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Christchurch City Council
STRATEGY AND RESOURCES COMMITTEE
SEMINAR AGENDA
MONDAY 26 JANUARY 1998
TUESDAY 27 JANUARY 1998
WEDNESDAY 28 JANUARY 1998
at 9.00 AM
and
FRIDAY 30 JANUARY 1998
at 10.30 AM (approximately)
IN THE NO 2 COMMITTEE ROOM, CIVIC OFFICES
| Committe: | Councillor David Close (Chairman), The Mayor, Ms Vicki Buck, Councillors Oscar Alpers, Carole Evans, Gordon Freeman, Pat Harrow, Ian Howell, Alister James, Garry Moore, Margaret Murray, Denis O'Rourke and Ron Wright. |
| Principal Adviser | Committee Secretary |
| Mike Richardson | Julie Sadler |
| Telephone: 371-1553 | Telephone: 371-1438 |
| Fax: 371-1811 | Fax: 371-1786 |
A light lunch will be available at all meetings.
INDEX
| 1. | APOLOGIES | |
| 2. | RELATIONSHIP OF THE FUNDING POLICY TO OTHER POLICIES | RR 6840 |
| 3. | SCOPE OF THE FUNDING POLICY | RR 6841 |
| 4. | POST HEARING DEVELOPMENT OF THE FUNDING POLICY | RR 6839 |
| 5. | REVISED FUNDING POLICY ANALYSIS SHEETS |
1. APOLOGIES
2. RELATIONSHIP OF THE FUNDING POLICY TO OTHER POLICIES RR
6840
Geoff Barnes, Financial Policy and Systems Manager, reports:
The following report is aimed at explaining the role of the Funding Policy in relation to the other policies required by the Local Government Amendment Act 1996. For this Council they are first applied for the financial year beginning 1 July 1998 ie the next budget round.
COMMON POLICY FORMATION AND PUBLISHING PROCESS
The Funding Policy is one of five policy statements published annually at the time of the Annual Plan. They are the:
Much of the subject matter of these policies are not new to this Council. In the past the Council has drawn the issues underlying these policies together within the Annual Plan and Budget long term financial model (see the table on page 11) the Long Term Financial Strategy and Overview and the Statement of Financial Management Policies.
Now the legislation requires a more formal set of policy statements. They will interrelate and will be published together as one document.
The Annual Plan and Budget will continue to include detail for current year and in general terms the following two subsequent years:
Also to be now included will be:
All of the policies will be subject to the Annual Plan process including the consultation process and are therefore able to be amended prior to adoption of the Annual Plan.
KEY FEATURE OF EACH OF THE NEW POLICIES
1. Long Term Financial Strategy
This policy includes the following issues on the Council programmes planned over the next 10 years:
It requires consideration of standards of service, options of delivery, affordability and timing. It includes strategic planning on activities. It is also a reflection of the financial and operational impact on the citizens and ratepayers.
2. Funding Policy
This in essence is a benefit study of each proposed Council activity and a conclusion on the preferred source of funding.
It has three distinct stages:
Stage one - Cost allocation based on economic principles (cost
matching)
Stage two - The Council's preferred allocation of costs (Council
discretion)
Stage three - Selection of funding tools (rates or user charges)
Stage one includes:
3. Borrowing Management Policy and Investment Management Policy
These policies are designed to determine appropriate levels of debt and to determine the long term and day-to-day management of debt and investments. They are often linked into a single comprehensive Treasury Management Policy
The management control factors will include policy on funding and performance ratios similar to that of the current Financial Management Statement. The day-to-day control features will include all elements of the current investment policy as well as required debt manage policies.
3. SCOPE OF THE FUNDING POLICY RR 6841
Geoff Barnes, Financial Policy and Systems Manager, reports:
The following report addresses some of the scope issues of the Funding Policy:
RATING SECTORS
The current rating sectors of Residential/Base, Commercial/Industrial, Rural and Non-rateable (institutions) have been used for `categories of persons' allocations in the Funding Policy.
The definition of Residential/Base, Commercial/Industrial, and Rural are contained in the differential rating scheme as resolved by Council. If the sectors are changed either in whole or by definition amendment, the differential rating scheme needs to be changed. This requires Council resolution and a 60 day consultation period.
The Non-Rateable sector is defined in the Rating Powers Act as generally land held for the community benefit or part of the transport infrastructure. Under the Act they are liable to Water, Sewerage and Refuse rates (if serviced). This Council has a water and sewerage rate.
The purpose of sectors under the differential scheme is to facilitate a different rate to each group. If all rates were levied by straight capital value (excluding those by uniform charges), there would be no need to distinguish between sectors, there would be no differentials. The proposed Funding Policy Output benefits statements includes a varying allocation between sectors therefore the differential scheme should remain.
WHY THESE DIFFERENTIAL BASED SECTORS
There is an acceptance of the current sector split between Residential and Commercial/Industrial. The character of each is generally definable although there is some difficulty at the margin with commercial residential e.g:
The greater difficulty is with the Rural definition. It is based on land use rather than zoning. For example, a farming or horticultural use in the built-up area of the city would qualify for the Rural differential.
There is 15.42% by capital value or 242 properties of the Rural sector within the serviced area of the Council. These could be excluded from the Rural sector differential definition. The Funding Policy benefits distribution is based (in part) on comparative access to and utilisation of amenities. The Rural sector contends it is remote from the Council facilities and therefore deserves a rate reduction. This argument does not apply to those within the serviced area. A case can be made for treating all serviced properties similarly and as such reclassify them as either Residential (or Base) or Commercial/Industrial.
I therefore recommend that the differential for Rural be amended by deleting those properties within the built-up area.
The proposed Funding Policy is based on these sectors. The current sectors, whilst broad, are credible and transparent. A refined definition of the Commercial/Industrial differential or split into further sectors would in all probability cause anomalies. For example the Revenue Study Working Party discussed the feasibility of separately identifying the cental business district as a separate rating area able to be charged rates different from that of the balance of the Commercial/Industrial areas.
The issues considered included:
It was considered that the distinguishing features were less significant between areas than as between land use (which covers all Commercial/Industrial areas of the city) and therefore a central city rate was rejected.
The fundamental distinction between Residential and other land uses is the most credible.
Attached (green paper) are the Differential Rates sector definitions.
RATE TYPES
The rate types used in the Funding Policy are:
These rates can not be levied against the non-rateable sector.
Separate rates charged to serviced properties as rate in the dollar of capital value:
The rate types are the same as under the current rating structure. What has changed is the method of allocation of rates to sectors within each rate type.
WHY NOT MORE RATE TYPES
For General Rate funded functions there is no advantage to having more rate types if the sectors stay as they are (excluding the minor redefinition of the Rural Sector). The Funding Policy benefits process assigns the rates to sectors efficiently. Additional rate types would not aid this process. The spread to ratepayers within each sector would not change.
There may be an advantage for introducing a Refuse Rate in that rates could then be levied to the Non-rateable sector. However this would need consideration of the benefits allocated and
the modification of allocations, currently $178,243. This is a relatively minor sum and would not justify a new separate rate.
RATING MECHANISMS USED
Capital Values as the Allocation Base
Capital values are used as they represent a good proxy for:
The capital values are credible in that they are independently and consistently derived and are adjusted over time to ensure equity.
Uniform Annual Charges
These are used as a proxy for relative number of ratepayers between sectors and within each sector for those benefits which should be charged on a per property basis.
The numbers are credible although each assessment is treated equally even though there are often significant differences in terms of size and value.
User Charges
User charges are reviewed by the Council annually as part of the Annual Plan process. The Funding Policy benefits analysis has accepted this and incorporated the results in the funding mechanisms recommended. It is expected that user charges will be under continuing review and will include consideration of other Council policies.
Other Funding Issues
Issues such as capital funding and the relationship with the Longterm Financial Strategy will be addressed in the Draft Policy Statement yet to be developed. Features of the financial model as published in the Annual Plan and Budget (1997 - page 11) will be incorporated .
4. POST HEARING DEVELOPMENT OF THE FUNDING POLICY RR 6839
Rex Harrison, Corporate Planner, reports:
BACKGROUND
Staff were asked to investigate a number of issues following the hearing of submissions, including the impact certain suggestions would have on the overall allocation of user charges and rates. The results of those investigations that affect the allocation of revenues and the structure of the funding policy document are reported in the attached revised analysis pages. Reports on the other issues will be presented as the information comes to hand.
MATTERS RAISED IN SUBMISSIONS
The matters raised by submitters fall into two broad issues - how the costs of providing benefits should be allocated and the corresponding impact on funding, and technical issues dealing with the structure of the policy document, the methodology used by the Working Party, and the treatment of general benefits.
ALLOCATION ISSUES
There was clear, if not overwhelming, support for retaining the status quo or close to it. The rural and business communities were particularly concerned with the possible increase in rating to their sectors.
Rural Issues
The rural sector expressed concern about the allocation of costs for environmental planning and rural fire protection, and the use of capital value as a way of allocating benefits for functions such as libraries, the Art Gallery, parks, beaches, gardens, libraries, and other functions which increase the overall amenity of the city.
Environmental Planning
The RSWP allocated 5% of the costs of environmental planning to the rural sector, based on the premise that "rural issues" generate more planning effort in proportion to the capital value of properties than do other issues. The rural residents countered that planning issues in rural areas are mostly the result of urban activities seeking to spread into the rural area. Staff in Environmental Planning concur, and also point out that by "rural issues" they included all issues in rural Christchurch, including the Port Hills, beach and foreshore issues, etc, and not just those related to rural ratepayers.
It is therefore suggested that the share of general environmental planning costs for the rural sector be reduced from 5% to 2%, and the balance distributed proportionally among the remaining sectors.
Rural Fire Protection
The RSWP allocated 90% of the costs for rural fire protection to the rural sector. Rural residents countered with the argument that while fires may well occur in the rural area, the majority of them are in no way connected with the activities of rural people.
The Rural Fire Officer concurs:
It is therefore suggested that the cost of fighting rural fires be allocated by capital value, as urban, commercial and rural properties all receive protection.
Contributions to the Amenity of the City
A number of functions have had their general benefit allocated by capital value, on the grounds that functions such as the Art Gallery, parks, libraries and a few others increase the amenity of Christchurch as a place to live, and so the costs should be allocated in a way that reflects stakeholders' interests in the city. This interest was considered to be best represented by capital value.
Rural residents countered with the argument that their remoteness from the city meant that they did not only use the services, but did not receive the full value from any increase in amenity they may provide.
It is suggested that a discount of 20% be applied when using capital value to allocate the costs of amenity values to the rural sector, this number being the current rural differential.
Functions that would be affected by the discount are services provided by the Art Gallery, Libraries, Canterbury Museum, Economic Development, Leisure and Community Services, Parks and Public Accountability.
Net Result
The net result of the suggested changes is that the rate increase to the rural sector would drop to 14% from the 32% in the RSWP booklet.
Other Rural Rating Issues
Geoff Barnes reports on the following three issues which were raised during the submissions hearings.
A report was requested on those items not included with the output benefit allocations.
Separation for Rating Farm Land from the Dwelling
If the amended rating distribution proceeds then there is no gain for the rural ratepayers for this action as any portion of an assessment being classed as Residential will increase the rates levied, not reduce them. The Residential rate per capital value is now higher then the Rural rate. Prior to the submission process the reverse was true.
The Council can request Valuation New Zealand to separately value any part of a property where it would lie within a different differential group. Therefore a residence could be separated from farm land within a single assessment. Valuation New Zealand is familiar with this process. It used it for taxation purposes. For stamp duty exemption on dwellings under a sale and purchase agreement, the residence with a maximum area of 4,500 square metres can be exempt. A similar concept is applied to Income Tax and GST apportionment.
For rating there is difficulty in assuming the balance of the land beyond that defined as Residential is productive farm land. All that can be said is that it would be capable of being farm land and therefore subject to the rating policy for Rural. The actual use can vary year to year and occupier to occupier.
The Council should consider the precedent impacts of this action. For instance a motelier could request similar treatment to separate the manager's dwelling from the balance of the complex. Likewise could rest home proprietors. The Council has held that the residence is an essential part of the business, and is therefore rated as part of the primary purpose.
Inner City Rural Differential
There is 15.42% by capital value or 242 properties of the Rural sector within the serviced area of the Council. These could be excluded from the Rural sector differential definition. The Funding Policy benefits distribution is based (in part) on comparative access to and utilisation of amenities. The Rural sector contends it is remote from the Council facilities and therefore deserves a rate reduction. This argument does not apply to those within the serviced area. A case can be made for treating all serviced properties similarly and as such reclassify them as either Residential (or Base) or Commercial/Industrial.
Taxation Advantages for Commercial/Industrial and Farmers
Rates are tax deductible and subject to GST input credits for those who are earning assessable income from the land (subject to threshold criteria). For those ratepayers there is an after tax benefit as compared to the Residential ratepayer who is not in business. In terms of after tax impact, for every $1 of rates paid by the Residential ratepayer, the business ratepayer has a rates cost of $0.62. This is slightly reduced where a dwelling is included with part business use.
For the Rural sector the impact is greater for the higher valued properties as they are most likely to be business based as distinct to lifestyle blocks. The impact of the part private portion is reduced.
A loading of 160% on other than Residential rates would give equal after tax impact.
Commercial Issues
The RSWP allocated corporate revenues to sectors on the basis of capital value. Under the existing system, corporate revenues are allocated in proportion to the total liability for general rates after uniform charge. That is, the commercial sector pays about 32% of the general rate, and so receives 32% of the corporate revenues. Under the RSWP findings, the commercial sector would pay 36% of the general rate, but only receive 18% of the corporate revenues.
It is suggested that the practice of allocating corporate revenues proportionally to liability for rates be restored.
Net Effect
The net effect would be that rates to the commercial sector would drop by 1.8%, instead of the increase of just under 5% as reported in the booklet.
Collective Impact of Suggested Changes
Residential |
Commercial |
Rural |
Institutions |
|
| Revised Rates per Sector | 81,025,911 |
31,280,506 |
1,965,283 |
1,017,439 |
| Share | 70.3% |
27.1% |
1.7% |
0.9% |
| Rates As Struck | 80,309,650 |
31,860,421 |
1,720,213 |
1,398,853 |
| Share | 69.7% |
27.6% |
1.5% |
1.2% |
| Change | 0.9% |
-1.8% |
14.2% |
-27.3% |
| Booklet Change | -2.0% |
4.7% |
32.0% |
-26.0% |
Detailed tables are attached (blue paper):
The revised analysis sheets have been prepared on the basis of the above suggestions.
TECHNICAL ISSUES
These issues were raised by Messrs Donnelly et al, and an academic economist. They fall into three categories - the structure of a funding policy document, the methodology used by the Working Party, and the treatment of general benefits.
As these issues relate to complying, and demonstrating having complied, with the requirements of the legislation, legal advice was obtained from Mr Jonathan Salter of Simpson Grierson. A copy of Mr Salter's report is attached (Appendix 4).
Structure of a Funding Policy Document
Booklet - Your City Your Choice (YCYC)
Donnelly et al claimed that the booklet did not demonstrate that the RSWP had complied with the procedures specified in the legislation.
This statement is correct in principle. YCYC was designed to facilitate discussion on the allocation issues, in particular whether services should be funded by rates or user charges, and which category of ratepayer should meet what expenses. Although the booklet outlined the process the RSWP went through to arrive at its findings, it was not structured in such a way as to formally demonstrate that process had been followed.
YCYC was never intended to be a statutory document. It was intended as a vehicle for public discussion and consultation over and above that prescribed by the legislation.
Mr Salter states that the booklet was an excellent document for consulting on funding issues, but agreed its structure did not demonstrate formal compliance with the legislation.
Structure of a Statutory Funding Policy Document
Demonstrating Compliance
The legislation prescribes that a funding policy document must do two things (among others):
(YCYC does not meet the requirements of the second step.)
A revised structure for the final policy document has been prepared in consultation with Mr Salter, and has been used for the revised analysis pages which follow. Mr Salter has given preliminary verbal approval of the structure, and will be following this up with more detailed written comments.
Level of Aggregation
Messrs Donnelly et al claimed YCYC did not show enough detail on how the RSWP had built up its findings. (Members will recall that a version of the discussion document prior to the publication of the booklet identified some 50 separate functions.)
Mr Salter suggested an appropriate level of aggregation would be somewhere between YCYC's 13 functions, and the 50 or so previously used. The attached analysis pages recognise some 30 functions and sub functions.
Working Party Methodology
The data in YCYC was compiled from decisions made by the RSWP when it considered each of the outputs on the detailed working sheets, first for the allocation of benefits, and secondly for deciding whether direct benefits should be met from user charges or allocated to ratepayers. The working sheets were structured so that the following process was followed:
While this is in harmony with the legislation, it is not necessarily technically rigorous. Technical rigour can be achieved when the allocations in the analysis sheets are considered, as those sheets are structured to explicitly disclose that statutory three step process.
Treatment of General Benefits
Messrs Donnelly et al argued that general benefits by their very nature cannot be allocated to specific sectors. Any benefit which can be so allocated is in effect a direct benefit, and so must be subject to the test of user charges.
Mr Salter concurs in part, but does not agree with the extreme position taken by Donnelly et al.
To qualify as a general benefit, a function must meet some or all of the following:
Such expenditure should then "be allocated in a manner consistent with economic efficiency and appropriate to the nature and distribution of the benefits generated ..."
Mr Salter stated that there is little agreement on what the term "consistent with economic efficiency" means. He did not accept the extreme position taken by Donnelly et al.
It would seem, then, that where the RSWP has allocated so-called general benefits to a specific sector, these would no longer qualify to be called general benefits.
This has necessitated a re-working of the numbers. General benefits that had been allocated to a specific sector have been re-classified as direct benefits. They have then been allocated to sectors in the same manner as before, provided arguments of community interest, fairness and equity, or Council policy can be found.
Net Effect
The net effect of the re-classification has been to greatly reduce the number of general benefits and increase direct benefits. Allocations among sectors of to user charges have not been changed as a result of this re-classification, as there are, in the opinion of staff, adequate grounds for allocating these benefits to sectors in the way originally envisaged by the RSWP.
This will need to be confirmed for each function in the attached analysis sheets.
STRUCTURE OF THE ANALYSIS SHEETS
The revised analysis sheets are divided into three sections.
Allocation of Costs Pursuant to Section 122E(1)(a)
This section discloses whether a function generates general benefits, direct benefits or controls negative effects, and in what proportion. No effort is made to assign costs to beneficiaries at this stage.
Allocation of Costs Pursuant to Section 122E(1)(b)
This section considers whether costs need to be re-allocated on the criteria of community interest, fairness and equity and/or Council policy. This section includes the discount proposed for rural ratepayers when applicable, adjustments for the fact that rates cannot be collected from some properties, and adjustments for when the Council wishes to fund direct benefits from rates rather than user charges.
Funding of Expenditure Needs Pursuant to Section 122E(1)(c)
This section makes the final decision on how functions shall be funded in order to achieve the distribution of costs indicated in the first two sections. It also includes a table showing how costs will be allocated among the various sectors, and how the function will be funded, showing users charges, rates and uniform charges as appropriate.
CONCLUSIONS
The majority of submitters were seeking an outcome not substantially different from the status quo.
The methodology followed by the RSWP has been substantially correct. Rigorous attention to methodology will be essential during the preparation of the statutory funding document.
While the booklet did not demonstrate compliance in the manner required by the legislation, it nevertheless proved a useful vehicle for public consultation on the issues over and above that required by statute. The final funding policy document will need to be structured so as to demonstrate compliance with the legislation.
5. REVISED FUNDING POLICY ANALYSIS SHEETS
Attached (pink paper) are analysis sheets prepared following the hearing of submissions on the booklet Your City Your Choice - Rates or User Charges.
These analysis sheets are in a form suggested as appropriate for the statutory funding policy document, and contain suggested modifications to allocations as a result of submissions.