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Decisions on debt and assets of Hawke’s Bay councils

Date: 27 February 2015

The Local Government Commission has confirmed its decisions on how to treat the debt and assets of Hawke’s Bay councils, in the event they are formed into one council for the region.

In late 2013 the Commission proposed that the debt of each of the four city and district councils should be ring-fenced to the area where it was incurred, for six years after the transition to a new council. It has since undertaken a detailed financial analysis of council debts and assets, both now and into the future.

The analysis has established that all councils are in different financial positions, in relation to their debt and also to the condition of their core infrastructural assets.

As a result, the Commission has confirmed its original decision to ring fence debt, and it now also proposes to ring-fence financial assets. The arrangements would continue till 2021.

This means that until July 2021, the loans raised by the current district and city councils would be serviced and repaid by their current ratepayers; and those councils’ current financial assets would be used for renewing and replacing infrastructure in their areas to address the differences in infrastructure life.

The Commission Chair Basil Morrison said the financial review had been a useful exercise. “The Commission is now able to share more detailed information with the people of Hawke’s Bay about the implications of transition to one council”, Mr Morrison said.

“Both debt and the state of core infrastructure must be considered alongside each other to get the full picture of each council’s actual financial position and future liabilities. These are important considerations for the Commission and for the residents and ratepayers in each area.”

“The financial analysis was based on information provided by each council and from scrutiny of their public documents and reports. It confirms that each council begins at a different starting point in terms of debt and assets.”

The analysis showed Hastings and Central Hawke’s Bay councils have higher levels of debt than Napier and Wairoa councils, but their infrastructure is in relatively better condition. In practical terms this means that Napier and Wairoa will need to invest more to maintain and renew core assets in the future, in order to equalize the condition of infrastructure across Hawke’s Bay.

“This decision is about ensuring fairness between the ratepayers of each part of the Hawke’s Bay in the event our proposal for one Hawke’s Bay Council was to proceed, given that each council is starting from a different financial position.  We make no comment or judgement about the condition of infrastructure of any existing council”, Mr Morrison said.

The Commission has looked for ways to ensure ratepayers across the four councils are treated equitably, without undermining the eventual need to move to one rating system for the region. It therefore proposes to ring-fence financial arrangements from the start date of the new council (1 November 2016) for five years, to 2021.

Basil Morrison said ring-fencing means that loans raised by the current councils would be repaid by their current ratepayers, through a targeted rate in those areas. Equally, the current financial assets in each council area would be used to renew and replace the infrastructure in those areas, to bring the standard of assets up to the regional average.

In summary, the analysis showed that:

  • Napier and Wairoa councils have positive net financial assets; and Hastings and Central Hawke’s Bay councils have negative net financial assets.
  • Napier’s net financial assets are valued at $78.6 million; Wairoa at $12.5 million; while Hastings are valued at -$45.2 million; and Central Hawke’s Bay at -$0.3 million.
  • The core infrastructure of Hastings and Central Hawke’s Bay councils has a higher remaining useful life than the infrastructure in Napier and Wairoa, as measured by its depreciated replacement value (also known as residual value).  
  • Napier and Wairoa councils would need a higher level of investment to maintain and renew their core assets, in order to bring them up to the average standard for all councils in the region. The required spending for these two councils would be greater than their net financial assets (above). It would place Napier in deficit by $45 million and Wairoa by $18 million. Hastings would be $55 million ahead of the level of investment required, while Central Hawke’s Bay would be $7 million ahead of the investment required.

Following the announcement of this decision, a survey is planned to provide the Commission with an understanding of the public’s views on the Commission’s proposal for a single Hawke’s Bay council with five local boards.

The Commission will not release the results of that survey until a binding poll is held or the process has been completed.  “The Commission is mindful not to impact on the public’s participation or voting behaviour in a poll, or create confusion among the public about the status of any survey undertaken on our behalf”.

“The purpose of the survey is to assist Commissioners to understand the views of the public and the degree to which our proposal has support before we make our next decision in the process”, Mr Morrison said.  

Ends

Glossary:

Core infrastructure assets: roading and bridge networks; water supply, wastewater and stormwater systems.

Depreciated replacement value:  the value of replacing an asset, less the depreciation that has been accumulated against that asset. Also known as residual value.

Gross financial assets: council investments and monetary holdings that can be immediately and practically realised or converted to cash, e.g. term deposits, bonds, and shares in publicly listed companies. This does not include physical assets such as buildings or properties.

Internal borrowing: where a council borrows for immediate projects from its own reserve accounts or investment accounts. Councils undertake to repay these borrowings.

Net financial assets: gross financial assets, less internal and external borrowing.

Further Information:

Revised position on Hawke’s Bay local government (17 November 2014)

Hawke’s Bay local government reorganisation - Questions and Answers (docx, 146KB)

Summary Report on Ring-Fencing, Hawke’s Bay councils (docx, 161KB)

MWH – Asset Management Activities Hawkes Bay Region Local Authorities- Final Report -  20 January 2015 (docx, 965)

MWH – Asset Management Activities Hawkes Bay Region Local Authorities- Final Report -  20 January 2015 (pdf, 3.9MB)

Advisory report on Internal Borrowing at Hastings District Council and Napier City Council, Brian Smith  - 19 February 2015 (docx, 33KB)

Hawke’s Bay councils – proposed changes: A guide for households March 2015 (pdf, 3.6MB)