The Joint Funding Project

1
The Joint Funding Project what do we know about
the national picture?

• Mike Reid,
• Local Government New Zealand
• Fiona Illingsworth,
• Department of Internal Affairs

2
Phase one 2004/05

• Joint project to look at
• Magnitude/nature of fiscal pressures facing LG
  sector
• Drivers of fiscal pressure
• Sustainability for communities
• Extent existing legislative tools assist LG to
  meet any fiscal pressures
• Options to resolve any problems identified

3

• Phase one report found little evidence of a
  systemic funding problem across the LG sector. In
  particular
• Little evidence of increase in rates exceeding
  increases in last 10 years
• Local authorities with high levels of rates and
  debt are most likely to face fiscal pressures

4

• The Phase one report found no statistically
  significant relationship between
• population levels and rates
• population growth and rates
• Level of non-rateable land and level of rates
• Some significance between population density and
  rates was found.

5
In Summary

• Local authorities most likely to face funding
  pressures are ones with high levels of rates and
  debt - 5 local authorities in this situation.
• Analysis in phase one was based on transitional
  LTCCPs and not all expenditure may have been
  included

6
Post Phase One Research

• 9 case studies
• Updated the funding indicators based on 2006-2016
  LTCCPs
• Compiled information on the capital expenditure
  programmes
• Tested the draft statement of issues against
  results of case studies

7

• Developed a set of criteria for assessing
  alternative funding sources
• Considering the merits of various alternative
  funding sources against the criteria and the
  problem definition

8
Funding Indicators Update

• Points to note
• Used final 2006-2016 LTCCPs except 3 (not
  available)
• Rates estimates are GST inclusive
• Some methodological issues, such as lack of
  income data at territorial authority level

9
Average rates

• 2005/2006 average level of rates per household is
  estimated at 2246 per household
• 1988 for territory authority rates and 258 for
  regional council rates
• Projected rates increases are greater in the
  first five years

10

• Average level of rates increase for metropolitan
  local authorities is projected to be 67 over 10
  years
• National average in 2005/2006 of rates to income
  ratio is 5 and this increases to 6.2 by
  2015-2016
• Based on phase one criteria - 14 local
  authorities are high rates authorities

11

• There will be a very significant increase in
  local authority borrowing.
• Forecast to increase from around 4.0 billion to
  8.2 billion (105).
• Increase should be viewed in context of increases
  in asset values from 78 billion to 116 billion.

12
Debt

• 17 councils will have a high level of debt
  relative to the sector in 2006/2007
• 1 local authoritys debt has been called
  unsustainable by the Office of Auditor-General.
• Findings support suggestion that more use of debt
  as a tool for spreading costs could occur

13

• Government assistance for local authorities
  continues to be fastest growing source of revenue
  for local government (13)
• Year to June 2005 local government received
  661.4 million from central government (excluding
  drinking water subsidies and various land
  tranpsort projects added since June 2005)

14
Capital Expenditure Programme

• 30.8 billion in capital expenditure is planned
  for the period 2006-2016.
• Expenditure peaks in year three and then
  decreases steadily
• 22.4 billion (73) for network infrastructure
  (roads, wastewater, water etc).
• 5.6 billion (18) on community infrastructure
  (libraries, pools etc).

15

• Metropolitan sector tends to spend less on
  network infrastructure and more on community
  infrastructure

16
Case Studies

• To identify the cost drivers placing pressure on
  current rating levels
• To develop a comprehensive picture of the extent
  of these drivers over different communities
• Distinguish between mandatory and discretionary
  activities

17

• Consideration of funding pressures in 7 specific
  local authorities (DIA and LGNZ)
• 2 case studies to consider pressures related to
  drinking water and libraries (LGNZ)

18
LA case study findings

• Affordability
• Few indications of council wide sustainability
  issues in 6/7 councils
• Most expecting rates increases of 1-2 per annum
  more than Phase one. One expected rates to
  decrease
• Affordability issues, where they exist, are
  likely to be at the level of individuals and
  ratepayers groups

19
Use of debt

• Divided in use of debt
• 4 out of 7 could take on more debt (with 3 more
  substantially)
• One is anticipating 1 dollar in 3 of rate income
  will be servicing debt interest by 2015/2016

20
Growth

• Population growth
• 3 facing rapid population growth
• others are encouraging people to come or stay in
  the area
• 5 councils making some use of development
  contributions
• Overall, growth is a significant driver of many,
  but not all, expenditure programmes

21
Expenditure

• Major infrastructural development phase
• Capex plans are greater than preceding 10 years
• 7 case study councils plan to spend 3.941
  billion on capital works for 2006-2016
• For most of case studies capital expenditure is
  expected to double

22
Infrastructure

• Network infrastructure makes up the majority of
  capex programmes
• Road and water infrastructure account for 2/3rds
  of capital programmes in case studies
• Roading is the single biggest item of capex for 6
  out of 7 case study councils

23

• Growth is a major driver for many but not all
  infrastructure programmes
• Provision for depreciation increases
  substantially over 2006-2016
• Most are planning capital programmes to improve
  drinking water

24
Density

• Density not a significant issue for 4 local
  authorities
• Low density played a role for 2 local authorities
  - especially with road networks
• Providing infrastructure for scattered
  communities seems to be a significant issue for
  the large rural districts

25
Non-rateable land

• Most case study local authorities had low levels
  of non-rateable land
• For most local authorities non-rateable land does
  not appear to be a cause of affordability issues

26
Governance and Management

• Improvements in LTCCPs since transitional LTCCPs
• Most showed some improvement in asset management
  but some issues were identified
• service levels not well developed
• Information on the condition of infrastructure
  was incomplete
• Reliance on commercially produced templates
  obscured important information

27

• Improvements in asset management indicate issues
  with deferred maintenance and renewal esp.
  underground reticulated infrastructure
• Majority of local authorities have room for more
  debt (from a financial standpoint) or to use
  other financing tools
• Pay as you go approach still prevalent

28
Funding tools

• Little use of targeted rates
• Most local authorities in case studies agreed
  could make more use of development contributions,
  especially around community facilities
• Use of demand management strategies varied across
  case studies

29
Assets

• Most had one or more revenue generating assets
• Not all assets were generating significant
  returns
• There may be scope for councils to reconsider
  ownership objectives for some assets

30
Case Study - Libraries

• Councils provide 273 library buildings and 18
  mobile libraries
• Regarded as part of the social infrastructure
• Rates fund 80-97 of public library services
• Expenditure ranges between 1 and 9 of council
  operating expenditure

31
Libraries funding pressures

• Population growth (major pressure)
• Information communication technology
• Increase in formal and informal lifelong learning
• Increased role to promote business
  competitiveness
• Central government's e-government digital
  strategy
• Increased popularity of libraries recreational
  role.

32
Case Study Drinking Water

• 36 councils surveyed for project
• Unlike libraries there is a legal obligation to
  supply
• Overall forecast shows that councils are able to
  fund operating expenditure over 10 years
• Depreciation accumulates at a constant rate but
  expenditure is lumpy depreciation lagging
  behind.

33
Drinking Water

• Significant drop in upgrades and renewals in year
  5 6
• Unusually high levels of expenditure in first 4
  years due to possibility of mandatory standards
• Smaller rural councils facing infrastructure
  deficit
• Population growth a major driver.

34
Financial Governance Work Stream

• To assess the overall standard of financial
  governance in local authorities and, if
  necessary, to develop proposals to address areas
  where performance can be enhanced
• Scope includes
• Defining the notion of financial governance
• Understanding the current standard of financial
  governance

35

• Elected member understanding of asset management
  planning
• Guidance around the relative merits of different
  funding and rating choices
• Guidance around the relative merits of different
  rating systems
• Understanding depreciation
• Understanding debt and inter-generational equity

36
Process

• Inter- agency working group
• Officials and elected members
• Two meetings held
• Target
• LG Conference 2007 to launch elected member
  training modules
• October 2007 for officials training

37
Perceptions of LG ( rates) Project

• LGNZ funded project to determine how New
  Zealanders perceive rates
• Phase 1 focus groups (urban/rural/metropolitan)
• Phase 2 National survey based on focus group
  responses.

38
What ratepayers want from council

• Good communication (timely, interesting and
  relevant)
• Early input into decisions that affect them
  personally
• News of events happening in their area
• Less rules and regulation, or more flexibility
  within these
• A review of the rating system (rural ratepayers)

Ratepayers want to be kept informed about things
the council is doing to enhance their region
rather than the day-to-day essentials. There was
a general lack of awareness about the range of
council responsibilities.
39
Perceptions of Local Council

• Local council and local councillors are perceived
  differently
• Councillors politicians they come and go
• Council an entity the council does its own
  thing

Ratepayers tend to divorce council from the
actions of councillors, as council is more
stable/permanent. As there are more positive
perceptions of the entity of the council than
councillors, build on the good works council is
doing.
40
Perception of Local Councillors
Council Long-term Planning
Benefit to Community
Councillors Short-Term quick wins
Benefit to Councillors
Ratepayers perceive local politicians (ones whom
they do not know personally), to be somewhat more
concerned about their own affairs, than bettering
the region overall. Local councillors can improve
ratepayer perceptions of them by being strategic
and long-term and highlighting the benefits to
the region to any new initiatives.
41
Factors that influence rates perceptions
How much the bill is relative to income rather
than the value of their property
How many services they perceive access to and can
see
How the rating system is calculated (Rural)
How much rates paid compared to other regions or
other properties
Rates
Media reports of council spending on what and
how well
Perceived fairness of Council decision making
42
Perceptions of Rates (Residential)

• Ranges from just another bill to feeling
  ownership and connection with their city/region
  
• Manageable for some but the elderly singled out
  as unfairly burdened (houses they have lived in
  for years have increased in value)
• Rates bills are increasing at a higher rate than
  inflation
• Why? I dont understand something must be
  wrong
• Is Council paying themselves more / trying to do
  too much / wasting money?
• Justified as things cost more and you have to
  keep up maintenance and infrastructure otherwise
  it is more expensive in the long run

43
Perceptions of Rates (Rural)

• Rural farmers perceive the rating system to be
  unfair because
• They do not feel represented as well as townies
  by local councillors and see their needs as
  invisible to council
• There are less of them, so they have less voting
  power and are disregarded in decisions about
  spending priorities
• Services such as swimming pools, libraries are
  less accessible to them (as they live out of the
  urban areas)
• They pay proportionally more than residential
  ratepayers and get fewer services
• They do not consider themselves wealthy
  landowners as their land is often passed on
  through generations. There land value is
  virtual rather than realised

44
What have we learnt or confirmed since Phase One

• Rates will continue to increase over the next 10
  years
• It is likely to be at individual ratepayer level
  where issues of affordability occur
• Local government is not heavily indebted
• Todays ratepayers appear to be subsidising the
  benefits received by future ratepayers

45

• Providing infrastructure is the driver of future
  expenditure needs
• Past governance decisions and lack of asset
  management means a period of infrastructure
  expenditure
• Little evidence compliance costs from legislative
  changes are a significant driver of costs
• Population change is driving some plans.

46

• Most local authorities could make more use of
  development contributions as a tool for recouping
  development-related costs
• Population density (or lack of) is a driver of
  costs in some rural communities, particular for
  the provision of network infrastructure
• Removing rating exemptions is unlikely to have a
  significant benefit for the majority of local
  authorities

47

• Rates are highly visible tax and willingness to
  pay issues are likely to arise because of their
  coercive nature and the invisibility of some
  services (e.g. stormwater disposal).
• Local government sector could take the
  opportunity to promote the value ratepayers
  receive.
• Standard of financial management and government
  is improving.

48
Room for improvement

• The importance of strategic planning is not
  always appreciated
• Some local authorities have not made clear
  judgements regarding their role in community
• Some local authorities are unwilling to decline
  requests or make trade-offs
• Asset management planning still needs more
  attention

49

• Asset management concepts are not well understood
  by some elected members and council staff
• Key funding/financial principles and concepts are
  not well understood (e.g. intergenerational
  equity)
• Some local authorities do not use the
  opportunities the 2002 legislation offers, such
  as targeted rates.

50
Where are we at?

• Things have moved on significantly since the last
  report in August 2005
• Rates certainly made the news
• Increases generally about correcting consequences
  of past underinvestment
• Government is finalising terms of reference for
  an inquiry on rating matters

51
Phase two continues

• Is looking at
• Enhancing the standard of financial governance
  and management
• Tools and techniques to help local government
  promote the value of money spent on rates
• Possible changes to the development contributions
  regime
• Considering Crown contributions in lieu of rates
  on non-rateable Crown land
• Examining the local authority petroleum tax

52
To conclude

• There is a lot of useful information provided
  from both phases of the project which will assist
  the Inquiry
• There is more work to do