Late Agenda of Regional Council Meeting

HAWKE’S BAY REGIONAL COUNCIL

Wednesday 27 May 2020

Subject: Adoption of 2020-21 Annual Plan Consultation Document and Supporting Information

Reason for Report

1. This item provides the information necessary to enable Council to adopt the 2020-21 Annual Plan consultation document and supporting information in accordance with the relevant provisions of the Local Government Act 2002 (LGA 2002).

2. The item comprises two parts.

2.1. Part 1: Background and Previous Workshop Discussions provides some background and a public summary of the information presented to Council at the 29 April workshop on 2020-21 Annual Plan Financials, and the subsequent discussion that took place.

2.2. Part 2: Discussion for 27 May 2020 Meeting provides information to assist Council in its decision making in regards to adopting the 2020-21 Annual Plan consultation document and supporting information.

Executive Summary

3. At a workshop on 11 March 2020, Council received information outlining the budget requirements for the 2020-21 Annual Plan year, with a 7.3% rate increase. Council had previously signalled an intention not to formally consult the community on the 2020-21 Annual Plan. Despite challenging cost pressures on overheads, specifically in the areas of people costs and IT, there were no material differences to year 3 of the Long Term Plan.

4. The local economy has since been impacted by the effects of both COVID-19 and the drought.

5. In response to these events, Council asked officers to revisit the budget to update changes to:

5.1. known revenue assumptions

5.2. provide options on how to deliver a 0% rate increase to ratepayers, and

5.3. include $1 million (m) funding to leverage central government funding for ‘shovel ready’ projects which would support economic recovery.

6. Council was presented with four options to address the rate increase, at a meeting on 22 April, being:

6.1. Continue with the proposed 7.3% rates increase and service levels and use Council’s rate remissions policy to remit the increase for some or all ratepayers (a broad-based or targeted approach)

6.2. Continue with the proposed 7.3% rate increase and service levels and use Council’s rates postponement policies to postpone the required increase

6.3. Rework the budgets to reduce service levels and costs to deliver a 0% rate take increase

6.4. Continue with the proposed levels of service, adjust for known changes in revenue and reduce rates income to the same level as 2019-20.

7. For all options, the proposal was to borrow for any revenue shortfall.

8. The potential impact on Council income, due to the economic downturn, is based on a Conservative Scenario. Alternative scenario impacts (Ultra Conservative ‘worst’ and Optimistic ‘best’) were also considered for comparison. The 2020-21 net funding shortfall, excluding any change to the level of rate, ranged from $4m to $12.4m.

9. The total change to Council’s budgeted revenues under the modelled scenario sees a gross revenue reduction of $10.08m with a net funding impact of $8.08m.

10. Following feedback from Council, no changes have been made to the Levels of Service provided for in year 3 of the Long Term Plan on the basis that these are important programmes of work and delivery should continue.

11. The impact of these changes to the 2020-21 budgets, based on Council’s preferred options results in:

11.1. Council planning for an operating deficit of $4.37m in 2020-21. This means that Council does not plan to balance its budget for the 2020-21 Annual Plan.

11.2. A need for additional borrowing of $7.58m to fund the projected funding shortfall (as well as a reduction in reserves balances of $0.497m).

11.3. A significant increase in the projected rate increase in 2021-22 to pass on the deferred 2020-21 increase, service the new borrowings and fund existing cost increases for 2021-22.

11.4. A requirement for Council to consult on the proposed 2020-21 Annual Plan, thereby delaying the adoption date until after 30 June 2020.

12. A proposed new timeline has been developed which will see consultation taking place from 8 – 28 June, with the Annual Plan not expected to be adopted until 29 July 2020.

13. Measures will be implemented to demonstrate fiscal restraint and responsibility wherever possible. Messaging to address these are included in the consultation material. Any savings achieved during the 2020-21 year will reduce the borrowing requirement and should be sought.

14. The Council has two proposals for the community to consider so the organisation can cushion the effect of COVID-19 in these challenging times:

14.1. Our approach to rates charges to provide some relief to ratepayers (three options are provided) while debt funding the expected shortfall in our income for the year ahead; and

14.2. A proposal to establish a Recovery Fund to leverage potential central government co-funding into Council-related capital projects, to support job creation and economic activity while enhancing our environment.

15. Both proposals are significant and/or material changes to the activities set out in Council’s 2018-28 Long Term Plan for 2020-21 (year 3). As per section 95(2) of the LGA 2002 we are required to consult on these changes with our community.

PART 1: Background and Previous Workshop Discussions

Background

16. Council is required to prepare and adopt an Annual Plan for each financial year, except when a Long Term Plan is developed, which is every three years.

17. At a workshop on 11 March 2020, Council received information outlining the budget requirement for the 2020-21 Annual Plan year. This showed that officers had been able to maintain the rate requirement to align with that signalled in year 3 of the LTP but it had been challenging due to significant cost pressures on overheads, specifically remuneration / people costs and IT.

18. People related costs had increased due to two factors, an increase in headcount over and above the Long Term Plan and the partial implementation of a remuneration review which was conducted in June/July 2019. The review was in response to an internal audit by a remuneration specialist and a remuneration survey with staff. This demonstrated that existing remuneration systems and processes did not deliver fair outcomes, were not in line with the market and were no longer fit for purpose. The remuneration system no longer aligned with the strategic direction and business imperatives of Council, nor the needs of staff.

19. Also included in the original budget is an increase in Corporate Support costs for IT of approx. $780k. This is a result of the following.

19.1. Expectations that some current costs would disappear when services were moved to Revera and SaaS (software as a service) products. This hasn’t happened due to dependencies that were difficult to spot during LTP budgeting.

19.2. Increased data collection and use of technology across all business units, e.g. drone video footage replacing site visits with pen and paper. This adds significant cost to data indexing, processing and storage.

19.3. End-users tend to have more complex hardware now (instead of PC plus monitor – we’re purchasing, configuring and supporting laptop + docking station + phone + tablet for some users giving more ability to work mobile in the field).

19.4. Some improvements to ICT maturity and resilience come with extra cost – support agreements, software test environments, cyber-security protections.

19.5. Increase in headcount over and above original LTP estimates.

20. The following chart provides a snapshot of what was driving the need for a 7.3% increase.

2020-21 Annual Plan (7.3% overall increase vs 2019-20 Annual Plan)

21. Following the 11 March workshop, and in response to the impact of recent events, Councillors asked officers to revisit and present a budget which accounts for the proposed 7.3% rate increase through borrowing (in effect delivering a 0% rate take increase). The proposed expenditure and service levels were to remain the same with Council borrowing to pay for:

21.1. The extra 7.3% in rates that was needed to fund the 2020-21 budget, and

21.2. The reduction of non-rate revenues as a result of the economic impact.

22. In addition, requested for community consultation, a $1m Recovery Fund. It is proposed this be funded through a partial reallocation of a $3m budgeted placeholder for long-term office accommodation.

Workshop Discussions

The 2020-21 Annual Plan Budget & Financial Statements

23. The 2020-21 Annual Plan Budget has been revised to reflect the expectation that Council non-rate income, including that derived from HBRIC (Napier Port dividend) and managed investment fund portfolios, including the Future Investment Fund, and Long-Term Investment Fund will be impacted from the current economic downturn. The NZ stock market has already seen a significant loss in value and a reduction in the official cash rate means lower returns on fixed interest securities. In addition, we have also reviewed revenue budgets for cost recovered consents and compliance activities and have reflected adjustments to the expected lower levels of income from these activities.

Key Assumptions – Detailed further in next section

24. In preparing the revised budget and associated projections and narrative for the 2020-21 Annual Plan the following assumptions have been applied:

24.1. That there will be a significant economic impact as a result of COVID-19 and many ratepayers and businesses will be adversely affected during the 2020/21 financial year.

24.2. HBRC and HBRIC revenues, in particular its investment revenues, will be impacted with a resulting reduction in revenue for HBRC.

24.3. An interest rate of 3.0% on new borrowings for project expenditure with an assumption of 2.5% used to show the cost of servicing the COVID-19 loan (with a range of repayment terms as shown at the bottom of Table 1 for comparison for the COVID-19 loan).

24.4. No allowance of interest on the COVID-19 loan until the 2021-22 financial year (assumes that the funds are not borrowed until the end of the financial year).

25. Based on changes to assumptions and a preferred option to collect the same value of rates charged in 2019-20, Council is budgeting for a deficit of $4.13m in 2020-21. This means that Council is planning to not balance its budget in the 2020-21 financial year. Council is entitled to plan for an unbalanced budget, however, in doing so Council must demonstrate that it is prudent to do so.

26. As proposed in the modelled scenario, adjustments have not been made to planned expenditure. The initial budget (presented 11 March) was already ‘tight’ given the cost pressures (IT overheads, cost of remuneration review, etc.). Therefore, proceeding with the proposed LTP levels of service requires the budgeted shortfall in income to be funded.

27. While Council did not ask officers to review the budget for cost-saving opportunities the executive team are continuing to discuss their position on, and the possibility of cost savings which will not significantly impact on the ability to deliver the services proposed in the LTP such as:

27.1. Travel and accommodation

27.2. Training / Conferences

27.3. Headcount - ceiling or sinking lid

27.4. Zero market movement / Salary increases for those already remunerated fairly

27.5. Long Term Accommodation project deferral

27.6. Use of contractors / procurement policy settings.

28. Community expectations will be that the management team demonstrates a high level of fiscal discipline and responsibility. Councillors have indicated an initial preference for no staff cuts however management will review the need for new staff appointments and efforts should be made to reduce expenditure where possible during the year.

29. Any savings achieved by management will reduce the size of the loan required to bridge the gap between revenue and expenditure for the 2020-21 Annual Plan year.

30. Rather than delay the budget process by attempting to make numerous changes to budgets, staff recommend that the budgets remain largely as they are in the Annual Plan with management asked to put in place measures to reduce costs wherever possible, without making changes to the levels of service.

31. When we refer to levels of service we refer to the Council priorities and work programmes set out and consulted on as part of the LTP. In an Annual Plan year Council can revise the budgeted cost to deliver services (and consult if the cost and proposed rates income differs significantly from that in the LTP). Minor changes with services are ok provided they do not change the strategic direction or significantly change the quantum of work agreed upon in the LTP.

Changes to the Budget

32. The following table details the changes proposed to key assumptions. The modelled Conservative Scenario is included in the revised financial statements which form the basis of the Annual Plan consultation.

Table 1 – Summary of Changes to March version of 2020-21 Annual Plan Budget

Description	Note	11 March 20-21 AP ($000)	Change Reduction 15 April 20-21 AP ($000)	Conservative Scenario Reduction ($000)	Ultra Conservative Scenario Reduction ($000)	Optimistic Scenario Reduction ($000)	Impact on Scheme Rate (scheme reserve funded)
		Conservative Scenario = Scenario reflected in Financial Statements			Alternative Scenarios
Budget items changed
Rates (from 7.3% down to 0%)	29.3.1	26,430	1,790	1,506	1,506	1,506	284
Dividend from Port (HBRIC)	29.3.2	8,067	5,067	5,067	8,067	3,067
Interest\returns from Port IPO Future Investment Fund & other investments	29.3.3	6,798	1,535	1,535	2,851	219
Compliance Fees & Charges budget	29.3.4	1,584	929	929	1,229	929
Resource Consents Fees & Charges budget	29.3.5	1,979	429	429	629	229
Interest on Reserves and operating cashflows	29.3.6	858	230	91	121	61	139
Rates Penalties	29.3.7	230	100	26	26	26	74
SubTotal – Revenue Items		45,945	10,080	9,584	14,429	6,038	497
Reduction in budgeted transfer to Dividend Equalisation Reserve	29.3.8	(2,000)	(2,000)	(2,000)	(2,000)	(2,000)
Total Budget Changes			8,080	7,584	12,429	4,038	497

Loan Interest Rate Assumption		2.50%
Cost of Servicing Loan ($000’s)		Loan Term	3 Years	2,626	4,305	1,398
		Loan Term	5 Years	1,615	2,647	860
		Loan Term	10 Years	858	1,406	457
%age impact on Rates		Loan Term	3 Years	10.7%	16.3%	5.3%
		Loan Term	5 Years	6.1%	10.0%	3.3%
		Loan Term	10 Years	3.2%	5.3%	1.7%

33. Three scenarios have been presented to model the potential impacts.

33.1. Conservative Scenario (Moderate) - $7.58m rates impact

33.2. Ultra Conservative Scenario (Worst) - $12.4m rates impact

33.3. Optimistic Scenario (Best) - $4.04m rates impact

34. The Council has chosen to prepare the consultation document and financial modelling based on the Conservative Scenario.

35. The Council has chosen to model the impact of deferring the rates increase by recovering the cost from ratepayers over a 10 year period. The treasury policy will determine the actual borrowing term and conditions.

36. Accurately predicting the revenues for 2020-21 is difficult at this stage however we are required to make our projections based on assumptions and the best data we have available at present so we can present a revised budget to the community.

36.1. A reduction in budgeted rates increase from 7.3% down to 0% results in reduced rates revenue of $1.7m. Some of the reduction will result in various scheme reserves being depleted while the remainder ($1.5m) needs to be funded from borrowing.

36.2. Despite being the majority shareholder, the Council (via HBRIC) cannot access any more financial data, than is available to all investors for Napier Port. The degree to which the Port’s 2020-21 profit, and the dividend paid to HBRIC, will be impacted is unknown, however it is prudent to anticipate that there may be some impact on the planned dividend from the Port. Treasury advisers PWC, have indicated that a conservative approach would be to plan for no dividend. At this stage though, we believe we should anticipate a HBRIC dividend to Council, utilising funds from a Port dividend, at a lower level than previously planned. The modelled Conservative Scenario assumes a $3m dividend with the more Optimistic Scenario assuming a $5m dividend. No dividend is assumed under the Ultra Conservative Scenario.

36.3. The Council’s portfolios of managed funds have @31 March 2020 been impacted by the reduction in share market prices and the drop in interest rates resulting in approx. -2% loss on the consolidated portfolio which equates to a loss of approx. $9m in capital value. We expect the most significant impact will be realised in the current (2019-20) financial year, however returns in 2020-21 will be off a lower capital base and we should expect continued volatility and lower company dividends throughout 20-21. The returns for the three scenarios were modelled off the fund balance as at 31 March 2020, after the impact of a significant value write-down and projecting the balance forward. Feedback from one of the fund managers (Jarden) was that it is possible expectations of a 5% return in 2020-21 could be reasonable, however this is off a lower capital base. As $60m is invested through HBRIC it is assumed, assuming no intervention, that tax will be paid on the HBRIC portfolio earnings. The budgeted return for each scenario is:

36.3.1. Conservative Scenario = 4%

36.3.2. Ultra Conservative Scenario = 3.0%

36.3.3. Optimistic Scenario = 5.0%

36.4. Council has increased the level of its compliance activities in the LTP and Annual Plan. Staff have reviewed the likely revenues and have assumed that similar levels to those actually charged last year (2018-19) will be collected. It would be inappropriate to aggressively seek to increase the actual fees charged in this area in the 20-21 year. This results in a potential reduction of $928k in budgeted revenues reflected in the Annual Plan. For the Ultra Conservative Scenario a further reduction of $300k has been assumed.

36.5. Resource Consents activity and revenues have increased significantly over the past two years. Factored is a decline in revenue due to economic conditions. If the volume of consenting activity declines staff may need to be redeployed i.e. to either policy or compliance activities. If this occurs resourcing implications will be reviewed however it is prudent to assume there will be a reduction in the net revenue for Council. For the Ultra Conservative Scenario, a further reduction of $200k has been assumed.

36.6. If the Council’s revenue and reserve levels decline, coupled with possible rates postponements, the Council’s cash position will be affected. Therefore, due to a combination of less cash and lower interest rates the Council’s ‘other interest income’ will reduce so an allowance has been made for a reduction in other interest.

36.7. The LTP budget was reflected in the 11 March draft Annual Plan budget. This assumed a dividend of $8m with $2m transferred into the dividend equalization reserve (net $6 used to reduce the amount collected from rates). A lower dividend projection means there will be no excess funds to be transferred to the reserve in 2020-21.

37. The Council currently has a heavy reliance on revenue from its investments to subsidise the cost of services, thereby reducing the level of rates it needs to collect from the community. The total derived from dividends, returns on cash investments and managed funds used to reduce rates is $12.8m which is approximately 50% of total rates. This means rates would be 50% higher without this source of revenue.

38. The following table shows revenue lines which have not been adjusted.

Description	11 March 20-21 AP	15 April 20-21 AP	Change	Conservative Scenario	Ultra Conservative Scenario		Optimistic Scenario
(All numbers in $000's)	Conservative Scenario		Impact on Rates		Impact on Rates (debt funded)
Revenue Subtotal (Budget Items Changed)	45,945	35,865	10,080	9,584		14,429		6,038
Revenue Items that have not been adjusted
Government Grants	3,933	3,933	-	-		-		-
Recoveries and targeted rates for Heat Smart, Sustainable Homes, FEMOs and ECS	1,100	1,100	-	-		-		-
Leasehold rents	2,343	2,343	-	-		-		-
Forestry Income	532	532	-	-		-		-
Fees and Charges for Integrated Catchment Management Activities	3,621	3,621	-	-		-		-

Other Activity revenues	3,242	3,242	-	-		-		-
Non- Cash P & L entries
Value Gain on Investment Properties & Forestry	3,118	3,118	-	-		-		-
Reduction in ACC Liability	917	917	-	-		-		-

Total Revenue	64,751	54,671	10,080	9,584		14,429		6,038

Income in Summary- Options for Consultation

39. The Council anticipates a significant reduction in income from investments, dividends and other non-rate income over the coming year, primarily due to the global impact of COVID-19.

40. This shortfall in funding is estimated at $6.1m. We believe that debt funding through a loan to manage the income gap is the most preferable way to support ratepayers and our economy rather than reduce our work programmes and therefore our levels of service. We plan to fund this shortfall over 10 years and this will add an additional $687k to the general rate in the following financial year. This will increase rates in 2021-22 by 2.6%.

41. Along with funding the income gap created by the anticipated drop in non-rate income, we are considering the impact on our community of the proposed 7.3% rates increase included as part of the Long Term Plan.

42. As the Council has low external borrowings, we have considered that one way to lessen the financial impact of COVID-19 on the region is to fund the rates increase by borrowing rather than increasing rates.

43. The consultation will offer three rate approach options to consider. The Council’s preferred option is to keep the rates revenue at the same level as 2019-20 and borrow the required funding. Alternative options are:

43.1. Proceed with the planned 7.3% rate increase in line with the Council’s 2018-28 Long Term Plan, or

43.2. Proceed with a 3.6% rates increase for 2020-21 and borrow the balance of the required funding.

Recovery Fund

44. The consultation is about the establishment of a Regional Council Recovery Fund of $1m. It is proposed to be debt funded for capital expenditure.

45. The Regional Council is working with PSGEs, other councils, business and central government through the Matariki Regional Economic and Social Development vehicle to develop a regional recovery plan of which the proposed Recovery Fund is intended to make a contribution.

46. The Recovery Fund would only be used to supplement any co-funding received from central government for shovel-ready projects to stimulate the Hawke’s Bay economy. Given forecasts that Māori will be disproportionately affected by the recession, it is the Regional Council’s intention to work with tāngata whenua on opportunities for Māori employment.

47. The money for the proposed Recovery Fund has been reallocated from a budgeted placeholder to borrow for the provision of additional office space and updated facilities for field staff. This would therefore have no impact on rates or the Council’s debt.

Other Budget Changes between LTP Year 3, Annual Plan 2019-20 and the 2020-21 Annual Plan

48. There have been some movements between the year 3 LTP budget and those presented in the 2020-21 AP.

48.1. Most revenue changes reflect the budget changes outlined above.

48.2. Operating expenditure on activities is significantly higher that what was presented in the LTP ($52.87m vs $47.23m - an extra $5.6m).

48.2.1. The biggest impact is the reclassification of the $3m budget for the Erosion Control Scheme as Capital Expenditure. As no Council asset is created (the expenditure relates to erosion control on private farms) this budgeted cost has been reclassified as operating expenditure in both the 2019-20 Annual Plan and 2020-21 AP

48.2.2. The remaining $2.6m variance reflects the continuation of the quantum change that occurred in the 2019-20 AP and the additional cost pressures that were outlined to Council on 11 March. The expenditure in the 2019-20 AP was $50.35m compared to the LTP budget of $45.48m for the same year

48.2.3. Finance costs are lower due to the use of a lower interest rate assumption (4.5% was used in the LTP budget projections).

Capital Expenditure in 2020-21 Annual Plan

49. The proposed Capital Expenditure $18.7m vs the LTP budget of $19.9m.

50. In addition, due to the delays caused by the lockdown, it is probable that a number of the 2019-20 projects will continue into 2020-21 with funding requested to be carried forward when Council considers its end-year report.

Summary of Capital Expenditure

Prospective Statement of Comprehensive Revenue and Expense
		Annual	LTP	Annual
		Plan	Year 3	Plan
		2019-20	2020-21	2020-21
	Note	($'000)	($'000)	($'000)
CAPITAL EXPENDITURE
Property, plant, equipment & intangible assets	5	7,633	5,213	8,011
Infrastructure assets - flood & drainage		3,920	4,396	2,839
Infrastructure assets - open spaces & regional assets		160	160	227
Forestry assets		207	265	250
Community net lending from reserves		250	3,021	-
Sustainable homes net lending		168	963	953
Regional Freshwater Security		3,086	-	1,574
Advances to Napier / Gisborne rail & Investment Company		-	-	-
Public debt repayments	4(a)	4,879	5,904	4,883

Total Capital Expenditure		20,303	19,922	18,737

NOTE 5 - Depreciation and Amortisation
	Annual	Annual	LTP	Annual
	Report	Plan	Year 3	Plan
	2018-19	2019-20	2020-21	2020-21
	($'000)	($'000)	($'000)	($'000)

Capital Expenditure on Property, Plant & Equipment


Land and Buildings	224	-	3,000	3,223
Motor Vehicles and Plant	942	1,273	928	1,256
Science Equipment	544	3,138	597	972
Technical Equipment	95	177	23	23
Computer Equipment	278	870	310	733
Office Furniture and Equipment	267	25	25	124
Intangible Assets – Other	1,218	2,150	330	1,680
Capital Work in Progress	101	-	-	-

Total Capital Expenditure on Property, Plant & Equipment	3,669	7,633	5,213	8,011

51. The above tables set out the proposed Capital Expenditure in the 2020-21 Annual Plan. The key capital projects and variances are following:

Property Plant & Equipment (Note 5)

52. This includes a $2m provision for as a place holder for long-term office accommodation.

53. Some minor building asset renewal items totaling $223k have been identified and included in the budget. This includes a security system upgrade, Council Chamber technology and meeting table replacements.

54. Some additional items of plant are proposed, mainly for Works operations.

55. In the LTP additional funding for SKYTEM was incorrectly included in the operating budget. $375k is included for 2020-21.

56. A more detailed needs assessment has resulted in additional budgets being proposed for computer equipment and intangibles (software).

56.1. The additional computer equipment items include a backup\disaster recovery solution ($150k) and new aerial photography ($250k)

56.2. A number of software enhancements are proposed including a replacement Finance System, Asset Management System & Electronic Document management System.

Infrastructure Assets – Flood & Drainage

57. This mainly reflects changes in the proposed timing for projects. $1.2m in asset renewal projects have been deferred as has $400,000 for new works on the Heretaunga Plains Flood Control Scheme.

58. Community Net Lending ($3m in LTP) is the Erosion Control Scheme funding which has been reclassified as operating expenditure.

59. The Regional Freshwater Security Project was included in the LTP however it did not appear in the summary of Capital expenditure. It was classified as Council acquiring an investment in the LTP.

60. During 2020-21 a disciplined approach will be taken to delivering the proposed capital programme. Preference will be given to projects that will underpin the economic recovery. Council does have the ability to modify and accelerate the capital programme as long as the projects proposed are in the LTP.

Impact of Borrowing to Fund the 2020-21 Revenue Shortfall

61. Borrowing to fund the shortfall in 2020-21 will have an impact on future years.

62. In 2021-22, year 1 of the 2021-31 LTP, Council’s rates requirement, based on the preferred option will be:

62.1. The proposed 2020-21 increase of 7.3%, plus

62.2. Any additional increase needed to fund Councils operations in 2021-22, plus

62.3. The cost of servicing and repaying the $7.58m loan raised in 2020-21

63. The overall impact on rates in 2021-22, including the repayment of the funding for the shortfall in non-rates revenue, would be $2.6m, which is an increase of 10.7%.

64. As 2021-22 is an LTP year Council does have the opportunity to reset the proposed service levels and consider options such as smoothing the impact, by phasing in the increases over more than one year.

65. We expect that, based on our cashflow forecast, we will not need to borrow for the 2020-21 shortfall of $7.8m until the later part of the year. Therefore, no debt servicing costs have been included in the 20-21 year.

Financial Prudence Obligations under LGA 2002

66. Financial prudence and impact of decision to budget for a deficit and to borrow to fund the 2020-21 budget deficit.

67. Council is planning to not balance its budget in 2020-21 with an operating deficit of $4.37m forecast in the statement of comprehensive income.

68. This means that Council is not able to achieve the balanced budget benchmark (of 100%) for the 2020-21 financial year. The projected ratio is 92.6%. This means that Council’s revenues are only 92.6% of the amount required to balance the budget.

69. In addition, Councils cash deficit, which is proposed to be funded from additional borrowings, under the conservative scenario, is $7.58m.

69.1. The impact of borrowing to balance the budget in 2020-21 is that future ratepayers will be asked to pay more. They will be asked to:

69.1.1. Repay the loan taken out to fund the shortfall in 2020-21, plus

69.1.2. Step back up to the level of rates that should have been charged, plus

69.1.3. Fund any projected increase in the cost of delivering services between 2020-21 and 2021-22.

70. Council is able to set an unbalanced budget for 2020-21 if it considers it financially prudent to do so after considering:

70.1. section 101(1) and (2) of the LGA 02, and

70.2. the matters stated in section 100(2)(a) to (d) of the LGA 02.

HBRC Financial Position and Ability to Debt Fund a Deficit in 2020-21

71. Raising additional debt will not breach any of the debt affordability benchmarks nor the covenants in the treasury policy. Council has enough headroom in terms of its ability to raise additional debt.

72. HBRC has significant assets with large levels of investments that could be sold / divested and converted into cash if required. The 2020-21 balance sheet projects that Council will have investment assets of almost $500m:

72.1. Finance Assets and cash totaling $109m

72.2. Investment in HBRIC worth $390m comprising

72.2.1. Port shareholding of $330m (at $3 per share)

72.2.2. HBRIC managed funds invested of $60m.

72.3. This, plus relatively low debt levels means that HBRC will have no trouble accessing funds to finance its activities.

73. However, Council relies heavily on investment returns to fund its activities and effectively subsidize the amount collected from ratepayers.

73.1. Any reduction in capital invested will have a cost.

73.2. For example, further divestment of shareholding in Napier Port, or divestment of invested funds would result in either the share of port dividend being reduced or the return from managed funds will be reduced. (Note: We could not reduce our shareholding of Napier Port, to less than 51%, without a special consultation.)

73.3. This means that any use of funds on an activity that does not deliver a return that is at least equivalent to the current budgeted returns will result in an additional cost that will in the longer term, need to be recovered from higher rates.

73.4. This is why the proposed funding of the projected budget deficit has been based on the equivalent cost of borrowing and repaying a loan. This approach preserves the current level of investments that Council relies on to fund services and keep the level of rates down.

74. Officers recommend debt funding particularly given the historically low cost of borrowing at the present time.

Summary of Port IPO Proceeds

75. Council received $103.7m in net proceeds from the sell down in the port shareholding. The following table shows the funds currently invested for the Long-Term Investment Fund (ex RWSS) and Port Proceeds.

Description	Total Capital contributed $	Value 31 Dec 2019 $	Value 31 March 2020 $
LTIF – HBRC	46,620,291	50,651,390	46,305,031
HBRIC (port Proceeds)	59,013,403	60,013,359	58,452,263
HBRC (Port Proceeds)	43,967,485	44,703,200	41,711,848
Total	149,601,179	155,367,949	146,469,142

76. These funds have been invested in managed funds by HBRC and HBRIC as required by Council resolution. Council resolved to place the funds into the Napier Port IPO Future Investment Fund reserves. These funds are expected to deliver a 5% average annual return in addition to growing by 2% per annum (to inflation adjust the capital base).

Difference between the P & L and Cashflow position

77. The Statement of Comprehensive Income presents the traditional P & L view which presents both cash and non-cash transactions that impact on Council’s statement of financial position (Balance sheet).

77.1. The statement of general funding position, at the bottom of the Statement of Comprehensive Income links the P & L view back to the funding view.

78. In addition, the statement of cashflows, and the Funding Impact statement present Council with the true view from a funding perspective – how much cash are we spending and where does it come from.

What does a 0% increase mean for HBRC ratepayers?

79. For every rate factor that HBRC charges we are charging the same amount of rates as we did for the current 2019-20 year. However as rating unit circumstances (e.g. subdivision, revaluation, building extensions) change the rates allocation changes for individual properties.

80. In 2019-20 the HBRC ratepayer base comprised a total 71,067 rating units:

80.1. 51,352 Urban properties paying an average of $328.19 each ($16.853m in total)

80.2. 19,715 Rural properties paying an average of $592.25 each ($11.676m in total)

81. Rates vary from property to property based on the relative property value and as there are approximately 116 different rate factors this is a complicated calculation that affects different properties in different ways. For example, the sample properties in the 2019-20 Annual Plan show that while the sample properties on the Napier Hill and in Havelock North were paying $336, a property in Flaxmere was paying $142 and the sample properties in Wairoa and Central Hawkes Bay were paying $135 and $146.

82. Regional Councils are unique in that their ratepayers come from multiple district or territorial councils. Each council has a different revaluation date which means that the relative rateable values used for rating can vary widely relative to the current market values. To ensure there is an even playing field with properties in each territorial council treated equally a value equalization needs to occur so that relativities are maintained.

83. Hastings District properties were revalued in 2019 and the new property values must be applied in the 2020-21 rating year. This means that changes in value between properties in the Hastings District will mean that some properties will pay more, while others pay less.

84. In addition, the value equalization process can and does create fluctuations in the share of rates paid by each territorial council area. This year, due to the equalization process we are seeing Hastings District properties, as a group, paying more and properties from the other council areas (Napier, Central Hawkes Bay and Wairoa) paying less. In particular, the change is more significant for rates changed on a land value basis where Hastings land values have increased by 26% compared to only a 9% increase in Napier.

85. The following table shows the movements in value based on the equalization certificate provided by QVNZ.

Movement in Equalised Values 2018 to 2019
Council Area	No of Assessments	Growth in assessments	Capital Value Movement	Land Value Movement
Hastings	31,358	227	14.40%	26.20%
Napier	25,679	87	11.50%	9.00%
Central Hawkes Bay	7,498	114	16.00%	12.60%
Wairoa	6,657	6	18.30%	16.80%
Taupo	47	-	-10.70%	-11.00%
Rangitikei	22	-	3.60%	8.50%
Total	71,261	434	13.72%	18.24%

Rates Postponement and Rates Remission Policies

86. The Council has existing policies that apply to the remission or postponement of rates on rating units.

87. Under the legislation there is a key difference between how policies for remission must be applied compared to policies for postponement.

87.1. Where a property meets the criteria for remission Council may grant a remission.

87.2. Where a property meets the criteria for postponement Council must grant a postponement.

88. In addition, a remission results in a permanent loss of income by Council (means other ratepayers pay for the amount remitted). A postponement is just that, the date when the rates must be paid is postponed but the rates still remain payable.

89. A general outline of what Council has current rate remission policies for is:

89.1. Remission of Rates on Māori Freehold Land – Where no occupier is receiving financial benefit from the land.

89.2. Remission of Rates in Special Circumstances – Provides flexibility where Council wishes to grant remission to a rating unit(s) where remission is not able to be granted under any other policy

89.3. Remission of Rate Penalties – Provides some flexibility where payment has been missed and a ratepayer pays the full rates or enters into a payment plan.

89.4. Remission of Rates for Ratepayers Affected by Natural Calamity – For those experiencing financial hardship where a natural calamity has affected the use or occupation of land.

89.5. Remission of UAGC (Uniform Annual General Changes) – Where a ratepayer has several near adjacent rating units and the statutory exemption does not apply or where a developer holds multiple titles as part of an urban development.

90. Council currently has a single policy that provides for the postponement of rates on a rating unit.

90.1. This applies in cases of financial hardship or natural disaster. The Chief Executive has been delegated the power to implement this policy.

91. As we move into uncertain times for Council and our ratepayers, the important thing for Council is to ensure it has in place policies on the remission or postponement of rates that give Council the ability to respond to changes in the ability of ratepayers to pay their rates.

92. The current policies do appear to give Council an ability to respond where a ratepayer is experiencing financial hardship.

92.1. The ability to grant a remission in certain circumstance is a broad “catch all’” policy where Council wishes to grant remission. The key to applying this policy is to have clear criteria and to apply it consistently.

92.2. The postponement policy applies where there is either financial hardship or a natural disaster.

92.3. Both require a ratepayer to apply and both require an assessment of the ratepayer’s ability to pay. Council does have the ability to define how rigorously any criteria are to be applied.

93. The recommended mechanism if Council wants to provide relief is through the rate postponement policy where the payment of rates is deferred.

94. Officers recommend a paper specifically reviewing the existing polices is prepared for Council discussion at the 24 June 2020 Council meeting, any required amendments can therefore be resolved on or before adoption of the annual plan.

PART 2: Discussion for 27 May 2020 Meeting

Payment Dates and Penalties

95. Staff have considered the impact of the COVID-19 and the timing of the penalties that had been previously adopted by Council to apply in the 2020-21 year. Following this analysis, the following payment dates and penalty dates have been included within Funding Impact Statement (attached):

95.1. The payment date for 2020-21 has been kept as 20 September as adopted by Council on 26 June 2019.

95.2. Penalties for non-payment of the current rates invoice has been moved from 20 September back to the 2019-20 date of 1 February 2021. This allows more time for ratepayers to pay their rates or organise a payment plan with Rates Staff.

95.3. The key message to be conveyed through communications following the adoption of the Annual Plan and during the Rates process will be that Council will work with ratepayers in setting up payment plans with consideration to individual circumstances.

95.4. Any ratepayers who have agreed a payment plan / process with Council staff will not be charged penalties.

95.5. Postponement of rates payments could allow for payment over the 2020-21 rating year and beyond if necessary.

96. Officers recommend this be discussed in detail at the 24 June 2020 Council meeting as part of the remissions / postponements policy review.

Annual Plan Legislation Requirements and Consultation

97. The Regional Council had not intended to consult on this year’s Annual Plan as our programmes of work and budget were on track with our Long Term Plan until COVID-19 and the drought. Changes to the Local Government Act in 2014 enabled councils to adopt an Annual Plan without consultation unless there are significant or material differences from the content of the Long Term Plan for the financial year to which the proposed Annual Plan relates, of if the local authority chooses to.

98. A change in the proposed Rates Approach and establishing a Recovery Fund are significant and/ or material changes to what was planned for year 3 of the Council’s 2018-28 LTP and therefore require consultation.

99. Consultation must give effect to section 82 of the LGA. Additionally, a Local Government New Zealand (LGNZ) and Society of Local Government Managers (SOLGM) Guidance Paper for Covid-19 Local Government Response articulates that online engagement is sensible, but consultation using only the internet is unlikely to be adequate in terms of section 82. Councils should provide consultation information in their usual ways except by any means which would breach COVID-19 lockdown rules, or which are no longer available due to external constraints, i.e. community newspapers no longer being published/delivered.

100. Councils should also consider alternatives to the internet, such as:

100.1. using local radio stations to raise awareness and provide information about engagement and participation opportunities;

100.2. options for contacting people by telephone and enabling telephone submissions;

100.3. household mailouts and/or special deliveries of printed documents under certain circumstances; and

100.4. accepting and processing hard copy submissions by post with reference to advice from health authorities.

101. Section 82 does not specify a required period for consultation, however advice sought by the Regional Council advises that three weeks is appropriate for the proposed consultation. We are also advised that the variances do not trigger the need to amend our Long Term Plan, which would require a special consultative procedure.

102. As provided for in section 97 the triggers for a LTP amendment are:

102.1. A decision to significantly alter the intended level of service provision for any significant activity undertaken by or on behalf of the local authority, including a decision to commence or cease any such activity, or a decision to transfer the ownership or control of a strategic asset to or from the local authority, unless the decision is explicitly provided for in the Long Term Plan and the proposal was consulted on in a LTP consultation document.

103. Officers consider the planned consultation process meets the requirements of section 82 of the LGA 2002, the topics do not require an amendment to the LTP, the process gives effect to the guidance provided by LGNZ and SOLGM, and legal advice sought independently by Hawke’s Bay Regional Council.

104. The timeline for consultation is:

8 June 2020	Consultation opens
28 June 2020	Consultation closes
15 July 2020	Hearing and deliberations
29 July 2020	Council adopts Annual Plan (COVID-19 guidance may affect the way we hear submissions).

105. People will be able to make submissions to the Regional Council in the following ways: online, email, the Council’s facebook page, text, voicemail, and hardcopy submission. The intention is also to make submission forms available at our offices (Napier, Taradale, Waipawa and Wairoa) and at the region’s libraries – which are open under COVID-19 Alert Level 2 guidance.

106. A communications plan has been prepared and will be circulated prior to, and presented for feedback on 27 May. This outlines the tools that will be used to inform people that consultation is taking place and advise people how they can have their say. Due to COVID-19, the plan is geared toward digital rather than physical engagement. Two digital public meetings are planned for June, through Facebook Live using Zoom, giving people the opportunity to ask questions about the proposals in the consultation document. These will be attended by Council’s Chief Executive, Chair and Councillors.

107. The key messages in the communication plan are:

107.1. Hawke’s Bay people have been personally and financially affected by COVID-19 and the drought

107.2. People facing hardship may need extra support this year

107.3. We intend to maximise leveraging external funding to support the regional recovery and accelerate projects

107.4. Have your say on this year’s rates and a recovery fund by 28 June.

Consultation Document

108. The consultation document is an exceptions document and focuses on the key proposed variances to year 3 of the 2018-28 LTP. It therefore should be read in conjunction with the LTP.

109. Section 95A of the LGA 2002 sets out the purpose and content requirements for the consultation document. Officers consider that the proposed draft consultation document meets the requirements of the Act. Section 95A(4) requires Council to adopt the supporting information before its adopts the consultation document. This is reflected in the order of the recommendations in this report.

110. The consultation document and supporting information will be made available on Council’s website. The intention is to also make these available to the public at Regional Council offices and at the region’s libraries - which are open under COVID-19 Alert Level 2 guidance.

Options Assessment

111. Council can either adopt the consultation document and supporting information today requesting minor changes, or request substantial changes if it believes the consultation document does not meet the needs of Council or the community. Not adopting at this meeting could further delay adoption of the draft Annual Plan.

Option 1: Adopt the consultation document and supporting information today, agreeing on small changes if required
Advantages:	· Meets the requirements of the LGA 2002. · Consultation can begin as scheduled and the process can remain on track for the new proposed adoption date of 29 July 2020.
Disadvantages:	None
Option 2: Do not adopt the consultation document and supporting information today, and/or request substantial changes
Advantages:	Council can direct officers to make changes if Council believes the consultation document does not meet its needs or the needs of the community.
Disadvantages:	Substantive changes could further delay the adoption date of the draft Annual Plan. Any delay in the adoption of the Annual Plan would mean that invoicing of this year’s rates could be delayed or require 2 invoices to be raised based on the requirement.

Significance and Engagement Policy Assessment

112. Council officers have determined that the changes proposed to the Annual Plan are significantly and/or materially different from what was forecast for year 3 of the 2018-28 Long Term Plan. Council is therefore required to consult in accordance with section 82 of the LGA 2002. The decisions sought in this paper are to initiate the consultation.

Considerations of Tangata Whenua

113. As stated earlier on this report Regional Council is working with PSGEs, other councils, business and central government through the Matariki Regional Economic and Social Development vehicle to develop a regional recovery plan of which the proposed Recovery Fund is intended to make a contribution.

114. Given forecasts that Māori will be disproportionately affected by the recession, it is Regional Council’s intention to work with tāngata whenua on opportunities for Māori employment.

Financial and Resource Implications

115. The cost to implement the communications plan for community consultation is estimated at $46,045 + GST. The most significant cost is the postcard drop to all ratepayer mailboxes at $34,275. A physical postcard delivered to every ratepayer satisfies the intent to reasonably consult with our community, who may not otherwise be reached by digital, print and radio advertising

116. It also helps to give effect to advice from LGNZ and SOLGM that consultation using the internet only is unlikely to be adequate and alternative options should be considered. A household mailout was one of the alternatives recommended for consideration, the alternate option of a postcard provides significant cost savings.

Decision Making Process

117. The Local Government Act 2002, section 82(a)(3) sets out the consultation required for an Annual Plan and states that a Consultation Document is required where there are significant or material differences between the proposed Annual Plan and the content of the LTP for the financial year to which the Annual Plan relates.

118. Council has determined that there are some material and significant issues and these are covered in the Consultation Document prepared for the special consultative procedure.

Recommendations

That Hawke’s Bay Regional Council:

1. Receives and considers the “Adoption of 2020-21 Annual Plan Consultation Document and Supporting Information” staff report.

2. Adopts the following supporting information and, as amended at this meeting, to the 2020-21 Annual Plan and Consultation Document:

2.1. Financial Statements

2.2. Draft 2020-21 Funding Impact Statement including sample rates for specific properties

2.3. Group of Activity proposed performance measures

3. Adopts the Consultation Document for the 2020-21 Annual Plan, incorporating any amendments made at the 27 May 2020 Regional Council meeting.

4. Agrees that the Chief Executive and Group Manager Corporate Services are delegated to approve any minor amendments and edits required to the supporting information and the consultation document prior to publication for consultation.

Authored by:

Drew Broadley

Community Engagement and Communications Manager

Ross Franklin

Contractor, Finance

Mandy Sharpe

Project Manager

Bronda Smith

Chief Financial Officer

Approved by:

Jessica Ellerm

Group Manager Corporate Services

Attachment/s

⇩1	Financial Statements for the Draft 2020-21 Annual Plan
⇩2	Draft 2020-21 Funding Impact Statement
⇩3	Council Activities
⇩4	Draft Consultation Document
⇩5	HBRC Climate.Smart.Recovery. Presentation