Balancing the Budget

Council's Financial Strategy

Our Financial Strategy for the 2021-31 LTP will leverage our strong financial position to meet the challenges we face over the next ten years, to continue to maintain current levels of service; enhance our community facilities; and regenerate the Timaru CBD.
This is a step change for our Financial Strategy and will mean an increase in both debt and rates, but in getting the balance right we can achieve our goals of:

  • Maintaining long-term financial resilience;
  • Providing high-quality infrastructure and facilities;
  • Ensuring our services are affordable and meet the wellbeing needs of our community.

Thriving Together

Council’s Financial Strategy for the next ten years is to ensure we have the financial ability to:

  • Meet the social, cultural, environmental and economic wellbeing needs of our communities, now and into the future;
  • Maintain current levels of service across the core infrastructure services of roading and footpaths; drinking water; stormwater; sewage; and waste management;
  • Provide for the future economic wellbeing of our District by ensuring long-term water supply resilience;
  • Undertake an ambitious capital work programme across our community infrastructure to provide high quality, fit-for-purpose community facilities and regenerated CBD;
  • Ensure Council has the resources to plan effectively for future environmental, legislative, and societal challenges; and
  • Deliver all of this in a way that is affordable and fair to current and future communities.

Our Strategy responds to the challenges Council and our District is facing including:

  • Ageing infrastructure, requiring a large capital renewal programme;
  • Increasing operating costs for our activities across the board;
  • Increasing regulatory requirements and community expectations;
  • The need to maintain infrastructure and services that are resilient to natural disasters and the impacts of climate change;
  • Uncertainty around the Government’s Three Waters Reform Programme; and
  • A reduced dividend from Council’s shares (held by TDHL) in Alpine Energy.

Debt

Our large capital works programme means that our debt will increase from $120M to $279M across the life of the LTP

As a result, we have to lift our debt limit. This is a change from our previous strategies where our debt limit was set at 150% of revenue, but Council believes lifting the debt limit is essential to the delivery of our Plan and to meet our community wellbeing outcomes. Using our debt wisely also ensures that future users of new and upgraded assets will contribute appropriately.

While we have a maximum debt level of 280% of operating revenue, our Strategy sets a limit of normal operating debt at, or below, 210%. These debt limits are supported by Council’s strong credit rating.

By limiting our debt in this way, we are ensuring that there is still capacity to borrow in an unforeseen event (e.g. a significant natural disaster). We also know from our 30-year Infrastructure Strategy that beyond this LTP there is still significant investment required in aging infrastructure, and upgrades and replacements to community facilities (e.g CBay and the Timaru Library). This debt limit will allow headroom for the future interests of the Timaru District and give future Councils the ability to make decisions about what is important to their community.

A step-change

For the past two LTPs Council has taken a conservative, business as usual approach to the Financial Strategy.

This approach has placed Council in a strong financial position with relatively low debt. But we also recognise that we have not rated to the full extent planned for in these previous LTPs. In 2020/21, for example, Council decided to reduce the total amount of rates collected by $2.99M, recognising the impact of COVID-19 on our community.

This is where the step change comes in…

We recognise that to continue to meet levels of service we have agreed with our community, to improve our community infrastructure (specifically the Theatre Royal and Heritage Hub, Aigantighe Art Gallery and Aorangi Park) and meet other additional demands, we need to increase our debt, and increase our rates revenue. We will balance this step change with financial prudence, and ensure fairness between current and future ratepayers.

The financing balancing act

We need to ensure that operational costs – from paying the power bill, to paying our staff – are covered by operational revenue, such as rates, fees and charges.

This is called a ‘Balanced Budget’. If we can’t achieve this, we have to borrow to cover these costs. This means that current ratepayers are not paying the full share, and future ratepayers will have to meet those costs, and the interest. We don’t believe this is fair, prudent, or sustainable.

These everyday operating costs are increasing due to a range of factors including:

  • Increasing staff costs to meet the evolving demands of local government;
  • Increasing the amount we fund to replace our infrastructure assets, like roads and water networks (also referred to as funding depreciation); and
  • Increased operating expenses due to inflation, the cost of carbon credits, and higher compliance standards in areas like water and sewer.

Throughout the life of this plan, Council will continue to look for ways to control expenditure and ensure efficiency across all our services.

Growth and Land Use Changes

Population and household growth in the Timaru District is relatively steady.

We are projecting a 0.7% annual population growth and an increase of 2,267 households over the next ten years. We have factored the rates contribution of this growth into our forecast rates increases.

Rates

Council has set a rate increase limit of 10.5% in 2021/22 and 7% in the following years.

While we don’t plan to reach this limit, and are forecasting that the increase will remain at 4.9% from 2022/23 onwards, it does allow some flexibility if inflation-related costs change across the life of the plan. The graph below shows the total rate increases and the rate increase limit across the ten years.

The average rates increase for 2021/22 is higher than in previous years, and also in the later years of the plan, and this reflects the step-change in our Financial Strategy and Long Term Plan. We recognise that we need to fully fund our operating costs if Council is to continue to deliver our services to a high standard, to maintain and renew our existing core infrastructure, and to invest in our community facilities.  
These rates increases also form part of the balancing act. If we were to collect less rates it would reduce how much we can borrow, remembering how much we can borrow is a ratio of how much revenue we collect. This would mean that some of the projects we have planned would need to be deferred, redesigned or not completed.

Capital Spending

Council has planned a capital works programme of $566 million over the next ten years.

All project costs shown within this document are the full estimated projects cost, including inflation.

This is a significant increase on prior LTPs. The majority of this investment is in core infrastructure renewals and upgrades, like water and sewer pipes, roads and footpaths, and our landfill, and will ensure Council can continue to maintain and improve our levels of service, based on its Activity Management Plans

Council also recognises how important our community facilities, like the Aigantighe Art Gallery, the Theatre Royal and South Canterbury Museum, and Aorangi Stadium, are to supporting community wellbeing. This Strategy enables Council to fund the upgrades and development of these facilities over the next ten years, and enhance the lifestyles of our communities. The graph show our Planned capital expenditure (100%) across our groups of activities.

90% Delivery Assumption

The planned capital work programme is an ambitious work programme. A critical element to help deliver this programme is the change in our delivery model. The ‘head start’ project initiative is a change from the ‘do it all in one year’ as has been past practice. For example, we are awarding construction work contracts over multiple years and designing projects and awarding construction work contracts in the previous financial year for immediate start in the year allocated.

Despite this we recognise that risks outside of Council’s control can impact on our ability to deliver some projects, regardless of the size of our capital work programme. For example, this includes the availability of contractors, disruption to supply chains, legislative change, resource consent delays and further project investigations that expose unknown issues. To reflect those external risks, it is assumed that Council will deliver and fund 90% of its planned capital works programme in any 12-month period and over the 10 year plan period. Council believes it is not fair to rate for more than it reasonably expects to deliver. Projects planned but not delivered in any one year are deferred to future years or re-prioritised (e.g. where an asset like a bridge is going to last longer or new technology provides a better solution), potentially beyond this LTP period.

The graph below shows how much we expect to spend on replacing assets, improving levels of service, and meeting additional demand, based on the 90% delivery assumption. As demonstrated in our Activity Management Plans, our assets are being enhanced over the 10-year period, which enables the levels of service to be maintained at 90% expected delivery.

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