What has shaped our thinking around debt vs. rates?

Council will have to increase the revenue it generates to achieve everything that you’ve told us is important to you over the next 10 years, meet your aspirations for Nelson’s progress, and provide core services. User charges apply for some services, but most of our revenue comes from rates.

In setting its budgets Council considers:

• What it must do, for example because it is required by legislation
• What it has to do, for example finishing projects it has already started
• What it should do, because to not act will create problems in the future.

How much we need to increase rates by each year depends on several factors. Major drivers are:

• How much the cost of providing services has increased
• What the community want us to achieve, and how much this costs
• How much money we should borrow and pay back later
• The changing value of our assets and how much we need to save annually to replace them in future (known as depreciation – explained further in our financial supporting information)
• Government legislation regulations and standards.

COVID-19 recovery: The significant and ongoing impact of the pandemic, including the impact of setting the net rates increase to 0% in 2020/21, and Council’s role in supporting Nelson’s recovery and regeneration. You can read more about our proposed activity on page 56.

Revaluation: At 30 June 2020 Council had a large revaluation of its Three Waters assets which would have, if no balancing action had been taken, driven an extra 3% of rating increase.

Capital expenditure: The proposed capital expenditure in this Long Term Plan (the money we require to build and upgrade physical assets such as infrastructure and community assets) has increased by $169 million compared to the previous Long Term Plan.

These factors have put our Financial Strategy (how much we increase rates and how much we borrow) under pressure. We know we need to cap rates at an affordable level. We also don’t want to burden future generations with high debt or by not looking after and upgrading vital infrastructure.

We will need to increase Council’s revenue from rates to deliver the Long Term Plan. Rates rises are expected to be between 5.0% and 5.7% per year over the 10 years of the Long Term Plan. This will enable us to achieve the outcomes that you have told us are important to you, and deliver the core services we need to provide as a unitary authority (a council which has the responsibilities of both a regional and district council). At the end of the 10 years our net debt will be $291 million, and our debt/revenue ratio will be 143%.

A benefit of this approach is that although our debt will increase, it will be less than what it would be if rates were set at a lower level. This means that future generations won’t inherit a larger than necessary level of debt, and will have more choice about what they can invest in. It will also make Nelson more resilient to unexpected events by leaving us with a healthy margin between our level of debt and our debt cap.

In order to achieve this, Council’s Financial Strategy proposes to increase the rates cap from LGCI plus 2% (our current cap) to LGCI plus 2.5%. LGCI is the Local Government Cost Index. This is used rather than the Consumer Price Index as it better reflects the realities of higher local government costs. The debt to revenue ratio cap would also move from 150% to 175%.

In order to keep debt at lower levels than it would otherwise be at, 2030/31, and comfortably under the debt to revenue ratio of 175% (which will peak at 152% in 2028/29), it is proposed to set annual rates increases at the new rates cap of LGCI + 2.5%, except for 2021/22. In 2021/22 the overall rates increase is proposed to be 5.7% (vs 6.2%, which it would be at LGCI +2.5%).

What this results in, is borrowing from the Emergency Fund from 2021/22 to 2025/26 to keep the rates increases smooth and lower than they otherwise would be. In 2026/27 to 2030/31, Council will repay the Emergency Fund which will come back into funds in 2028/29, by having higher rates increases than they otherwise would be (and higher operating surpluses).This provides more stability for ratepayers, while also giving Council the income it needs to fund the services you have told us are important to you.

The Local Government Act 2002 provides for councils to have an unbalanced budget. Council has considered the ‘big picture’ for the next 10 years, and has determined that an unbalanced budget is the best approach from 2022/23 to 2023/24 of the Long Term Plan to reduce rates fluctuations. This means that we will borrow money (using the Emergency Fund) in the first five years of the Long Term Plan to make up the shortfall that rates will not cover during this time. If Council did not borrow this shortfall, the rates increases would need to be higher to compensate. Council considers that a more even annual rates increase is preferable. With this approach we will be able to maintain both our levels of service for the public and the integrity of our assets. In 2027/28 to 2030/31 of the Long Term Plan, Council will contribute $29.2 million to the Emergency Fund, resulting in a projected balance of $20.3 million at the end of the 10 year period (less any disaster expenditure over the next 10 years).

If there was a large event which wasn’t covered by insurance, Council would borrow the funds from the Emergency Fund (after the first $150,000 per activity was covered from existing Council budgets). Council has allowed enough headroom for this to occur with the self-imposed debt to revenue ratio of 175%. Council is in a strong position to borrow, and our preferred strategy will spread the financial impact of an unbalanced budget in a manageable way.

• We will receive $1,758 million from 2021/22 to 2030/31
• We plan to spend $2,312 million* from 2021/22 to 2030/31
• By June 2031 our net debt is expected to be $291 million
• From 1 July 2021 to 30 June 2031 we expect to have increased total debt by around $176 million
• By June 2031 our total asset value will be $2,531 million.

*includes both capital and operating expenditure

Do not use the Emergency Fund to smooth rates increases and reduce debt

The alternative is to not use the Emergency Fund to smooth rate increases and reduce debt. This would result in rates increases for the first three years of 7.4%, 5.4% and 4.4% respectively, and an average of 3.5% for the remaining seven years. Net debt at the end of the ten years would be higher at $315.9 million.

Significantly reduce our work programme

This could mean that less infrastructure is built and renewed. We would have to drop many of the initiatives we are talking about in this document, which would reduce the level of economic stimulus Council is able to contribute to the region through its projects. Council has considered its work programme through a COVID-19 recovery lens, and believes it has achieved a balance which will help support the community.

Balancing debt vs. rates is a key component of this 10 year plan. Do you support the balance we have struck between increasing rates and taking on debt? Or do you prefer one of the alternatives?