Should the Council smooth rates increases by debt funding operations?
To keep rates down, the Council is proposing to debt fund operations.
Debt funding operational expenses is not considered good practice if it is done over a long period or without considering how this debt will be paid back, over what period, and the impact of that debt repayment. Operating expenses such as day-to-day services are recurring costs, and using debt to fund them means borrowing money that must be repaid with interest, so it does have an impact on future budgets.
However, during tough times debt funding can provide a short-term alternative to rates revenue, allowing rates increases to be introduced more gradually. We call this an unbalanced budget and many Councils in New Zealand are currently managing unbalanced budgets, particularly by unfunding depreciation, to provide their rate payers with some relief.
The Council is currently debt funding the unfunded portion of depreciation in the wastewater, stormwater, parks, arts & heritage, libraries, civic buildings and multisport activities, as well as the District Plan costs. Without debt funding any further operations, the rates rise required for the Council to operate at a back-to-basics level is 24.25%.
What are the options?
Option 1: 24.25% rates increase with a lower debt balance in 2034
The Council proposes to continue not collecting a portion of rates for depreciation of wastewater, stormwater, parks, arts & heritage, libraries, civic buildings and multisport activities, and debt fund associated renewals until 2028 as well as some District Plan costs. However, in option one all other operating costs are funded from rates.
Under this option current and historic operational debt that has arisen from unfunded depreciation and the District Plan will be repaid by 2034. We realise that a rate increase of 24.25% is unacceptable for our community, so we are proposing two other options with different debt funding scenarios.
Impact on rates:
| Option 1 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 |
|---|---|---|---|---|---|---|---|---|---|
| Rates Increase | 24.25% | 8.20% | 5.16% | 4.16% | 3.95% | 4.46% | 4.41% | 4.11% | 4.28% |
Impact on Debt:
| Option 1 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 |
|---|---|---|---|---|---|---|---|---|---|
| $ million | $ million | $ million | $ million | $ million | $ million | $ million | $ million | $ million | |
| Opening debt | $53.5 | $66.7 | $72.1 | $72.6 | $77.4 | $79.9 | $82.1 | $92.8 | $102.8 |
| New debt for operations | $2.2 | $0.7 | $- | $- | $- | $- | $- | $- | $- |
| New debt for capital | $11.0 | $4.7 | $0.5 | $4.8 | $2.5 | $2.2 | $10.7 | $10.0 | $10.1 |
| Total debt | $66.7 | $72.1 | $72.6 | $77.4 | $79.9 | $82.1 | $92.8 | $102.8 | $112.9 |
Option 2: 9.90% rates increase this year, with higher debt balance in 2034 (Preferred)
The Council proposes to continue not collecting a portion of rates for depreciation of wastewater, stormwater, parks, arts & heritage, libraries, civic buildings and multisport activities which means debt funding associated renewals in these areas. In addition, the Council also proposes to debt fund the District Plan costs, some IT system upgrades and some other additional operational expenses. We propose to lower the rate increases in the short term by using debt to fund operations for the first three years. This approach will result in a higher debt position by 2034.
In Option Two, we are collecting less rates, so our depreciation reserves are not being topped up to pay for asset renewals. This means that we are funding this shortfall through new debt for capital expenditure, which is why the closing debt balance is higher than the other options.
Under this option current and historic operational debt that has arisen from unfunded depreciation, the District Plan and IT system upgrades will be repaid by 2035/36.
Impact on rates:
| Option 2 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 |
|---|---|---|---|---|---|---|---|---|---|
| Rates Increase | 9.90% | 11.38% | 9.00% | 6.31% | 5.95% | 5.98% | 6.39% | 5.89% | 5.92% |
Impact on Debt:
| Option 2 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 |
|---|---|---|---|---|---|---|---|---|---|
| Amount | $ million | $ million | $ million | $ million | $ million | $ million | $ million | $ million | $ million |
| Opening debt | $53.5 | $70.7 | $79.6 | $82.7 | $89.6 | $93.2 | $96.4 | $107.2 | $116.5 |
| New debt for operations | $6.2 | $4.2 | $0.5 | $- | $- | $- | $- | $- | $- |
| New debt for capital | $11.0 | $4.7 | $2.6 | $6.9 | $3.6 | $3.2 | $10.8 | $9.3 | $8.4 |
| Total debt | $70.7 | $79.6 | $82.7 | $89.6 | $93.2 | $96.4 | $107.2 | $116.5 | $124.9 |
Option 3: 12.25% rates increase this year, with lower debt balance in 2034
The Council proposes to continue not collecting a portion of rates for the depreciation of wastewater, stormwater, parks, arts & heritage, libraries, civic buildings, and multisport activities. In addition, the Council proposes to debt fund the District Plan costs and some IT system upgrades. This option aims for slightly higher rate percentage increases in the first few years, which will require less debt (around $700k less) and achieves a balanced budget sooner. Our projections indicate that the debt position in 2034 under this option will be closely aligned with option one.
Under this option current and historic operational debt that has arisen from unfunded depreciation, the District Plan and IT system upgrades will be repaid by 2033/34.
Impact on rates:
| Option 3 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 |
|---|---|---|---|---|---|---|---|---|---|
| Rates Increase | 12.25% | 11.65% | 9.01% | 6.33% | 5.96% | 5.99% | 6.38% | 5.90% | 5.93% |
Impact on Debt:
| Option 1 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 |
|---|---|---|---|---|---|---|---|---|---|
| Amount | $ million | $ million | $ million | $ million | $ million | $ million | $ million | $ million | $ million |
| Opening debt | $53.5 | $70.0 | $78.1 | $80.2 | $86.0 | $88.5 | $90.3 | $99.5 | $107.2 |
| New debt for operations | $5.5 | $3.4 | $- | $- | $- | $- | $- | $- | $- |
| New debt for capital | $11.0 | $4.7 | $2.1 | $5.8 | $2.5 | $1.8 | $9.2 | $7.7 | $6.6 |
| Total debt | $70.0 | $78.1 | $80.2 | $86.0 | $88.5 | $90.3 | $99.5 | $107.2 | $113.8 |
How do the options compare?
In all options, the Council proposes to debt fund renewals associated with the unfunded portion of depreciation in wastewater, stormwater, parks, arts & heritage, libraries, civic buildings, and multisport activities, as well as the District Plan costs.
They key difference between the options are the proportion of debt funding that is used to cover IT system upgrades and operational expenses. In Option One, debt is only used to cover renewals that would usually be paid for by depreciation and some District Plan costs. Option Two proposes the highest levels of debt associated with operational costs, in order to avoid a rate rise of more than 10%. Option Three represents a middle ground with a slightly higher rate rise in year one resulting in less debt being required to subsidise operational expenses. Options One and Three are paid back over the same time period but our preferred option results in a higher overall debt position at the end of the LTP period, and an additional year or two to pay it back.
