Introduction

The Revenue and Financing Policy (RFP) outlines the Council’s policies on funding sources to be used to fund the operational and capital expenditure of Council’s activities and the rationale for their use.

The policy is required by Section 102 and 103 of the Local Government Act 2002 (the Act). The full policy must be included in the Long Term Plan (LTP). Where a change to the policy is made outside of the LTP process, only a significant amendment is required to be audited.

Section 103(2) of the Act allows the following mechanisms to be used for funding the operating or capital expenditure of Council’s activities:

a) general rates, including –

• i) choice of valuation system; and
• ii) differential rating; and
• iii) uniform annual general charges

b) targeted rates:

ba) lump sum contributions

c) fees and charges:

d) interest and dividends from investments:

e) borrowing:

f) proceeds from asset sales:

g) development contributions:

h) financial contributions under the Resource Management Act 1991:

i) grants and subsidies:

j) any other source.

In addition to identifying the sources of funding, the policy must outline why the Council has determined they should be used.  A two-step process is required under Section 101 (3) of the Act. Firstly, for each activity, the Council must consider the following matters:

• The community outcomes to which the activity primarily contributes
• The distribution of benefits between the community as a whole, any identifiable part of the community, and individuals
• The period of time over which benefits occur (intergenerational equity). For example, the benefits of some activities will occur over the entire life of the asset. This will benefit not only existing generations but future generations who should also contribute towards paying for the cost.
• The extent to which actions or inactions of particular individuals or groups contribute to a need to undertake the activity. Also called the ‘exacerbator pays’ principle, this suggests that exacerbators should meet at least part of the cost of an activity.
• The costs and benefits from funding the activity distinctly from other activities. This particularly relates to transparency and accountability, but may also relate to factors like the financial scale of the activity (e.g. a small activity may not warrant separate funding due to the cost of establishing systems to support cost recovery).

Secondly, following consideration of these elements, the Council must consider the overall impact of this allocation of liability for revenue needs on the community. This may lead to some changes to the policy where there are particularly negative effects. These are noted under each individual activity.

Changes to 2015 Revenue and Financing Policy

The following changes have been made to the previous policy:

• The removal of the Aquatic Centre targeted rate, with funding to be taken from the differentiated General rate and Uniform Annual General Charge to make this consistent with other leisure and recreation facilities
• The removal of subsidised labour and rural fire activities due to these services no longer being provided by the Council
• The addition of borrowing as a funding source for operating expenditure if deemed appropriate, targeted towards large projects (e.g. District Plan review)
• Changes in private funding splits for some activities, the most significant being:
  • Airport (45-55% to 70-80%), due to additional private funding sourced from Airport parking
  • District Planning (20-30% to 10-20%), due to the level of general rate funding required for the district plan review
  • Safer Communities (70-80% to 80-90%), due to the majority of funding received via contract funding for Project Turnaround
  • Theatre Royal (10-20% to 0-10%), due to the anticipated impact on funding from closure of the Theatre for upgrading
• Roading and Footpaths – splitting this into subsidised roading and other roading
• The addition of volumetric water charging as a funding source for urban supplies
• Minor editing and grammatical changes.

The Council reviews the RFP every three years, in line with its preparation of the Long Term Plan (LTP). Changes to the RFP can be made between reviews, but must go through the appropriate consultation processes. The Act requires the Council to produce a Funding Impact Statement (FIS) annually that illustrates how the RFP is being implemented, provides details on the funding mechanisms to be used and how these rates will be applied.

The policy covers all of the Council’s activities, as outlined in the diagram below;

Funding of Operating Expenditure

Operating expenditure is expenditure on the day to day operations of the Council. The Council has determined that the following sources may be used to fund operating expenditure:

• General rates, including differential rating and a uniform annual general charge
• Targeted rates
• Fees and charges
• Interest and dividends from investments
• Proceeds from asset sales
• Financial contributions under the Resource Management Act 1991
• Grants and subsidies
• Borrowing
• Other Sources

The proportion of operating expenditure to be funded by each mechanism is outlined in this policy.

Funding of Capital Expenditure

Capital expenditure is expenditure on new or existing assets that maintains or increases their value and the level of service to the community. The Council has determined that the following sources may be used to fund capital expenditure:

• General rates, including differential rating and a uniform annual general charge
• Targeted rates
• Lump sum contributions
• Interest and dividends from investments
• Borrowing
• Proceeds from asset sales
• Development contributions
• Financial contributions under the Resource Management Act 1991
• Grants and subsidies
• Reserve funds
• Other sources

The use of these sources will be considered for each capital expenditure project. It will frequently involve a mixture of funding sources that will vary over time.

Council’s Funding Approach

The Council provides a wide range of activities to district residents, ratepayers and visitors. Council aims to provide a fair and equitable rating system for all ratepayers. A mixture of rating and other funding mechanisms are used to achieve this. Some constraints exist, such as the ability of Council to only receive 30% of Council revenue from rates set on a uniform basis. This requires Council to use other mechanisms, such as rates set on the land value of properties.

Rates provide the budgeted net funding requirements of the Council work programmes through the Long Term plan. Other sources, such as those listed above can be used as funding sources. Rates are set on each rating unit under the provisions of the Local Government (Rating) Act 2002.

The following principles will help guide the assessment and design of the Council’s funding approach:

• Benefits – those who benefit from a Council service or facility should pay for the service, where equitable and administratively efficient. This involves selecting funding sources that are appropriate to the distribution of benefits.
• Exacerbators – those who contribute to the need for a Council facility or service should contribute to the cost of that facility or service
• Equity and fairness – Council will seek to ensure the most equitable and fair funding approach
• Affordability – Council will consider the impact of funding mechanisms on people’s ability to pay and seek to ensure that Council facilities, services and rates remain affordable
• Intergenerational equity – each generation of ratepayers should contribute towards the services they receive
• Minimise effects of change -  where reviews result in significant funding changes, transitional approaches will be used where possible to ease the financial impact
• Legal compliance – the policy will comply with legal requirements under the Local Government Act 2002 and Local Government (Rating) Act 2002

The application of these principles requires Council to apply judgement and balance often competing principles. The most equitable solution will be sought for funding each activity using these and the Section 101 analysis required for each activity under the Local Government Act.

Three main types of rates are used:

1. General Rates, which are value based rates and can be adjusted through differentials. The Council is able to rate properties based on capital, land or annual value. Timaru District Council uses the land value system.
2. Uniform Annual General Charge (UAGC)
3. Targeted Rates

General rates

A general rate is set based set on a rate per dollar of rateable land value, and differentiated on the use to which the land is put. This is set on all rateable land in the Timaru District. It is used to fund those services where there is a community benefit across the whole district and where a fixed charge per Rating Unit is not considered appropriate.

The objective of differential rating is to ensure a fair and equitable proportion of rates are paid by the various differential categories.

In 2015, it was decided to adjust differentials to increase the proportion paid by the primary (rural) category to improve the overall fairness of the system. Since that time, district properties have been revalued with shifts in the overall value of property categories. As a result, this will affect how much each property category will pay overall towards the general rate.

The Council believes that the existing proportions represent a fair split of the overall payment of the General Rate. As a result, it is adjusting the current differentials to ensure each property category continues to pay the same proportion overall.

The Council uses differentials to distribute the General Rate between particular categories of the community, as listed below. This does not change the total amount of General Rates funding required annually, but rather the proportion of overall funding of the General Rate from each category differs according to the differential factor applied.

The Council differentiates the General Rate based on land use (Schedule 2 Local Government (Rating) Act 2002). The differential is applied to the following nine categories:

Uniform Annual General Charge

A Uniform Annual General Charge (UAGC) is a fixed charge set per rating unit in the District. The charge enables all ratepayers to make a minimum contribution to the Council’s costs, and ensures that higher value properties do not carry a disproportionate amount. This rate also applies to fund those services where community benefits apply across the district. The Council has decided that the level of annual increase in the UAGC will be the same overall percentage increase as the General Rate increase in any given year.

Targeted Rates

The Council applies Targeted Rates to a number of services where the benefits are clearly received by a particular
community or group of ratepayers. These apply to properties who receive certain services or are located in specific areas. The following targeted rates are used:

How these rates are set is further described under each activity.

Target recovery from funding sources

The following table shows the percentage target recovery for each activity from private funding sources organised by 10% bands:

Private funding sources (e.g. sewer targeted rate or fees and charges) are used mainly where benefits from services apply to a specific group of people or individuals are the primary beneficiaries or users of a service delivered by the Council. All sources of funding to be used by the Council are summarised in the table below for all Council activities.

Fees and Charges

The council will amend its fees and charges annually (or more frequently as appropriate) to reflect increases in costs as measured by the assumed rate of inflation and/or maintain the cost recovery levels underlying the basis for setting the fee levels.

Funding of Depreciation

The Council fully funds depreciation on assets with the exception of:

• Roading – Council does not fully fund depreciation on roading because it is continually maintained and renewed, and over 50% of this cost is received as a subsidy. The Council funds a portion of the depreciation based on average subsidy rates.

Conclusions (Section 101 (3b) consideration)

Timaru District communities are diverse. There are many different users of Council services. Council’s funding approach is a complex assessment of determining where the benefits of Council services apply, what the best methods for funding those services are and how this can be equitably applied across Timaru district communities. Council must also consider affordability both from a ratepayer perspective and for individuals and groups using Council provided services. This ensures that everyone has a reasonable opportunity to access these services.
Council has considered all of these elements and considers the overall funding approach to be fair and equitable.

Council Activities

A summary of the rationale for operating expenditure for Council activities is included below. Each activity includes analysis of the five matters listed above and the funding sources and ratios the Council has identified to be used for each activity:

adopted Council meeting 26 June 2018

Publish Date: 26 Oct 2018