- Wellington City Council and Group Consolidated Financial Statements For the year ended 30 June 2015
- Financial Prudence
- Funding Impact Statements
A well-managed city – the financial overview
We have had another well managed year, with the Council recording an underlying net surplus of $1.8 million, compared to a breakeven budget. This equates to a variance of 0.4% of total operating expenditure. We have delivered our broad range of services from roading and sewerage to parks, pools, sportsfields and libraries, at a cost of just $5.95 per resident per day, an increase of 2.2% over last year.
In addition to maintaining the high standard of delivery for all our services, a key goal for this year was to increase our focus on growing the economy and encouraging development. The resulting growth in the rating base means there are more ratepayers to spread the cost of delivering services across. The City’s rating base grew by 1.4% in 2014/15 indicating the local economy is picking up, setting a platform for the invest to grow strategy that underpins our 2015/25 Long-term Plan.
A further indicator of growth in the City is the level of assets vested to the Council. Vested Assets are non-cash items such as roads, streetlights, water, waste water, and storm water pipes that often arise from sub-division work undertaken. In addition to $2.1 million of development contributions received, $12.4 million of assets were vested to the City during the year, an increase of $3.8 million (44%) over the last 5 year average. This takes Vested Assets passed to the Council to $31.5 million over the last 3 years.
By improving our planning, forecasting and delivery processes we have been able to better manage the expectations of our asset renewal and upgrade budgets this year. Total capital expenditure for the year was $146.5 million compared to a budget (including carry forwards) of $166.9 million. This difference primarily relates to the anticipated deferral of significant upgrade projects including earthquake strengthening of the Town Hall and increasing the capacity of the city landfill along with some delays in completion of social housing and swimming pool projects.
We have met 12 out of 13 government benchmarks required to be disclosed under the Financial Reporting and Prudence regulations. The purpose of these benchmarks is to enable an assessment of whether we are prudently managing our finances. They are summarised later in this overview and reported in detail in the Financial Prudence section on page 213.
Balanced budget requirement
In order to encourage growth in the City, our financial strategy takes into consideration the level of rate increases, level of borrowings and our ability to ‘balance our budget’, as required by the Local Government Act 2002.
The balanced budget requirement is closely linked to the principle of intergenerational equity, the notion that each generation of ratepayers pays their fair share for the goods and services that they use. As part of this principle, coupled with good financial governance and stewardship, we aim to ensure:
- assets are not run down for future generations to pay
- debt is not used to fund operating expenditure, unless there are clear intergenerational considerations
- debt levels are regularly reviewed to ensure that projected debt levels will not restrict a future Council’s ability to fund new assets through debt
- operational expenditure implications of capital expenditure decisions are considered.
Underlying operating result
Our balanced budget requirement means we budgeted for a break-even underlying operating result. The main contributors to our actual $1.8 million underlying surplus are summarised in the table below.
|Actual 2015 $m|
|UNBUDGETED REVENUE / EXPENDITURE|
|Restatement of weathertight homes provision||(1.0)|
|Insurance costs (net of recoveries) funded through insurance reserve||(1.6)|
|Total unbudgeted revenue / expenditure||(2.6)|
|Variations from budget|
|Decrease in rates revenue||(0.5)|
|Decrease in revenue from activities ||(0.3)|
|Dividends in excess of budget (inc Wellington Intl Airport Ltd)||2.0|
|WIAL resource consent contribution||(2.0)|
|Decrease in net interest expense||2.8|
|Decrease in depreciation||3.9|
|Other net variances||(1.5)|
|Total variations from budget||4.4|
|Council underlying variance excl ring-fenced amounts||1.8|
The Council’s financial statements show the impact of the underlying surplus, plus a number of items, including revenue received for capital projects not available to offset rates. For example, subsidies paid by New Zealand Transport Agency (NZTA) to help fund the renewal and upgrade of our roading network. Accounting rules require these to be included within the net surplus even though the related capital expenditure is not. The operating surplus in the financial statements also includes a number of other non-cash items including the value of assets which are vested to the Council by external parties and the increase in valuation of Investment Properties. With the inclusion of these adjustments, the Council budgeted for an operating surplus of $26.4 million for the 2014/15 year. The actual surplus for the year is $35.5 million; noting that this difference can be attributed to items that are both non-cash in nature and not available to offset rates.
The table below shows the key items that contribute to the Council’s net operating surplus for the year as recorded in the financial statements.
|Actual 2015 $m||Budget 2015 $m||Variance $m|
|Exclude Non-cash funded items|
|Fair Value movements2||6.9||0.0||6.9|
|Gain/(Loss) and impairment of assets (net)||(5.1)||0.0||(5.1)|
|Gain on acquisition (WREDA)||1.3||0.0||1.3|
|Exclude revenue for capital items|
|NZTA Subsidy on capital work||18.1||10.6||7.5|
|Housing Upgrade Project Capital Grant and ring-fenced activities||13.4||32.1||(18.7)|
|Bequests, trust and other external funding||2.3||0.7||1.6|
|Transfers to provisions & reserves||4.0||4.0||0.0|
|Additional net expenditure on Venues Projects and Joint Ventures with Porirua||0.8||0||0.8|
|Less variance from ring-fenced activities||(2.5)||(3.4)||0.9|
|Reported net surplus||35.5||26.4||9.1|
- Vested Assets are assets where the ownership of the asset have been transferred to the Council and are non-cash in nature.
- Fair Value movements describes the change in market value for assets that are revalued, these movements are non-cash in nature and primarily relate to annual Investment Property revaluations.
- Unfunded depreciation is the amount of depreciation that is not funded by rates and relates mainly to roading assets that are funded by NZTA and sewerage treatment assets where the operator has responsibility for asset renewal.
In addition to the net surplus, the Statement of Comprehensive Revenue and Expense also includes revaluation movements for property, plant and equipment and other fair value adjustments. While these do not impact our rate funding requirement they do have an impact on our equity.
In 2015 we revalued our operational land and building assets, in line with our 3-yearly revaluation policy. Our 2014/15 Annual Plan budgeted for an increase of $57.1 million reflecting the anticipated increase value since the last revaluation in 2012.
The actual revaluation of these assets resulted in an increase in asset values of $11.2 million reflecting lower increase in values of social housing and associated land than anticipated.
The increase in asset values is caused by restating our assets (that are being revalued) into current dollar value after taking into account land value and condition of Housing stock.
During the year we recorded net Comprehensive Revenue and Expense of $29.7 million, this increases our overall equity by approximately 0.5%. This is explained further in the Financial Position and Changes In Net Worth sections of this overview.
Deciding who pays
When we are deciding how to fund an activity (whether to use rates, user charges or other sources of revenue), we consider:
- community outcomes that the activity contributes to
- who benefits – individuals, identifiable parts of the community, or the community as a whole
- the timeframe in which the benefit occurs – for example, an asset that lasts for several generations will generally be funded initially through borrowing – with ratepayers paying their share each year by funding depreciation on the asset (which pays off borrowing), so that everyone who benefits, present and future, contributes.
Our Revenue and Financing Policy sets out how each activity will be funded based on these criteria. The policy is available on our website www.wellington.govt.nz
During the year we received total revenue of $469.9 million compared to a budget of $450.2 million. The variance is largely due to unbudgeted vested assets (which while not cash in nature are required to be shown as revenue) and higher than expected revenue from Wellington Venues and our share in joint ventures with Porirua City Council.
Rates are our main source of funding, with revenue from operating activities (including user fees), being the next largest source. Some of our other sources of revenue include revenue for capital expenditure, revenue from interest and dividends.
General rates revenue is collected based on property rateable values. We currently apply a general rates differential of 2.8:1. This means that commercial properties pay 2.8 times more general rates per dollar of rateable value than non-commercial properties. This impacts on the value of total rates collected from each sector as shown in the graphs below.
Our total expenses for the year were $434.3 million which represents the cost of running the city during the year. Our activities are divided into strategic areas of focus:
Environment includes water supply, stormwater and sewerage, landfills and Kiwi Point Quarry. Also includes maintaining and protecting parks, botanic gardens, coastlines and open spaces.
Social and recreation includes the libraries network, swimming pools, recreation centres, cemeteries, social housing, marinas, sportsfields, playgrounds and skate parks.
Transport includes maintaining and developing the city's transport networks and providing on-street parking spaces.
Economic development includes supporting and attracting major events and promoting Wellington overseas and locally.
Urban development includes assessing building consent and resource consent applications, providing funding for heritage buildings and the development of streets and other public areas.
Council includes costs associated with deriving council-wide revenue.
Cultural wellbeing includes support of the Wellington Museums Trust and events in the city, Wellington City Archives and Toi Pōneke.
Governance includes community engagement, Council elections and meetings.
The table below shows the gross cost per Wellington resident19 per day for each strategic area. This is funded through a combination of rates, user charges, revenue from investments and other grants and subsidies.
Cost per strategic area per resident per day
|Strategic area||Total cost $m||Cost per resident per year $||Cost per resident per day $|
|Social and recreation||103.3||517||1.42|
Our performance over time
This section sets out our financial performance over the last 5 years.
Our revenue is particularly influenced by the amount of grants we receive for capital expenditure in any one year. This varies depending on the annual capital expenditure programme to be funded.
The level of operating expenditure for each of strategic areas over time is summarised below.
Changes in net worth
This section explains our financial position, focussing on net worth (equity), capital expenditure and debt.
Net worth is the difference between our total assets and total liabilities. Net worth is represented in the financial statements by the balance of equity.
The graph above shows that significant changes occur as a result of movements in revaluations and hedges. Revaluations represent the change in the value of assets held, to restate the replacement value in current dollar terms based on their condition and remaining life. Changes in hedge values represent market value changes in the value of the interest rate hedges that are held to maturity. For further explanation refer to Note 26 Hedging reserve page 180. Changes in revaluations, Cash Flow hedges and Fair Value are all non-cash movements and are subject to changes in market driven values beyond our control.
Assets and capital expenditure
Our major assets include:
- property, plant and equipment (including land, buildings, pipes, roads and other infrastructure assets) – $6,595.9 million
- other assets (including investment properties and investments in subsidiaries and associates) – $378.8 million.
The chart below shows how much was spent on each strategic area during the year for replacing, constructing and purchasing assets:
We have prudently managed our borrowings to ensure we meet the specified requirements in our Long Term Financial Strategy. Net borrowings at 30 June 2015 are 84% of revenue, within the target of 105% set by Council and significantly less than the 150% limit contained within its Financial Strategy. This is illustrated in the section on Financial Prudence page 213 on Local Government Benchmarks.
Our major liabilities include:
- gross borrowings - $433.7 million23
- other liabilities (including trade and other payables) – $170.7 million.
We use borrowings to fund the purchase or construction of new assets or upgrading existing assets that are approved though the Annual Plan and Long-term Plan process.
Net borrowings increased by $21.3 million during the year. Net borrowings at the end of the year are $34.0 million less than budgeted in the 2014/15 Annual Plan. The difference is due to changes in the timing of some capital projects and savings made in the delivery of others.
The total net borrowing of $367.8 million is less than 80% of our annual revenue and make up 10% of our total asset value (excluding land under roads). This is equivalent to a household with an average property value of $530,000, earning $70,000 a year, having a mortgage of less than $54,000.
We continue to maintain a strong investment position when compared with the level of borrowings. The graph below compares the balance of investments and net borrowings over the last 5 years.
Investments reflects a change in accounting treatment, whereby the Council no longer includes the Wellington Regional Stadium Trust within its investments.
The value of investments primarily relates to investment properties, our share of the net assets of our associates (including Wellington International Airport Limited) and other financial assets.
During the year we maintained our AA rating with the independent credit rating agency Standard and Poor's. The credit rating is a comparative measure of our financial strength. The AA credit rating held by us is the highest credit rating attributed to any council across New Zealand. Holding and maintaining such a high credit rating provides us with a range of benefits that would not otherwise be available. These benefits include access to lower cost borrowings and access to a wider range of borrowing alternatives.
Local Government (Financial and Prudence) Regulations 2014
This set of financial benchmarks is required by legislation. The results for 2014/15 are summarised below. There are 13 benchmarks that are split into the following seven categories:
|1.||Rates affordability benchmarks||Rates (revenue) affordability – were the actual rates increases below the 2012 LTP quantified dollar limit.||Yes $253.4m|
|Rates (increases) affordability - were the actual rates increases below the 2012 LTP percentage increases limit.||Yes 2.94%|
|2.||Debt affordability benchmarks||Net Borrowing as a percentage of equity <10%||Yes 6%|
|Net Borrowing as a percentage of revenue <150%||Yes 84%|
|Net Interest as a percentage of revenue is <15%||Yes 4%|
|Net Interest as a percentage of annual rates revenue <20%||Yes 8%|
|Liquidity (term borrowing committed loan facilities to 12-month peak net borrowing forecast) >110%||Yes 117%|
|Triennial additional loan-funded capital expenditure (cumulative) limit < $60m||Yes $57.3m|
|3.||Balanced Budget benchmark||Operating revenue is greater than operating expenditure as a proportion >100%||Yes 104%|
|4.||Essential services benchmark||Capital expenditure on network is greater than depreciation on network services as a proportion >100%||Yes 127%|
|5.||Debt servicing benchmark||Borrowing costs as a proportion of operating revenue <10%||Yes 5%|
|6.||Debt control benchmark1||Net debt as a proportion of planned debt <100%||Yes 100%|
|7.||Operations control benchmark2||Net cash flow from operations as a proportion of its planned net cash flow from operations >100%||No 97%|
- This benchmark is required to use the 2012/2022 Long-term Plan Net Debt figures as the benchmark comparator. These will differ from the figures agreed through subsequent Annual Plans.
- This benchmark is required to use the 2012/2022 Long-term Plan Net Cash Flow from Operations figures as the benchmark comparator. These will differ from the figures agreed through subsequent Annual Plans.
Areas of reported non-compliance
Operations control benchmark
The Council is satisfied that it is prudently managing operational cash flow, with variances explained by the timing difference in the receipt of revenues compared to budget that lead to the “not met” outcome for this measure.