Depreciation Uncertainty Focus Of Annual Plan Debate
Press Release – Hamilton City Council
The value of waters assets, and how that could impact Hamilton City Councils books, has dominated todays (Thursday 29 May) Annual Plan discussions. Council is undergoing a revaluation of the citys drinking water, wastewater, and stormwater …
The value of waters assets, and how that could impact Hamilton City Council's books, has dominated today's (Thursday 29 May) Annual Plan discussions.
Council is undergoing a revaluation of the city's drinking water, wastewater, and stormwater pipes and pumpstations.
The new value of the assets determines how much Council needs to budget for depreciation. As depreciation is an operating cost, the revaluation has potential flow-on effects on Council's financial measures, particularly the balancing the books outcome.
The draft findings of the revaluation suggested a 120% increase in the cost to replace the assets compared to 2022, significantly above shifts in market-based indicators used by councils as a guide for asset values.
Because of this discrepancy, staff recommended not including the draft findings as part of the Annual Plan, so these could be further interrogated before the drinking water and wastewater assets are transferred to the new joint waters company (also resolved today).
'There have been considerable industry changes to how revaluations are carried out since the last waters one in 2022,' said Chief Financial Officer Gary Connolly.
'The changes have produced complex results, with significant uncertainty about the validity for budgeting purposes. Extending the revaluation work would let us better understand the results.'
The 2025/26 Annual Plan, which will be formally adopted in June, has a balancing the books deficit of $13 million in 2025/26 and a small surplus the following year.
If the draft results had been factored into the Annual Plan, and no other subsequent changes made, the 2025/26 balancing the books deficit would be $37 million and reaching a surplus wouldn't be achieved until 2028/29.
'Reacting immediately to the draft results, given that many of these assets don't need to be replaced for another 50+ years, could have significantly perverse outcomes,' said Connolly.
'The staff recommendation isn't based on what would have happened with the balancing the books result.
'The revaluation issue has highlighted the risk of focusing too intently on balancing the books given the impact depreciation can have on that measure.
'We are developing a wider suite of measures to provide a more holistic picture of financial sustainability.'
Deferring the revaluation means staff expect the 2024/25 Annual Report to receive a qualified opinion from Audit NZ. Given the lack of confidence in the draft findings, accepting these could also have this result.
A qualified opinion is given when there are significant issue(s) in the Annual Report that prevent an unqualified opinion being given, but these issues are not considered pervasive. Staff do not anticipate any real-world negative consequences of a qualified audit opinion.
The Annual Plan was eventually passed, subject to final adoption, eight votes to six. Those in favour: Mayor Southgate, Deputy Mayor O'Leary, Councillors Hutt, Casey-Cox, van Oosten, Tauariki, and Huaki. Those against: Councillors Wilson, Taylor, Macindoe, Pike, Bydder, and Naidoo-Rauf.
Greater visibility of water costs coming to rates bills
Hamiltonians will have more clarity of the costs to provide water services when their next rates invoice arrives.
Elected Members have approved the introduction of targeted rates in 2025/26 to itemise what a property pays to receive drinking water, wastewater, and stormwater services.
The targeted rates are not in addition to a property's rates for 2025/26. Property owners will see a corresponding reduction in the General Rate portion of their rates to accommodate the change to how rates are itemised.
The General Rate funds most of the services provided by Council. For a median value home, the general rate currently makes up about 73% of the total rates bill.
After the introduction of the targeted rates, the general rate portion will be about 45%.
The targeted rates are required to meet central government's expectations for councils to separate water costs and revenue from the other services they provide, as part of the Local Water Done Well reforms.
The drinking water and wastewater targeted rates will be in place for 12 months, before the newly formed joint waters company with Waikato District Council assumes responsibility for delivering and charging for those services.
The targeted rates will be calculated in the same way as the general rate – by capital value.
Council also approved, subject to final adoption in June, the proposed 15.5% rates increase for 2025/26.
This is consistent with the rates increase projected in the 2024-34 Long-Term Plan, to address Council's rising costs due to inflation, higher interest rates, and depreciation.
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