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Ordinary Council meeting Agenda
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19 August 2024
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11 Business
11.1 Briefing
to Incoming Council - Update
File
Number: A16210521
Author: Jeremy
Boase, Manager: Strategy & Corporate Planning
Authoriser: Christine
Jones, General Manager: Strategy, Growth & Governance
Please
note that this report contains confidential attachments.
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Public Excluded Attachment
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Reason why Public Excluded
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Item 11.1 - Briefing to
Incoming Council - Update - Attachment 1 - Attachment 1 - Project Funding
Updates Council Report 11 July 2024
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s7(2)(h) - The
withholding of the information is necessary to enable Council to carry out,
without prejudice or disadvantage, commercial activities.
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Item 11.1 - Briefing to
Incoming Council - Update - Attachment 2 - Attachment 2 - Council Resolutions
11 July 2024
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s7(2)(h) - The
withholding of the information is necessary to enable Council to carry out,
without prejudice or disadvantage, commercial activities.
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Purpose of the Report
1. To provide an update to
the Briefing to Incoming Council adopted by the previous Council, and to advise
Council as to the action plan to address matters identified in that update.
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Recommendations
That the Council:
(a) Receives the report "Briefing
to Incoming Council - Update".
(b) Formally receives the
“Briefing to Incoming Council” prepared and adopted by the
previous Council.
(c) Transfers Attachments 1 and 2
into the open with immediate effect.
(d) Notes the Action Plan to
continue to seek endorsement of a business case and ultimately secure funding
for Cameron Road Stage 2, (as outlined in paragraph 16 of the ‘Briefing
to Incoming Council – Update’ report).
(e) Attachment 1 can be
transferred into the open when approved by Council resolution (refer (c)
above).
(f) Attachment 2 can
be transferred into the open when approved by Council resolution (refer (c)
above).
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Background
Briefing
to Incoming Council
2. On 10 June 2024,
Council formally approved a document prepared by the commissioners titled
‘Briefing to Incoming Council’. That document was
subsequently posted on the Election 2024 page of Council’s website where
it is still available: brief-incoming-council-2024.pdf.
It was also referenced in an email from the Electoral Officer to all candidates
on 17 June 2024.
3. The Commissioners
prepared the Briefing to Incoming Council to share with the incoming Council
their thoughts on the strategic direction and priorities for the city, and the
challenges and opportunities that Council faces. Council is invited to
formally receive that document.
Matters occurring
since
4. Since the Briefing
to Incoming Council was written, adopted and published, two matters beyond
Council’s control have occurred that have a significant impact on
elements of that document. One of these matters relates to the financing
of the Te Manawataki o Te Papa (the heartbeat of Te Papa) project which is
covered in a separate report on this agenda. The other matter of
significance relates to funding from New Zealand Transport Agency (NZTA).
5. In response to those
matters, the outgoing Council received a confidential report on 11 July 2024
setting out the matters that arose and the potential impacts on Council.
That report also outlined an action plan developed by staff to respond to those
matters. A copy of that report and its three attachments is included as confidential
Attachment 1 to this report.
6. Having considered
the report, Council passed several resolutions. These included endorsing
the action plan prepared by staff and the preparation of an addendum to the
Briefing to be reported to the incoming Council (this report). The
adopted resolutions are included as confidential Attachment 2 to
this report.
Revoking
confidentiality
7. The 11 July 2024
report was received in confidential, and the Council resolved to retain it in
confidential. At that time, the reasons for this were to enable ongoing
discussions and negotiations to continue with commercial partners (Crown
Infrastructure Partners and LT McGuiness) and external parties (NZTA and
government Ministers) before the issues became public.
8. Those discussions
and negotiations have now reached a stage on both topics such that ongoing
confidentiality is no longer appropriate. As such, recommended resolution
(c) above recommends that the 11 July report 2024 report and its attachments,
together with the minutes of that part of the meeting, be released from
confidential into the open.
Action
taken
9. With regard to the
Council-endorsed action plan, progress against the various elements of the
action plan is included as Attachment 3 to this report.
10. As part of the response to the
Council-endorsed action plan, letters have been written to the Chair and Chief
Executive of NZTA (Attachment 4) and to Ministers Bishop, Brown and
Willis (Attachment 5).
11. A response from NZTA is
included as Attachment 6 to this report.
12. Council sought further
information through an Official Information Request to access the minutes of
the NZTA Value, Scope and Outcomes Committee which considered the Cameron Road
Stage 2 (CRS2) business case and made a recommendation to go through to the
NZTA Board. These minutes are included in Attachment 7.
13. A further letter has been
received from NZTA advising of the indicative funding allocations in advance of
the finalisation of the National Land Transport Programme (NTLP) this month (Attachment
8).
14. Informal conversations have
been held with NZTA to more fully understand the Board decision and to explore
possible pathways forward.
Action Plan –
Phase 2
15. Following the execution of the
majority of the action plan endorsed by the outgoing Council on 11 July 2024, a
phase 2 action plan has been developed.
16. The Action Plan – Phase 2
includes:
· Exploring
the opportunity to progress with urban accessibility (including active modes)
aspects of the project through retaining future proofed flexibility within the
design and reconfiguration of the funding stack.
· Developing
a revised CRS2 business case which more strongly aligns with GPS 2024
· Analysis
of the individual components of the project to understand the Benefit/Cost
ratio of each, and ensuring that the business case funding request has
components which individually and collectively exceed 1.
Statutory Context
17. See the report to Council on 11
July 2024 (confidential Attachment 1) for full details of the strategic
context relating to the matters included in that report.
STRATEGIC ALIGNMENT
18. These matters covered in the 11
July 2024 report contribute to the promotion or achievement of the following
strategic community outcome(s):
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Contributes
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We are an inclusive city
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ü
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We value, protect and enhance the environment
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ü
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We are a well-planned city
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ü
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We can move around our city easily
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ü
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We are a city that supports business and education
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ü
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19. The recommendation in this
report to endorse the action plan supports ensuring better outcomes for the
city under each of the strategic community outcomes listed above.
Options Analysis
20. This report is largely for
information purposes. Other than the recommendation to release a previous
report into the open section of the meeting there are no substantive decisions
sought. As such, no options analysis is necessary.
21. There is, though, a
recommendation to simply ‘note’ the action plan endorsed by the
previous Council. For the matter relating to Te Manawataki o Te Papa
financing, a separate report is on this agenda to further consider that
matter. For the transport funding matter, work will continue in
accordance with the Action Plan – Phase 2 as per paragraph 16
above.
Financial Considerations
22. High-level fiscal implications
of the matters under consideration are addressed in the 11 July 2024 report to
Council (confidential Attachment 1).
Legal Implications / Risks
23. Legal and risk implications of
the matters under consideration are addressed in the 11 July 2024 report to
Council (confidential Attachment 1).
TE AO MĀORI APPROACH
24. The elements of Council’s
business that are covered in the 11 July 2024 report have a strong focus on
tangata whenua recognition and values. In particular, the Te Manawataki o
Te Papa project, and the land it occupies, has very strong importance to
tangata whenua. A partnership approach has been taken to land ownership,
and the precinct was co-designed with tangata whenua. The museum,
exhibition space, and civic whare have particular resonance to tangata
whenua.
25. The action plan to address the
matters that have arisen since the Briefing to Incoming Council was adopted
does not have a specific Māori or tangata whenua perspective.
CLIMATE IMPACT
26. The matters covered in the 11
July 2024 report that remain confidential include elements that have a positive
climate mitigation aspect, particularly with respect to increasing use of
public and personal transportation. However, the action plan to
address the matters that have arisen since the Briefing to Incoming Council was
adopted does not have a specific climate impact.
Significance
27. The Local Government Act 2002
requires an assessment of the significance of matters, issues, proposals and
decisions in this report against Council’s Significance and Engagement
Policy. Council acknowledges that in some instances a matter, issue, proposal
or decision may have a high degree of importance to individuals, groups, or
agencies affected by the report.
28. In making this assessment,
consideration has been given to the likely impact, and likely consequences for:
(a) the current
and future social, economic, environmental, or cultural well-being of the
district or region
(b) any persons who are likely to be
particularly affected by, or interested in, the matter.
(c) the capacity of the local authority
to perform its role, and the financial and other costs of doing so.
29. In accordance with the
considerations above, criteria and thresholds in the policy, it is considered
that the matter is of high significance. However, the decision is of low
significance as the decision relates to receiving an update on a
previously-resolved action plan in order to understand the matter more fully to
enable an informed decision to be made at a later date or under a separate
report.
ENGAGEMENT
30. Taking into consideration the
above assessment, that the decision is of low significance, and that there will
be future decisions to be made by Council, officers are of the opinion that no
further engagement is required prior to Council making a decision as per the
recommendations of this report.
Next Steps
31. Subject to Council’s
decision, work will continue as per the Action Plan – Phase 2 and will be
reported back to Council in due course.
Attachments
1. Attachment
1 - Project Funding Updates Council Report 11 July 2024 - A16211201 - Public
Excluded
2. Attachment
2 - Council Resolutions 11 July 2024 - A16217798 - Public Excluded
3. Attachment
3 - Action Plan and Progress - A16213690 ⇩ 
4. Attachment
4 - 2024 07 16 Letter to NZTA Chair Bridges re project of local significance
urban transformation - A16328226 ⇩
5. Attachment
5 - 2024 07 16 Letter to Ministers update IFF and CRS2 - A16328198 ⇩
6. Attachment
6 - Response from NZTA to Marty Grenfell Dated 20 July 2024 - A16247096 ⇩
7. Attachment
7 - Extract Minutes from NZTA Value, Outcome and Scope Committee 18 April 2024
- A16265386 ⇩
8. Attachment 8 -
Letter NZTA to TCC re: Indicative Funding Allocation - A16264466 ⇩
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Ordinary
Council meeting Agenda
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19
August 2024
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11.2 Te Manawataki o Te
Papa Infrastructure Funding and Financial (IFF) Resubmission and Library /
Community Hub Contract
File
Number: A16315533
Author: Christine
Jones, General Manager: Strategy, Growth & Governance
Paul Davidson, Chief
Financial Officer
Authoriser: Marty
Grenfell, Chief Executive
Please
note that this report contains confidential attachments.
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Public Excluded Attachment
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Reason why Public Excluded
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Item 11.2 - Te
Manawataki o Te Papa Infrastructure Funding and Financial (IFF) Resubmission
and Library / Community Hub Contract - Attachment 4 - Confidential C1 Twenty
Two (David Lambie) advice re Contract Delayed Consequences
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s7(2)(h) - The
withholding of the information is necessary to enable Council to carry out,
without prejudice or disadvantage, commercial activities.
s7(2)(i) - The
withholding of the information is necessary to enable Council to carry on,
without prejudice or disadvantage, negotiations (including commercial and
industrial negotiations).
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Purpose of the Report
1. To decide whether Council
continues with the proposed use of the Infrastructure Funding and Financing
(IFF) Act to raise a levy to part-fund the Te Manawataki o Te Papa project.
2. To authorise (or
otherwise) the Chief Executive to enter into the main construction contract for
the Library and Community Hub element of Te Manawataki o Te Papa.
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Recommendations
That the Council:
(a) Receives the report "Te Manawataki
o Te Papa Infrastructure Funding and Financial (IFF) Resubmission and Library
/ Community Hub Contract".
Te
Manawataki o Te Papa Infrastructure Funding and Financing (IFF) Levy
(a) Confirms that Council will
not continue to use an IFF Levy as a financing and funding tool for Te
Manawataki o Te Papa at this time.
(b) Proceeds to secure approval
through Local Government Funding Agency for increased debt covenants for
Tauranga City Council.
(c) Notes
that in the absence of an approval for an increase in debt covenants by 30
November 2024 Council will receive a further report on potential financing
and funding options within the borrowing limits that are current at that
time.
(d) Notes that the IFF levy which
was planned to be introduced on 1 July 2025 will no longer occur.
(e) Approves additional borrowing
of $54 million, being the amount that was budgeted to be drawn down through
the IFF levy and a revision of cash flows in the 2024/25 year, increasing the
total borrowing programme for 2024/25 to $445m and increasing gross debt to
$1.53 billion from the previously approved amount of $1.47 billion.
(f) Approves a 2024/25
operational budget overspend of up to $1.54 million being the amount of
funding required to service additional debt borrowing based on the estimated
cash flow.
(g) Notes
this overspend will be managed through other operational savings, however in
the absence of these being fully achieved, any resulting rating deficit will
be debt funded.
(h) Confirms there will be
sufficient funds available to fund the capital costs of TMoTP, noting that
the Council has the option to achieve this by:
(i) Introduction
of a rate (targeted or otherwise) commencing from 1 July 2025; and/or
(ii) Reprioritisation
(including changes in scale and timing) of the capital programme from 1 July
2025 onwards.
Construction
contract
(i) Authorises the Chief
Executive to enter the main construction contract with LT McGuiness Ltd for
the Library and Community Hub.
(j) Notes that the next
Civic Whare, Exhibition and Museum (CWEM) contract will be presented to
council towards the end of 2024, for consideration and approval or otherwise.
Other
(k) Retains Attachment 4 in the
public excluded section to enable Council to carry on, without prejudice or disadvantage,
negotiations (including commercial and industrial negotiations).
(a) Attachment 4 can be
transferred into the open on completion of the contract.
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Executive Summary
3. Tauranga City
Council has previously consulted on and approved utilising an Infrastructure
Funding and Financing Levy to part fund the Te Manawataki o Te Papa
project. The process to put the levy in place subsequently progressed
including seeking Ministerial approval as required by legislation.
4. The Minister of
Housing wrote to Council in late June 2024 advising that he had “decided
not to recommend establishing a levy order under section 27 of the IFF Act at
this time’. The Minister noted that the incoming Council could
resubmit the request for an IFF Levy.
5. On 8 August 2024 the
Minister for Local Government announced initiatives impacting on the Local
Government Funding Agency (LGFA). These changes will enable borrowing by
Water Council Controlled Organisations (CCO’s) at a ratio of 500% debt to
revenue and provide the potential for some local authorities to increase
borrowing limits up to 350% where needed.
6. A decision is sought
from Council as to whether to continue to progress an IFF levy for Te
Manawakati o Te Papa, or to pursue alternative financing and funding arrangements.
7. Given the recently
announced opportunity for increased borrowing through LGFA by both local
authorities and Water CCO’s, it is recommended that this pathway be
pursued as it is likely to offer a lower net cost of borrowing for the community.
8. A decision is also
sought as to whether Council enters the main construction contract with LT
McGuiness Ltd for the Library and Community Hub. If Council resolves to
progress a pathway which will deliver sufficient funding and financing, it is
recommended that the contract be entered into.
Background
Infrastructure
Funding and Financing (“IFF”) Act 2020
9. The IFF Act 2020 was
enacted to “provide a funding and financing model for the provision of
infrastructure for 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” (s3, IFF Act 2020).
10. Briefly, the IFF approach
enables a third-party entity to finance or part-finance Council infrastructure
and to recover that investment over time via a levy on property
owners. Council would own and operate the infrastructure paid for
through the IFF levy, but the cost of that investment wouldn’t impact on
Council’s balance sheet (or affect its debt-to-revenue ratio).
11. The impact of Council not
financing this debt through the use of the IFF are shown in Figure 1
below. It effectively means that Council would exceed its current debt to
revenue limitations based on the current LGFA limits. A revised ratio is
shown on the graph below which would be the maximum amount of a covenant
increase as discussed later in this report.
Figure 1: Impact of not using IFF funding on
Council’s borrowing position.
12. Tauranga City Council was the
first local authority in the country to take advantage of the opportunity
provided by the IFF Act 2020, establishing financing and funding (via a
property owner levy commencing 1 July 2024) for a portfolio of transport
projects.
13. The Te Manawataki o Te Papa IFF
would be Tauranga City Council’s second project funded through IFF (and
the third project across New Zealand).
Te
Manawataki o Te Papa and the IFF Act 2020
14. In May 2022, after a
public consultation process, Council approved an amendment to the Long-term
Plan 2021-2031 to include the Te Manawataki o Te Papa project[1]. At that time the
ratepayer-funded portion of the total project costs were formally capped at
$151.5 million[2].
15. In July 2023[3] Council considered a
suite of reports on the Te Manawataki o Te Papa project. One of those
reports outlined that staff had commenced discussions with Crown Investment
Partners (who manage the IFF process on behalf of the Crown) to determine
whether the rate-funded portion of Te Manawataki o Te Papa could be funded via
an IFF levy on property owners.
16. In September 2023[4]
Council considered further work done on the IFF proposal by staff and
consultants and with Crown Investment Partners. Council approved
continuing work on the IFF proposal and for formal community consultation on
the IFF proposal to take place. That consultation occurred between 14
September and 6 October 2023.
17. Council received 301
submissions on the proposal. Of these, 63% supported the option of using
an IFF approach, 28% preferred the option of using rates-funded loans, and 9%
did not express a preference between the options. Five of the submitters
also presented a verbal submission to Council in October 2023[5].
18. In November 2023[6]
Council considered the results of the community consultation together with
further work undertaken on the proposed use of the IFF Act 2020 process.
Council approved further work on the IFF proposal including the Chief Financial
Officer working with Crown Investment Partners and relevant government
ministries. That work was to be reported back to a future Council meeting
before a final decision about whether to proceed with an IFF agreement and levy
could be taken.
19. In December 2023[7] the
Chief Financial Officer reported back to Council in public excluded
session. Council approved continuing work and delegated authority to the
Chief Financial Officer to finalise and submit a Levy Proposal to the Ministry
of Housing and Urban Development. At the same time, Council noted that
Crown Infrastructure Partners would launch a financing process in January and
February. Despite the above actions, Council resolved that a final
decision would not be made until February 2024 when further information on the
expected costs of the proposal would be available.
20. In February 2024[8] the
Chief Financial Officer presented a comprehensive report back to Council in
public excluded session. Council confirmed its intention to submit a Levy
Proposal to the Ministry subject to the final levy to property owners not
exceeding stated limits (Crown Investment Partners had not completed its
financing round at this stage so final levy values were not available).
Council also re-delegated responsibility to the Chief Financial Officer to
submit the Levy Proposal and also to finalise the Infrastructure Funding,
Financing and Administration Agreement with the Crown Investment Partners
subsidiary that was responsible for raising the financing.
21. Shortly after the February 2024
meeting, the Levy Proposal was submitted to the Ministry. At that time,
financial close was anticipated to be before the end of June 2024.
22. In May 2024[9] Council considered a
further report on Te Manawataki o Te Papa funding, including the IFF proposal.
Subject to Ministerial approval of the Levy Proposal, Council confirmed that
the levy would commence on 1 July 2025 and that the maximum amounts for the
median residential levy would be $128 (including GST) and for the median
commercial levy would be $464 (including GST) for the 2025/26 financial
year. The final actual levy would be determined at the conclusion of the
financing process being run by Crown Investment Partners.
23. Each of the reports referred to
in paragraphs 14 to 22 have been made available to elected members prior to
this meeting[10].
24. On the 8th of
August the Minister of Local Government announced changes to the LGFA
borrowing programme allowing lending to water council-controlled organisations
and the potential to increase borrowing covenants for high growth councils.
Ministerial
decision
25. On 26 June 2024, the Minister
of Housing wrote to Council to state that he considers ‘it important
that the incoming council has their say on the levy proposal for Te Manawataki
o Te Papa’ and that he had ‘decided not to recommend
establishing a levy order under section 27 of the IFF Act at this time’.
He further stated:
· ‘I
must emphasise that this is not to do with the quality of the proposal nor the
merits of the project itself. In fact, I am glad you brought this project
to my attention – I understand it will be a key driver in encouraging
more people to live, work, and play in the Tauranga city centre’ and
· ‘If
the new council would like to resubmit the same or similar levy proposal for Te
Manawataki o Te Papa, I would be very happy to consider it.’
26. The full letter from the
Minister is included as part of Attachment 1 to the ‘Briefing to Incoming
Council – Update’ report elsewhere on this meeting’s agenda.
Council’s
response to the Ministerial decision
27. On 3
July 2024, the Chief Executive wrote to Minister Bishop, acknowledging receipt
of the Minister’s letter and advising that a decision would be sought
from the incoming Council. A copy of that letter is also included as part
of Attachment 1 to another report (‘Briefing to Incoming Council –
Update’) elsewhere on this meeting’s agenda.
28. Legal advice was also sought
and received regarding ‘next steps’ particularly given the
proximity of the election and Council’s imminent change of
governance.
29. On 11 July 2024, Council
received a report titled ‘Project Funding Updates’ that addressed,
among other things, the Minister’s letter. That report is
re-published elsewhere on this meeting’s agenda.
30. The 11 July report included an
action plan for responding to the Minister’s letter. Briefly, it
was:
· work
with Crown Infrastructure Partners to create a brief for an independent
consultant.
· engage
an independent consultant.
· receive
a report from the independent consultant providing advice to the incoming
council.
31. The independent consultant
appointed was Kevin Jenkins, co-founder of MartinJenkins an experienced
financial, economic and public policy consulting firm based in Wellington and
Auckland. A brief biography of Mr Jenkins is available on the
MartinJenkins website: https://www.martinjenkins.co.nz/about-us/board/kevin-jenkins/.
32. Mr Jenkins’ independent
report has now been received and is included as Attachment 1 (to this
report. It is important to note that Mr Jenkins undertook and concluded
his work prior to the government announcement on local government financing (as
per paragraphs 39 to 42 of this report).
Consequential
implications – contract approval
33. In July 2023, as part of a
suite of reports related to Te Manawataki o Te Papa, Council considered a
‘Design and Cost Update’ report. At that time, Council
resolved as follows:
Delegates to the Chief Executive authority to enter
contracts on behalf of Council for the delivery of the Te Manawataki o Te Papa
(Site A) programme of works as further outlined within the Te Manawataki o Te
Papa Design and Cost Update Report – July 2023 (attachment 1), subject
to:
(i) Endorsement by the Te
Manawataki o Te Papa Board (Ltd.); and
(ii) Sufficient funds
being available in accordance with the Te Manawataki o Te Papa Financial
Strategy Report resolutions approved by Council at this 24 July 2023 meeting;
and
(iii) Condition
of commercial sensitivity.
34. Under this delegation,
contracts were entered into, and initial work on projects including the Library
and Community Hub commenced. The delegation remains in place.
35. The main Library and Community
Hub construction contract with LT McGuiness, valued at approximately $71
million ($23 million of which has already been contractually committed to under
preliminary arrangements) is now ready to be signed. The contract is
under the budgeted value for this part of the work and includes a 10%
contingency.
36. After the 11 July 2024 Council
meeting, the Chief Executive sought legal advice on the impact of the
Minister’s decision on the IFF levy proposal on the delegation noted
above. In particular, whether the Minister’s decision affects the “subject
to … sufficient funds being available” element of the
delegation.
37. The resultant legal advice is
included as Attachment 4 to this report.
38. As
a result of the legal advice, the main construction contract for the Library
and Community Hub with LT McGuinness remains unsigned.
Government
Announcement on Local Government Debt
39. On 8 August 2024 the Minister
for Local Government announced initiatives impacting on the Local Government
Funding Agency (LGFA) specifically around lending to Water Council Controlled Organisations
(CCO’s) and the potential to increase borrowing limits for some councils
where needed.
40. The proposed changes include:
(a) LGFA will support leverage for
water organisations up to the level equivalent to 500 per cent of operating
revenues subject to water organisations meeting prudent credit criteria.
LGFA will treat borrowing by water organisations as separate from borrowing by
parent council.
(b) LGFA is also reviewing whether
it can prudently provide additional flexibility to councils to meet the future
challenges faced by the sector. This includes consideration of increasing
debt limits for high growth councils beyond the current ceiling of 285 per cent
of operating revenues. It has been indicated this would be up to a ceiling
of 350% based on LGFA board approval.
41. It should be noted that (b)
above requires the approval by majority of LGFA shareholders which is scheduled
for November. Board approval is also required and may require
additional scrutiny by the lender which has not been made clear at this point.
42. The impact of these proposed
changes is significant to Council. Most notably the debt projections in
figure one in paragraph 11 are well within the proposed changed debt covenants
if approved. Therefore, this would be the most economical form of
borrowing given the lower interest rates offered through the LGFA.
43. It should be noted that there
may be flow through implications to Councils credit rating undertaken by
Standard and Poors.
STRATEGIC ALIGNMENT
44. The Te Manawataki o Te Papa
project contributes to the promotion or achievement of the following strategic
community outcome(s):
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Contributes
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We are an
inclusive city
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ü
|
|
We value, protect
and enhance the environment
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☐
|
|
We are a
well-planned city
|
ü
|
|
We can move around
our city easily
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☐
|
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We are a city that
supports business and education
|
ü
|
45. This report focuses only on
part of the funding and financing methodology for the Te Manawataki o Te Papa
project. There are no significant direct community outcome implications
from the funding and financing options.
Options Analysis
46. There are two distinct issues
covered by this report and consequently two decisions to be made. These
are:
Issue 1 Whether
or not Council wishes to resubmit an IFF levy proposal for Te Manawataki o Te
Papa, and
Issue 2 Whether
or not Council wishes to enter into the main construction contract for the
Library and Community Hub.
47. The financial
considerations for the decisions are outlined in paragraphs 81 to 95 of this
report.
Option Analysis: Issue 1 -
IFF Levy
48. There are three main options
under this issue.
Option 1A –
Resubmit the existing IFF levy proposal
49. Under this option, Council
would simply confirm its support for the Levy Proposal submitted to the
Ministry in late February 2024.
50. The Minister has stated that he
would be ‘very happy’ to consider the resubmitted proposal.
51. The independent report by Kevin
Jenkins (see Attachment 1) recommends the use of the IFF Act and levy to
part-fund Te Manawataki o Te Papa. However, as noted above this work was
concluded prior to the government announcement on local authority debt (as per
paragraphs 39 to 42 above).
52. This option confirms and
continues the work that has been done to date on the IFF Levy proposal that was
consulted on with the community.
53. The advantages and
disadvantages of this option are outlined in Table 1 below.
Table
1: Advantages and Disadvantages of Option 1A
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Advantages
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Disadvantages
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· Option is able to be implemented immediately as this aligns with
work to date and has been consulted on with the community.
· Greater flexibility to fund future infrastructure projects than
would be possible without IFF funding.
· By retaining balance sheet capacity this lessens the risk that
future additional debt retirement rates charges will be required or delays or
removal of Council’s investment program.
· Enables the cost of infrastructure to be spread over the life of
the project enabling intergenerational equity.
· A competitive financing process is being undertaken by CIP to
ensure competitive rates for project financing.
· Providing certainty of project funding and commitment to complete
projects. This certainty is likely to be significant to external to council
funding agencies and private investors.
· Benefit for future funding negotiations by demonstrating, to the
Crown and the public, that council is making use of all reasonably available
funding sources.
· Ensures the amount of the levy is certain over the longer term.
· Council has systems and processes already set up for the TSP IFF
levy although these will need to be reviewed for this proposal.
· Refer also Kevin Jenkins report Attachment 1.
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· Higher cost of debt than Council would expect from LGFA while balance
sheet capacity remains.
· There is a risk that base rates could move significantly prior to
Financial Close of the IFF transaction resulting in an increase in the
required levy (or, should Council confirm, reduction in the IFF funding
provided). However, it is anticipated that levy amounts remain within,
or close to, the levels consulted on.
· There is a risk that finance costs may move lower after the swap
rate for this project financing is fixed, which is a feature of all fixed
rate borrowing.
· Rating agencies have confirmed that they will consider future levy
amounts in their assessments of council’s ability to implement future
rates increases. Rating agencies have noted that the levy amounts are
not material in their assessment at present including this levy. Also,
to note that previously rates have been included to fund this project.
This proposal replaces these rates with a levy.
· May lock in long term financing while other funding and financing
solutions that are subsequently offered to the sector may have greater merits
than this transaction.
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54. This option is not recommended.
Option 1B –
Amend the existing IFF Levy proposal and then re-submit
55. Under this option, Council
would amend the Levy Proposal in some way and then re-submit. Staff and
advisors would work with Council to determine the amendments required.
56. The Minister has stated that he
would be ‘very happy’ to consider a levy proposal for Te Manawataki
o Te Papa that is ‘similar’ to the levy proposal already submitted.
Depending on the extent of amendments sought by Council, the Minister’s
definition of ‘similar’ may be important to the success of an
amended levy proposal.
57. The advantages and
disadvantages of this option are outlined in Table 2 below.
Table
2: Advantages and Disadvantages of Option 1B
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Advantages
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Disadvantages
|
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· There may be a reduction in the funding costs if the IFF funding
is delayed.
· Greater flexibility to fund future infrastructure projects than
would be possible without IFF funding.
· By retaining balance sheet capacity this lessens the risk that
future additional debt retirement rates charges will be required or delays or
removal of Council’s investment program.
· Enables the cost of infrastructure to be spread over the life of
the project enabling intergenerational equity.
· A competitive financing process is being undertaken by CIP to
ensure competitive rates for project financing.
· Ensures the amount of the levy is certain over the longer term.
· Council has systems and processes already set up for the TSP IFF
levy although these will need to be reviewed for this proposal.
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· This option would most likely eventuate from a change in the
projects being delivered through Te Manawataki o Te Papa project.
Implications of this include:
o Changing
the benefit assessment and therefore putting at risk the ability to access
IFF funding at all
o Being
unable to sign up to the construction contract creating large sunk costs,
litigation risk and losing all momentum on the project
o Likely
to trigger a need to reconsult with the public
o Significant
loss of credibility for Council with the construction community (wider than
just the Te Manawataki o Te Papa project)
· Any significant change in the funding (even if not changing the
projects) would be likely to require a new consultation process to be
undertaken, significantly delaying the construction process already started.
· Existing financing offers from the market likely to expire due to
the time required to develop the revised proposal, complete the beneficiary
analysis and consult.
· Reputational risk with investors that fund the IFF project, caused
by the delay. This might have an impact on how many financiers continue
to engage in the market process and the interest rates they charge (risk
premium).
· Higher cost of debt than Council would expect from LGFA while
balance sheet capacity remains.
· Rating agencies have confirmed that they will consider future levy
amounts in their assessments of council’s ability to implement future
rates increases. Rating agencies have noted that the levy amounts are
not material in their assessment at present including this levy. Also,
to note that previously rates have been included to fund this project.
This proposal replaces these rates with a levy.
· May lock in long term financing while other funding and financing
solutions that are subsequently offered to the sector which may have greater
merits than this transaction.
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58. This option will take
additional time to implement as an amended levy proposal is prepared and then
subsequently reviewed by Crown Investment Partners and the Ministry of Housing
and Urban Development.
59. This option is not recommended.
Option 1C – Do not proceed with the IFF Levy
proposal at this time, pursue LGFA borrowing and proceed with the project
60. Under this option, Council
would:
· Not
continue with the IFF levy proposal at this time; and
· Pursue
LGFA borrowing to fund TMoTP.
61. Given the requirement for LGFA
shareholder approval for the changes to LGFA covenants if these are not
forthcoming in November 2023 then the option exists to revisit a IFF
levy. This also provides time for proposed amendments to IFF legislation
to be understood.
62. In the short-term, a decision
not to proceed with the IFF levy proposal would mean Council would need to make
a decision on the contract award without having clarity on the funding source
and the overall impact of that on Council’s fiscal position.
63. This could however be mitigated
by the providing direction to the Chief Executive to find savings equivalent to
the costs associated with on balance sheet funding in the current financial
year through Councils overall rating envelope. This is estimated to be
approximately $1.54m and is reflected in recommended resolution (h).
64. Council would also manage
within existing borrowing covenants noting that this will need review in the
event that the approval for increased covenants is not forthcoming.
65. It should also be recognised
that there may be an implication on Councils credit rating through Standard and
Poors through an increase in debt to revenue ratios. Further work will be
undertaken to assess this risk and potential consequence noting that a one
notch downgrade would not impact on Councils ability or cost of borrowing
through the LGFA.
66. Under this option Council would
need to look to:
· introduce
a targeted rate or other rating mechanism through the 2025/26 Annual Plan
process; and/or
· reprioritise
the capital programme from 2025/26 onwards.
67. The advantages and
disadvantages of this option are outlined in Table 3 below.
Table
3: Advantages and Disadvantages of Option 1C
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Advantages
|
Disadvantages
|
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· If Council can remain within its debt limits the borrowing costs
on the Te Manawataki o Te Papa project are likely to be lower than under an
IFF arrangement.
· There may be new funding and financing solutions that are
subsequently offered to the sector which may have greater merits than this
IFF transaction.
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· Savings would need to be achieved in the current financial year to
fund costs expected this year that were assumed to be funded through the IFF
levy (it was assumed that this funding via IFF would be received in the
current year despite the levy not being charged to ratepayers until July
2025).
· Requires approval of LGFA shareholders and LGFA board to allow
bespoke higher debt to revenue covenants. Indications are that there is
a reasonable probability of this being achieved by the end of the calendar
year.
· Reputational risk with the Crown/ CIP given how far progressed the
IFF transaction is and bids have been received by the senior debt panel of
CIP.
· Council will need to introduce a rate or reprioritise spending in
future Annual Plans to accommodate this project which was previously assumed
to funded by off balance sheet funding through the IFF levy.
· Existing IFF financing offers from the market may expire, which
would require another tender round with potential additional costs if Council
does subsequently decide to return to an IFF model.
· Potential for credit rating downgrade.
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68. This option is recommended
and reflected in proposed resolutions.
Option Analysis: Issue 2 -
Construction contract
69. There are two options for this
issue.
Option 2A –
Immediately enter into the main construction contract for the Library and
Community Hub
70. The contractor and all
sub-contractors had expected the main construction contract for the Library and
Community Hub to have been signed by now. If the IFF levy proposal had
been approved by the Minister, then the main construction contract would have
been approved by the Chief Executive under existing delegated authority from
Council.
71. Council could wait until one or
more of the following events before entering into a construction contract:
· a
rate to fund Te Manawataki o Te Papa is put in place; and/or
· the
capital programme for 2025/26 and beyond is reprioritised; and/or
· an
IFF levy is fully approved.
However,
the associated time delay has significant negative financial, reputational, and
delivery impacts on the Library and Community Hub
72. Option 2A allows for Council to
make a specific delegation to the Chief Executive to finalise and sign the main
construction contract immediately. Such a resolution of Council would
over-ride the existing delegation.
73. Clearly there is a risk that,
having approved the contract and committed Council expenditure, the ultimate
financing/funding stream is not secured or approved by Council.
74. On the other hand, the impacts
of not approving the construction contract are not ‘high risks’
they are certainties.
75. This is the recommended
option and is reflected in recommended resolution (l).
Option 2B – Do
not immediately enter into the main construction contract for the Library and
Community Hub
76. Under this option, the main
construction contract for the Library and Community Hub would remain unsigned
until conditions determined by Council have been met. Currently those
conditions include ‘sufficient funds being available in accordance with
the Te Manawataki o Te Papa Financial Strategy Report resolutions approved by
Council’ in July 2023.
77. The consequences of this option
are immediate and significant. Any delay in signing the main construction
contract is likely to see the contractor demobilise from the site.
78. Significant consequences
include:
(a) Financial consequences:
demobilisation costs, re-establishment costs, penalty payments, and programme
escalation clauses will have significant negative financial consequences for
Council.
(b) Community outcome consequences:
there are also likely to be significant impacts on Council’s reputation
and on the ultimate delivery of the project and its benefits to the city
centre, the city and the wider sub-region.
79. Refer paragraph 96 for more
detail.
80. This option is not recommended.
Financial Considerations
Issue 1 – IFF
Levy
81. The 2024/34 Long Term Plan was
adopted based on having an IFF levy in place for Te Manawataki o Te Papa
(TMOTP). This allowed council to budget for a $4.9b capital programme and
remain within its borrowing limits.
82. The IFF levy for TMOTP was
based on funding the $151.5m ratepayer portion of the TMOTP programme of works
which was the outcome of a separate consultation process where the option of
funding TMOTP via rates or IFF ley was consulted on, and the latter option
chosen.
83. Council remains within its
borrowing limits noting that there is some additional cost using the IFF levy
due to the longer-term nature of this borrowing. Whilst the IFF levy does
ensure certainty for ratepayers and ensures that the costs of the project are
spread over generations through a 30-year payment period the following analysis
has been undertaken comparing Councils traditional borrowing through the LGFA with
options using IFF.
84. The option of borrowing through
the LGFA is restricted by existing borrowing covenants. Whilst it is
acknowledged that the LGFA covenants have, and continue to be, the subject of
discussions, TCC is currently restricted to borrowing 285% reducing to 280% of
its revenue.
85. Therefore, in order to continue
with the capital programme, and assuming this is delivered over time, Council
would breach its covenants. For the 2025 and 2026 financial years Council
is close to its covenants. Whilst the timing of external funding will
impact on the amount of additional rating required to remain within limits
given the external funding is projected at 50% of the programme an additional
$151m of debt capacity would be required over the medium term. Assuming
the delivery of the wider capital programme this would require debt retirement
in the form of additional rating of up to $54m over the medium term to maintain
compliance with current debt to revenue ratios.
86. Another option considered was
borrowing outside of the LGFA. This would occur should Council breach its
borrowing covenants based on the current ratios allowed. This would
require refinancing of all of Council debt and a range of between 25 to 40 basis
points additional which may be dependent upon the potential downgrading of
Councils credit rating and subsequent implications on its borrowing rates,
liquidity requirements, etc. This would result in additional costs over
and above unconstrained LGFA borrowing of $60 per annum per median residential
ratepayer.
87. Using the IFF and acknowledging
an increased borrowing margin of 113 basis points the cost difference of the
$151.5m of debt would be approximately $19 per annum per residential
ratepayer. This is lower than the other options as it requires only
financing of $151.5m at the higher rate and not the full amount of Council
debt. This margin is based on the net cost of the IFF borrowing which
would be the expected rate noting that there is risk which is capped at the
gross amount which would see an additional cost if this were to occur $13 per
annum per residential ratepayer in a worst-case scenario.
88. To summarise in an environment
constrained by LGFA borrowing limits:
· the
IFF model would expect an additional cost of $19 per annum per residential
ratepayer; compared to
· refinancing
all of Council’s debt which will have a rate impact of up to $60
per annum per residential ratepayer.
· Maintaining
the current LTP programme and remaining within LGFA limits would require the
introduction of significant debt retirement charges via rates.
IFF
also provides certainty to ratepayers and other funders over long periods of
time (30 years).
Updated Financial
Considerations based on 8 August waters and LGFA debt announcement
89. On 8 August 2024 the Minister
for Local Government announced that the LGFA would be able to lend directly to
Water Council Controlled Organisations up to 500% of their revenues without
impacting on the financial covenants relating to the Council parent
entity.
90. They also announced a review of
borrowing covenants the opportunity for high growth councils to increase
covenants from the existing 285% up to 350% following LGFA shareholder approval
and approval of bespoke arrangements by the board of LGFA. This is
expected to be decided in November 2024.
91. Based on these announcements
Council staff have modelled the impacts on Councils balance sheet which show
that Council will remain well within these updated covenants (figure one
above). It should be noted that subject to further modelling it is
expected that direct lending to a Waters CCO will further reduce overall
Council debt to revenue ratios.
92. The financial impact in the
current financial year would be an increase in debt levels of $54m representing
the assumed amount of the LTP drawdown this financial year. The expected
rating impact of this would be $1.54m noting this would see the removal of the
IFF levy previously expected to start on 1 July 2025.
93. Rates would need to be included
in the next Annual Plan to fund the expenditure previously assumed to be funded
through an IFF levy and this could be in the form of a targeted rate.
94. It should also be noted that in
the event of Councils borrowings increase the credit rating of A+ may be
impacted, noting that remaining at an A rated credit rating with Standard &
Poors is sufficient to be able to continue to utilise LGFA borrowings.
Issue 2:
Construction Contract
95. For issue 2 – the
financial consequences of signing the main construction contract immediately
are as allowed for in the adopted Long-term Plan 2024-2034.
96. If the Library and Community
Hub main construction contract is not signed immediately then the consequences
will be immediate, significant, and increasing with time. Confidential
attachment 4 provides information on the nature and financial scale of
these consequences.
Legal Implications / Risks
97. Refer to the independent
consultant’s report (Attachment 1) and the legal advice (confidential
Attachment 3) for a summary legal implications and risks.
98. It is also important to note
that the Local Government Act requires a local authority to “manage its revenues, expenses, assets,
liabilities, investments, and general financial dealings prudently and in
a manner that promotes the current and future interests of the
community.”[11]
TE AO MĀORI APPROACH
99. While the Te Manawataki o Te
Papa project has significant elements reflecting Council’s approach to Te
Ao Māori, the funding and financing matters
covered by this report are not directly impacted by that approach.
CLIMATE IMPACT
100. Similarly, the funding and financing
matters covered by this report are not directly impacted by Council’s
approach to climate impact.
Consultation / Engagement
101. As noted earlier in this report, the
proposal to establish an IFF Levy was subjected to public consultation in
September and October 2023.
Significance
102. The Local Government Act 2002 requires an
assessment of the significance of matters, issues, proposals and decisions in
this report against Council’s Significance and Engagement Policy.
Council acknowledges that in some instances a matter, issue, proposal or
decision may have a high degree of importance to individuals, groups, or
agencies affected by the report.
103. In making this assessment, consideration
has been given to the likely impact, and likely consequences for:
(a) the current
and future social, economic, environmental, or cultural well-being of the
district or region
(b) any persons who are likely to be
particularly affected by, or interested in, the decision.
(c) the capacity of the local authority
to perform its role, and the financial and other costs of doing so.
104. In accordance with the considerations
above, criteria and thresholds in the policy, it is considered that the
decision to reconfirm a proposal for Te Manawataki o Te Papa is of high
significance.
ENGAGEMENT
105. Taking into consideration the above
assessment, that the decision is of high significance, and that public
consultation has already been undertaken on the substantive matters, officers
are of the opinion that no further engagement is required prior to Council
making a decision.
Next Steps
106. If the recommended resolutions are
adopted, staff will progress seeking approvals to increase the LGFA related
debt to revenue ratios. In addition, the Chief Executive will sign
the main construction contract for the Library and Community Hub.
Attachments
1. Kevin
Jenkins Independant Final Report 7 August 2024 - A16283785 ⇩
2. TMoTP
Funding Stack Updated 2 August 2024 - A16247002 ⇩
3. Legal
Advice re Signing Civic Precinct for Library and Community Hub - A16217785 ⇩
4. Confidential C1
Twenty Two (David Lambie) advice re Contract Delayed Consequences - A16246580 -
Public Excluded
