Financial Statements

Financial Prudence

The government has introduced the Local Government (Financial Reporting and Prudence) Regulations 2014 which has a series of measures and benchmarks, disclosed in the following pages.

Readers are urged to read the commentary and explanations provided to give context to the information, as it is not always possible to compare Wellington City Council’s results with other councils due to their size, location and provision of services.

During the 2015-25 Long-Term Plan process and with consultation with ratepayers, the Council revised the number of benchmarks and removed measures that were similar in nature and added no value in understanding of the measures to readers.

Annual report disclosure statement for year ending 30 June 2018

What is the purpose of this statement?

The purpose of this statement is to disclose the Council’s financial performance in relation to various benchmarks to enable the assessment of whether the Council is prudently managing its revenues, expenses, assets, liabilities, and general financial dealings.

The Council is required to include this statement in its annual report in accordance with the Local Government (Financial Reporting and Prudence) Regulations 2014 (the regulations). Refer to the regulations for more information, including definitions of some of the terms used in this statement.

Unless prescribed by the regulations the quantified limit for each benchmark is calculated using the financial information from the Council’s 2015-25 LTP.

Rates affordability benchmark

The Council meets the rates affordability benchmark if—

Rates (revenue) affordability
The following graph compares the Council’s actual rates increases with a quantified dollar limit on rates increases included in the financial strategy included in the Council’s long-term plan. The quantified limit for the first three years of the 2015-25 LTP, which encompasses the financial years 2015/16; 2016/17 and 2017/18 is $301,552,000. This means rates revenue should remain below this2 limit for each of these years.

Rates (revenue) affordability, rates revenue ($000) graph compares the Council’s actual rates increases with a quantified dollar limit on rates increases included in the financial strategy included in the Council’s long-term plan.

Rates (increases) affordability

The following graph compares the Council’s actual rates increases with a quantified limit on rates increases included in the financial strategy in the Council’s long-term plan.

This 4.5% limit is an average for the first three years of the 2015-25 LTP encompassing the following financial years 2015/16; 2016/17 and 2017/18. This means the average rate increase over these years should be 4.5% or less after growth. The quantified limit for 2017/18 is therefore 6.0% before growth (1.5% growth was assumed in the LTP for 2017/18) and 4.5% after growth.

The actual average for these years was 5.4% before growth and 4.2% after growth. Therefore Council met this benchmark overall for the three years applicable to this measure.

Rates (increases) affordability, rates increases (%) graph compares the Council’s actual rates increases with a quantified limit on rates increases included in the financial strategy in the Council’s long-term plan.

Debt affordability benchmark

The Council meets the debt affordability benchmark if its actual borrowing is within each quantified limit on borrowing. The Council has seven measures for debt affordability and these are set out below. The suitability of these measures has been assessed by Council’s professional advisers, PwC Wellington.

Net borrowing as a percentage of revenue3

The following graph compares the Council’s actual borrowing with a quantified limit on borrowing stated in the financial strategy included in the Council’s long-term plan. The quantified limit is net borrowings, comprised of borrowings less cash and cash equivalents, being less than or equal to 175% of revenue. For this measure revenue is defined as total revenue less vested assets and development contribution revenue.

Debt affordability benchmark, Net borrowings as a percentage of revenue (%) graph compares the Council’s actual borrowing with a quantified limit on borrowing stated in the financial strategy included in the Council’s long-term plan.

Net interest as a percentage of revenue4

The following graph compares the Council’s actual borrowing with a quantified limit on borrowing stated in the financial strategy included in the Council’s long-term plan. The quantified limit is net interest, defined as interest expense less interest revenue, being less than or equal to 15% of revenue. For this measure revenue is defined as total revenue less vested assets and development contribution revenue.

Net interest expense as a percentage of revenue (%) graph compares the Council’s actual borrowing with a quantified limit on borrowing stated in the financial strategy included in the Council’s long-term plan. Limit 15% 2018 actual 4%.

Net interest as a percentage of annual rates revenue

The following graph compares the Council’s actual borrowing with a quantified limit on borrowing stated in the financial strategy included in the Council’s long-term plan. The quantified limit is net interest, defined as interest expense less interest revenue, being less than or equal to 20% of annual rates revenue.

Net interest expense as a percentage of annual rates revenue (%) graph compares the Council’s actual borrowing with a quantified limit on borrowing stated in the financial strategy included in the Council’s long-term plan. Limit 20% 2018 actual around 7%

Liquidity (term borrowing + committed loan facilities to existing external net debt)

The following graph compares the Council’s actual borrowing with a quantified limit on borrowing stated in the financial strategy included in the Council’s long-term plan. The quantified limit is liquidity being greater than or equal to 115%. For debt affordability, liquidity is the total of Council’s existing external net debt. Net borrowings for debt affordability are defined as borrowings less cash and cash equivalents.

NOTE: this measure was introduced in the 2015/16 financial year.

Liquidity (term borrowing + committed loan facilities to existing external net debt) (%) graph compares the Council’s actual borrowing with a quantified limit on borrowing stated in the financial strategy included in the Council’s long-term plan. The quantified limit is liquidity being greater than or equal to 115%. 2018 actual just over 120%.

Balanced budget benchmark

The following graph displays the Council’s revenue (excluding development contributions, financial contributions, vested assets, gains on derivative financial instruments, and revaluations of property, plant, or equipment) as a proportion of operating expenses (excluding losses on derivative financial instruments and revaluations of property, plant, or equipment).

The Council meets this benchmark if its revenue equals or is greater than its operating expenses.

Balance Budget benchmark Revenue / expenditure (%) graph benchmark target is equal to or greater than 100%, benchmarks met 2014 103%, 2015 105%, 2016 105%, 2017 107%, 2018 104%.

Essential services benchmark

The following graph displays the Council’s capital expenditure on network services as a proportion of depreciation on network services.

The Council meets this benchmark if its capital expenditure on network services equals or is greater than depreciation on network services.

Although for 2013/14 it appears to show that the Council has “not met” the benchmark, included within the depreciation figure, there is a depreciation amount for Moa Point Treatment Plant which is under an arrangement where 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 those 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.

Capital expenditure / depreciation (%) graph displays the Council’s capital expenditure on network services as a proportion of depreciation on network services. Benchmark is greater than or equals 100% 2018 actual was 147%.

Debt servicing benchmark

The following graph displays the Council’s borrowing costs as a proportion of revenue (excluding development contributions, financial contributions, vested assets, gains on derivative financial instruments, and revaluations of property, plant, or equipment).

Because Statistics New Zealand projects the Council’s population will grow as fast as the national population growth rate, it meets the debt servicing benchmark if its borrowing costs equal or are less than 10% of its revenue.

Debt servicing benchmark, borrowing costs / revenue (%) graph displays the Council’s borrowing costs as a proportion of revenue. Benchmark is equal or less than 10% 2018 actual is 4%.

Debt control benchmark

The following graph displays the Council’s actual net debt as a proportion of planned net debt. In this statement, net debt means financial liabilities less financial assets (excluding trade and other receivables).

The Council meets the debt control benchmark if its actual net debt equals or is less than its planned net debt.

The calculation of net debt includes derivative (non-cash) financial instruments, predominantly cash flow hedges. The 2015/16 net debt was impacted by the valuation of the Council’s cash flow hedge liabilities being higher than planned as a result of interest rate volatility during the financial year. Actual net borrowings at $396.5m were lower than planned net borrowings of $415.0m and well below other benchmarks.

Debt control benchmark, actual / budgeted net debt (%) graph displays the Council’s actual net debt as a proportion of planned net debt. Benchmark is equal or less than 100% 2018 actual is 89%.

Operations control benchmark

This graph displays the Council’s actual net cash flow from operations as a proportion of its planned net cash flow from operations.

The Council meets the operations control benchmark if its actual net cash flow from operations equals or is greater than its planned net cash flow from operations.

A number of assumptions are made around the timing of events. Any departure from these assumptions can affect the outcome of this measure. The Council is satisfied that it is prudently managing operational cash flow, with variances in the 2014/15 and 2017/18 years explained by the timing difference in the receipt of revenues compared to budget that lead to the “not met” outcome for this measure.

Operations control benchmark, actual / budget net cash flow from operations (%) graph displays the Council’s actual net cash flow from operations as a proportion of its planned net cash flow from operations. Benchmark is greater than or equals 100% 2018 actual is 98% benchmark was not met.

2The qualified limit was set at $301,552,000 for the first three years of the 2015-25 Long-Term Plan on the basis that this would equate to an average annual rates increase of 4.5% (after growth) over this three period.
3The revenue figure used for this calculation of Net Borrowing as percentage of Revenue and Net Interest as a percentage of Revenue is Total Revenue less Vested Assets and Development Contribution Revenue. The Council has also deducted variable capital grants it receives for social housing from these calculations.
4The revenue figure used for this calculation of Net Borrowing as percentage of Revenue and Net Interest as a percentage of Revenue is Total Revenue less Vested Assets and Development Contribution revenue. The Council has also deducted variable capital grants it receives for social housing from these calculations.