economic recession will need to inform the 2020-21 annual plan with the final budget based around an agreed set of assumptions that inform the most likely scenario.
b. Initial high-level estimates of the impact of COVID-19 for the 2020-21 year were undertaken in the first week of April. These estimates were based on assumptions of border closure and significant operating constraints on businesses. This led to estimates of revenue shortfall of $40-$77m below budget for the group, (including BVL). Impacted revenue includes both operating revenue (rates and user fees) and asset revenues (capital subsidies and development contributions).
c. The rates reduction assumed ranged from a figure close to the 2020-21 total revenue adjusted for growth through to the 7.6% level already in the draft.
d. Work is being undertaken over the next few weeks to refine expectations of service delivery under various Alert Levels, which will provide a better indication of expected revenue and costs for various activities over the next year.
e. In the light of reduced revenue, Council would need to reduce both operational and capital expenditure to remain financially sound and compliant with borrowing covenants.
f. Council is talking with Government about funding support for capital investment to bridge the revenue gap and ensure that the planned level of capital investment can be maintained along with additional expenditure that could further stimulate the economy.
g. Without Government funding, the extent of revenue loss estimated would reduce the capital investment proposed in the annual plan from $244m to $40-$120m, while also increasing the council’s debt to revenue ratio toward its limit of 250%.
h. Further work will be undertaken during May to update annual plan budgets to reflect the changes to services, capital prioritisation and Government funding support.
Financial Risk
6. There are a number of areas of uncertainty, business and economic trends which increase the financial risk of council’s business over the next 12 to 18 months. These risks will continue to be monitored and assumptions updated as we move though the annual plan process and the year ahead. Council will need to agree amended assumptions for the annual plan as the revised budgets are developed.
7. Key areas of uncertainty and risk revolve around:
a. Planning scenarios related to alert levels and business operations
b. The impact on revenue and opportunities to reduce expenditure in the short term
c. Increasing costs of delivering capital projects and prioritisation of available capital funding
d. Council ability to debt fund revenue shortfalls or unexpected events.
e. The ongoing impact of cutting rates revenue in the short term on Council’s long-term financial sustainability and ability to fund the ongoing capital programme.
f. Economic recession – its extent and duration and the impact on the city, council services and residents’ ability to pay for council services.
g. Ability of LGFA to raise finance over time to meet the demands of councils and in the light of government stimulus packages.
h. Possible credit rating downgrade due to a deteriorating financial position.
Risk Management
8. Staff are working on a detailed COVID-19 risk register. This is built around areas of social, economic, and built and natural environment. This will be available for the next FARC committee meeting in a fortnight.
Background
Overall Change in Financials resulting from COVID-19
9. Prior to COVID-19, council had already identified, and begun to address through the draft annual plan, the worsening financial position as a result of:
a. ongoing demands for new infrastructure to manage growth
b. the increasing costs of that infrastructure,
c. the cost of unplanned liability for weathertight building issues, and
d. lower revenue including rates increases and user fee revenue than was budgeted in the LTP.
10. Covid-19 response, including the closing of borders, the associated lockdown, and ongoing Alert Level constraints on economic activity has led to a significant worsening of our financial position, both for the remainder of 2019/20, but more significantly into next financial year. Council’s initial response in the draft annual plan was to reduce the proposed average rates increase from 12.6%, (which included 5% for debt retirement) to 7.6%. The proposed capital programme budget remained at $244m.
11. Subsequently high-level modelling by the finance team was undertaken to ascertain the likely impacts on TCC business next year from the business and wider economic impacts of COVID-19 and associated Alert level responses. The results showed potential revenue loss of $40-$77m resulting in a reduced level of affordable capital investment of $40-$120m.
2019-20 Financials
12. Council’s primary source of operating revenue is rates. Because Tauranga City Council (TCC) operates a two-instalment rates collection process – in August and February- most of the rates due for the year was collected by the end of February (98% collection to date) prior to the impact of COVID-19. This rates revenue enables council to continue to run its operations for the remainder of the year without generating a significant rates deficit outside of some specific activities. We note that the councils who provided rates postponement in the 2020 year were those that operated 4 (or more) instalments.
13. The two main impacts on the financial results through to year end in June 2020 relate to other revenue including user fees, development contributions and government subsidy.
14. Operating revenue for 2019-20 for the group (including BVL) is forecast to be $15m lower than budget - $10m of this is due to COVID-19. Business areas significantly affected by revenue loss include BVL, parking, property management and the airport.
15. Asset revenue which supports the capital expenditure programme is forecast to be $13m lower, however, this is expected to be a timing difference.
16. For the remainder of this financial year, Council has taken a number of actions to respond to the impact on our community of COVID-19 including rent relief, consideration of remitting rates penalties on a case by case basis and establishment of a fund for user fees and charges relief. In total this package of measures is estimated to cost up to $900,000, with $135,000 rates funded in the 2019-20 year. In total these initiatives are reflected in lower revenue estimates totalling $800,000 this financial year. These impacts are included in the 2019-20 revenue forecasts.
17. Operating expenditure largely continues as budgeted, with many of council’s services identified as essential. Delays in some activities during lockdown are expected to be offset by busy workload once services such as building services inspections and plant and asset maintenance come back into operation. Other council services that are expected to remain temporarily closed for a period after lockdown include community services such as the library, Baycourt and BVL facilities. While in the short term some of the operational costs of these activities may be reduced, many of the costs are likely to remain. Therefore, the rates collected to fund these activities are expected to continue to be required, and some increase in loan is expected in user fee funded activities to meet costs through to 30 June 2020.
18. The BVL Board is considering service delivery options and associated financing as part of finalising their Statement of Intent for 2020-21.
19. Cash expenditure on capital is lower as a result of the lockdown when most sites have remained closed. However, this is a timing difference only, so the expenditure will occur during 2020-21. Furthermore, the contract costs associated with delays in current projects, and potentially higher costs of delivery under Alert Level 3, mean that over time capital expenditure is expected to be higher to deliver the proposed programmes of work.
20. Because the slow-down in capital expenditure more than offsets the revenue loss, the net debt position for council at year end is expected to be $525m, which is lower than the level budgeted of $544m.
21. There is currently no difficulty in maintaining liquidity. LGFA, from whom we source our new borrowings has successfully completed a syndicated borrowing of $1 billion. The Crown has extended their support to LGFA in the capital market by extending liquidity support on LGFA Bonds to provide confidence to investors and rating agencies.
2020-21 Annual Plan Financials
22. As was outlined to Council in late-2019 and through Annual Plan discussions in early 2020, Council’s financial situation entering the COVID-19 crisis was challenging. This was a direct result of carrying significant levels of debt to fund essential growth infrastructure. The impact of COVID-19 has made that financial situation significantly worse.
23. Initial high-level modelling of revenue in early April indicated that the ongoing effects of the COVID-19 pandemic are likely to have a severe impact on revenue, and because of our high debt levels directly impacts Council’s ability to fund proposed infrastructure investment projects.
24. The initial modelling indicated potential revenue loss between $40 million and $77 million below that budgeted in the draft Annual Plan. This revenue included both operational and capital revenue. The reduction in revenue directly affects ability to borrow to fund capital investment leading to a reduction in the affordable capital programme for 2020-21 from the $244m budgeted to between $40 -$120m.
25. The changes in revenue and its relationship to our debt to revenue ratio and the value of capital investment that can be undertaken is shown graphically in Attachment 1. Three different revenue scenarios are included showing the value of the capital programme and debt to revenue ratio under each scenario. The basis of the existing draft annual plan as currently being consulted is scenario one. While low and high revenue reduction assumptions are represented in scenarios 2 and 3. These graphs are at a high level. They assume that lower operating revenue is offset by lower operating expenditure. Where expenditure reductions can’t be achieved debt levels will be higher.
26. The impact of COVID-19 is expected to have a significant and ongoing impact on Council’s ability to deliver its planned capital programme, even before considering the Government’s desire to increase economic stimulus by bringing projects forward. This is due to the impact of reduced revenue on Council’s debt/ equity borrowing limits. This has been externally recognised through a central Government paper. Attachment 2 of this document is a key summary of their findings.
27. Key assumptions for the initial modelling included ongoing border closure, restriction on social activity and general economic recession. Revenue impacts were therefore most severe in airport, recreational and parking activities. Capital revenue was assumed to also be disrupted with capital subsidies affected by delays in capital delivery, and a slow-down in development contributions.
28. Council has agreed to conduct further work on planning scenarios relating to future disruption assumptions. These will inform the development of scenarios for next year’s economic and business conditions which can then inform revised annual plan budgets.
29. As the impact of COVID19 on New Zealand and the world becomes clearer over the coming weeks Council will be considering appropriate amendments to the 2020-21 annual plan. A range of potential scenarios and their budget implications will be considered and refined.
30. Experience from the Global Financial Crisis which impacted council for several years from 2008 was that it is important to continue to plan for growth even when immediate demand is reduced due to recessionary impacts. This ensures Council is in a position to respond as economic conditions improve. Council also has a role in supporting Government economic stimulus through its capital investment and operational expenditure. Initiatives to support the community including relief from rates or user fees should be appropriately targeted to ensure council maintains necessary revenue and remains within required debt levels.
31. To respond to the business conditions of various scenarios we will look at:
(a) both revenue and expenditure settings across essential and non-essential services,
(b) priority for capital expenditure,
(c) potential of government funding support to bridge the revenue gap and achieve stimulatory infrastructure investment (the outcome of this may lead to the need to reconsult on our existing 2020-21 Annual Plan), and
(d) in the event support is provided, a high-level analysis of the potential future costs flowing from such investment.
Financial Risks and Risk Management
32. There are a number of areas of uncertainty and business and economic trends which increase the financial risk of council’s business over the next 12 to 18 months. These risks will continue to be monitored and assumptions updated as we move though the annual plan process and the year ahead. Council will need to agree amended assumptions for the annual plan as the revised budgets are developed.
33. The identified financial risks are as follows:
a. Uncertainty around the appropriate planning scenarios which reflect expectations of how COVID-19 continues to affect our community and alert level requirements.
b. Uncertainty around revenue including rates, user fees and asset revenue.
c. Constraints on and implications of reducing costs in the short term in response to revenue shortfalls, while enabling council to assist with economic recovery through investment and to cost effectively restore level of service across its activities once alert levels are lifted.
d. Increasing costs of delivering capital projects including:
i. additional costs of alert level requirements, in particular health and safety standards,
ii. financially challenged construction sector,
iii. contractual considerations including project risk and where it falls and
iv. the pricing and delivery impacts of a large government stimulus package across New Zealand.
e. Council ability to debt fund revenue shortfalls or unexpected events.
f. Economic recession – its extent and duration and the impact on the city, council services and residents’ ability to pay for council services.
g. Ability of LGFA to raise finance over time to meet the demands of councils and in the light of government stimulus packages.
h. In the event Council breached LGFA borrowing covenants, in particular the debt to revenue ratio of 250%, this would trigger Council to refinance all debt funded by LGFA. Re-financing in the current market would be very challenging and likely to be at a significantly higher cost.
i. Possible credit rating downgrade due to a deteriorating financial position.
j. The ongoing impact of cutting rates revenue in the short term on Council’s long-term financial sustainability and ability to fund the ongoing capital programme.
34. Staff are continuing to work on a detailed COVID-19 risk register. This is built around the areas of social, economic, natural and built environments. At present this is a detailed list of risks. In line with previous conversations around risk governance, staff will now refine this detailed register to allow councillors to focus on the key risks from a governance perspective. This will be available for the next FARC committee meeting in a fortnight
Strategic / Statutory Context
35. COVID-19 represents a significant challenge to the financial sustainability and effectiveness of Council. Regular update of financial situation and risks enables Council to be informed and to take these matters into account in its key decision making, particularly in relation to the annual plan.
Options Analysis
36. There are no options associated with this report. The report is provided as information only.
Significance
37. Under the Significance and Engagement Policy 2014, the decision to receive this report is of low significance.
Next Steps
38. This report is intended to regularly update the FARC committee on Council’s financials and risks. This information will also feed into the work on the annual plan 2020-21 that is ongoing. More complete information on performance to date and forecasts to year end by activity will be covered through the Quarterly Monitoring report to be presented to FARC on 12 May.
1. Graphical Analysis of
Revenue Scenarios and Capital Programme - A11406957 ⇩
2. Local Government Sector
COVID-19 Financial Implications Summary Report - A11406606 ⇩