The Council has had a strong year financially, with an underlying net surplus of $1.2 million compared to a breakeven budget. We have delivered our broad range of services at a cost of $5.82 per resident per day. The Council’s fiscal prudence is further illustrated by meeting 12 out of 13 measures within the 2014 benchmarks required to be disclosed under the 2014 legislated Financial Reporting and Prudence regulations. This is the first year these benchmarks have been required to be disclosed. Their purpose is to enable an assessment of whether council is prudently managing its finances. They are summarised later in this overview and reported in detail on pages 199-205.
Following a similar trend to previous years, the Council has not spent all of the funds it had budgeted to invest in renewal and upgrade of its assets. Total capital expenditure for the year was $128.0 million compared to a budget of $172.5 million. This variance primarily relates to the deferral of significant upgrade projects including earthquake strengthening of the Town Hall and increasing the capacity of the city landfill along with delays in completion of social housing and swimming pool projects. This trend is likely to continue for the 2014/15 year, for which the Annual Plan has already been set, however a programme is in place to significantly improve the alignment between planned and actual capital expenditure for the 2015-25 Long-term Plan.
The Council’s financial strategy takes into consideration the level of rate increases, level of borrowings and its ability to ‘balance its budget’, as required by the Local Government Act.
The Balanced Budget requirement is closely linked to the principle of intergenerational equity, the notion that each generation of ratepayers pays their fair share for the goods and services that they use. As part of this principle, coupled with good financial governance and stewardship, Council aims to ensure:
Council sets its budget so that its net surplus includes capital transactions that it is required to show as revenue in the financial statements. For example, subsidies paid by New Zealand Transport Agency (NZTA) to help fund the renewal and upgrade of the Council’s roading network are included within the net surplus, while under accounting rules, the related capital expenditure is not. Council also adjusts this surplus to recognise that there are some expenditure items that it is prudent not to fund. Once these adjustments are made, Council has budgeted for a balanced budget, such that operating revenue equals operating expenditure.
To understand the Council’s underlying financial performance (whether the Council is operating at an actual surplus or deficit), it is necessary to exclude these non-funded and capital-related transactions from the Net Surplus of $27.5 million, as shown in the table below.
|Actual 2014 $M||Budget 2014 $M||Variance $M|
|Reported net surplus||27.5||35.7||(8.2)|
|Exclude Non-cash funded items|
|Fair Value movements13||7.8||(0.6)||8.4|
|Gain/(Loss) and impairment of assets (net)||2.3||-||2.3|
|Total Excluded Non-cash funded items||15.9||14.1||1.8|
|Exclude revenue for capital items|
|NZTA Subsidy on capital work||(10.5)||(10.3)||(0.2)|
|Housing Upgrade Project Capital Grant and ring-fenced activities||(21.1)||(27.3)||6.2|
|Bequests, trust and other external funding||(2.2)||(1.5)||(0.7)|
|Total Excluded revenue for capital items||(39.7)||(42.6)||4.4|
|Transfers to provisions and reserves||(5.7)||(5.7)||-|
|Additional net expenditure on Wellington Waterfront and Venues Projects, and Joint Ventures with Porirua||5.0||-||5.0|
|Less variance from ring-fenced activities||(1.8)||-||(1.8)|
|Total Other adjustments||(2.5)||(5.7)||3.2|
The variance between the underlying net surplus and budget is made up as follows:
|Major Budget variations||$M|
|Unbudgeted revenue / (expenditure):|
|Restatement of weathertight homes provision||(2.9)|
|Insurance costs (net of recoveries) funded through insurance reserve||(1.1)|
|Total unbudgeted revenue/expenditure||(4.0)|
|Significant variations from budget|
|Decrease in rates revenue||(0.5)|
|Decrease in income from activities||(1.1)|
|Dividends in excess of budget (including Wellington International Airport Limited)|
|Decrease in net interest expense||1.8|
|Decrease in depreciation||1.2|
|Other net variances||1.6|
|Total significant variations from budget||5.2|
|Council underlying variance excluding ring-fenced amounts||1.2|
The Net Surplus is the difference between the expenses the Council incurred during the year and the income the Council received.
The Council recorded a net surplus of $27.5 million. The budgeted net surplus was $35.7 million. The net surplus for the year was $8.2 million less than budgeted. The key reasons for this variance are summarised in the preceding table.
In addition to transactions that make up the net surplus, the Statement of Comprehensive Financial Performance also includes the impact of revaluation of property, plant and equipment and other fair value adjustments. While not impacting on the Council’s funding requirement they do have an impact on Council equity.
In the 2014 year Council undertook its triennial revaluation of its infrastructural assets, which include water, wastewater, stormwater and roading assets. The 2013/14 Annual Plan budgeted for an increase of $176.1 million arising from this revaluation, reflecting the anticipated value uplift since the last revaluation.
The actual revaluation of these assets resulted in a decrease in asset values of $45.4 million due to the following factors:
The reduction in asset values caused by revaluation are non-cash in nature and are restating the Council’s assets (that are being revalued) into current dollar value after taking into account asset condition and remaining life of the asset. This revaluation reduction equates to 0.7% of the total fixed asset value of $6.5 billion, and is a minor adjustment in the overall value of the Council’s assets. The decrease in the asset revaluation is partially offset by an increase in the value of the cash flow hedges of $9.5 million.
As a result of these non-cash movements, the Council has ended the financial year with a Comprehensive Expense of $8.3 million. This Comprehensive Expense reduces the overall equity of the Council by approximately 0.1%. This is explained further in the Financial Position and Changes In Net Worth sections of this overview.
When the Council is deciding how to fund an activity (whether to use rates, user charges or other sources of income), we consider:
The Council’s Revenue and Financing Policy sets out how each activity will be funded based on these criteria. The policy is available on our website www.Wellington.govt.nz
The Council received total income of $451.7 million during the year compared to a budget of $424.4 million. The variance is largely due to unbudgeted revenue arising from Vested Assets, Wellington Waterfront Projects, Wellington Venues and a share in joint ventures with Porirua City Council.
Rates are the main source of funding for the Council, with revenue from operating activities, which includes user fees, being the next largest source. Other sources of income for the Council include income for capital expenditure, income from interest and dividends.
General rates revenue is collected based on property rateable values. The Council currently applies a general rates differential of 2.8:1. This means that commercial properties pay 2.8 times more general rates per dollar of rateable value than non-commercial properties. This impacts on the value of total rates collected from each sector as shown in the graphs below.
The total expenses incurred by the Council during the year were $424.2 million which represents the cost of running the city during the year. The activities of the Council are divided into activity areas of focus:
Governance includes community engagement, Council elections and meetings.
Environment includes water supply, stormwater and sewerage, landfills and Kiwi Point Quarry. Also includes maintaining and protecting parks, botanic gardens, coastlines and open spaces.
Economic development includes supporting and attracting major events and promoting Wellington overseas and locally.
Cultural wellbeing includes support of the Wellington Museums Trust and events in the city, Wellington City Archives and Toi Poneke.
Social and recreation includes the libraries network, swimming pools, recreation centres, cemeteries, social housing, marinas, sportsfields, playgrounds and skate parks.
Urban development includes assessing building consent and resource consent applications, providing funding for heritage buildings and to develop streets and other public areas.
Transport includes maintaining and developing the city's transport networks and providing on-street parking spaces.
Cost per activity area per resident per day
|Activity area||Total cost |
|Cost per resident per year |
|Cost per resident per day |
|Social and recreation||100.1||500||1.37|
This section sets out Council’s performance over the last 5 years.
The Council’s revenue is particularly influenced by the amount of grants it receives for capital expenditure in any one year. This varies dependant on the annual capital expenditure programme to be funded as shown by higher 2012 revenue levels resulting from an increase in housing grants received.
The level of operating expenditure for each of activity area over time, is summarised below.
This section explains the financial position of the Council, focussing on its net worth (equity), capital expenditure and debt.
|Summary Statement of Changes in Equity||Council||Group|
|Equity at the beginning of the year||6,348.3||6,358.6||6,306.3||6,510.7||6,466.2|
|Net surplus for the Year||27.5||35.7||28.2||31.0||30.4|
|Other comprehensive income / (expense)||(35.8)||176.1||13.8||(37.6)||14.1|
|Total comprehensive income/(expense) for the year||(8.3)||211.8||42.0||6.6||44.5|
|Equity - closing balances|
|Accumulated funds and retained earnings||4,953.6||4,986.0||4,923.0||5,005.0||4,970.9|
|Fair value through other comprehensive income reserve||0.1||0.6||0.1||0.1||0.1|
|Total Equity - closing balance||6,340.0||6,570.4||6,348.4||6,504.1||6,510.7|
Net worth is the difference between the total assets and the total liabilities of the Council. Net worth is represented in the financial statements by the balance of equity.
The graph above shows that significant changes occur as a result of movements in revaluations and hedges. Revaluations represent the change in the value of assets held, to restate the replacement value in current dollar terms based on their condition and remaining life. Changes in hedge values represent market value changes in value of the interest rate hedges that are held to maturity. For further explanation refer to Note 26 Hedging reserve page 161. Changes in revaluations, Cash Flow hedges and Fair Value are all non-cash movements and are subject to changes in market driven values beyond the control of the Council.
The major assets of the Council include:
During the year $128.0 million was spent on replacing, constructing and purchasing assets across the city, which contributed to the closing value of Property, plant and equipment. This was $44.5 million lower than the budget of $172.5 million included in the Annual Plan (inclusive of budgets carried forward from the previous year).
The main contributors to this variance were the deferral of earthquake strengthening of the Town Hall, expansion of the city landfill and delays in the upgrade of the Keith Spry Pool and social housing projects. Of the total underspend the Council proposes to carry-forward $14.9 million for projects that are now scheduled to be completed in the 2014/15 year. Expenditure on the balance of uncompleted projects will be reconsidered as part of the 2015-25 Long-term Plan.
The chart below shows how much was spent on each activity area during the year for replacing, constructing and purchasing assets:
The Council has prudently managed its borrowings to ensure it meets the specified requirements in its Long-term Financial Strategy. Net borrowings at 30 June 2014 are 84% of income, within the target of 105% set by Council and significantly less than 150% limit contained within its Financial Strategy. This is illustrated on page 201.
The major liabilities of Council include:
The Council uses borrowings to fund the purchase or construction of new assets or upgrading existing assets that are approved though the Annual Plan and Long-term Plan process.
Net borrowings are the total borrowings less any cash and cash equivalents and current deposits.
Net borrowings increased by $2.6 million during the year. Net borrowings at the end of the year are $26.6 million less than budgeted in the 2013/14 Annual Plan. The difference is due to changes in the timing of capital projects and savings in capital expenditure.
The Council continues to maintain a strong investment position when compared with the level of borrowings. The graph below compares the balance of investments and net borrowings over the last five years.
The value of investments primarily relates to investment properties, our share of the net assets of our associates (including Wellington International Airport Limited) and other financial assets.
During the year the Council maintained its AA rating with the independent credit rating agency Standard and Poors. The credit rating is a comparative measure of the financial strength of the Council. The AA credit rating held by the Council is the highest credit rating attributed to any council across New Zealand. Holding and maintaining such a high credit rating provides a range of benefits to the Council that would not otherwise be available. These benefits include access to lower cost borrowings and access to a wider range of borrowing alternatives.
This is the first year for reporting of financial benchmarks required by legislation. The benchmarks disclosed in this year’s Annual Report are for the two financial years, 2012/13 and 2013/14; with the results for 2013/14 summarised below. There are 13 benchmarks that are split into the following 7 categories:
|1.||Rates affordability benchmarks||Rates (income) affordability – were the actual rates increases below the 2012 LTP quantified dollar limit.||Yes|
|Rates (increases) affordability - were the actual rates increases below the 2012 LTP percentage increases limit.||Yes|
|2.||Debt affordability benchmarks||Net Borrowing as a percentage of equity <10%||Yes|
|Net Borrowing as a percentage of Income <150%||Yes|
|Net Interest as a percentage of income is <15%||Yes|
|Net Interest as a percentage of annual rates income <20%||Yes|
|Liquidity (term borrowing committed loan facilities to 12 month peak net borrowing forecast) >110%||Yes|
|Triennial additional loan funded capital expenditure (cumulative) limit <$60m||Yes|
|3.||Balanced Budget benchmark||Operating revenue is greater than operating expenditure as a proportion >100%||Yes|
|4.||Essential services benchmark||Capital expenditure on network services is greater than depreciation on network services as a proportion >100%||No (98%)|
|5.||Debt servicing benchmark||Borrowing costs as a proportion of operating revenue <10%||Yes|
|6.||Debt control benchmark||Net debt as a proportion of planned debt <100%||Yes|
|7.||Operations control benchmark||Net cash flow from operations as a proportion of its planned net cash flow from operations >100%||Yes|
The essential services benchmark compares the level of depreciation for network assets (comprising roading, drainage, waste and water assets) to the level of capital expenditure made during that financial year for those assets. The depreciation value used to calculate this measure includes depreciation for the Moa Point Sewerage Treatment Plant which is under an arrangement whereby the assets are managed by a third party who will return the assets to the Council in the same condition that they were at the start of the arrangement. Therefore there will be no capital expenditure undertaken by Council in relation to a portion of these assets. If the depreciation attributable to those assets were excluded from the calculation, then the benchmark measure would show that the Council had “met” the target by achieving 104% for 2013/14 (125% 2012/13).
This measure also takes a snapshot of capital expenditure on a year on year basis, whereas capital expenditure for essential services are planned on a project by project basis and do not always neatly align with the depreciation expenses and funded within a financial year. This is further impacted by delays to projects that cause timing differences that will also affect the outcome of this measure. Accordingly it may be more appropriate to consider an average over a number of years as a measure of Councils performance in meeting this benchmark. If the average is taken across the 2013 and 2014 years, then Council has met the requirement for both years with an average of 108%. In light of these factors, the Council considers its performance against this measure as prudent.
Financial benchmark regulations were not in place for the 2012/13 year, but Council is required to provide 2013 information as a comparator for 2014. Of the benchmarks for the 2012/13 financial year, the Council met eleven of thirteen. The two measures recorded as “not met” being the Debt Control and Operations Control benchmarks. The debt control benchmark shows whether actual net debt as defined by the regulations is equal or less than the planned net debt. The operations control benchmark shows whether actual net operating cash flow is equal or less than the planned net cash flow from operations.
During the preparation of the long-term plan for which these controls relate, a number of assumptions were made around the timing of events. Any departure from these assumptions can affect the outcome of these measures. The Council is satisfied that it is prudently managing its net debt position, as reflected in its AA credit rating and favourable ratios of net debt to income and net debt to investments. Council’s net debt to income ratio is significantly lower than most other metropolitan councils in New Zealand.
Council is also satisfied that it is prudently managing operational cash flow, with variances in the 2012/13 year explained by the timing difference in the receipt of revenues compared to budget that lead to the “not met” outcome for this measure.