Agenda of Extraordinary Meeting of Council

Extraordinary Meeting of Council - 11 June 2020 - Open Agenda Item 1

Agenda Items

1. Consultation - Rates Postponement Policy

Type of Report:	Legal and Operational
Legal Reference:	Local Government Act 2002
Document ID:	935149
Reporting Officer/s & Unit:	Garry Hrustinsky, Investment and Funding Manager

1.1 Purpose of Report

To review and update the policy to include a clearer definition around financial hardship. To introduce rates postponement resulting from Significant Extraordinary Circumstances. Some minor clarification of Criteria wording.

Officer’s Recommendation

That Council:

a. Approve the proposed amendments to the Rates Postponement Policy to include Significant Extraordinary Circumstances.

b. Approve wording change from “Elderly” to “Older Persons”

c. Approve other minor changes detailed in this report

d. Approval to go to consultation on the revised Rates Postponement Policy to run parallel but separately to the Annual Plan 20/21.

e. Approve the consultation plan for the Rates Postponement Policy

1.2 Background Summary

The COVID-19 pandemic and a subsequent response planning has highlighted the need to better define rates postponements for Significant Extraordinary Circumstances.

1.3 Issues

In its current form, the Rates Postponement Policy is structured to review postponements on a very small (individual) scale. Significant time (including that of Prosperous Napier Committee) and resources are required to process each application. The proposed amendment allows the Council to apply broad postponements in situations where Significant Extraordinary Circumstances are identified.

The proposed amendment is as follows:

Postponement for Significant Extraordinary Circumstances

Objective

To provide a rates postponement to ratepayers experiencing financial hardship directly resulting from Significant Extraordinary Circumstances that affects their ability to pay rates.

For the purpose of this policy the following definitions will apply:

· Significant Extraordinary Circumstances: as defined by Council resolution. Significant Extraordinary Circumstances may be natural or economic in nature, and will identify the type and location of properties affected.

· Financial Hardship: for the purpose of this provision is defined as the inability of a person, after seeking recourse from Government benefits or applicable relief packages, to reasonably meet the cost of goods, services and financial obligations that are considered necessary according to New Zealand standards. In the case of a ratepayer who is not a natural person, it is the inability, after seeking recourse from Government benefits or applicable relief packages, to reasonably meet the cost of goods, services and financial obligations that are considered essential to the functioning of that entity according to New Zealand standards.

· Small Business: a business operated by a small business person, small partnership or close company as defined in section YA 1 of the Income Tax Act 2007.

Conditions and Criteria

This part of the policy will only apply to Rating Units used for residential purposes or by Small Businesses.

Once Significant Extraordinary Circumstances have been identified by Council, the criteria and application process (including an application form, if applicable), will be made available. Council may set a timeframe for the event. Council may review the criteria and/or timeframe of Significant Extraordinary Circumstances through subsequent resolutions.

Council resolution will include:

a. that the resolution applies under the Rates Postponement Policy; and

b. the Significant Extraordinary Circumstances triggering the policy (e.g. including, but not limited to, flood, pandemic, earthquake); and

c. how the Significant Extraordinary Circumstances are expected to impact the community (e.g. hardship); and

d. the types or location of properties effected by the Significant Extraordinary Circumstances; and

e. timeframe for postponement in relation to the Significant Extraordinary Circumstances.

No application for postponement can be made under this policy unless Significant Extraordinary Circumstances have been identified by Council.

Any requests for rates postponement for Rating Units with a land value greater than $1.5m will be decided upon at the discretion of Council and requests for rate postponement for Rating Units with a land value less than $1.5m will be delegated to Council officers.

The ratepayer must demonstrate, to the Council’s satisfaction that paying the rates would result in Financial Hardship.

The applicant must demonstrate to Council’s satisfaction that the ratepayer has taken all necessary steps to claim any central government beneﬁts or allowances the ratepayer is properly entitled to receive that would assist the ratepayer to meet their financial commitments. Evidence such as official correspondence must be provided with the application.

Council will consider applications where the same ratepayer is liable for rates for multiple Rating Units. In such instances, Council will look at the collective impact to the ratepayer.

Only the person/s entered as the ratepayer (in the case of a close company every director must sign the application form), or their authorised agent, may make an application for rates postponement for Significant Extraordinary Circumstances that resulted in Financial Hardship. However, where the ratepayer is not the owner of the Rating Unit, the owner must also provide written approval of the application.

The ratepayer must be the current ratepayer for the Rating Unit at the time Significant Extraordinary Circumstances are identified by Council.

Where the Council decides to postpone rates the ratepayer must make acceptable arrangements for payment of rates, for example by setting up a system for regular payments. Such arrangements will be based on the circumstances of each case.

Council may charge a fee on postponed rates for the period between the due date and the date they are paid. This fee is designed to cover Council’s administrative and financial costs. The fees will be set as part of the Council resolution identifying Significant Extraordinary Circumstances.

Postponed rates will remain postponed until the earlier of:

a. The ratepayer/s ceases to be the owner or occupier of the Rating Unit; or

b. A date specified by Council in the Council resolution identifying Significant Extraordinary Circumstances.

Further minor amendments include:

· Postponement for the elderly has been changed to Postponement for Older Persons with policy text amended to reflect the wording change.

· Removal of the 5 year ownership rule for applications under Postponement for Older Persons.

· Removal of the provision “At the end of five years any postponed rates will be written off if the rating unit has not been subdivided.” From Postponement for Farmland. This will encourage development in areas identified for growth.

· Delegation to approve rates postponements for Postponement for Farmland and Postponement for Older Persons extended to Chief Financial Officer and Investment & Funding Manager.

· Additional legislative and Council document references have been included in the policy.

· Applications under Postponement for Special Circumstances can now be made by the “…ratepayer or their authorised agent…” instead of solely by the “applicant”.

1.4 Significance and Engagement

There has been no external consultation on the proposed changes.

The proposed amendments are similar to those already in place, or proposed, for other Councils.

Significance of the proposed amendments are high as they could potentially impact proportion of residents or ratepayers.

If approved, public consultation will be required and undertaken as a separate consultation in parallel with the Annual Plan 20/21.

1.5 Implications

Financial

N/A

Social & Policy

The proposed amendment will allow Napier City Council to be more responsive by events that have a material negative impact on the wider city.

Risk

Taking the Postponement Policy in its current form, the Council is not well placed to provide timely postponement, and may be overwhelmed due to administrative burden should another extraordinary or emergency event occur.

1.6 Options

The options available to Council are as follows:

a. Adopt all of the proposed changes.

b. Adopt selected proposed changes.

c. Adopt none of the proposed changes.

1.7 Development of Preferred Option

The proposed changes to the Rates Postponement Policy allow Council to be more responsive in times of Significant Extraordinary Circumstances impacting the community.

1.8 Attachments

a Rates Postponement Policy ⇩

b Consultation Plan - Rates Postponement Policy ⇩

Extraordinary Meeting of Council - 11 June 2020 - Attachments

Item 1

Attachments a

Rates Postponement Policy
Approved By	Pending Approval by Council
Department	Finance
Original Approval Date	29 June 2018	Review Approval Date	Pending
Next Review Deadline	June 2023	Document ID	346038
Relevant Legislation	Local Government (Rating) Act 2002 Local Government Act 2002 Income Tax Act 2007
NCC Documents Referenced	Published in the Long Term Plan 2018-2028 which was reviewed between March/April 2018 and adopted on 29-06-18 Reviewed and amended in response to COVID-19 Rating – Delegations under Local Government (Rating) Act 2002

Purpose

To enable Council to postpone the requirement to pay all or part of the rates on a Rating Unit under Section 87 of the Local Government (Rating) Act 2002 where a rates postponement policy has been adopted and the conditions and criteria in the policy are met.

Policy

Postponement for Farmland

Objective

To support the District Plan by encouraging owners of farmland around urban areas to refrain from subdividing their land for residential purposes.

Conditions and Criteria

To initially qualify, or continue qualifying, for postponement of rates under this policy the Rating Unit must be classified, or continue to be classified, as farmland for differential purposes (ratepayers wishing to ascertain their classification are welcome to inspect the Council’s rating information database at the Council office).

Rates postponement will continue to apply on those properties that were subject at 30 June 2003 to postponement under Section 22 of the Rating Valuations Act 1998. Other rural ratepayers wishing to take advantage of this part of the policy must make application in writing, addressed to the Director Corporate Services. The application for postponement must be made to the Council prior to the commencement of the rating year. Applications received during a rating year will be applicable from the commencement of the following rating year. Applications will not be backdated.

For properties currently subject to rates postponement and for new applications approved, Council will postpone the difference between rates payable on the equivalent Rates Postponement Value advised by its Valuation Service Provider and rates payable on the Rateable Value of the land each year.

The Council may charge an annual fee on postponed rates for the period between the due date and the date they are paid. This fee is designed to cover the Council’s administrative and financial costs and may vary from year to year. The amount of the fee is included in Council’s Schedule of Fees and Charges.

If the Rating Unit is subdivided then postponed rates and any accumulated fees will be payable. The ratepayer will be required to sign an agreement acknowledging this. Postponed rates will be registered as a charge against the land (i.e. in the event that the property is sold the Council has first call against any of the proceeds of that sale). Again, the ratepayer will be required to sign an agreement acknowledging this.

Authority to approve applications will be delegated by Council to the Director of Corporate Services, Chief Financial Officer and Investment and Funding Manager.

Postponement for Older Persons

Objective

The objective of this part of the policy is to assist ratepayers who are Older Persons with a fixed level of income to meet rates particularly, but not exclusively, resulting from increasing levels of rates.

Definition

Older Persons are those who are old enough to qualify to receive NZ Superannuation.

For the purpose of this provision, Financial Hardship is defined as the inability of a person, to reasonably meet the cost of goods, services and financial obligations that are considered necessary according to New Zealand standards.

Conditions and Criteria

Postponement will only apply to Older Persons on a fixed income.

Only Rating Units used solely for residential purposes will be eligible for consideration for rates postponement under this policy.

Only the person entered as the ratepayer, or their authorised agent, may make an application for rates postponement for Financial Hardship. The ratepayer must be the occupant and current owner of the Rating Unit which is the subject of the application. The person entered on the Council’s rating information database as the ‘ratepayer’ must not own any other Rating Units or investment properties (whether in the district or elsewhere).

The ratepayer (or authorised agent) must make an application to Council on the prescribed form (copies can be obtained from the Council Office).

The Council will consider, on a case by case basis, all applications received that meet the criteria outlined under this section. The following factors will be considered – age, income source and level, annual rates payable, period of postponement, equity in the property owned, and the amount of rates postponed.

Authority to approve applications will be delegated by Council to the Director of Corporate Services, Chief Financial Officer and Investment and Funding Manager.

Applicants seeking rates postponement will be encouraged to seek independent advice before formally accepting any offer for postponement made by the Council.

As a general rule postponement will not apply to the first $500 per annum of the rate account after any rates rebate has been deducted.

Where the Council decides to postpone rates the ratepayer must first make acceptable arrangements (e.g. by setting up a system to meet agreed minimum regular payments) for payments required under the terms of the postponement approval for the current rating year, and future payment years.

Postponement will only apply on properties on which houses have been insured. Annual proof may be required that insurance has been maintained.

Where rates postponement is approved for a property with an outstanding mortgage, the mortgagee will be advised by Council that rates postponement has been granted by the Council.

Any postponed rates will be postponed until:

The death of the ratepayer(s); or

· Until the ratepayer(s) ceases to be either the owner or occupier of the Rating Unit; or

· Until a date specified by the Council.

The Council will charge an annual postponement fee. The annual postponement fee will cover Council’s administrative costs including finance costs. The finance cost will be charged at the average return on investments rate for Council for that year.

All postponement fees payable (including finance costs) will be added to the amount of postponed rates annually and be paid at the time postponed rates are paid.

The policy will apply from the beginning of the rating year in which the application is made although the Council may consider backdating past the rating year in which the application is made depending on the circumstances.

The postponed rates, inclusive of any accumulated postponement fees, or any part thereof may be paid at any time. The applicant may elect to postpone the payment of a lesser sum than that which they would be entitled to have postponed pursuant to this policy.

Postponed rates will be registered as a statutory land charge on the Rating Unit title. This means that the Council will have first call on the proceeds of any revenue from the sale or lease of the Rating Unit. In addition to the annual fee and interest, Council will charge any other costs or one-off fees incurred in relation to registration of the postponement as part of the postponement.

This policy will not affect any rates postponement provisions approved prior to 1 July 2009, which will continue to apply in accordance with the conditions related to each case.

This policy does not apply to non-Older Person ratepayers experiencing financial hardship.

Council will assist in the referral of any other ratepayer on a fixed income facing long term financial hardship to the appropriate agency.

Postponement for Significant Extraordinary Circumstances

Objective

To provide a rates postponement to ratepayers experiencing financial hardship directly resulting from Significant Extraordinary Circumstances that affects their ability to pay rates.

For the purpose of this policy the following definitions will apply:

· Significant Extraordinary Circumstances: as defined by Council resolution. Significant Extraordinary Circumstances may be natural or economic in nature, and will identify the type and location of properties affected.

· Financial Hardship: for the purpose of this provision is defined as the inability of a person, after seeking recourse from Government benefits or applicable relief packages, to reasonably meet the cost of goods, services and financial obligations that are considered necessary according to New Zealand standards. In the case of a ratepayer who is not a natural person, it is the inability, after seeking recourse from Government benefits or applicable relief packages, to reasonably meet the cost of goods, services and financial obligations that are considered essential to the functioning of that entity according to New Zealand standards.

· Small Business: a business operated by a small business person, small partnership or close company as defined in section YA 1 of the Income Tax Act 2007.

Conditions and Criteria

This part of the policy will only apply to Rating Units used for residential purposes or by Small Businesses.

Council resolution will include:

a. that the resolution applies under the Rates Postponement Policy; and

b. the Significant Extraordinary Circumstances triggering the policy (e.g. including, but not limited to, flood, pandemic, earthquake); and

c. how the Significant Extraordinary Circumstances are expected to impact the community (e.g. hardship); and

d. the types or location of properties effected by the Significant Extraordinary Circumstances; and

e. timeframe for postponement in relation to the Significant Extraordinary Circumstances.

No application for postponement can be made under this policy unless Significant Extraordinary Circumstances have been identified by Council.

The ratepayer must demonstrate, to the Council’s satisfaction that paying the rates would result in Financial Hardship.

Council will consider applications where the same ratepayer is liable for rates for multiple Rating Units. In such instances, Council will look at the collective impact to the ratepayer.

The ratepayer must be the current ratepayer for the Rating Unit at the time Significant Extraordinary Circumstances are identified by Council.

Postponed rates will remain postponed until the earlier of:

a. The ratepayer/s ceases to be the owner or occupier of the Rating Unit; or

b. A date specified by Council in the Council resolution identifying Significant Extraordinary Circumstances.

Postponement for Special Circumstances

Objective

To enable Council to provide rates postponement for special and unforeseen circumstances, where it considers relief by way of rates postponement is justified in the circumstances.

Conditions and Criteria

Application for rates postponement must be made in writing by the ratepayer or their authorised agent.

Each circumstance will be considered by Council on a case by case basis. Where necessary, Council consideration and decision will be made in the Public Excluded part of a Council meeting.

The terms and conditions of postponement including any application of an annual fee will be decided by Council on a case by case basis.

The applicant will be advised in writing of the outcome of the application.

Policy Review

This policy will be reviewed at least once every three years.

Document History

Version	Reviewer	Change Detail	Date
2.0.0	Caroline Thompson	Updated and approved by Council	29 June 2018
3.0.0		Updated and approved by Council

Extraordinary Meeting of Council - 11 June 2020 - Open Agenda Item 2

2. Consultation - Rates Remisson Policy

Type of Report:	Legal and Operational
Legal Reference:	Local Government Act 2002
Document ID:	935164
Reporting Officer/s & Unit:	Garry Hrustinsky, Investment and Funding Manager

2.1 Purpose of Report

To review and update the policy to include a clearer definition around financial hardship. To introduce rates remission resulting from Significant Extraordinary Circumstances. Some minor clarification of Criteria wording.

Officer’s Recommendation

That Council:

a. Approve the proposed amendments to the Rates Remission Policy to include Significant Extraordinary Circumstances.

b. Approve other minor changes detailed in this report.

c. Approval for consultation on the revised Rates Remission Policy to run parallel but separately to the Annual Plan 20/21.

d. Approve the consultation plan for the Rates Remission policy

2.2 Background Summary

The COVID-19 pandemic and a subsequent response planning has highlighted the need to better define rates remissions for Significant Extraordinary Circumstances.

2.3 Issues

In its current form, the Rates Remission Policy is structured to review remissions on a very small (individual) scale. Significant time (including that of Prosperous Napier Committee) and resources are required to process each application. The proposed amendment allows the Council to be proactive, and apply broad remissions in situations where Significant Extraordinary Circumstances are identified.

The proposed amendment is as follows:

Remission of Rates in Response to Significant Extraordinary Circumstances being identified by Council.

Objective

To enable Council to provide rates remission to assist ratepayers in response to Significant Extraordinary Circumstances impacting Napier’s ratepayers.

Definitions

Financial Hardship: for the purpose of this provision is defined as the inability of a person, after seeking recourse from Government benefits or applicable relief packages, to reasonably meet the cost of goods, services and financial obligations that are considered necessary according to New Zealand standards. In the case of a ratepayer who is not a natural person, it is the inability, after seeking recourse from Government benefits or applicable relief packages, to reasonably meet the cost of goods, services and financial obligations that are considered essential to the functioning of that entity according to New Zealand standards.

Conditions and Criteria

For this policy to apply Council must first have identified that there have been Significant Extraordinary Circumstances affecting the ratepayers of Napier, that Council wishes to respond to.

Once Significant Extraordinary Circumstances have been identified by Council, the criteria and application process (including an application form, if applicable), will be made available.

For a Rating Unit to receive a remission under this policy it needs to be an “Affected Rating Unit” based on an assessment performed by officers, following guidance provided through a resolution of Council.

Council resolution will include:

1. That the resolution applies under the Rates Remission Policy; and

2. Identification of the Significant Extraordinary Circumstances triggering the policy (including both natural and man-made events); and

3. How the Significant Extraordinary Circumstances are expected to impact the community (e.g. financial hardship); and

4. The type of Rating Unit the remission will apply to; and

5. Whether individual applications are required or a broad based remission will be applied to all affected Rating Units or large groups of affected Rating Units; and

6. What rates instalment/s the remission will apply to; and

7. Whether the remission amount is either a fixed amount, percentage, and/or maximum amount to be remitted for each qualifying Rating Unit.

Explanation

The specific response and criteria will be set out by Council resolution linking the response to specific Significant Extraordinary Circumstances. The criteria may apply a remission broadly to all Rating Units or to specific groups or to Rating Units that meet specific criteria such as proven Financial Hardship, a percentage of income lost or some other criteria as determined by council and incorporated in a council resolution.

Council will indicate a budget to cover the value of remissions to be granted under this policy in any specific financial year.

The types of remission that may be applied under this policy include:

· The remission of a fixed amount per Rating Unit either across the board or targeted to specific groups such as:

§ A fixed amount per residential Rating Unit

§ A fixed amount per commercial Rating Unit

Further minor amendments include:

Provision for the remission of penalties through identification of Significant Extraordinary Circumstances.

Applications under Remission for Special Circumstances can now be made by the “…ratepayer or their authorised agent...” instead of solely by the “ratepayer”.

2.4 Significance and Engagement

There has been no external consultation on the proposed changes.

The proposed amendments are similar to those already in place, or proposed, for other Councils.

Significance of the proposed amendments are high as they could potentially impact proportion of residents or ratepayers.

If approved, public consultation will be required and will be run in parallel to the Annual Plan 20/21.

2.5 Implications

Financial

N/A

Social & Policy

The proposed amendment will allow Napier City Council to be more responsive, by way of financial relief, to any events that have a material negative impact on the wider city.

Risk

Taking the Rates Remission Policy in its current form, the Council is not well placed to provide timely relief via remission, and may be overwhelmed due to administrative burden should further Significant Extraordinary Circumstances occur.

2.6 Options

The options available to Council are as follows:

a. Adopt all of the proposed changes.

b. Adopt selected proposed changes.

c. Adopt none of the proposed changes.

2.7 Development of Preferred Option

The proposed changes to the Rates Remission Policy allow Council to be more responsive in times of Significant Extraordinary Circumstances impacting the community.

2.8 Attachments

a Rates Remission Policy ⇩

b Consultation Plan - Rates Remission Policy ⇩

Extraordinary Meeting of Council - 11 June 2020 - Attachments

Item 2

Attachments a

Rates Remission Policy
Approved by	Pending Approval by Council
Department	Finance
Original Approval Date	30 June 2019	Review Approval Date	June 2020
Next Review Deadline	June 2023	Document ID
Relevant Legislation	Local Government Act 2002, Local Government (Rating) Act 2002
NCC Documents Referenced	Published in the Long Term Plan 2018-2028 which was reviewed between March/Apr 2018 and adopted on 29-06-18 Reviewed and amended as part of 2019/20 Annual Plan Reviewed and amended as part of 2020/21 Annual Plan

Purpose

To enable Council to remit all or part of the rates on a rating unit under Section 85 of the Local Government (Rating) Act 2002 where a Rates Remission Policy has been adopted and the conditions and criteria in the policy are met.

Policy

1. Remission of Penalties

Objective

The objective of this part of the Rates Remission Policy is to enable Council to act fairly and reasonably in its consideration of rates which have not been received by the Council by the penalty date due to circumstances outside the ratepayer’s control.

Conditions and Criteria

Penalties incurred will be automatically remitted where Council has made an error which results in a penalty being applied.

Remission of one penalty will be considered in any one rating year where payment has been late due to significant family disruption. This will apply in the case of death, illness, or accident of a family member, at about the times rates are due.

Remission of the penalty will be considered if the ratepayer forgets to make payment, claims a rates invoice was not received, is able to provide evidence that their payment has gone astray in the post, or the late payment has otherwise resulted from matters outside their control. Each application will be considered on its merits and remission will be granted where it is considered just and equitable to do so

Remission of a penalty will be considered where sale has taken place very close to due date, resulting in confusion over liability, and the notice of sale has been promptly filed, or where the solicitor who acted in the sale for the owner acted promptly but made a mistake (e.g. inadvertently provided the wrong name and address) and the owner cannot be contacted. Each case shall be treated on its merits.

Penalties will also be remitted based on the application, by officers, of Council criteria established after Council has identified that Significant Extraordinary Circumstances have occurred that warrants further leniency in relation to the enforcement of penalties that would otherwise have been payable. The criteria to be applied will be set out in a council resolution that will be linked to the specific Significant Extraordinary Circumstances that have been identified by Council.

Penalties will also be remitted where Council’s Chief Financial Officer considers a remission of the penalty, on the most recent instalment, is appropriate as part of an arrangement to collect outstanding rates from a ratepayer.

2. Remission for Residential Land in Commercial or Industrial Areas

Objective

To ensure that owners of rating units situated in commercial or industrial areas are not unduly penalised by the zoning decisions of this Council and previous local authorities.

Conditions and Criteria

To qualify for remission under this part of the policy the rating unit must:

· Be situated within an area of land that has been zoned for commercial or industrial use. Ratepayers can determine where their property has been zoned by inspecting the City of Napier District Plan, copies of which are available from the Council office.

· Be listed as a ‘residential’ property for differential rating purposes. Ratepayers wishing to ascertain whether their property is treated as a residential property may inspect the Council’s rating information database at the Council office.

Rates will be automatically remitted annually for those properties which had Special Rateable Values applied under Section 24 of the Rating Valuations Act 1998 up to 30 June 2003, and for which evidence from Council’s Valuation Service Provider indicates that, with effect from the 2002 revaluation of Napier City, the land value has been penalised by its zoning. The amount remitted will be the difference between the rates calculated on the equivalent special rateable value provided by the Valuation Service Provider and the rates payable on the Rateable Value.

Other ratepayers wishing to claim remission under this part of the policy must make an application in writing addressed to the Chief Financial Officer.

The application for rates remission must be made to the Council prior to the commencement of the rating year. Applications received during a rating year will be applicable from the commencement of the following rating year. Applications will not be backdated.

Where an application is approved, the Council will direct its Valuation Service Provider to inspect the rating unit and prepare a valuation that will treat the rating unit as if it were a comparable rating unit elsewhere in the district. The ratepayer may be asked to contribute to the cost of this valuation. Ratepayers should note that the Valuation Service Provider’s decision is final as there are no statutory right of objection or appeal for values done in this way.

3. Remission for Land Subject to Special Preservation Conditions

Objective

To preserve and encourage the protection of land and improvements which are the subject of special preservation conditions.

Conditions and Criteria

Rates remission under this Section of the policy relates to land that is subject to:

· A heritage covenant under the Historic Places Act 1993; or

· A heritage order under the Resource Management Act 1991; or

· An open space covenant under the Queen Elizabeth the Second National Trust Act 1977; or

· A protected private land agreement or conservation covenant under the Reserves Act 1977; or

· Any other covenant or agreement entered into by the owner of the land with a public body for the preservation of existing features of land, or of buildings, where the conditions of the covenant or agreement are registered against the title to the land and are binding on subsequent owners of land.

Ratepayers who own Rating Units meeting this criteria may qualify for remission under this part of the policy.

Rates will automatically be remitted annually for those properties which had Special Rateable Values applied under Section 27 of the Rating Valuations Act up to 30 June 2003, and which meet the above criteria. The amount remitted will be the difference between the rates calculated on the equivalent special rateable value provided by the Valuation Service Provider and the rates payable on the Rateable Value.

Other ratepayers wishing to claim remission under this part of the policy must apply in writing to the Council office, and must provide supporting documentary evidence of the special preservation conditions, e.g. copy of the Covenant, Order or other legal mechanism.

Applications for remission under this part of the policy will be approved by the Council. The Council may specify certain conditions before remission will be granted. Applicants will be required to agree in writing to these conditions and to pay any remitted rates if the conditions are violated.

Where an application is approved, the Council will direct its Valuation Service Provider to inspect the Rating Unit and provide a special valuation. The ratepayer may be asked to contribute to the cost of this valuation. Ratepayers should note that the Valuation Service Provider’s decision is final as there is no statutory right of objection or appeal for values done in this way.

The equivalent special rateable value will be determined by the Valuation Service Provider on the assumption that:

· The actual use to which the land is being put at the date of valuation will be continued; and

· Any improvements on the land will be continued and maintained or replaced in order to enable the land to continue to be so used.

It will be assessed taking into account any restriction on the use that may be made of the land imposed by the mandatory preservation of any existing tenements, hereditaments, trees, buildings, other improvements, and features.

4. Remission of Uniform Annual General Charges (UAGC) and Targeted Rates of a Fixed Amount on Rating Units Owned by the Same Owner

Objective

To provide for relief from UAGC and Targeted Rates of a fixed amount per Rating Unit or Separately Used or Inhabited Parts of a Rating Unit, where two or more Rating Units are owned by the same person or persons, and are:

· part of a subdivision plan which has been deposited for separate lots, or separate legal titles exist; or

· but the Rating Units may not necessarily be used jointly as a single unit, and each Rating Unit does not benefit separately from the services related to the UAGC and Targeted Rates.

Conditions and Criteria

Remission of UAGC and Targeted Rates of a fixed amount applies in the following situations:

· Unsold subdivided land, where as a result of the High Court decision of 20 November 2000 ‘Neil Construction and others vs. North Shore City Council and others’, each separate lot or title is treated as a separate Rating Unit, and such land is implied to be not used as a single unit.

All remissions under this part of the policy will be approved by the Chief Financial Officer.

5. Remission for Water Rates (by meter)

Objective

To provide ratepayers with a measure of relief by way of partial rates remission where, as a result of the existence of a water leak on the Rating Unit which they occupy the payment of fuller rates is inequitable, or where officers are convinced that there are errors in the data relating to water usage.

Conditions and Criteria

· The existence of a significant leak on the occupied Rating Unit has been established and there is evidence that steps have been taken to repair the leak as soon as possible after the detection, or officers have reviewed the usage data and are convinced that the usage readings are so abnormal as to require adjustment.

· The Council or its delegated officer(s) as determined from time to time and set out in the Council’s delegations register shall determine the extent of any remission based on the merits of each situation.

6. Remission to smooth the effects of change in rates on individual or groups of properties

Objective

To enable Council to provide rates remission where, as a result of a change in Council policy or other change that results in a significant increase in rates, Council decides it is equitable to smooth or temporarily reduce the impacts of the change by reducing the amount payable.

Conditions and Criteria

· Remission of part of the value based rates to enable the impact of a change in rates to be phased in over a period of no more than 3 years.

To continue with any existing rates adjustment where, due to change in process, policy or legislation Council considers it equitable to do so subject to a maximum limit of 3 years to a remission made under this clause in the policy.

7. Remission for Special Circumstances

Objective

To enable Council to provide rates remission for special and unforeseen circumstances, where it considers relief by way of rates remission is justified in the circumstances.

Conditions and Criteria

Applications for rates remission must be made in writing by the ratepayer or their authorised agent.

Each circumstance will be considered by Council on a case by case basis. Where necessary, Council consideration and decision will be made in the Public Excluded part of a Council meeting.

The terms and conditions of remission will be decided by Council on a case by case basis. The applicant will be advised in writing of the outcome of the application.

8. Remission of Rates in Response to Significant Extraordinary Circumstances being identified by Council.

Objective

To enable Council to provide rates remission to assist ratepayers in response to Significant Extraordinary Circumstances impacting Napier’s ratepayers.

Definitions

Conditions and Criteria

For this policy to apply Council must first have identified that there have been Significant Extraordinary Circumstances affecting the ratepayers of Napier, that Council wishes to respond to.

Once Significant Extraordinary Circumstances have been identified by Council, the criteria and application process (including an application form, if applicable), will be made available.

Council resolution will include:

1. That the resolution applies under the Rates Remission Policy; and

2. Identification of the Significant Extraordinary Circumstances triggering the policy (including both natural and man-made events); and

3. How the Significant Extraordinary Circumstances are expected to impact the community (e.g. financial hardship); and

4. The type of Rating Unit the remission will apply to; and

5. Whether individual applications are required or a broad based remission will be applied to all affected Rating Units or large groups of affected Rating Units; and

6. What rates instalment/s the remission will apply to; and

7. Whether the remission amount is either a fixed amount, percentage, and/or maximum amount to be remitted for each qualifying Rating Unit.

Explanation

The specific response and criteria will be set out by Council resolution linking the response to specific Significant Extraordinary Circumstances. The criteria may apply a remission broadly to all Rating Units or to specific groups or to Rating Units that meet specific criteria such as proven Financial Hardship, a percentage of income lost or some other criteria as determined by council and incorporated in a council resolution.

Council will indicate a budget to cover the value of remissions to be granted under this policy in any specific financial year.

The types of remission that may be applied under this policy include:

· The remission of a fixed amount per Rating Unit either across the board or targeted to specific groups such as:

o A fixed amount per residential Rating Unit

o A fixed amount per commercial Rating Unit

Policy Review

This policy will be reviewed at least once every three years.

Document History

Version	Reviewer	Change Detail	Date
2.0.0	Caroline Thomson	Updated and approved by Council with LTP	29 June 2018
3.0.0	Caroline Thomson	Updated in conjunction with 2019-20 Annual Plan	4 June 2019
4.0.0		Updated in conjunction with 2020-21 Annual Plan

Extraordinary Meeting of Council - 11 June 2020 - Open Agenda Item 3

3. Consultation Document and Draft Annual Plan 2020/21

Type of Report:	Legal
Legal Reference:	Local Government Act 2002
Document ID:	935370
Reporting Officer/s & Unit:	Adele Henderson, Director Corporate Services

3.1 Purpose of Report

To present the consultation document and supporting information for the Annual Plan 2020/21 for Council adoption.

Officer’s Recommendation

That Council:

a. Note that the Annual Plan 2020/21 does not meet the section 100 (i) balanced budget provision of the Local Government Act 2002, and Council will work towards a balanced budget for the Long Term Plan 2021-31.

b. Adopt the following documents as supporting information for the Annual Plan 2020/21:

i. Draft Annual Plan financials for 2020/21

ii. FAQs – Water

iii. FAQs – Waste

iv. Capital Programme Changes

v. Remaining capital programme projection for Long Term Plan 2018-28

vi. Long Term Plan 2018-28 Major Projects Update

vii. Where your rates dollar goes

viii. Water Supply Network Master Plan, Council report and minutes

ix. Civic Precinct Report (Library) Council report and minutes

x. Whakarire Revetment – Funding Decision, Council report and minutes and Consultation Summary

xi. Project Shapeshifter business case

xii. Napier Aquatic Development Update, Council report and minutes

xiii. Napier Recovery Plan, Napier Recovery Budget, Council report and minutes

xiv. Schedule of Fees and Charges 2020/21

xv. Annual Plan proposed rate increase options.

c. Adopt the Consultation Document to form the basis of Council’s consultation with the community on the Annual Plan 2020/21.

d. Note that separate consultation will occur on the proposed Rates Remissions Policy; Local Government Funding Agency; and Rates Postponement Policy.

e. Delegate responsibility to the Chief Financial Officer to approve any final edits required to the Consultation Document, financial information and supporting information in order to finalise the documents for uploading online and physical distribution.

f. Adopt the high level consultation plan and note that it includes options for engagement under different alert levels should Alert Levels for Covid-19 change during the consultation period.

3.2 Background Summary

Process to develop annual budget

The process to develop council’s annual budget for the financial year commencing 1 July 2020 ending on 30 June 2021, began in November 2019, with a series of workshops with Councillors to set direction on the budget. These seminars occurred on 27 November, 4 December, 12 December, 23 January, 5 February, 10 February, and 20 February. Councillors were provided with cost pressures and efficiencies that could be made, and set direction to stay within the financial limits as outlined in the Financial Strategy. On 10 March 2020, Council approved the underlying material, assumptions and key decisions for the development of the draft Annual Plan 2020/21 and Consultation Document including a proposed average rates increase of 6.5% for existing ratepayers. The 6.5% was due to increases relating to waste, recycling and water-related projects.

Officers then prepared the Annual Plan 2020/21 Consultation Document and supporting information for community consultation based on the decisions of the 10 March 2020 meeting to present to Council on 31 March 2020.

On 20 March 2020, at the Audit and Risk Committee meeting, the Annual Plan 2020/21 was discussed, and Council’s Auditor and Audit and Risk Committee directed Council to review the Annual Plan 2020/21 in light of Covid-19 impacts, particularly as Napier City Council receives only 51% of its total income from rates. It is a legislative requirement under the Local Government Act 2002 to have a balanced budget. The impact of Covid-19 on revenue would result in an unbalanced budget, and therefore Council had to review its 2020/21 budget.

On 25 March 2020, central government moved New Zealand to Alert Level 4, and then moved into Alert Level 3 on 27 April, then to Alert Level 2 on 13 May. At the time of this report, New Zealand remains in Alert Level 2. The impacts of the Alert Levels and the global response to the pandemic have caused significant implications for our community, and changes the context within which the Council can deliver its services and within which it must assess the corresponding budgetary implications.

In April 2020, Officers developed a project plan to develop a revised Annual Plan 2020/21 that allowed for revision of content and impact on timelines for consulting and hearings. The revised adoption date is set for 27 August. Adoption no later than this date will ensure that rates notices are delivered within quarter one to mitigate cashflow issues; and allow commencement of capital projects planned for 2020/21 as soon as possible.

Description	Indicative Date(s)
Consultation	18 June – 15 July 2020
Extraordinary Council meeting - Annual Plan 2020/21 & Special Consultative Process Hearing	12/13 August 2020
Extraordinary Council meeting - Annual Plan 2020/21 Adoption & Rates Setting	27 August 2020
Issue rates notices	10 September 2020

On 23 April, Council agreed to the deferral of the release of the Annual Plan 2020/21 until the most appropriate plan for the changed context of Covid-19 was developed and agreed by Council. Council noted that by deferring the release of the plan, Council will be in breach of the legislative timelines under the Local Government Act 2002 to adopt the Annual Plan 2020/21 by 30 June the year prior to the plan commencing.

Advice provided by LGNZ, SOLGM and supported by Simpson Grierson confirms that an Annual Plan 2020/21 adopted after 30 June is lawful and if challenged is unlikely to be declared invalid provided the delay can be explained and the plan is not acted on until it is adopted. Audit NZ and the Department of Internal Affairs (DIA) have been advised of the late adoption date for the Annual Plan 2020/21.

Elected Members attended weekly workshops throughout April and May covering budget impacts, revised significant forecasting assumptions, rates (including funding options to reduce 2020/21 rates increase), options analysis and impact on future year’s rates and loans, proposed recovery package budget, risks, financial policies, and consultation. The Audit and Risk Committee was updated fortnightly. Council set direction on a 4.8% rates increase.

Budget review

Proposed rates increase

Officers reviewed the budget in light of Covid-19 impacts to achieve a 4.8% rates increase and $3.7M of savings were identified across the board which are not expected to unduly impact levels of service. Officers also revised planning assumptions, and provided Council with a shortlist of options to fund the operating deficit $6.74M for 20/21 with a preferred option of utilising Council reserves.

Capital programme

The capital programme has not changed significantly as projects have already been programmed. Any changes to the programme of work will be addressed through officer’s submissions to the Annual Plan 2020/21. The currently known proposed changes to the capital programme and remaining years of the capital programme for the current LTP are listed as supporting documents to the Annual Plan 2020/21. Delivery of the capital plan is an important aspect of economic recovery. Council will consider any final changes required for the capital plan as part of its final deliberation.

Central government funding

Officers have also applied for central government funding for a number funding streams available through Covid-19 recovery and at the time of this report are awaiting feedback.

Napier recovery plan

In parallel to the development of the revised Annual Plan 2020/21, officers revised the Rates Postponement Policy and Rates Remissions Policy to enable Council to provide relief for hardship to the community; and developed the Napier City Recovery Plan which includes:

· 543K for rates and rental relief for residents, businesses and community groups. Up to 350K available for residential reductions of up to $200; up to $500 for commercial reductions; and up to 193K for rental relief for organisations that are charged to rent, lease or for a license to occupy any Council land or premises.

· $1M to support recovery including continued support for We are Team Napier; Jump Start Innovation fund to support great ideas that help accelerate recovery for our community and or economy; Using the rest of the funding to support emerging ideas and longer term strategies.

External borrowing

Despite not requiring external borrowing in the past, the financial forecast taking into consideration Covid-19 impacts identified that Napier City Council may have a loan funding requirement of approximately $33 million for 20/21. Officers explored options for external borrowing and Council set direction to join the Local Government Funding Agency. To ensure that Council would be able to meet the criteria of the Local Government Funding Agency if membership was decided on, the Investment Policy and Liability Management Policy were reviewed for compliance.

Council decisions to inform Annual Plan 2020/21

Since the 10 March Council meeting where Council adopted the underlying material, assumptions and key decisions to form the basis of the Annual Plan 2020/21, Council has made several decisions related to the revised Annual Plan 2020/21. Council reports and decisions include:

Meeting	Topic	Council report and decision
9 April Council meeting	Whakarire Ave Revetment	Council received a report on Whakarire Ave including an update on residents’ feedback and made the following decisions relevant to Annual Plan 2020/21: Ø to proceed with the project, Ø approve the updated project cost estimate that now includes additional items, including landscaping, stormwater conveyance and third party supervision and to fund the additional cost from loans; Ø approve the private contribution to be held at the same amount as per the 2019/20 consultation, resulting in a change to the public/private split to 2.5% private/95.5% public. Whakaire Ave Revetment is an update in the Annual Plan 2020/21 Consultation Document. The Revenue and Financing Policy will be updated prior to the targeted rate commencing.
9 April Council meeting	Library Site Selection	Council received a report as an update on the Civic precinct project including library site selection process and made the following decisions relevant to Annual Plan 2020/21: Ø accepted in principle, the recommendation from the Library site project steering group to pursue the development of the library on the Station Street Site. Ø Noted the Annual Plan 2020/21 will include the preferred site for the library and any feedback received on this will be forward to the Civic Precinct Steering Group for consideration in the masterplan development. Napier Library Civic Precinct is an inform piece in the Annual Plan 2020/21 Consultation Document.
20 April Audit and Risk Committee meeting	External Accountability – investment and debt Annual Plan 20/21 underlying documents	The Committee received a report on External Accountability – investment and debt which outlined that although Council is still in a current cash position, Council will likely need to move into an external debt position through the Annual Plan 2020/21, depending on timing of projects. The Committee received the snapshot report on Council’s Investment and Debt. The Committee received a report on the underlying financial information to the Annual Plan 2020/21. The Committee made the following recommendations to Council relevant to the Annual Plan: Ø Received the underlying information including capital plan changes; 10 year revised capital plan; financial information. Ø Noted that further review should be undertaken in light of Covid-19 impacts and the full Council to be advised immediately of this review.
23 April Extraordinary Council meeting	Annual Plan 2020/21 update	Council received a report on the suggested revised timelines for the Annual Plan 2020/21 and made the following decisions: Ø Note that by deferring the release of the 2020/21 Annual Plan, Council will be in breach of its legislative timelines under the Local Extraordinary Meeting of Council - 23 April 2020 - Open Minutes 4 Government Act 2002 to adopt the Annual Plan by 30 June in the year prior to the plan. Ø Approve the deferral of the release of the 2020/21 Annual Plan for community consultation, and amendments to Financial Policies, until such time as the most appropriate plan for the changed context of Covid-19 is developed and agreed by Council. Ø Note Officers are working towards the draft Annual Plan 20/21 and consultation document being brought to Council in June with community consultation to occur after this. Ø The Hearing and adoption of the Annual Plan will be most likely in August.
30 April Extraordinary Council meeting	Annual Plan proposed rate increase options Rates and debtors relief packages Fees and charges for 20/21	Annual Plan proposed rates increase options Council received a report on the details of the financial impacts of Covid-19 on the 2020/21 budget, with planning assumptions to guide budgeting for 2021, and a shortlist of options to fund the operating deficit. The report also sought Council approve for proposed rates increase and to prepare the 2020/21 draft Annual Plan and consultation document on the basis of the decisions made at the meeting. Council made the following decisions: Ø Note that a number of briefing sessions/workshops have been held with elected members and seek Councillor input and direction setting in relation to preparing the final material required for the revised Annual Plan and consultation document for the community. Ø Note the revised timeline that was provided to Council on 23 April, will see the adoption of the Annual Plan later than the statutory deadline due to the additional changes required for the revised plan and impact on the timeline for consulting and hearings. The revised adoption date is currently set for 27 August. Ø Note that Covid-19 has had a material impact on Council’s budget for the current year (2019/20), and is likely to put Council into a net operating rates deficit when the final position is known in August (currently estimated at $3m). Ø Agree that the 2020/21 Annual Plan and consultation document be prepared for consideration by the Council, based on Option C, which recommends i. A 4.80% average rates, ii. Funding of a planned operating gap of $6.74 million is allocated from Council reserves, ($4 million from the Parking Reserve, and $2.74 million from the Suburban and Urban Growth Fund.). Council will consult on the use of these funds as part of the Annual Plan 2020/21. iii. Note that under section 80 of the Local Government Act 2002 Council could consider internal borrowing for any rates or debtors relief applications received prior to community consultation and adoption of the 2020/21 Annual Plan. If community consultation confirms that it is appropriate to use the parking and urban/suburban growth funds to fund the operating gap of $6.74m the internal loan would be repaid from these reserves. iv. Note Council officers have identified operational savings of $3.7 million in the development of the revised Covid-19 Annual Plan 20/21. There are two options provided regarding how to pay for the funding shortfall and achieve an average rates increase of 4.8% per household. The proposed option is to use reserves to fund the operating gap of $6.74m and the other option presented is to borrow to cover the operating gap. Rates and debtors relief packages Council received a report on financial relief options for Council to consider in response to financial stress in the community caused by Covid-19. Council made the following decisions: Ø Note that a separate paper be bought back to Council with proposed changes to the Rates Postponement Policy for consideration and community consultation alongside the Annual Plan 20/21. Ø Note that Rates Postponement for 20/21 be considered under “Special Circumstances” in the existing policy until such time the revised Rates Postponement Policy is adopted by Council. Ø Approve funding of up to $525k to be funded from Reserves to support Rates Postponement Policy requirements for 2020/21 (being up to 50% of rates being deferred up to 6 months). Ø Note delegation to the Director Corporate Services, Chief Financial Officer, and Investment and Funding Manager to approve Rates postponement in relation to the Covid-19 event for 2019/20 and 2020/21 is set out in the Rates Postponement Policy. Ø Note that a public excluded paper will be bought to Council every 6 weeks documenting the approved delegated requests for rates postponement under “Special Circumstances” or “Extraordinary or Emergency Event”. Ø Note that any request for rates postponement for properties with a capital value greater than $1.5m are to be considered by Council on a case by case basis in a public excluded agenda. Ø Note the recommendation to reduce rates penalty for the first 6 months of 2020/21 (to December 2020) from 10% to 3.5% and will be adopted formally when the rates are set for 20/21. Ø Reduce the Annual Plan 20/21 budget by $88k for rates penalty to reflect the reduction in anticipated penalty fees for 2020/21. Ø Approve rental relief up to $193k for those demonstrating hardship (across both 2019/20 and 2020/21), for leases, rents, licences to occupy, non-profit organisations. Ø Provide delegation to the Director Corporate Services, Chief Financial Officer and Manager Property to approve rental relief in relation to the Covid-19 event for 2019/20 and 2020/21 Ø Note that a public excluded paper will be bought to Council every 6 weeks documenting the approved delegated requests for rental relief. l. Approve in principle the formation of the Napier City Rates Relief Fund for one year only (20/21) up to $350k to be funded from Council Reserves $100k – commercial ratepayers $250k – residential ratepayers If approved, direct Council Officers to prepare a formal Napier City Council Rates Relief Policy 20/21 for adoption by Council to be effective 1 July 2020. Ø Approve in principle the use of reserves be utilised for the purposes of the Rates Postponement, Rates Rebate and the net operating shortfall for the Annual Plan 2020/21. Reserve funding has been identified in the Parking Fund ($5m) and the Suburban and Urban Growth ($2.6m) Fund. This change in purpose from the original proposed use as identified in the Long Term Plan will be considered by the community as part of the Annual Plan consultation 2020/21. There will be approximately $5m balance in each of the two reserves after the proposed allocation from the reserve for future projects. The use of the funds, and the residual balance of the fund is considered prudent to offset hardship faced by the community during this time. Ø Approve the ‘Community Information – Rates and Rental Relief’ document for distribution for residents and businesses in relation to rates, and rental support for the community. Napier’s Recovery Plan is an inform piece as part of the Annual Plan consultation. Fees and Charges Ø Council received the Fees and Charges for the 20/21 financial year and decided to adopt the schedule of fees and charges for 2020/21 effective 1 July 2020, as specified in the document titled Schedule of Fees and Charges 2020/21. Fees and Charges forms part of the supporting documents to the Annual Plan. Note: fees and charges will be effective as of 1 July, except for Fees and Charges under the Resource Management Act which will be effective as of the Annual Plan Deliberations on 12-13 August.
7 May Extraordinary Council meeting	Water supply masterplan	Council received a report on Water Supply Master planning including the Water Supply Masterplan and a report which identified critical projects are need to be programmed and delivered in the 20/21 Annual Plan, and made the following decisions relevant to Annual Plan: Ø Approve the approach to developing Borefield#1 in advance of the Global Resource Consent application, with the aim to provide low manganese source water as soon as practical. Ø Accept that this approach has potential financial risks with the installation of the larger pipeline that connects the proposed bore to the existing network. Water Supply Projects is an inform piece in the Annual Plan consultation document.
14 May Extraordinary Council meeting	Napier recovery budget	Council received a report on the proposed funding of the recovery process for 20/21 and the terms of reference for the Napier City Council recovery effort, and made the following decisions relevant to Annual Plan Ø Approve the funding of the recovery process for 20/21 ($1 million dollars). Ø Endorse the recovery approach, Terms of Reference, and integration with the Long Term Plan direction setting. Ø Receive regular reports on the Steering Group’s activities and plans and have input into these where appropriate. Napier’s Recovery Plan is an inform piece in the Annual Plan consultation document.
21 May Extraordinary Council meeting	Rates postponement policy review Rates remission policy review Investment policy review Liability management policy review Statement of proposed to join the local government funding agency	Council received several reports including: Financial policies relating to community hardship Rates Postponement Policy: proposed better definition around financial hardship resulting from Significant Extraordinary Circumstances. Rates Remission Policy: to include definition around financial hardship resulting from Significant Extraordinary Circumstances. These policies were not approved at this time and laid on the table for further review by Officers, in particular whether the policies would apply to an applicant who has owned the property for at least 5 years, and applicants who reside outside of Napier. These revised policies form part of a separate Council report at the 11 June Council meeting. These policies will be consulted on separately to the Annual Plan, but in parallel. Financial policies relating to external borrowing Investment Policy Review: proposed amendments to include provision for Napier City Council to hold bonds, commercial paper and shared issued by the Local Government Funding Agency (LGFA). Liability Management Policy: proposed amendments to include provision for Napier City Council to contribute a portion of borrowings back to the LGFA as and equity contribution, provide guarantees and allow charges by the LGFA – this is a condition of membership. Both policies were adopted without amendments. These policies are included as supporting documents to the Consultation on joining the LGFA . Statement of Proposal to join the LGFA: provided options available if Council decides to join the Local Government Funding Agency and commence process of joining the LGFA through release of a Statement of Proposal. Council made the following decisions relevant to Annual Plan: Ø Approve Napier City Council proceeding with public consultation to join the Local Government Funding Agency (LGFA). Ø Endorse Option 4 (join the LGFA as an unrated guaranteeing local authority) as Council’s preferred membership option. Joining the Local Government Funding Agency is a consultation run separate to the Annual Plan, but in parallel, and follows the Special Consultative Procedure.
4 June Council meeting	Napier Aquatic Centre Update	Council received a report with options in relation to the next steps in the development of the Napier Aquatic Centre, and made the following decisions relevant to Annual Plan: Ø Note that Council, being conscious of the widespread community interest around progressing the previously proposed Napier Aquatic Centre Development, wishes to take some time to reconsider the various options. Ø Resolve that Council will commence some further consultation on the Napier Aquatic Centre Development as part of its Long Term Plan 2021-31 with a view to ensuring that the whole community is involved in progressing any finally agreed project in due course even though that might not determine a final option until a future annual plan. Ø Note that Council prefer not to continue with the tender for the Napier Aquatic Centre Development as issued on 21 May 2019 in favour of further considering the project as part of the Long Term Plan 2021-31. Ø Note that Council had provided $5m in the draft Annual Plan 2020/21 on the basis that it wasn’t sure of the court outcome at the time, nor of the best way to progress matters, and therefore had left itself some options to proceed while also noting the residual balance of the project sits in future years. Ø Note that Council are consulting on its draft Annual Plan 2020/21 and can make the necessary changes to move the current budget to future years for the Napier Aquatic Centre Development as part of deliberations and community feedback. Ø Resolve to transfer $500k from the reserve funding currently allocated for the pool in 2020/21 to operating costs to allow for further site investigations and design requirements at Onekawa site or any other requirements for potential consultation and further consideration as part of the Long Term Plan 2021-31. Council are informing the community on the use of $500,000 from reserves for further site investigations and any design requirements if required.

Annual Plan 2020/21 Consultation document

The consultation topics are:

· Rates increase and options for covering revenue shortfall due to Covid-19.

· Post Covid-19 Recovery Plan including rates and rental relief; Jump Start Innovation Fund; We are Team Napier promotion.

· Water Supply Projects.

· Safe chlorine-free drinking water review.

· Wastewater outfall.

· Kerbside waste collection.

· Napier Library Civic Precinct.

The Consultation Document provides updates on the Napier Aquatic Development; Community Housing; Project Shapeshifter (Aquarium); Te Pihinga and Whakarire Revetment. It also signals the timing changes to the capital works programme and potential impacts on 21/22 budget.

The Consultation Document also signals the separate consultation which will inform the Annual Plan 2020/21, occurring on

· Financial policy changes to rates policies and borrowing including Rates Remissions Policy; Rates Postponement Policy; Local Government Funding Agency (separate consultation).

The following documents have been prepared as supporting information for the Consultation Document:

· Draft Annual Plan financials for 2020/21

· FAQs – Water

· FAQs – Waste

· Capital Programme Changes

· Remaining capital programme projecting for Long Term Plan 2018-28

· Long Term Plan 2018-28 Major Projects Update

· Where your rates dollar goes

· Water Supply Network Master Plan, Council report and minutes

· Civic Precinct Report (Library), Council report and minutes

· Whakarire Revetment – Funding Decision, Council report, Council minutes, and Consultation Summary

· Project Shapeshifter business case

· Napier Aquatic Development Update, Council report and minutes

· Napier Recovery Budget, Council report and minutes including Napier Recovery Plan

· Schedule of Fees and Charges 2020/21.

3.3 Issues

Requirement to borrow externally

Napier City Council held approximately $58 million of cash investment including $48 million in term deposits and the balance in cash. It is expected that the timing of cash flow, reduced receipts, public support packages, operational expenditure for essential services and committed capital expenditure will result in a funding gap for 20/21. External borrowing is necessary as prior to the decision to join the LGFA. Council is forecasting external borrowing requirements of $33m for 20/21 (this is in line with year 3 of the LTP and assumes the capital programme will be fully completed). External borrowing will be required if there are insufficient reserve balances to draw on.

Council is forecasting $76.7m of internal debt and with forecast external borrowings of $33m for 20/21 this would bring total public debt to $109.7m.

Consultation on the proposal to join the LGFA will be undertaken separately and at the same time as the Annual Plan 20/21 consultation (refer Sections 82 to 83AA of the LGA 2002).

Covid-19 impacts

The fast-changing events since the pandemic impacted on New Zealand, its borders, and being in lockdown has meant it has been difficult to prepare our Annual Plan for 2020/21 with any certainty. It is in effect, an emergency budget rather than a normal Annual Plan.

Council is committed to a programme and budget that supports the city to recover, but many of those details are based on several factors, including how long the Covid-19 pandemic lockdown lasts, what role Central government play in recovery, and the impact on the economy and on residents and businesses.

While it will be important to build a budget that recognises the current financial challenges that household and business face, it is also important to note that substantial support packages are available via government, banks and local government.

It is important to note that any costs that are deferred, or funded through different funding mechanisms, shift this year’s rates burden to future years and rates will be steeper in those years as a consequence.

The broad basis for setting the 2020/21 budget is finding the right balance between supporting those in need now and stimulating the local economy, while not over burdening ratepayers in the future.

Unbalanced budget

The significant reduction in revenue from the tourism activities has meant that Council will be setting an unbalanced budget for the 2020/21 year. Council has carefully considered in relation to section 80 of the LGA the options of funding the operating shortfall for 2020/21 and the future financial implications that will need to be managed in later years.

3.4 Significance and Engagement

Council has assessed that there are material and significant changes from the 2018-28 Long Term Plan for the 2020/21 year and that these matters will be consulted on as per the Consultation Document (Attached). The High Level Consultation Plan is also attached.

The consultation and submission period for the Annual Plan 2020/21 is Thursday 18 June 2020 to noon Wednesday 15 July 2020. Submissions can be made online on the Council website or by hardcopy. A summary brochure will be sent to all households outlining the consultation matters and information about feedback can be provided.

Due to Covid-19, instead of community meetings, Council will host live chat sessions where the public can ask questions and before making a submission to the Annual Plan 2020/21. The sessions will be led by the Mayor, supported by the Deputy Mayor with Councillors in attendance. The live chat sessions will occur on Council’s facebook page fb.com/NapierCityCouncil at:

23 June 2020, 11.15am

2 July 2020, 7pm

9 July 2020, 7pm.

There will also be a formal hearing prior to the deliberations process. The Hearing provides an opportunity for interested members of the public to come and speak to their written submission. The Hearing meeting will allow for oral submissions to be made in person. However if Alert Level requirements change and prohibit this, an online solution will be provided. The Hearing will be livestreamed and will be held on:

12-13 August 2020, from 9am

Napier War Memorial Centre, Marine Parade.

A New Zealand Sign Language Communicator will be available at both the live chat sessions and the Hearing.

Council will consider all feedback from the community, received both online and through the live chats, and in submissions, when making its final decisions on the Annual Plan 2020/21.

At the Hearing, Council will deliberate and make a resolution to proceed and complete the final Annual Plan. Council adoption of final Annual Plan will be Thursday 27 August 2020.

3.5 Implications

Financial

The proposed rates increase in the Long Term Plan 2018-28 for 2020/21 was 5.1%, and it is now proposed to be 4.8%. To achieve the proposed rates increase of 4.8% there will be a funding shortfall of $6.74m. Council have considered section 80 of the LGA and are consulting on the use of reserves to fund this unbalanced budget funding gap.

Due to changes to water supply projects and kerbside waste and recycling collection, there is a possible 2.6% increase on rates for 2021/22. The rates impact of the waste collection service will result in a 0.8% increase, and the impact of recycling will be 1.2%. The rates impact for 2021/22 of the changes to the 3 waters programme is approximately 0.6%.

The impact of any of the changes proposed in 2020/21 on rates for 2021/22 will be considered in the development of the Long Term Plan for 2021-31.

Social & Policy

N/A

Risk

Audit and Risk committee to provide feedback on risks to Annual Plan delivery to Council by 9 June (via the Director of Corporate Services). This feedback will be tabled at the Council meeting.

3.6 Options

The options available to Council are as follows:

a. Approve the Annual Plan 2020/21 Consultation Document and the supporting documents for consultation.

b. Do not approve the Annual Plan 2020/21 Consultation Document and the supporting documents.

c. Approve in part the Annual Plan 2020/21 Consultation Document and the supporting documents.

3.7 Development of Preferred Option

Option A - Approve the Annual Plan 2020/21 Consultation Document and the supporting documents for consultation.

3.8 Attachments

a Draft Annual Plan financials for 2020/21 ⇩

b FAQs - Water ⇩

c FAQs - Waste ⇩

d Capital Programme Changes ⇩

e Remaining Capital Programme Projection for LTP 2018-28 ⇩

f LTP 2018-28 Significant Projects Update ⇩

g Where Your Rates Dollar Goes ⇩

h Water Supply Network Master Plan (Under Separate Cover)

i Water Master Planning, Council Report ⇩

j Water Master Planning, Council Minutes ⇩

k Civic Precinct Report (Library), Council Report ⇩

l Civic Precinct Report (Library), Council Minutes ⇩

m Whakarire Revetment - Funding Decision, Council Report ⇩

n Whakarire Revetment - Funding Decision, Council Minutes ⇩

o Whakarire Revetment Consultation Summary (Under Separate Cover)

p Project Shapeshifter Final Detailed Business Case (Under Separate Cover)

q Napier Aquatic Development Update, Council Report ⇩

r Napier Aquatic Development Update, Council Minutes ⇩

s Napier Recovery Budget, Council Report ⇩

t Napier Recovery Budget, Council Minutes ⇩

u Schedule of Fees and Charges 2020/21 (Under Separate Cover)

v Consultation Document ⇩

w High Level Consultation Plan ⇩

x Annual Plan Proposed Rate Increase Options, Council Report ⇩

Extraordinary Meeting of Council - 11 June 2020 - Attachments

Item 4

Attachments a

Statement of Proposal

To join the

Local Government Funding Agency

Key Dates

Consultation opens: 18 June 2020

Consultation closes: 15 July at 12noon

Hearings and deliberations: 12-13 August 2020, from 9AM, Napier War Memorial Centre

Adoption: 27 August 2020

Where can I get more information?

· Visit Council’s websites at www.napier.govt.nz and www.sayitnapier.nz

· Tune in to the live chat sessions on our Facebook page at fb.com/NapierCityCouncil
These are scheduled for: 23 June 2020 11.15am; 2 July 2020 7pm; 9 July 2020 7pm

· If you’d like to speak to your Ward Councillor, visit www.napier.govt.nz search keyword #mayorandcouncillors or call our Customer Service Centre on 06 835 7579 who will put you in touch with them.

Application to join the Local Government Funding Agency

Introduction

Napier City Council is considering participating as an “Unrated Guaranteeing Borrower” in the

New Zealand Local Government Funding Agency Limited (LGFA) scheme.

The LGFA scheme was set-up in 2011 by a group of local authorities and the Crown to enable local authorities to borrow at lower interest margins than would otherwise be available. The LGFA scheme is recognised in legislation, which modifies the effect of some statutory provisions and allows the scheme to provide lower cost lending than would otherwise be the case. Currently 54 of the 78 local authorities in NZ participate in the LGFA scheme.

Under the scheme, all participating local authorities are able to borrow from the LGFA, but different benefits apply depending on the level of participation. Napier City Council intends to participate as an Unrated Guaranteeing Borrower.

Being a member of the LGFA, Napier City Council has the option to borrow, but is not bound to use the LGFA to do so.

An Information Memorandum, describing the arrangement in detail, is attached as Appendix A, and forms part of this proposal. A number of terms that are used in this proposal are defined in that Information Memorandum.

Statutory Considerations

Section 56 of the Local Government Act 2002 (LGA 2002) requires that a local authority must carry out a consultation process before acquiring shares in a Council-Controlled Organisation (CCO). The LGFA is a CCO and there are circumstances in which, under the LGFA scheme, shares in the LGFA may be issued to participants in the scheme.

Consequently, it is prudent for a local authority to carry out a consultation process before joining the scheme.

Analysis of Reasonably Practicable Options

Part C of the Information Memorandum sets out an analysis of the costs and benefits of participating in the LGFA Scheme. A summary of those costs and benefits and a brief rationale based on consideration of the Council’s specific circumstances is set out below.

Options – LGFA	Additional Spend	Impact on Rates	Impact on Debt
1) No change. Not join the LGFA. No other institutions are approached for lending.	$0	Rates will need to be increased to fund revenue lost due to the pandemic.	No debt
2) Not join the LGFA. Borrowing sourced from an approved lending institution.	Between $3,500 and $5,000 per $1m per annum to ensure facility is available. Approximately 1.7%pa for any utilised facility.	No impact on rates	Debt will increase by the amount borrowed (estimated at $33m total).
3) Join the LGFA as a non-guaranteeing local authority. This allows NCC to borrow up to $20m through the LGFA.	Associated legal fees. Ongoing trustee fees.	Potential reduced rates due to savings in facility and interest rate costs.	Debt will increase by the amount borrowed (up to $20m with LGFA and any balance sourced from an approved lending institution).
4) Join the LGFA as an unrated guaranteeing local authority. This allows NCC to borrow more than $20m, but with higher risk.	Associated legal fees. Ongoing trustee fees.	Potential reduced rates due to savings in facility and interest rate costs.	Debt will increase by the amount borrowed (estimated at $33m total).
5) Join the LGFA as a principal shareholding local authority. This allows NCC to both borrow more than $20m and invest in LGFA shares, but with higher risk than option 4.	Associated legal fees. Ongoing trustee fees. The cost of any shares purchased.	Potential reduced rates due to savings in facility and interest rate costs. A modest return may be received from shares held in the LGFA. It is likely that any share purchase would be debt-funded.	Debt will increase by the amount borrowed (estimated at $33m total) plus the cost of any shares purchased.

Our preferred option is Option 4 – join the LGFA as an unrated guaranteeing local authority.

Rationale

To date Napier has been in the fortunate position of not needing to borrow. However, ongoing demand from operational and capital costs combined with the impact of the COVID-19 pandemic has led to Council budgeting a $33 million shortfall over the next 12 months.

The benefits of lower interest margins are significant.

Based on a comparison of borrowing available from approved lending institutions, Council anticipates interest savings of approximately $7,900 or 0.79% for every $1 million of debt^{^[1]}. At an anticipated peak debt level of $33 million this equates to approximately $260,700 per annum.

If Council was to join as a non-Guaranteeing Local Authority (option 3 on page 3) there would be a $20m limit in its total borrowing capacity.

There are one-off up-front legal costs associated with joining the LGFA of approximately $26,000 and annual ongoing trustee fees of approximately $8,000. There are no LGFA fees (either up front or ongoing). Council believes that the benefit of these savings outweigh the costs referred to in the cost/benefit analysis in Part C of the Information Memorandum. There is a low risk to Council by joining LGFA as a guarantor. This is discussed in the Information Memorandum, Appendix, Part A paragraphs 24 to 31.

As a Guaranteeing Local Authority, Napier City Council would be guaranteeing LGFA’s obligations to its creditors and not the obligations of individual councils. There has never been a default by a New Zealand local authority and there is strong oversight of the sector. The LGFA is also well-capitalised. The lending undertaken by LGFA to local authorities is with a security charge over rates.

Should the Council participate in the LGFA Scheme as a Guaranteeing Local Authority?

Council is proposing to join the LGFA Scheme as a Guaranteeing Local Authority, which

• will cost Council an estimated $26,000 in legal fees and an estimated $8,000 per year ongoing trustee fees,

• will save Council $7,900 in interest for every $1m of debt (potentially $260,700 per annum),

• does not restrict borrowing to $20m.

How do I have my say?

Online: sayitnapier.nz

In person:
Drop in your form to our Customer Service Centre at:

Dunvegan House

215 Hastings Street

Napier

By post:

LGFA Application

Napier City Council

Private Bag 6010

Napier 4142

Feedback will need to get back to us by 15 July at 12noon.

Information Memorandum

PART A – INTRODUCTION AND PURPOSE

Purpose of Information Memorandum

1. This Information Memorandum provides a description of a funding structure for local authorities (LGFA Scheme), which was designed to enable participating local authorities (Participating Local Authorities) to borrow at lower interest margins than they would otherwise pay.

2. The purpose of this Information Memorandum is to provide information to supplement any consultation materials prepared by local authorities consulting on whether to participate in the LGFA Scheme.

3. This Information Memorandum is divided into three parts:

a) This Part A (Introduction and Purpose), which sets out the purpose of the Information Memorandum and provides some background on the purpose of, and rationale for, the LGFA Scheme.

b) Part B (How the LGFA Scheme Works), which sets out the characteristics of the LGFA Scheme, and the transactions that Participating Local Authorities will be entering into as part of their participation in the LGFA Scheme.

c) Part C (Local Authority Costs and Benefits), which sets out the costs and benefits to individual local authorities of participating in the LGFA Scheme.

Origin of the LGFA Scheme

4. There are a number of LGFA style schemes around the world, with the oldest in Denmark (KommuneKredit founded in 1898). Global LGFA style schemes all utilise a cross-guarantee structure by member councils similar to the structure of LGFA. There has never been a call under the guarantee in any of these countries.

5. Local Government Funding Agencies are vehicles that allow local governments to source capital for operational purposes or capital projects. LGFAs typically operate as a co-operative between members. The scheme allows members to source capital more cheaply than if they sourced it alone.

6. Several attempts to create a borrowing collective were made in the 1980s and 1990s in New Zealand. Prompted by the Global Financial Crisis, a proposal made in 2009 received strong support. The LGFA Scheme was incorporated by a group of New Zealand local authorities and the Crown on 1 December 2011. At the time, Standard and Poor’s and Fitch both assigned LGFA a preliminary domestic credit rating of AA+ (the same as the New Zealand government).

7. The development of the LGFA involved:

a) undertaking a detailed review and analysis of:

i) the then current borrowing environment in which New Zealand local authorities borrow; and

ii) centralised local authority debt vehicle structures that have been developed offshore to successfully lower the cost of local authority borrowing;

b) using this review and analysis to develop a funding structure (the LGFA Scheme), which was anticipated to deliver significant benefits to New Zealand local authorities;

c) confirming with rating agencies that the proposed LGFA Scheme could achieve a high enough credit rating to deliver the anticipated benefits;

d) obtaining formal central government support to facilitate establishment of the LGFA Scheme.

8. Currently there are 67 participating Council’s and at 23 April 2020 the LGFA has lent $10.8 billion to the local authority sector.

Rationale for LGFA Scheme

New Zealand Local Authority debt market

9. At the time the LGFA Scheme was developed, New Zealand local authorities faced a number of debt related issues.

10. First, local authorities had significant existing and forecast debt requirements. Councils 2009-2019 long-term plans indicated that local authority debt would double over the next five years to over $9 billion.

11. Secondly, pricing, length of funding term and other terms and conditions varied considerably across the sector and were less than optimal. This was due to:

a) Limited debt sources – Local authorities’ debt funding options were limited to the banks, private placements and wholesale bonds (issuance to wholesale investors), and, to a lesser extent, retail bonds. Increasing local authority sector funding requirements and domestic funding capacity constraints were likely to further negatively impact pricing, terms and conditions and flexibility of local authority sector debt.

b) Fragmented sector – There were 78 local authorities. Individually, a significant proportion of these local authorities lacked scale – the 10 largest accounted for ~68% of total sector borrowings. The remaining 68 councils had 32% of sector borrowings.

c) Regulatory restrictions – Offshore (foreign currency) capital markets were closed to local authorities with the exception of Auckland Council and the compliance process for local authority retail bond issuance was burdensome and generally restricted issuance to a six month window.

Addressing the local authority debt issues

12. Each of these issues needed to be addressed to rectify this situation. This was not likely to happen without an intervention like the LGFA Scheme for the following reasons:

a) The New Zealand debt markets (at least in the foreseeable future) were likely to maintain the status quo.

b) Individually, local authorities were not be able to attain significant scale.

c) At a sector level it might have been possible to address the issue regarding regulation, but regulators were likely to remain reluctant to significantly ease restrictions on financial management across the sector without gaining significant comfort as to the sophistication of the financial management of all local authorities. Even if this issue was addressed by regulators, this change alone would have been insufficient to provide a major step change.

13. The LGFA Scheme was developed because of the homogenous nature of local authorities; the large sector borrowing requirements and the high credit quality / strong security position (i.e. charge over rates) of local authorities. This created the opportunity for a centralised local authority debt vehicle to generate significant benefits.

14. There were numerous precedents globally of successful vehicles that pooled local authority debt and funded themselves through issuing their own financial instruments to investors. Such vehicles achieved success through:

a) “Credit rating arbitrage” – Attaining a credit rating higher than that of the individual underlying assets (local authority borrowers) and therefore being able to borrow at lower margins.

b) “Economies of scale” – By pooling debt the vehicles could access a wider range of debt sources and spread fixed operating costs, thereby reducing the dollar cost per dollar of debt raised.

c) “Regulatory arbitrage” – The vehicles could receive different regulatory treatment than the underlying local authorities, improving their ability to efficiently raise debt, e.g. through access to offshore foreign currency debt markets.

15. The offshore precedents were typically owned by the local authorities in the relevant jurisdiction (often with central government involvement), and that is what was proposed here through the LGFA Scheme.

16. The LGFA Scheme has now been successfully operating for eight years. It has exceeded the original lending and profit targets that were forecast in 2011.

PART B – HOW THE LGFA SCHEME WORKS

Basic structure of the LGFA Scheme

17. The basic structure of the LGFA Scheme is that a company has been established that borrows funds and lends them on to local authorities at lower interest margins than those local authorities would pay to other lenders.

New Zealand Local Government Funding Agency Limited

18. The company that lends to local authorities under the LGFA Scheme is called the New Zealand Local Government Funding Agency Limited (LGFA). It is a limited liability company, and its shares are held entirely by the Crown and by local authorities.

19. 20% of the shares in the LGFA are held by the Crown and the remaining 80% by 30 individual local authorities. Thus the LGFA is a Council Controlled Trading Organisation (CCTO).

20. The LGFA was established solely for the purposes of the LGFA Scheme, and its activities are limited to performing its function under the LGFA Scheme.

21. 30 local authorities (Principal Shareholding Local Authorities) hold those shares that are not held by the Crown. The Principal Shareholding Local Authorities contributed capital and, as compensation for their capital contribution, receive a predetermined return on this capital. However, the over-arching objective is that the benefits of the LGFA Scheme are passed to local authorities as lower borrowing margins, rather than being passed to shareholders as maximised profits.

Design to minimise default risk

22. One of the features that is critical to the LGFA Scheme delivering its benefit to the sector is the achievement of a high credit rating for the LGFA. Currently it is rated ‘AA+’ long term from Standard and Poor’s, which enables it to achieve the credit rating arbitrage referred to in paragraph 14(a). Consequently there are a number of features of the LGFA Scheme that are included to provide the protections for creditors that rating agencies require before agreeing to a high credit rating. These features are described in paragraphs 24 to 55 below.

23. Before agreeing to a high credit rating, rating agencies will consider the risks of both short term and long term default. Short term default is where a payment obligation is not met on time. Long term default is where a payment obligation is never met. In many cases short term default will inevitably translate into long term default, but this is not always the case – a short term default may be caused by a temporary shortage of readily available cash.

Features of the LGFA Scheme designed to reduce short term default risk

24. When a local authority borrows, the risk of short term default, although low, is probably significantly higher than its risk of long term default. In the long term it can assess and collect sufficient rates revenue to cover almost any shortfall, but such revenue cannot be collected quickly. Consequently, there is a risk that inadequate liability and revenue management could lead to temporary liquidity problems and short term default.

25. The principal asset of the LGFA will be loans to participating local authorities, so such temporary liquidity risks are effectively passed on to the LGFA. Consequently, the rating agencies look for safeguards to ensure that liquidity problems of a Participating Local Authority will not lead to a default by the LGFA.

26. There are two principal safeguards that the LGFA has in place to manage short term default (liquidity) risk:

a) It holds cash and other liquid investments (investments which can be quickly turned into cash). As at 23 April 2020 LGFA held $872 million of cash and liquid investments.

b) It currently holds a $1 billion borrowing facility with central government that allows it to borrow funds from central government if required.

27. It is expected that these safeguards will sufficiently reduce any short term default risk.

Features of the LGFA Scheme designed to reduce long term default risk

28. There are a number of safeguards that the LGFA has in place to manage long term default risk, the most important of which are set out below:

a) The LGFA requires all local authorities that borrow from it to secure that borrowing with a charge over that local authority’s rates and rates revenue (Rate Charge).

b) The LGFA maintains a minimum capital adequacy ratio.

c) The Principal Shareholding Local Authorities have subscribed for $20 million of uncalled capital in an equal proportions to their paid up equity contribution.

d) As at 23 April 2020, 54 Participating Local Authorities (Guaranteeing Local Authorities) guarantee the obligations of the LGFA.

e) Guaranteeing Local Authorities commit to contributing additional equity to the LGFA if there is an imminent risk that the LGFA will default.

f) The LGFA hedges any exposure to interest rate and foreign currently fluctuations to ensure that such fluctuations do not significantly affect its ability to meet its payment obligations.

g) The LGFA puts in place risk management policies in relation to its borrowing and lending designed to minimise its risk. For example, it imposes limits on the percentage of lending that is made to any one local authority to ensure that its credit risk is suitably diversified.

h) The LGFA ensures that its operations are run in a way that minimises operational risk.

i) Additional detail in relation to the features referred to in paragraphs 28(a) to 28(e) is set out below.

Rates Charge

29. All local authorities borrowing from the LGFA are required to secure that borrowing with a Rates Charge.

30. This is a powerful form of security for the LGFA, because it means that, if the relevant local authority defaults, a receiver appointed by the LGFA can assess and collect sufficient rates in the relevant district or region to recover the defaulted payments. Consequently, it significantly reduces the risk of long term default by a local authority borrower.

31. From a local authority’s point of view it is also advantageous, because, so long as the local authority adheres to LGFA’s financial covenants, it is entitled to conduct its affairs without any interference or restriction. This contrasts with most security arrangements, which involve restrictions being imposed on a borrower’s use of its own assets by the relevant lender.

Minimum capital

32. One important factor in LGFA obtaining its high credit rating (AA+ from S&P and Fitch) is the LGFA having a minimum capital adequacy ratio (a ratio that measures the relative amounts of equity and debt-based assets that an entity has). A strong credit rating is important, because it provides an indication of the ability of the LGFA to ultimately repay all of its debts.

33. The minimum capital adequacy ratio requirement is an amount equal to at least 1.6% of its total assets. As at December 2019 the actual ratio was 2.2%.

Sources of equity for capital adequacy purposes

34. The equity held by the LGFA to ensure that it meets its minimum capital adequacy ratio requirement comes from two sources. First, the Crown and the Principal Shareholding Local Authorities contributed $25 million of initial equity as the issue price of their initial shareholdings. Retained earnings have seen the value of this equity rise to $79.1 million as at 30 December 2019. Secondly, each Participating Local Authority must, at the time that it borrows from the LGFA, contribute some of that borrowing back as equity. This source of equity is called borrower notes.

35. The way the borrower notes works is that, whenever a Participating Local Authority borrows, it does not receive the full amount of the borrowing in cash. Instead, a small percentage of the borrowed amount is invested by the local authority into borrower notes. LGFA pay interest on borrower notes. That percentage is 1.6% of the amount borrowed.

36. Borrower notes are repaid when the borrowing is repaid, so, in effect, the amount that must be repaid equals the cash amount actually advanced.

37. Borrower notes are convertible in some circumstances into shares in the LGFA.

38. To illustrate with an example, if a local authority borrowed $1,000,000 for five years from the LGFA, it would receive $984,000 in cash and $16,000 of Borrower Notes. At the end of the five years, it would repay $1,000,000, but would simultaneously redeem its Borrower Notes of $16,000, meaning its net repayment was equal to the $984,000 it initially received in cash.

39. A return is paid on the Borrower Notes, However, while it is anticipated that this return will be paid, it is paid at the discretion of the LGFA.

40. There is some additional risk to Participating Local Authorities from this arrangement, because redemption of the Borrower Notes will only occur if the LGFA is able to pay its other debts. For example, if at the end of five years, the LGFA was insolvent, the local authority would have to repay $1,000,000, but would not receive its $16,000 back for redeeming its Borrower Notes. To date, LGFA have fully repaid all borrower notes that have matured.

Guarantee

41. Most Participating Local Authorities entered into a guarantee when they join the LGFA Scheme (Guarantee). Under the Guarantee the Guaranteeing Local Authorities guarantee the payment obligations of the LGFA.

42. The purpose of the Guarantee is to provide additional comfort to lenders (and therefore credit rating agencies) that there will be no long term default, though it may also be used to cover a short term default if there is a default that cannot be covered using the protections described in paragraphs 24 to 26 above, but which will ultimately be fully covered using the rates charge described in paragraphs 29 to 31. The Guarantee allows the LGFA to draw upon the resource of all guaranteeing Local Authorities to avoid defaults.

LGFA Guarantee

43. The Guarantee will only ever be called if the LGFA defaults. Consequently, a call on the Guarantee will only occur if the numerous safeguards put in place to prevent an LGFA default fail. This is highly unlikely to happen.

44. To provide some perspective on default, based on Standard & Poor’s research on 39 years of global data (1981-2018), a AA+ rated bond is expected to have a cumulative default risk of 0.32% over 5 years.

45. If any such default did occur, and the Guaranteeing Local Authorities were called on under the Guarantee they could potentially be called on to cover any payment obligation of the LGFA. Such payment obligations may (without limitation) include obligations under the following transactions:

a) A failure by the LGFA to pay its principal lenders.

b) A failure by the LGFA to repay drawings under the liquidity facility with central government.

c) A failure by the LGFA to make payments under the hedging transactions referred to in paragraph 28(f).

Guarantee risk shared

46. There is a mechanism in the LGFA Scheme to ensure that payments made under the Guarantee are shared between all Guaranteeing Local Authorities. The proportion of any payments borne by a single Guaranteeing Local Authority is based on the annual rates revenue in its district or region.

Rates Charge

47. All participating Local Authorities must provide a Rates Charge to secure their obligations under the Guarantee.

Benefits of being a Guaranteeing Local Authority

48. Participating Local Authorities that are not Guaranteeing Local Authorities may only borrow up to $20,000,000 and pay a higher interest margin for their borrowing.

49. Therefore, Guaranteeing Local Authorities have the benefit of not having this low limit on borrowing, and paying lower funding costs.

Additional equity commitment

50. In addition to the equity contributions made in conjunction with borrowing, all Guaranteeing Local Authorities are required to commit to contributing equity if required under certain circumstances. It is expected that calls on any such commitments will be limited to situations in which there is a risk of imminent default by the LGFA.

51. A call for additional equity contributions will only be made if calls on the uncalled Capital and on the Guarantee will not be sufficient to eliminate the risk of imminent default by the LGFA. Consequently, the factors that limit the risk in relation to the Cross Guarantee also apply here.

52. All participating Local Authorities are required to provide a Rates Charge to secure their obligations to contribute additional equity.

Characteristics designed to make the LGFA Scheme fair for all Participating Local Authorities

53. The principal risk involved with the LGFA Scheme is that Participating Local Authorities will default on their payment obligations. The greater this risk is, the less attractive participation in the LGFA Scheme is for all Participating Local Authorities.

54. The Participating Local Authorities do not create this risk in equal amounts. There are some that carry a greater default risk than others, and therefore contribute disproportionately to the overall risk in the LGFA Scheme. Those local authorities are also the local authorities that would be likely to pay the highest interest margins if they borrowed outside the LGFA Scheme, and so potentially benefit the most from the LGFA Scheme.

55. To avoid, or at least minimise, what is effectively cross subsidisation of the higher risk local authorities by the lower risk local authorities, different interest margins are paid by different local authorities when they borrow from the LGFA, with margins based on if a local authority has an external credit rating and what the actual external credit rating is. For example a “AA” rated local authority will pay a slightly lower interest margin than a “AA-“ rated local authority. An unrated local authority will pay a slightly higher margin than a rated local authority.

Summary of transactions a Local Authority will enter into if it joins the LGFA Scheme

56. If a Local Authority joins the LGFA Scheme as a Guaranteeing Local Authority, it will:

a) subscribe for Borrower Notes (refer to paragraphs 34 to 40);

b) enter into the Guarantee (refer to paragraphs 41 to 49);

c) commit to providing additional equity to the LGFA under certain circumstances (see paragraphs 50 to 52); and

d) provide a Rates Charge to secure its obligations under the LGFA Scheme (see discussion in paragraphs 29 to 31, and 47).

PART C – LOCAL AUTHORITY COSTS AND BENEFITS

Benefits to local authorities that borrow through the LGFA Scheme

57. It is anticipated that the LGFA will be able to borrow at a low enough rate for the LGFA Scheme to be attractive because of the three key advantages the LGFA will have over a local authority borrower described in paragraph 14. That is – exploiting a credit rating arbitrage, economies of scale and a regulatory arbitrage.

58. In addition, the LGFA will provide local authorities with increase certainty of access to funding and terms and conditions (including the potential access to longer funding terms. LGFA currently offers borrowing terms out to 15 years.

59. The potential savings for a local authority in terms of funding costs will depend on the difference between the funding cost to that local authority when it borrows from the LGFA and the funding cost to the local authority when it borrows from alternative sources. This difference will vary between local authorities.

60. As at 23/04/2020 Napier City Council is expected to save approximately $7,900 per $1 million dollars borrowed by using LGFA (versus approved borrowing institution facilities).

61. The funding costs each local authority pays when it borrows from the LGFA will be affected by the following factors, some of which are specific to the local authority:

e) the borrowing margin of the LGFA;

f) the operating costs of the LGFA;

g) whether a local authority has an external credit rating

Costs to local authorities that borrow through the LGFA Scheme

62. The costs to Participating Local Authorities as a result of their borrowing through the LGFA Scheme take two forms:

a) First, there are some risks that they will have to assume to participate in the scheme, which create contingent liabilities (i.e. costs that will only materialise in certain circumstances).

b) Secondly, there is a minor cost associated with the Borrower Notes.

Risks

63. The features of the LGFA Scheme described above which are included to obtain a high credit rating are essentially steps that remove risk from lenders to make their residual risk low enough to justify the high credit rating. These features remove risk, in part, by transferring it to Participating Local Authorities.

64. These risks are that:

a) in the case of Guaranteeing Local Authorities, a call is made under the Guarantee (refer to paragraphs 43 to 45);

b) in the case of Guaranteeing Local Authorities, a call is made for a contribution of additional equity to the LGFA (refer to paragraphs 50 to 52); and

c) in the case of all Participating Local Authorities, the LGFA is not able to redeem their Borrower Notes (refer to paragraphs 36 to 40).

65. Each of these risks is discussed in some detail in the paragraphs indicated next to the relevant risk. For the reasons set out in those discussions, it is anticipated that each of the risks is low.

Cost of Borrower Notes

66. As discussed in paragraphs 34 to 40, all Participating Local Authorities are required to invest in Borrower Notes when they borrow from the LGFA. This carries a small cost, because the investment in Borrower Notes is funded by borrowing from the LGFA, and the cost of this funding will be slightly higher than the return paid on the Borrower Notes.

67. As noted in paragraph 39, while it is the intention for the LGFA to always pay interest on the Borrower Notes, such payments are at the LGFA’s discretion so, in some situations, those payments may not be made.

[1] Bank rate of 1.7% is based on collated average for 12 month floating rate across several providers. LGFA rate of 0.91% is for 12 month borrowing yield for unrated councils as at 23/04/20). Comparison does not include bank commitment fee of up to $165,000 per annum.

Council Members	Mayor Wise, Deputy Mayor Brosnan, Councillors Boag, Browne, Chrystal, Crown, Mawson, McGrath, Price, Simpson, Tapine, Taylor, Wright
Officer Responsible	Interim Chief Executive
Administrator	Governance Team
	Next Ordinary Council Meeting Thursday 23 July 2020