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.
- Confirmation of committee minutes.
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
|
|
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.
7 Business
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.
|
Recommendations
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.
|
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.
Attachments
1. Graphical Analysis of
Revenue Scenarios and Capital Programme - A11406957 ⇩ 
2. Local Government Sector
COVID-19 Financial Implications Summary Report - A11406606 ⇩
