Key issue: Rates affordability

Like every other council around New Zealand, we are facing rising costs. Council currently spends approximately $170 million each year on services and manages $2.4 billion of assets.

Our rates, our debt, and our capital spending (using long term loans) are the three financial ‘levers’ that influence what services we can provide. But how should we adjust these ‘levers’? We are looking for ways to make savings, and this includes deciding what to invest in now and what to put off until later. We need to make sure we are not unfairly loading costs onto future residents. We also need to weigh up what we would like to do compared to what we can afford to do³.

³This is an ever increasing challenge – a recent review into the future for local government highlighted the “current local government funding and finance system is already under pressure and is not sustainable”. Page 11, Review into the Future for Local Government (2023) He piki tūranga, he piki kotuku.

Financial pressure points

This Long Term Plan has been developed in a ‘perfect storm’ of financial pressures including inflation, high interest rates, and more expensive insurance. Between the Annual Plan 2023/24 and 2024/25, it’s estimated our interest costs to service our debt will increase by $4.2 million and our insurance costs by $752,000. The value of our infrastructure assets (such as pipes, roads and buildings) has significantly increased over the past few years to $1.85 billion, in part because of a sharp rise in construction costs. This means we need to put more money aside to replace them in the future, with an additional $1.5 million in depreciation funding in 2024/25.

Government reforms and changes in legislation (such as changing environmental standards and emergency management requirements) also increase our costs. Rising prices for both contracted labour and materials means it now costs more to provide our normal services and to complete projects.

The severe weather event in August 2022 caused massive flooding and landslides, which has had a major impact on our finances. Council has decided to build back better to make the city’s infrastructure more resilient, but that comes with a higher price tag. The total estimated cost of the recovery is $87.2 million, with some of this to be paid for by insurance and central government. That leaves about $60 million for us to pay.

At the same time, Council is keenly aware that high prices are putting pressure on everyone’s finances, making it even harder to pay for rates. Council wants to limit the level of rate rises where we can, to avoid making things more difficult for you.

Our proposed approach

Our plan is to keep rates rises as low as possible while maintaining core services, paying for the recovery, and continuing to invest in the projects that will make the most difference to Nelson’s future.

Something has to give. We need to make some difficult decisions on what services to stop providing, reduce in frequency, or provide to a different standard and what projects to remove from our to-do list. Other ways to save money include delaying some work and working more efficiently. We are proposing some changes to the rating system, including spreading the load of paying for the recovery more evenly across the whole community.

More details about rating changes are discussed in the Draft Revenue and Financing Policy.

What are the options for rates affordability?

Option 1

Fewer service cuts and higher rates increases

Accept higher rates increases to keep services and maintenance standards and frequency at levels similar to current practice.

This option would continue proactive maintenance and service delivery and maintain momentum in enhancing services to the community across all activity areas. Examples of the work that could be added into budgets would be reinstating operating funding for inflation for utilities infrastructure, transport, property, events, facilities and parks and reserves maintenance contracts; increasing the frequency of reporting on environmental monitoring; increasing weed control; and increasing operating funding for climate change strategic planning in the infrastructure activity.

The trade-off would be that this option has the highest immediate cost to ratepayers and community expectations remain at levels that may not be sustainable in the long term.

The exact cost increases would depend on what additional work Council undertakes. Some activities and projects will have a greater impact on rates and others on debt. For an additional $950,000 of operating expenditure or approximately $15 million capital expenditure added to Council’s annual work programme, an additional 1% would be added to rates.

Option 2 (Council's proposal)

Medium service cuts and medium rates increases (Council’s proposal)

Balance rates rises with providing services/some new projects and accept some reductions in services and maintenance standards and frequency.

As Council’s proposal, this option aligns with our draft Long Term Plan budgets (as they stand now) and will deliver our work programmes across Council’s 11 activity areas. Although rates will increase above current levels, this option would provide some financial relief for the community during the current cost of living pressures, while maintaining good financial management and performance. It would allow for continued investment across activity areas to support community wellbeing and progress projects and key renewals for the city’s future.

Disadvantages would include some maintenance being less proactive, services to customers or stakeholders being less responsive, and some increased risk of asset failures and unbudgeted repairs.

As outlined earlier in this section, this option would limit the average rates rises to 8.2% plus a $300 (including GST) Storm Recovery Charge in 2024/25, and subsequent average rates rises over the next nine years of between 1.7% to 5.4%. Projected net debt would increase from $208 million in June 2024 to $526 million in 2034.

Option 3

Big service cuts and lower rates increases

Reduce the rates increase by reducing Council’s work programme further. This option would involve a series of further cuts to already reduced budgets. Cuts would be spread across many activities and projects to avoid a major impact on any single one.

Examples of the types of further cuts that could be made are reducing the opening hours of the Council Customer Service Centre or reducing our spending on reactive maintenance in our parks and community facilities which would reduce our responsiveness (this could mean, for example, less cleaning of toilets or mowing of grass in response to community requests).

This option would further ease the financial impact on ratepayers, in an environment of cost of living pressures, but would increase the risk of asset failures and unbudgeted repairs, require deferring of some renewals and would be expected to impact on community wellbeing through reductions in service delivery in a wide range of areas. It would add costs to Council and our ratepayers in the long term.

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The total impact of the savings we are proposing is major when considered as a whole package. That’s why we want to hear from you before making a final decision.

We can take an alternative approach and continue to fund services as we do now, but remember that this will result in a higher rates rise for the community.

We have listed some examples below – and more details are available in the Activity Summaries in the supporting information.

We plan to cap funding for maintenance at current rates for a wide range of water infrastructure, transport, property, facilities and parks, and active recreation assets – rather than increasing them to reflect cost increases. We will continue to maintain essential infrastructure that we rely on to protect health and safety but we will be more selective in the maintenance that we undertake across our other assets. You may notice a reduction in the frequency or the standard of some maintenance, for example:

Reducing the budget for line marking on roads

from $200,000 per year to $110,000 for 2024/25 will decrease the frequency that lines are repainted on low volume roads, cycle lanes and parking areas.

Not increasing parks contracts for inflation in

2024/25 will save approximately $500,000. This will reduce some services and the frequency of some maintenance across our parks and reserves.

Another way we can save money is to cap some of our activity budgets at existing levels rather than raising them to match cost increases, or decide not to carry out new actions in recently approved strategies. This means Council will be selective about the services we continue to provide and how we respond to new legislative requirements.

For example:

Deferring some of the science and environment

budgets means we will continue to undertake air quality data collection but decrease the regularity of reporting.

Keeping heritage budgets at existing levels will

mean not implementing the new actions in the recently adopted Taonga Tuku Iho Strategy (Heritage Strategy).

In some situations, a reduced budget will mean the removal of, or reduction in, something currently provided. For example:

Delaying the expansion of the weed control

programme in landscape reserves by a year will reduce the 2024/25 budget from a planned $1.2 million in the last Long Term Plan to $480,000 (saving $720,000).

Divesting Council’s crematorium service at

Wakapuaka Cemetery in Atawhai from 2025/26 will have a net budget saving of approximately $163,000 per year.

We will pay for the recovery works from the August 2022 severe weather event over the next 10 years. We need to pay this off over a relatively short period because we expect more natural disasters and intense storm events to come our way in the future. Paying off this debt faster means higher costs in the short term.

We think a targeted rate of $300 (including GST) for 10 years for all separately used or inhabited parts of a rating unit (SUIP) in Nelson is the most transparent way to pay for the recovery. Council’s view is that a uniform charge is appropriate when considered with other rating proposal changes relating to stormwater and flood protection.

See ‘Our financial approach’ and the Draft Revenue and Financing Policy for more details about this proposal at nelson.govt.nz

Council has an extensive network of assets to support the smooth functioning of the city and wellbeing of the community. Many of these assets (e.g., water and wastewater pipes and ageing council facilities) will reach the end of their lives over the next couple of decades and we will be faced with a ‘bow wave’ of renewals. To help us manage this, we will bring forward some renewals, and increase our spending on renewals from an average budget of $23.2 million per year in the Long Term Plan 2021-2031 to an average of $43.6 million per year over the next 10 years.

As part of bringing forward some renewals and cutting others, we have considered our capital works programme carefully and focused on essential renewals. We have achieved a balance which will enable key infrastructure renewals to occur within our financial constraints.

This will have an impact on our debt. Although it will remain within our proposed debt cap of 200%, net debt is projected to rise from $248 million in 2024/25 to $526 million in 2033/34. Our increased debt and the projected interest rates over the next 10 years, means our interest costs are projected to increase from $7.7 million in the Annual Plan 2023/24 to $32.3 million at the end of 2034.

As mentioned above, our infrastructure assets have been revalued at a higher level, which means we need to put more money aside to replace them in future (when they wear out). We propose phasing in these additional depreciation costs of $4.1 million over 10 years to reduce the rates increases over the 10 years of the Plan. Also, our insurance costs have increased due to these higher valuations and it is more difficult and expensive to secure insurance cover following severe weather events globally. We will undertake a review of Council’s insurance (insurance optimisation) to limit some of these increases.

To lessen the burden on ratepayers we have also reviewed our schedule of fees and charges with the aim of moving more of the costs onto the specific users of services and decreasing the subsidy paid by the community as a whole.

Rates impact explained

The impact that a saving can have on rates depends on whether it is operational or capital expenditure:

• Operational expenditure pays for people’s time, ongoing services, maintenance and interest on debt, and needs to be paid for immediately (from
rates received that year).

• Capital expenditure pays for things (such as pipes and footpaths) and is funded by debt. Just like a mortgage, these costs are paid off over a long period of time (commonly 80–100 years).

• This means that a major project worth tens of millions of dollars can have a smaller impact on rates in any one year than an operational expenditure worth a fraction of the cost, but interest will be charged each year until the debt has been paid off.

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