Limits on rates and debt
Financial Goal - Set prudent limits on rate increases
We previously set a limit on annual rate increases at 4%. Over the last two Long Term Plan’s (or six years), Council’s average rate increase has been 2.52% - well below that limit.
But over the last 2 years, our cost pressures due to compliance and growth – particularly for water and wastewater, roading and rubbish and recycling have left these areas underfunded.
In 2018/19 we incurred a deficit of $1.46 million in our water, wastewater and stormwater activities, and a deficit of $2.1 million in 2019/20. Similarly for rubbish and recycling, we saw a deficit of $1.09 million in 2018/19, and $1.18 million in 2019/20.
Both activities received additional funding from rates for the 2020/21 financial year, but not to the level required to cover the ongoing cost pressures. On top of this, all other rates for 2020/21 were held at their 2019/20 level in response to the COVID-19 situation that unfolded as the budgets were being set.
There is a large catch-up required to get our rates to the level that is required just to keep us ticking. This catch-up will result in a proposed increase in total rates of 11.85% for next year. For the other years of the plan, we propose to set a limit on rate increases at 6%, with the exception of 2023/24, when we are proposing a 10.20% increase. This increase is largely impacted by the proposed change to the way we collect rubbish and recycling (explained earlier in this document).
Keeping our rates at this low level, at a time when our costs have continued to increase is no longer sustainable.
Financial Goal - Set prudent limits on debt
What we asked
In 2020 we asked the community whether we should take on more external debt to be to get some of the ‘nice to have’ projects underway sooner.
What you told us
The clear consensus was that the community preferred our current, more conservative approach to debt – that we should only borrow money to fund capital spending on our core assets.
What we’re planning…
We’re planning to increase debt, but very conservatively. For a council of our size we do not have a significant amount of external debt. Independent experts have advised that a debt level up to 150% of our total revenue would be prudent for a council of our size. In our last Annual Report at 30 June 2020, our external debt was $26.5 million. Our net debt (taking into account cash and other assets) would be 42% of our total revenue. So we have plenty of headroom.
We currently borrow money to pay for assets – for water, wastewater, roads and community buildings and facilities that will service the community over a long period of time.
Using loans to pay for these kinds of assets means we can recover the costs over time, so that both current and future ratepayers pay their fair share. Our debt is forecast to peak at $110 million in 2028/29.
In terms of our revenue (income) in the same year, this debt represents 126% of total revenue. For a number of years, we’ve had a limit on net debt set at 150% of annual revenue.
We feel this limit is still appropriate, and we treat the limit as exactly that, a limit not a target. We expect our debt to be on average around 102% of our revenue over the next ten years. Our forecasts show that we can comfortably service this level of debt.
