Our financial strategy will ensure:
- We keep rates affordable
- We have the financial resilience to respond to climate change and other challenges
We have a wide range of challenges coming in the future. These include responding to the impacts of Climate Change, delivering on environmental and legislative requirements, and meeting the expectations of our communities. We acknowledge these significant uncertainties and are planning to create the financial resilience respond to as we need to.
Even in the face of these challenges we acknowledge that our rates income must be an affordable and sustainable path. We have maintained our investments to provide another income source to provide for this.
The Council Group – who we are
As part of the Council Group, Regional Council is the 100% owner of Quayside Holdings Limited (Quayside), 100% owner of the Toi Moana Trust, a part owner of Bay of Plenty Local Authority Shared Services (BOPLASS), and a part owner of the Local Government Funding Agency (LGFA).
Quayside manages our 54.14% shareholding in the Port of Tauranga. It also manages a portfolio of other investments, which has grown to be worth $380 million as at June 2020. These investments provide financial resilience for challenges like climate change, provide us income to offset the amount of rates required, and diversify financial risk across a range of investments.
The Toi Moana Trust manages a $45 million investment to provide a dividend to offset rates. BOPLASS guarantees us access to shared service arrangements and joint procurements to reduce costs. The LGFA enables us to to borrow at low interest rates.
Financial Framework – what informed our strategy
We carried out a comprehensive review of our financial framework as part of preparing for the Long Term Plan. We have a range of options available to fund work and manage financial risk. These are referred to as our financial levers.
This review included the following steps:
- Reviewing our expenditure requirements
- Identifying our financial levers and benchmarking with other regional councils
- Setting the financial results we aim to achieve
After consideration of all factors and options, Council has decided to set the following key results to ensure our financial sustainability in the long term.
Our Future – what we must achieve
We must increase our financial resilience to respond to climate change and other challenges
We have budgeted based on current forecasts for climate change and other challenges. As forecasts are updated there may be changes to existing services, like increased capacity for Flood Protection, and new requirements imposed on the Regional Council.
Other potential major changes for Council include:
- Legislative changes, especially the replacement of the Resource Management Act
- New environmental standards
- Supporting population growth, urban form and transport
- Economic recovery from COVID-19
We must keep rates affordable
Council set a 0% general real rates increase for 2020/21 to minimise the economic impacts of COVID-19. Current forecasts for economic recovery have improved since early 2020 and moderate rates increases appear to be feasible.
The real general rates increase is 5.8% (on average $16 per property) in 2021/22, then under 3% per annum. Real targeted rates increase by 8.9% in 2021/22, and the cost per household depends on the services that household receives.
Our Path – how we will get to our future
We will grow dividends from Quayside Holdings Currently we use the dividend from Quayside Holdings to offset the general rates requirement. This enables everyone to benefit from the regional wealth thatwe control, and helps keep rates affordable. Quayside has also retained a portion of its profits for investment and has achieved stronger than forecast profit growth for several years.
Council has chosen to increase the forecast dividend received from Quayside from $33.1 million in 2020/21 to $40 million in 2021/21. After that, the dividend is forecast to increase at 3% per annum. The increases in dividend allow us to:
- Offset general rates by an average of $301 per property in 2021/22
- Keep rates affordable into the future by increasing the dividend at approximately the rate of inflation
- Build reserves funds that can be used when required
Council also receives distributions from the $45 million Toi Moana Trust, which are forecast as $2.25 million per annum.
We will use financial reserves where appropriate
Our financial approach has meant that we have accumulated financial reserves. Some of these can only be used for specific activities (e.g. flood repair reserves funded by targeted rates) and some are for general purposes (including theasset replacement reserve which can be used for capital funding or repaying borrowings).
Since 2018, we have used borrowing to fund capital expenditure because this was more efficient than using our savings. Current interest rates forecasts do not show this to be advantageous and we are therefore planning to use our reserves to fund capital expenditure.
We are also planning to use reserves to fund our $20 million contribution to the Ōpōtiki Harbour Transformation and bus route optimisation as part of the Transport Systems Plan. These are both investments to improve long term wellbeing that we can fund without increasing rates or bus fares.
Increased Quayside dividends allows our forecast reserves to grow. We expect to use these reserves to fund the work required to respond to the major changes that affect us without needing to increase rates more than currently forecast.
When our borrowings need to be refinanced, we may choose to repay the borrowing from reserves depending on the interest rates and our financial requirements at the time.
In addition to the reserves held by Council, our 10 year target is for Quayside to increase the value of its non-port investments from $380 million to $700 million. This increased value will generate additional profits to fund the dividend to Council, and is also another source of financial resilience.
The value of the majority shareholding in the Port of Tauranga is not currently included as a source of financial resilience because we have determined that this is a strategic asset for the region that we intend to hold for the long term.
We will maintain the ability to borrow if needed
Council is planning to use reserves in preference to new borrowing to fund capital expenditure. We have enough forecast reserve balances to finance our entire ten year capital programme of $120 million, of which $41 million is for flood protection and control projects.
We borrow and on-lend to Quayside as this minimises the interest cost for theCouncil Group. Quayside currently has $50 million of on-lending. We have provided for an additional $100 million to finance further industrial development at Rangiuru, which is forecast to be repaid in 2024/25 and 2032/33.
When our borrowings need to be refinanced, we may choose to repay the borrowing from reserves, depending on interest rates and our financial requirements at the time. As the decisions to repay or finance borrowing depend on future interest rates and other factors, we have chosen not to show Council repayments to demonstrate that Council remains financially stable even without paying down borrowing.
Quayside Holdings issued $200 million of perpetual preference shares in 2008. The income from this was used to fund our capital expenditure and grants to Regional Infrastructure Projects (excluding Ōpōtiki Harbour), and will be fully spent by July 2021. There are circumstances in which Council could be required to re-purchase this share issue and we ensure that we retain the ability to finance this.
We will be financially prudent and balance our budget
We have forecast an overall operating surplus for this Long Term Plan, including a surplus in each of years 3-10. For the first two years we are forecasting a deficit i.e. the money we expect to spend on operating expenditure is more than we expect to receive. While Council has an unbalanced budget in the first two years, this will be offset in the wider Council Group by profits retained in our Council Controlled Organisations, particularly Quayside.
The primary reasons for the unbalanced budgets are the grants in years one and two to the Ōpōtiki Harbour Project and using reserves to fund bus route optimisation for the Western Bay Transport Systems Plan in years one - three. These projects deliver long lasting benefits and are funded from our accumulated reserves rather than being rated for in the year it is spent. The reserve funding for the Western Bay Transport Systems Plan also recognises that Tauranga ratepayers will need to pay more for transport and land use-improvement. We propose to deliver budget surpluses from year three onwards for the reasons noted above.