7. Significant Assumptions DRAFT

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SIGNIFICANT ASSUMPTIONS

SIGNIFICANT FORECASTING ASSUMPTIONS

The Ten Year Plan has been prepared on the future direction of this Council and is targeted for community consultation as required by the LGA 2002.

In preparing the Ten Year Plan a number of assumptions and predictions about the future have been made. There are always risks and uncertainty with forecasting what will happen in the future. The assumptions underlying this prospective financial information are as at 31st January 2012. Therefore it is likely that what actually happens both financially and non-financially will vary from our projections and those variations may be material.

The guiding principle for the preparation of this Ten Year Plan was to provide sustainable financial management for this Council’s activities on behalf of the community. This is a significant challenge for this Council.

The management of Council’s external debt has been a key focus of the work to date to ensure that debt levels are manageable and within reasonable credit rating levels.

The relationship of debt to the receipt or likely receipt of development contribution revenues will be closely monitored as we proceed through the Ten Year Plan. The Treasury Management Policy requires that the level of revenue relative to total expenditure is fiscally responsible.

AREA

2006 CENSUS 2006-11 2011-16 2016-21

Occupied Dwellings

Total Dwellings

Usually Resident

Population Occupied Dwellings

Usually Resident

Population Occupied Dwellings

Usually Resident

PopulationOccupied Dwellings

Usually Resident

Population

Tauranga West 11608 12371 30946 674 1610 731 1665 828 1876

Tauranga Central 8516 9174 21569 927 2241 935 2097 1312 2921

Tauranga South 5983 6344 16720 513 1245 437 1001 497 1132

Mt Maunganui 7734 9317 18540 431 897 410 834 460 931

Papamoa 6995 7927 19056 773 1893 754 1718 1539 3473

Tauranga Total 40836 45133 106831 3318 7886 3267 7315 4636 10333

Included in the above projections are new urban growth areas, and potential residential intensification areas.

Tauranga City Council Draft Ten Year Plan 2012-202280


CITY GROWTH

POPULATION PROJECTIONS

Tauranga City is one of the fastest growing cities in New Zealand. The Statistics NZ growth assumptions have historically been conservative and have under represented actual growth. Through the SmartGrowth project, population projections have been prepared through to 2051. The original SmartGrowth forecasts prepared by the University of Waikato in 2004 were reviewed in 2007, 2010 and in 2011.

The population projections used for the Ten Year Plan (refer to table on previous page) have been extracted from the “Tauranga City Population and Household Forecast Review 2011”. This review allocated the more conservative SmartGrowth 2011 Forecasts down to statistical meshblock level and Census Area Unit Level 2031 and at SmartGrowth Sub-unit level to 2051.

Te Tumu

Te Tumu is the second stage of the Papamoa East Development – Wairakei being the first. This major urban growth area is programmed to be opened up in a planned sequence after a significant amount of the preceding Wairakei urban growth area is developed.

The SmartGrowth projections originally had this area commencing in the 2011-2016 period and the 2006/16 Ten Year Plan allowed for the acquisition of land for public works. This was changed in 2007 with revised growth projections and the release of the revised SmartGrowth Strategy, moving the Te Tumu commencement date to the 2021-2026 period.

The Mayor and Councillors have taken the view that this requirement will not occur within the period of this Ten Year Plan.

Council previously acquired a block of land together with Western Bay of Plenty District Council in the Te Tumu area. This land was purchased with the condition of providing the vendor the option to acquire it sometime from 2017 to 2027 financial years.

With the purchase of land, the vendor has the right to use the land in its undeveloped state until 2017. This gives rise to the creation of a financial asset which is available for sale where Council has a right to receive cash when the vendor exercises their option to repurchase the property.

Previously this asset has been recognised until the 2017 financial year however with the slow down of growth this has now been extended for the full option period ie. to 2027.

The commencement of development of this area is now expected to be outside the current Ten Year Plan. In the event that the vendor exercises their option to acquire the land within the period of the Ten Year Plan this will provide a cash flow to Council upon the exercise of the option that is currently assumed to be outside the ten years.

No significant infrastructure is included in the ten year planning period as growth will not be sufficient to allow development within the ten year period.

GROWTH-RELATED INFRASTRUCTURE COSTS

The 2012-22 Ten Year Plan includes all of the cost of providing infrastructure to accommodate the city’s growth within that time period.

Growth Uncertainty and Monitoring

Approximately 54% of the total capital programme in the Ten Year Plan is growth related.

The quantum and timing of growth is therefore a critical assumption for Tauranga City. Council has introduced a monitoring programme where the actual level of take-

up will be reviewed for residential land on a six monthly basis and business land on an annual basis. This includes an environmental scan of the development sector and discussion with key stakeholders as to emerging and likely trends.

Council will reassess and if necessary adjust the timing of growth related projects taking into account:

• Information obtained in the growth monitoring programme

• Assessment of land demand and remaining infrastructure network capacities

• Number of growth areas available for development

• Council’s Debt position

• Outcome of negotiations with developers to encourage developers to assume a greater share of the risk by forward funding development costs.

Whilst the most up to date modelling has been used in predicting growth for the Ten Year Plan it is not possible to predict future growth perfectly. The impact of changes in growth assumptions over the Ten Year Plan is on significant portions of the revenue, operational expenditure and capital expenditure of Council.

Development contribution revenue assumptions depend on both the amount of growth and the location of that growth (because different geographical areas have different levels of development contributions). Council’s assumptions about the amount of growth and the location of that growth are outlined on the preceding page.

If growth is different to that assumed then there will be an impact on revenue. If total revenue from development contributions is reduced then there will be a consequent increase in debt (because development contributions

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are levied to repay debt incurred when Council builds infrastructure to service growth). However, if growth slows further then Council may also be able to further defer capital expenditure on growth-related projects which will consequently reduce debt compared to the projections in the Ten Year Plan.

Note that if development contributions revenue is less than forecast and debt consequently increases there will be no impact on rates. This is because this debt is funded by development contributions and not rates.

As mentioned above Council monitors growth on an ongoing basis to ensure it aligns its capital expenditure programme with changes in growth demands and likely development contribution revenue used to fund growth. For example recent slow downs in growth have resulted in future growth related capital expenditure being delayed until future years so that it is more aligned to higher development contribution revenue which is used to fund this expenditure. Hence the net impact on Council’s financial position is minimised by ensuring the capital programme is continually aligned with changes in growth assumptions and therefore revenue streams.

Asset Management Plans

Forecast figures included in the Ten Year Plan relating to the management and enhancement of significant assets has been based on Council’s Asset Management Plans. The update of the following Asset Management Plans was completed between June 2011 and November 2011:

• Parks and Leisure

• Property Assets

• Roading

• Stormwater

• Wastewater

• Water Supply

The asset management plans are based on the city growth assumptions outlined above.

Useful Lives of Significant Assets

Refer to the Statement of Accounting Policies section of this document for information in relation to the useful lives of significant assets.

Depreciation rates are based upon the estimated lives of assets. As assets are revalued their useful lives are reassessed and depreciation adjusted accordingly. Changes to the useful lives of assets have a direct impact on the renewal profiles of assets, for example where asset replacements are delayed. The result of this is an increase in depreciation reserves for a period of time as this is the funding source for asset replacements. In order to ensure that depreciation is not over charged on a long term basis Council review the balances of their depreciation reserves. Hence the impact of changes in this assumption is managed by an ongoing review of depreciation rates and the level of balances in depreciation reserves compared to future funding needs for asset renewals.

Sources of Funds for Future Replacement of Significant Assets

Refer to the Revenue and Financing Policy and also the Groups of Activities section of the document for the Statement of Prospective Financial Performance table associated with each activity area.

A Funding Impact Statement (FIS) is provided for each major activity in the Financials section.

Levels of Service

The financial information included in this Ten Year Plan has

been prepared based upon the levels of service as outlined in the Ten Year Plan documentation. Levels of service in some areas are proposed to change through this Ten Year Plan process. See the major focus section for further details on these changes.

Projected Growth Change Factors

Refer to the Major Focus section of this document for information and assumptions relating to projected growth assumptions.

Approach to Potential Climate Change Impacts

The impacts of climate change have been considered in various activities. Where the impacts of climate change have a potential implication on that activity, these impacts have been factored into future forecasts.

Accounting Policies

The Ten Year Plan has been completed using the same accounting policies as those established for the presentation of the Annual Report.

INCREASE IN FUTURE YEAR’S ESTIMATES

There are many aspects that can influence the actual costs that will be incurred in the future. Some of the major ones affecting Tauranga City Council are:

Inflation

It is expected that no material changes will occur from exchange rate movements.


The Business and Economic Research Limited (BERL) price change estimates for the Local Government Cost Index have been used in the preparation of the Prospective Financial Statements. This index is based on goods and services more relevant to Local Government than the Consumer Price Index (CPI). It is recognised that the uncertainty of predicting the impact of any of the above cost

influencers is very high.

Any estimate of future inflation is based upon assumptions which will change over time. Council’s approach to inflation is to adjust each year’s Annual Plan in order to bring it in line with more up to date inflation estimates. As Council shows both inflation and non inflation key financial reports in its Ten Year Plan the impacts of inflation can be clearly shown. Any changes in these assumptions will be reflected in future Annual Plans and whilst every effort is made to absorb inflationary impacts if inflation exceeds that estimated future rate numbers may be higher than that shown in the Ten Year Plan. Conversely where inflation is lower than that expected where possible savings will be included in future Annual Plans.

Tauranga City Council has invested considerable effort into updating Levels of Service, Asset Management Plans and developing a robust Ten Year Plan. This provides important information for the community to assess relative priorities of the proposed projects. To assist the community engagement and understanding of the impact of price

changes in the Prospective Financial Statements, the Council has also provided supplementary information which focuses on the effects of growth and levels of service and does not include the effect of price changes.

THE MAJOR COST COMPONENTS

The operational and capital costs within the Ten Year Plan are made up of:

• Existing base costs

• Growth costs

• Level of service changes

• Inflation.

The table below describes each of the costs and where in the Ten Year Plan the relevant information can be found. Supplementary information is included to aid the readers understanding of the relevant impacts of costs excluding inflation. The supplementary financial information shows the build up of existing base costs, growth costs and level of service changes.

Cost Type Cost Description Information in Ten Year Plan

Existing base cost Costs to continue to deliver the current level of service to the existing community

• The approved Draft Ten Year Plan financials

• Asset renewals (refer capital expenditure schedule for each activity)

Growth costs Costs to deliver the current level of service to a larger community

• Draft Ten Year Plan financials and the Financial Strategy

• Growth related new or upgraded assets (refer capital expenditure schedule for each activity)

• Development Contribution Policy

Level of service changes

Costs to deliver a higher (or lower) level of service to the whole community

• Major Focus section explains Council’s approach to Levels of Service

• New, increased or decreased levels of service (refer Level of Service part of each activity)

• Other new or upgraded assets (refer capital expenditure schedule for each activity)

Inflation Increased cost on all (existing, growth and level of service changes) due to price changes

• Impact of inflation is separately disclosed in the Financial Summary, Debt Summary and Rates Revenue Summary in the ‘Our Council’ section

• Major Focus section discloses impact of inflation separately in all tables

• For each activity impact of inflation is separately disclosed in Statement of Prospective Financial Performance

• Funding Impact Statements for each activity is only shown inclusive of inflation

Total Cost Total for all four above costs • Overall Prospective Statement of Financial Performance, Position, Changes in Equity and Cashflow


Year

Revenue and Operational Expenditure % Adjustment

Capital Expenditure and Development Contribution Revenue % Adjustment

2013/14 3.13% 3.88%

2014/15 3.04% 3.34%

2015/16 3.17% 3.41%

2016/17 3.25% 3.63%

2017/18 2.83% 3.80%

2018/19 2.86% 4.03%

2019/20 3.18% 4.31%

2020/21 3.35% 4.54%

2021/22 3.31% 4.61%

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Borrowing and Interest Rates

Council’s current debt borrowing rates range from 4.13% to 8.2% providing an average rate over the ten years of 6.6% to 6.9%.

Interest expense was calculated based on opening debt, adjusted for loans being repaid evenly over the year and loans for new capital expenditure being taken out evenly over the year.

Over the Ten Year Period there could be considerable fluctuations in interest rates in particular in later years where accurate forecasts are difficult to make. Council however has considerable hedging and borrowing profiles in place to minimise the impacts of changes in interest rates in the short to medium term.

In the event that Council’s average interest rates change by 0.25% the impact on interest costs if the full amount (approximately $400 million) of debt was financed at this rate would be approximately $1 million per annum. However as Council’s borrowings are structured to ensure debt refinancing is considerably less on an annual basis this would be the worst case long term scenario. The actual annual impact of such a change would be considerably less as Council on average maintains approximately 80% of the debt at fixed interest rates during the initial two to three years of the Ten Year Plan.

It is assumed that Council will be able to borrow on similar terms and conditions to present.

Investment Interest Rate

The investment interest rates on invested funds assumed for the Long Term Planning period are between 3.88% and 5%.

Investment rates are based on the Reserve Bank Official Cash Rate (OCR) estimates.

Vested Assets

It has been assumed that vested assets will be received by Council in accordance with the assumed growth of the city.

Funding Growth Related Development

The growth related component of infrastructure required for new developments – stormwater, wastewater, water supply, roading and facilities and reserves – is proposed to be paid for by development contributions under the provisions of the Local Government Act 2002.

Council acts as “banker” for the capital expenditure, paying for work to be done and receiving money from the developers when subdivisions are complete.

Council often has to undertake the capital expenditure before development contributions are received and covers the shortfall with debt to be repaid when the development contributions are received.

The Development Contribution (DC) policy is consistent with the capital expenditure programme in the Ten Year Plan. The DC Policy provides for cost of capital to be charged on all Building Impact Fee projects and Subdivision Impact Fee projects.

The interest rates used for this Cost of Capital are consistent with borrowing rates for the ten years from 2012/13 to 2021/22.

Capital Expenditure

Council’s approach to the funding of capital is presented in the Revenue and Financing Policy. In brief Council policy is to fund capital expenditure from the following sources:

Renewal Expenditure (i.e. replacing an existing asset)

• Depreciation reserves

• Debt

• Rates or user charges

• New Zealand Transport Agency (NZTA)

New Capital Expenditure

• Development contributions

• Debt

• User charges

• Surplus cash or reserves

• New Zealand Transport Agency (NZTA)

• Other external funding

Where a capital expenditure project is dependent on financial or other contributions from a third party, it is assumed that those contributions will be received in a timely manner.

Operating Expenditure

Council’s approach to the funding of operational expenditure is presented in the Revenue and Financing Policy.

Expenditure includes increased operating costs (if any) associated with every capital project. Other operating costs (associated with assets resulting from capital expenditure) are assumed to be constant, except where there is expected to be a relationship between costs and increased population.

Costs associated with new debt are included. Depreciation for new capital expenditure is based on rates established for each individual project. These rates are based on the same useful lives as identified for existing assets.

Revenue

Revenue is generated in accordance with the Revenue and Financing Policy. It is assumed that where community




contributions are shown for specific projects, then those contributions will be received.

Creation and Realisation of Investments, Reserves and Assets

The plan assumes that all investments and reserves continue in accordance with their current pattern.

Depreciation Rates on Planned Asset Acquisitions

Refer to the Statement of Accounting Policies in the Financials section of this document for information relating to depreciation rates on planned asset acquisitions.

Future Revaluations

It has been assumed that asset revaluations will continue on a rolling cyclical basis. This revaluation impact is broadly equivalent to the increase in Local Government Cost Index (LGCI).

Internal Allocation

Support services in Council are allocated internally to individual activities. Expenditure shown in the Ten Year Plan includes those internal allocations.

Service Delivery Options

For the purposes of the Ten Year Plan, Council has assumed the existing services and methods of delivery will continue except where this has been clearly stated in the Groups of Activities section.

Resource Consents

A majority of Council’s capital works projects require resource consents to be granted before works can commence. It has been assumed that resource consents can be obtained for all capital works, and that obtaining those resource consents will not significantly impact on the timing of capital works shown in the Ten Year Plan.

For the purposes of the Ten Year Plan it is assumed existing resource consents will be renewed where appropriate. Changes to consent conditions are included in the Ten Year Plan where known.

Insurance

Council has in excess of three billion dollars of infrastructural assets. Risks are associated with damage to assets, either through accident, disaster, fire, fidelity or negligence.

Council has a range of insurance practices to protect it from these risks including:

• Public liability insurance

• Membership of the Local Authorities’ Protection Programme, a mutual fund created by the local government sector to provide funding in the event of damage to underground pipe assets.

• Various general insurances such as those covering business interruption, material damage, vehicles, computers, personal accident, etc.

Regulatory Environment

It is assumed that current national and regional policies, strategies and legislation will not change significantly during the period of the Ten Year Plan.

Local Authority Boundaries

It is assumed that there will be no changes to the nature of the Tauranga City Council’s business over the period of the Ten Year Plan.

Changes to Council’s business dictated by as yet unknown / unconfirmed legislation or Central Government Policy Change

It is assumed that there will be no change in legislation or

central government policy (e.g. change in water quality or Resource Management Act (RMA) requirements) unless otherwise noted.

New Zealand Transport Agency (NZTA)

It has been assumed that financial assistance from NZTA will continue on the same basis and at the same rate as is currently available. For more information, see the Transportation under Groups of Activities section of this document.

Changes to NZTA road prioritisation may impact on future funding.

Other Significant Assumptions

Council’s aquatic centres are owned and operated by Tauranga City Aquatics Limited (TCAL) and the Baypark site by Tauranga City Venues Limited (TCVL), wholly owned subsidiaries of Tauranga City Investments Limited (TCIL) which is wholly owned by Tauranga City Council.

Although the financial projections for TCAL and TCVL have not been consolidated into the Ten Year Plan, the net cost to Council of running the aquatic facilities and the Baypark site has been included. The impact of not consolidating the accounts is not expected to have any impact on future funding requirements.

No reduction in debt levels has been assumed from Route K (or Pyes Pa Bypass) over the Ten Year Period. Any reduction in debt due to the removal of all or part of this asset will further improve debt levels.

Debt relating to Route K is approximately $60 million plus the Pyes Pa By Pass of $11 million. Discussions are on going with New Zealand Transport Agency and in the event that an agreement is reached Council debt levels will reduce by the agreed amount which could be any amount up to these levels. Revenue may also reduce (and associated

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operational costs) if Route K is no longer owned by Council. The maximum impact this will have on Council’s key debt to operating revenue ratio is a 40% reduction in the event that debt reduces by the full amount of existing debt. As there is no rate funding for this activity there will be no rates impact.

Significant asset sales have been included in this Ten Year Plan in order to improve Council’s balance sheet position. These have been conservatively estimated. In the event that no asset sales were realised then Council’s debt levels would increase by $30.4 million over the ten years and the maximum debt to operating revenue ratio would be 245% still within its 250% limit. The majority of properties held for sale are not rate funded hence there will not be a material impact on rates in the event of these sales not fully materialising.

Significant assumptions that relate to specific groups of activities are shown in the relevant part of the Groups of Activities section.



Documents

7. Significant Assumptions DRAFT