Summary Report on Ring-Fencing, Hawke’s Bay councils
Local Government Commission, 27 February 2015
Introduction
1.
This report provides a summary of the information received by the Local Government
Commission (the Commission) on the current financial position, and condition and
funding of infrastructural assets of the Hawke’s Bay councils.
2.
It also explains the decision made by the Commission to propose ring-fencing the
financial arrangements (assets and debt) of the existing Hawke’s Bay territorial
authorities, as part of the Commission’s overall proposal to establish a single Hawke’s
Bay council with five local boards.
Background
3.
The draft Hawke’s Bay reorganisation proposal, released in November 2013, proposed
that for a period of no less than 6 years, loans raised by the existing Hawke’s Bay
councils be repaid by the areas for which the loan was raised i.e. there be targeted
rates over these areas. This specific proposal was the subject of many submissions and
much debate during the hearings on the Hawke’s Bay reorganisation proposal.
4.
Along with debate on the appropriateness of ring-fencing current financial
arrangements, there was also some media focus about the actual levels of debt of the
respective councils, including the extent to which loans were raised by the councils
from external sources and/or by borrowing against their own internal reserve or
investment accounts.
5.
In November 2014 the Commission released a position paper on Hawke’s Bay in light
of the enactment of legislation allowing for establishment of local boards as part of a
reorganisation proposal for a unitary authority as was the case in respect of the
Commission’s proposal for Hawke’s Bay.
6.
While the position paper also proposed a number of other amendments to the
Commission’s original draft proposal, the Commission reserved its position in respect
of the issue of the ring-fencing of financial arrangements pending receipt of further
information on the financial position of the existing Hawke’s Bay councils and also on
the condition of council infrastructure and plans for future investment in that
infrastructure. This information was important for ensuring equitable arrangements
were proposed as part of any final reorganisation proposal.
7.
When considering issues relating to establishing a single council for Hawke’s Bay, the
Commission noted that important equity concerns arise in relation to both the
councils’ current financial positions, such as levels of net debt, but also in relation to
future commitments and liabilities. A need to renew or replace costly infrastructural
assets in future is as much a liability as a loan that has to be repaid.
8.
Gaining a complete picture of councils’ financial positions and the state of their
infrastructural assets requires good quality information. The Commission notes that
the Auditor-General has recently reported on funding and management challenges
relating to infrastructure facing local authorities across the country and that, although
they tend to have a lot of data, local authorities do not necessarily use it well, or use
the best data, to support decision-making on infrastructural assets.
9.
Given the complexity of the issues involved, the Commission contracted Brian Smith
Advisory Services Ltd and MWH Global to provide reports respectively on the financial
position of the existing Hawke’s Bay councils and an analysis of the current state of
their key infrastructural assets (roading, water supply, wastewater and stormwater),
proposed future expenditure plans and an opinion on the reliability of their current
asset management plans. Copies of these reports are available on the Commission’s
website.
Analysis undertaken for Local Government Commission
Financial position of councils
10.
The report from Brian Smith Advisory Services Ltd confirmed that the four Hawke’s
Bay territorial authorities are in quite different financial positions. Table 1 below
shows the position of the respective councils in terms of their net financial position,
which is measured by taking gross financial assets (defined as the immediate and
practically realisable portion of council investments and cash holdings including such
things as term deposits, bonds and shares in publicly listed companies) less total
borrowing (both external and internal).
11.
Where gross financial assets are greater than total borrowing the net financial position
is positive, and where gross financial assets are less than total borrowing the net
financial position is negative.
12.
Table 1 shows that Napier City Council ($78.6m) and Wairoa District Council ($12.5m)
have positive net financial assets, while Central Hawke’s Bay Council (-$0.3m) and
Hastings District Council (-$45.2m) have negative net financial assets. It also shows
that all four territorial authorities in Hawke’s Bay use internal borrowing and that all
bar Napier City Council have some level of external debt.
13.
The Hawke’s Bay Regional Council also holds significant financial assets. These assets
are managed for the benefit of the region as a whole and would continue to be
available for the benefit of the region after the Commission’s proposed
reorganisation. Therefore there is no need or reason to consider ring-fencing them, or
regional council debt, and these have been excluded from the following analysis.
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Table 1: Debt and investment comparisons between Hawke’s Bay territorial authorities
Central Hastings Napier
Hawke’s District City
Bay
Council Council
District
Council
14.
Wairoa
District
Council
Total
across
region
Financial assets – gross ($m)
18.3
42.6
115.4
23.7
200.0
Financial assets – external ($m)
7.1
10.5
78.6
17.5
113.7
Public debt - external ($m)
7.4
55.7
0.0
5.0
68.1
Internal borrowing ($m)
11.2
32.1
36.8
6.2
86.3
Total borrowing ($m)
18.6
87.8
36.8
11.2
154.4
Net financial assets ($m)
-0.3
-45.2
78.6
12.5
45.6
Net financial assets per property ($)
-40
-1,496
3,162
1,669
650
Net financial assets per person ($)
-24
-617
1,373
1,584
302
The councils’ current long-term plans show slight variations in the levels of borrowing
by each council over the next 10-year period, however the overall picture and relative
position of the councils with respect to both forecast financial assets and total
borrowing does not change significantly.
Asset value and condition
15.
MWH Global surveyed the Hawke’s Bay councils on council asset values and condition
and reported its findings to the Commission as summarised in Table 2 below. Its
analysis is based on information and data provided by the councils themselves – in
response to survey questionnaires, follow-up questions, and sourced from the
councils’ annual plans and annual reports. The Commission considered this as solid a
basis of data and information as it could reasonably be expected to use for the basis of
its decision-making.
16.
Asset value is measured in terms of residual value, this being the replacement value of
assets less accumulated depreciation. The percentage of replacement value
represented by residual value can be used as a measure to illustrate the proportion of
the useful life of the assets that remain.
17.
The MHW Global report found that Hastings District Council has the largest
investment in physical assets, reflecting the combination of its urban infrastructure
and its large roading network. Central Hawke’s Bay District Council has more
substantial physical assets than Napier City Council, again reflecting the size and value
of its roading network.
18.
The regional average residual value as a percentage of replacement value for the
councils’ infrastructure is 71%. As Table 2 below shows, Hastings and Central Hawke’s
Bay councils have infrastructure with more remaining life than the regional average,
while Napier and Wairoa councils have infrastructure with less remaining life than the
regional average.
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19.
In practical terms the analysis means that Napier City and Wairoa District councils will
at some point in future need a higher level of investment than Hastings and Central
Hawke’s Bay District councils to maintain and renew their core infrastructural assets.
The amount of future investment that will be required to address the future renewal
and replacement of infrastructure can be considered to be just as real a ‘debt’ as a
formal loan instrument.
Table 2: Asset values and indicative condition
Central
Hawke’s
Bay
District
Council
Hastings
District
Council
Napier
City
Council
Wairoa
District
Council
Total
across
region
Replacement value ($m)
939
1,969
861
332
4,101
Residual value ($m)
(Depreciated replacement
value)
685
1,521
498
209
2,913
Residual value as a
percentage of
replacement value
73%
77%
58%
63%
71%
The case for ring-fencing the councils’ financial arrangements
20.
The analysis prepared for the Commission suggests that there are significant
differences between the financial positions of the four Hawke’s Bay territorial
authorities.
21.
In terms of net financial assets, two councils (Hastings and Central Hawke’s Bay
councils) start in a net debt position and two (Napier and Wairoa councils) start with a
surplus of financial assets over borrowing. The councils also, however, start from
different positions with respect to the condition of their infrastructure and the need
for future spending on that infrastructure.
22.
Table 3 below brings together both the net financial position of the four Hawke’s Bay
territorial authorities with the level of expenditure required to bring each council’s
infrastructure to the regional average. By adding the net financial assets of the four
councils (positive or negative) to the average remaining life of infrastructure assets
outlined in Table 2, the regional average measure rises from 71% to 72% in Table 3.
23.
Table 3 shows that both Napier and Wairoa councils would contribute a net
requirement for capital expenditure on renewals and replacement of their
infrastructure that is greater than their current financial assets. It also shows that the
greater residual life of Hastings District Council’s assets more than offsets its current
higher levels of debt.
24.
Put simply, improving Napier City Council’s infrastructural assets to have the same
residual life as the average across the region would require all of Napier’s $78.6m of
net financial assets and a further $45m. In contrast, Hastings’ infrastructure assets
have a longer residual life than the regional average.
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Table 3: Equalising asset values and indicative asset condition*
Central Hastings Napier
Hawke’s District City
Bay
Council Council
District
Council
Wairoa
District
Council
Total
across
region
Current position – residual value
plus net financial assets ($m)
685
1,476
577
222
2,959
Current position as % - residual
value plus net financial assets (as
% of replacement value)
73%
75%
67%
67%
72%
Equitable positions – residual
value required to achieve regional
average of 72% of replacement
value ($m)
677
1,421
621
240
2,959
Amount of required spending to
reach equitable positions – Row 1Row 3 ($m)
7
55
-45
-18
0
* Figures in this table have been subject to rounding
* A negative figure represents a net requirement for capital expenditure on renewals and
replacement of infrastructure that is greater than the council’s current financial assets
Commission’s proposal to ring-fence financial arrangements until July 2021
25.
The Commission has previously stated that the proposed new Hawke’s Bay Council
would need to develop an integrated rating system across Hawke’s Bay in conjunction
with the adoption of a new long-term plan for the 10-year period commencing 1 July
2021.
26.
There are significant differences in the current position of the existing territorial
authorities in terms of both their financial position and asset condition/values. There
was also much public debate and concern raised in submissions on the Commission’s
draft reorganisation proposal about the different financial position of councils.
27.
The Commission has looked to ensure equitable arrangements between existing
ratepayers in the four districts while not undermining the longer term desire to move
to an integrated rating system for the region. The Commission considers the ringfencing of current financial arrangements of the four territorial authorities is an
appropriate mechanism to address these concerns.
28.
Accordingly the Commission proposes to provide, should a final reorganisation
proposal be issued for Hawke’s Bay, for the ring-fencing of financial arrangements for
the period from constitution of the new council (1 November 2016) until adoption of a
long-term plan for the 10-year period commencing 1 July 2021.
29.
This means that until July 2021, the loans raised by the current district and city
councils would be serviced and repaid by their current ratepayers; and those councils’
current financial assets would be used for renewing and replacing infrastructure in
their areas to address the differences in infrastructure life.
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