Agenda of Regional Council - Wednesday, 25 October 2023


Informal Workshop Paper
To:	Regional Council
	25 October 2023
From:	Mark Le Comte, Principal Advisor, Finance; Karlo Keogh, Senior Management Accountant; Gillian Payne, Principal Advisor and Olive McVicker, Corporate Performance Team Lead
	Evaleigh Rautjoki-Williams, Acting General Manager, Corporate

2024-2034 Long Term Plan - Budget Version 2

1. Purpose

This paper provides Councillors with version 2 of the budget for the 2024-2034 Draft Long Term Plan (DLTP) which has been updated following Council workshops on expenditure levels for each activity held on 19 and 26 September 2023. Expenditure and levels of service for the Public Transport Services, Regional Development, Climate Change and Spatial Planning activities are the subject of an upcoming workshop.

As Councillors have provided guidance on expenditure levels, this workshop is focussed on the use of financial levers to close the remaining funding gap.

2. Guidance Sought from Councillors

· Guidance on the appropriate balance of funding levers to be applied to close the funding gap including revenue and reserves.

3. Context

The results of general election on 14 October 2023 will have a significant impact on Regional Councils. Since the last Council workshop, it is almost certain that there will be a National led government, but there is still uncertainty about the final policy mix in a National/Act coalition, or whether NZ First will have a role within Government. Based on common policy statements from National and Act, Council should be prepared for the likelihood of:

· Repeal of the Natural and Built Environment Act and Spatial Planning Act.

· Further Resource Management Act reform, to an unknown future state but likely to include fast track consenting.

· Repeal of the Affordable Water reforms.

· Increased transport infrastructure investment, but reduced focus on passenger transport.

· Increased focus on infrastructure investment.

Inflation and interest costs are high, and the country is facing a cost-of-living crisis. The latest Consumer Price Index (CPI) release on 17 October showed annual CPI had decreased from 6.0% to 5.6%. This was lower than most economist forecasts (5.8-6.1%) and lower than forecast in the last RBNZ Monetary Policy Statement forecast (6%). If the CPI results continue to fall faster than expected, then interest rate forecasts may also reduce. The next major announcement is the RBNZ Monetary Policy Statement on 29 November 2023.

4. LTP Process

The first version of the DLTP budget was presented to Councillors at the 19 September workshop. Further reviews of key activities are scheduled for upcoming workshops, including Public Transport Services, Regional Development, Climate Change and Spatial Planning; which could have a material effect on budget version 2 of the DLTP.

Capital budgets have been incorporated into the Asset Management Planning process, and staff are completing detailed deliverability reviews to ensure that capital forecasts are as robust as they can be.

The diagram below shows the DLTP process. The focus of this workshop is on funding and financing options.

Diagram 1. Connecting the Stages of the DLTP.

5. Draft Budget and the Funding Gap

Staff have updated the DLTP budget in response to Councillor direction received at 19 and 26 September workshops. The current result is a total funding gap of $5.47 million in 2024/25, which includes both general rate funded and targeted rate funded activities.

A summary of the process and decisions to reach the funding gap for budget version 2, and key items to be confirmed in upcoming budget versions is shown in the table on the next page. Key points to note include:

· The total rates increase to existing properties for year one has been capped at the current forecast CPI increase which is 4.5% for year one then 2% thereafter. The forecast total rates revenue for Council will also increase by a further 1.25% per annum due to growth in the rating base. These caps have been applied to both general and targeted rates. An allowance for rates penalties has been added as per scenario guidance at the previous workshops based on actual rates penalty trends.

· The timing of the Lake Tarawera and Rotorua Museum sewerage grants have been moved from 2024/25 to years two and three respectively on advice from Rotorua Lakes Council. These changes reduce expenditure in 2024/25, but do not affect the funding gap as they are funded from reserves.

· Capital budgets have been capped at $30 million pending the outcome of the capital deliverability reviews. The outcome of the deliverability reviews will be presented with budget version 3 at the 21 November workshop.

Item	Funding Surplus (Gap) $000	Comments
Version 1 Funding Gap	(7,206)
Total savings from financial scenarios workshops	4,462
Additional costs Rivers and Drainage from financial scenarios	(1,674)
Additional costs Public Transport from financial scenarios workshops	(1,895)
Net other adjustments	843	Reduced interest costs (capex deferrals) and allowance for litigation costs
Version 2 Funding Gap	(5,470)
Items to be confirmed in future versions
Asset Management Plans’ impact	TBC	Potential to save interest costs through capital deliverability review
Key activity reviews	TBC	Public Transport Services, Regional Development, Climate Change, Spatial Planning
Grants subsidies and collaboration projects not already identified	TBC	Refer section 6.1.1 and Attachment 2 (Public Excluded)
Amount of Quayside dividend	TBC	Determined through Statement of Expectations for 2024/25
Revenue and Financing Policy review	TBC	Mainly affects Targeted rate/General rate split (no effect on funding gap) but Fees and Charges may have a small effect – refer section 6.1.1
Version 3 Funding Surplus (Gap)	TBC

The ten-year view of the budget, including the funding gap, is shown in Attachment 1.

The funding gap grows from $5.47 million in year one, to a total of $27.7 million over the first three years, and to $59.8 million over the 10 years. The main contributors to the funding gap increases from year one to year two are higher borrowing costs due to the capital expenditure forecasts (discussed in section 5.2) and less (already approved) use of reserves in year two.

5.1 Capital and Borrowing

Current interest rates from the LGFA indicate that the cost of borrowing will remain elevated for the foreseeable future. The latest table of LGFA interest rates, from 11 October, is shown below.

Council currently has an AA credit rating, with a negative credit watch from Standard and Poor’s. The financial impact of a credit rating downgrade to AA- is to increase borrowing rates by 0.05%, which means for each $100 million of borrowing, an extra interest cost of $50,000 per year.

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Council receives 5.5% (OCR) on the majority of its cash holdings, which is less than its cost of new borrowing, so it is preferable to first use available reserves and only borrow if required.

Forecasts show that Council would be able to fund capital for 2024/25 from reserves but will need to borrow to fund the capital programme for 2025/26 and 2026/27. All else being equal, this increases the possibility of a credit rating downgrade.

Borrowing and interest rate forecasts will be updated in subsequent workshops including consideration of:

· CPI and OCR announcements - Bancorp and PWC will provide advice on the interest rate outlook and the appropriate treasury management approach respectively.

· Capital deliverability reviews. A $10 million capital expenditure delay for one-year results in an interest expense saving of approximately $600,000.

· Group level considerations including QHL forecasts.

6. Funding and Financial Levers

To address the funding gap, Council has several funding and financial levers available. These funding levers were ranked in hierarchies as part of the Financial Framework Review completed as part of LTP 2021-2031, shown below.

The hierarchy generally expresses Council’s preferences for funding sources, but it should be used and interpreted in conjunction with the Revenue and Financing Policy (RFP) which takes into account the characteristics of the activities being funded. For example, increasing fees and charges is a high priority to consider but may be constrained by consideration of beneficiaries, impacts on demand for the service of changing fees, and legislation that limits what can be charged. The RFP is currently under review as part of the DLTP process.

6.1 Levers to address operating funding gap:

6.1.1 Increasing Revenue

Increasing revenue is a sustainable option to close the funding gap, however, this can be phased in over time. Council would need to increase revenue by $12 million over three years to achieve a balanced budget for year three of this DLTP. Any funding gap that remains after considering the revenue levers would need to be funded from reserves (if available).

The table below shows the impact on the funding gap of increasing revenue cumulatively each year. The grey column, total budget gap years 1-3) shows the total cumulative use of reserves that would be required to smooth in the impacts of increasing revenue for years 1 to 3.

		2024/25 Year 1 $000	2025/26 Year 2 $000	2026/27 Year 3 $000	Total budget gap years 1-3 $000	2027/28 Year 4 $000
Budget V2 Funding Gap		(5,470)	(11,561)	(10,664)	(27,695)	(11,808)
Cumulative Annual Revenue increase $000
	1,000	(4,470)	(9,561)	(7,664)	(21,695)	(7,808)
	2,000	(3,470)	(7,561)	(4,664)	(15,695)	(3,808)
	3,000	(2,470)	(5,561)	(1,664)	(9,695)	192
	4,000	(1,470)	(3,561)	1,336	(3,695)	4,192

In order of the hierarchy, the revenue funding levers Council can consider are discussed below:

· Grants and subsidies - In addition to known and expected subsidies already factored into budget version 2, there may be potential for external funding for projects. A list of Council projects that may be proposed if funding avenues materialise is in Attachment 2 (Public Excluded). It is too early to budget for additional revenue from this source, and some of the items may require additional Council funding that is not yet factored into budget version 2.

· Fees and charges – Budget version 2 has increased fees and charges by inflation. A further 10% increase across all fees and charges (subject to RFP and legislative constraints) would yield $1.25m. This estimate includes bus fares, resource consent/compliance monitoring charges and harbour dues.

· Financial Contributions. Council does not currently have upcoming work planned that would qualify for Financial Contributions to be charged.

· Investment Income – Any change to the QHL Dividend depends on QHL’s corporate setting. Using this lever means trading off the benefit of a higher dividend now for reduced capital growth later. Council also receives investment income from its reserve funds and other minor dividends from its shareholding in the LGFA.

· Rates - Currently capped for budget version 2 at the forecast inflation rate as per Councillor guidance. Councillors could consider allowing an increase of greater than the rate of inflation, which could start in year one or in later years. A 1% increase, for either a general or targeted rate would yield approximately $400,000 (based on the current Revenue and Financing Policy ratios).

6.1.2 Using reserves

Reserves are not generally sustainable funding option, but their use can be appropriate to smooth change and for specific one-off projects. The cumulative budget gap in 6.1.1. shows the total amount of reserve use that would be required to smooth the impact of revenue increases.

The table below shows the purpose of each reserve type and the potential for reserve use, based on the forecasts of each reserve. Staff update reserve forecasts after each version of the budget is prepared.

Name and purpose of reserve	Potential of reserve to reduce funding gap
Regional Fund - This reserve is used to fund infrastructure projects.	The current forecast, based on Annual Report 2022/23 and early 2023/24 forecasts is that Regional Fund will not be enough to cover the year one budget gap. This forecast will be updated as the year progresses and for the Insight reporting in early November. This reserve was used in LTP 2021-2031 to fund specific projects and to smooth rates increases from 2021/22 to 2023/24. It is replenished through budgeted contributions from activities, and is available for use by all activities
Equalisation Reserve - used to smooth general rates increases.	Currently forecast at $Nil. This reserve is a consequence of actual performance results (overs and unders) from general funded activities. Any underspends from general funded activities currently reduce the amount of Regional Fund use.
Targeted Rates Reserves - can only be used for the specific targeted rate it was collected for.	Forecast in the 2023/24 Annual Plan to be $4.7 million in total across all targeted rates reserves. Some targeted rates reserves are forecast to have $Nil available.
Toi Moana Trust (TMT) – used for Council funds that can be held for 3-5 years and invested for higher returns than bank term deposits.	Valued at $69.6 million as at 30 September 2023. If Council were to consider drawing down on the Toi Moana reserve, it would need to stage the drawdown as TMT is currently invested in shares and bonds. Council would also forego the investment return budgeted at 5%.

6.2 Capital Funding Levers

Capital budgeting does not result in a budget gap because borrowing is an acceptable and available source of funding. Borrowing spreads the cost of capital assets over their useful lives so that all beneficiaries contribute towards the cost.

In order of hierarchy:

· Asset sales – there do not appear to be any immediate opportunities.

· Grants and subsidies – refer to comments on grants and subsidies in section 6.1.1 above. Some of the potential projects are capital items.

· Reserves – Refer to comments in operating expenditure above, particularly in respect of TMT. Given the expected return versus borrowing rates, Council should consider using reserves instead of borrowing to fund capex. The budget process has fully applied the Asset Replacement Reserves to fund capital expenditure.

· Borrowing generally provides for intergenerational equity and is discussed in section 5.1. The current budget requires new borrowing for the capital programme in years two and three.

7. Next steps

Following guidance at this workshop, and the upcoming activity planning workshops, staff will commence preparing budget version 3 for consideration at the 21 November workshop. This is intended to be the final draft budget and the last opportunity for Councillors to provide budget guidance before the LTP Consultation Document and supporting documents are endorsed for audit at the 14 December Council meeting.

Attachments

Attachment 1 - Version 2 - 10 year forecast ⇩

Attachment 2 - List of potential projects for external funding (Public Excluded) ⇩


Informal Workshop Paper
To:	Regional Council
	25 October 2023
From:	Kumaren Perumal, Chief Financial Officer; Mark Le Comte, Principal Advisor, Finance and Gillian Payne, Principal Advisor
	Evaleigh Rautjoki-Williams, Acting General Manager, Corporate

Revenue and Financing Policy - Funding Assessments

1. Purpose

The purpose of this report is to present staff analysis of the legislatively required assessments of Council’s activities to identify appropriate funding sources and seek Council feedback on the results.

This is the first step in the two-step process to develop a draft Revenue and Financing Policy (RFP) for public consultation alongside the Long-Term Plan 2024-2034 (LTP).

The second step is to aggregate the activity assessment results, apply them to LTP budget version 2 and consider the resulting distribution of rates and other funding requirements. Council considers the Step Two results and the impact it would have, if unchanged, on community well-being. As part of Step Two, funding sources identified in Step One can be adjusted, and the rationale documented in the draft Revenue and Financing Policy, for consultation.

2. Guidance Sought from Councillors

Staff seek Council direction on:

· Assessments of funding sources by activity (Step One), noting that Step Two considerations will take place at a subsequent workshop.

For this workshop, feedback from Councillors is sought on the rationale for assessment of beneficiaries, exacerbators (i.e., influencing demand and incentivising behaviour change), and the costs and benefits of separate funding for each activity (transparency and accountability).

In providing this direction, Councillors may wish to cross reference some of the results of the latest community engagement pulse-check conducted between 3 and 12 October, which will be tabled at the workshop. The engagement results particularly relate to funding sources for the Public Transport activity.

Considerations of overall effect on community wellbeing (e.g., equity, affordability, achieving community outcomes, promoting the preamble to the Te Ture Whenua Māori Act 1993) will be addressed in Step Two and additional information will be presented to Councillors to help put those considerations into perspective.

Suggestions for this information are outlined in section 4.1 of this report. It would be helpful to receive feedback from Councillors on this section so that sufficient information is presented at the workshop in November.

3. Discussion

3.1 Previous work

On 9 August 2023, at a Risk and Assurance Committee (RAC) workshop, Morrison Low presented the proposed methodology for the RFP for RAC endorsement. Councillors shared views on the principles underpinning the funding considerations and the trade-offs that would be required in coming to decisions on funding sources, through the review process.

The methodology has been jointly developed for Waikato and Otago Regional Councils, facilitated by external independent advice from Morrison Low. It brings a structured approach to the statutory activity funding analysis process and provides consistency in determining appropriate funding methods across all of Council’s activities. Attachment 1 illustrates the Step One methodology.

On 19 August Councillors received a summary of the activity assessment results, for which more detail is provided at this workshop.

3.2 Activity assessment results – Step One

Staff have used the Morrison Low methodology to consider the factors set out in Local Government Act 2002 (LGA) section 101(3)(a). The results are collated in Attachment 2.

It is important to note that these are not staff recommendations for the funding splits, they are just the results of the first step in the RFP review process.

Many of the activity assessments have yielded similar results to previous assessments. A few activities/sub-activities have results that are different to those adopted in RFP 2021, which are:

· Rotorua Catchments (refer page 1 Attachment 2)

· Emergency Management (refer page 8 Attachment 2)

· Regional Safety and Rescue Services, a component of Community Engagement (refer page 11 Attachment 2)

· Public Transport Services (refer page 12 Attachment 2) and results of community engagement (to be tabled at the workshop)

· Regional Development (Infrastructure) (refer page 16 Attachment 2)

· Rivers and Drainage Schemes (refer page 19 Attachment 2, and Attachment 3, page 6)

3.2.1 Further work - Rivers and Drainage

Regarding the Rivers and Drainage Schemes activity, Councillors will be aware that targeted rates are currently charged according to a complex set of rating categories based on location, which have not been reviewed in many years.

The scope of this Policy review does not include the detailed work required to confirm or review those categories. It is intended to consider a scope of work to undertake that review, starting in 2024/25, investigating each River Scheme in turn.

This work is expected to involve:

· technical analysis of the current and expected future distribution of benefits of the scheme (i.e., those that the RFP identifies should be collected through targeted rates)

· identifying options for proposals for rating categories, supported by the technical analysis

· extensive consultation with landowners in the catchments that would be affected.

Work of this nature was proposed in 2014, and scheduled over four years from 2016, but subsequently not undertaken. At that time the cost of a review was estimated at $250,000 per scheme.

As a result, changes to the incidence of rates for Rivers and Drainage will be proposed as part of this review (depending on Council direction regarding the attached activity assessments) and could change again in subsequent years, reflecting the outputs of detailed rating categories reviews.

3.2.2 Further work - Transport

Similarly, for the Public Transport activity, as the extent of the bus service expands or new services are introduced, Council may wish to review the areas of benefit for any Public Transport targeted rates that are currently within the defined boundaries of Tauranga City, urban Rotorua, Western Bay district and the Whakatāne district.

3.3 Financial implications of Step One assessments

Staff have modelled three options, not as recommendations, but to provide context for discussion.

Option 1 uses the funding bands in the current RFP, and the percentages from Annual Plan 2023/24.

Option 2 is the result of applying the Step One staff assessments.

Option 3 is for comparative purposes and is to highlight financial impact. It is a high-level model that shows all activities being 100% funded through General Rates (including the Uniform Annual General Charge (UAGC) set at 30%) except for Civil Defence which is the subject to an agreement with the Civil Defence Management Group.

Drivers of change in distribution of rates

Overall, the proposed Step 1 assessment (if flowed through to changes to the Revenue and Financing Policy) reduce total Targeted Rates and increase General Rates. The incidence of General Rates for each district depends on the number of rating units and total land value of properties in that district. These figures, along with the total rates for each district in 2023/24 are shown in Figure 1 below.

Districts which have a higher percentage of the total rating units and land value than they currently pay in rates will generally be most affected by moving towards more general rates. These districts are Tauranga and Western Bay.

Figure 1

Initial view of distribution of rates – Version 2 of LTP budget

Figures 2 and 3 below show the incidence of rates for each district based on budget version 2 of the LTP for each of the three options described above.

Figures 2 and 3 are modelled on the basis that targeted rates are set to be collected from the same categories of land and calculated using the same factors (land value, area, etc) as for the current RFP. Decisions that need to be made when setting targeted rates are described more fully in section 3.4 below.

Whakatāne and Rotorua are favourably affected due to the reduction of targeted rates for the river schemes, air quality and Rotorua Lakes. Western Bay and Tauranga are adversely affected by the reallocation of targeted rates to general rates (due to high land values) which is partially offset by a reduction in the Tauranga Passenger Transport targeted rate.

Figure 2

Figure 3 below shows the impact on the mean rates per district for each of the three options.

Figure 3

Detailed views of the distribution of rates are shown in Attachment 2, which includes modelling for representative locations and properties.

3.4 Setting Targeted Rates

The Local Government Rating Act 2002 (LGRA) determines how targeted rates can be set.

LGRA Schedule 2 sets out the matters Council can use to determine who should pay a targeted rate, and LGRA Schedule 3 sets out the factors that can be used to calculate how much the targeted rate should be for each property. This is summarised in the table below:

Matters (who) and Factors (how much)	Who pays?	How much do they pay?
Land use	ü
Activity on land – planned (e.g. residential zone)	ü
Activity on land - proposed	ü
Area with rating unit	ü	ü
Provision or availability of a service	ü
Where land is situated	ü
Annual value of land	ü	ü
Capital value of land	ü	ü
Land value of land	ü	ü
Value of improvements		ü
Area sealed paved or built on		ü
Number of separately used or inhabited parts		ü
Extent of provision of any service		ü
Number or nature of connections		ü
Area protected by a facility or amenity		ü
Area of floor of buildings		ü
Number of WCs or urinals		ü
Fixed amount per rating unit		ü^{^[1]}

Currently Council sets targeted rates as flat amounts per rating unit and per hectare for some Rivers and Drainage schemes, but it has options to use other factors as well, including land value, capital value and improvement value.

LGRA section 21 limits the size of the UAGC and any other uniform rates to 30% of total rates revenue. In this context, “uniform” means that for every rating unit charged, the same amount is charged. The targeted rate does not have to be paid by every rating unit in the region for it to be included in the 30% limit.

3.5 Other considerations

3.5.1 Potential for new Targeted Rate for climate-related initiatives

Explaining the incremental cost/benefit of new proposals, and ensuring transparency in their delivery, is frequently a challenge for Council. This is particularly the case when the funding for new proposals is part of general rates or other revenue streams that fund multiple activities.

One approach that other councils have used to improve transparency and accountability is the use of targeted rates (TR) for climate resilience (or similar) to fund specific initiatives. For example, Auckland Council introduced a Climate Action (Transport) Targeted Rate that is used to fund passenger transport improvements that reduce carbon emissions. Examples of projects funded by this targeted rate are bus/ferry electrification and new bus routes. Depending on how the TR was set, the financial impact could be the same as using existing rating mechanisms.

Staff have discussed this approach with Auckland Council staff, who said that this approach led to better and more meaningful consultation at the time the new initiatives were proposed. They also noted that the TR is an ongoing communication and accountability mechanism, provided the initiatives being funded by it are clear when established and relatively stable from year to year.

Care should be taken to ensure that the defined uses of the Targeted Rate are flexible enough to avoid having to frequently re-consult with the community when the focus or scope of projects funded by the TR changes. This means balancing the transparency sought by using TR and the flexibility Council desires or needs, to respond to changing circumstances and best practice in addressing climate change.

Council could consider using a Climate Resilience Targeted Rate to fund specified initiatives within particular activities that are facing increased cost pressures due to climate change.

The main options for Council to use this mechanism is in place of the proposed general rates funding for new initiatives within the Passenger Transport activity and increased maintenance and investment costs in the Rivers and Drainage activity.

More information on this potential approach will be presented at the workshop.

3.5.2 Application of Quayside Dividend

Another key influence on net amount of rates paid by each ratepayer is the methodology used to allocate investment income (Quayside dividend). Attachment 4 explains how the dividend is currently distributed and is provided at this workshop for information.

The effect of the current methodology is that 30% of the dividend reduces the UAGC and 70% of the dividend reduces land value rates.

A high-level comparison of applying the dividend under the current methodology and as a flat amount per ratepayer is shown in the table below. Direction on these options, and any other alternatives that Council wishes to explore, will be part of Step Two considerations in November.

4. Next Steps

Following the workshop, staff will adjust the Step One funding models to reflect the direction on any matters for consideration in this step, i.e. at activity level.

Council will consider Step Two (overall impact on Community wellbeing) at a later workshop, along with the potential impact of the policy direction on achieving the objectives set out in the Preamble of the Te Ture Whenua Māori Act 1993.

4.1 Supporting information for Step Two considerations

Staff seek Councillors’ guidance on the information they wish to see to inform their Step Two considerations in late November.

Staff will model the distribution of rates on typical properties across the region, based on version 3 of the LTP budgets, so these can be considered alongside indicators of the distribution of ability to pay, living conditions and other demographic information.

Direction will then be sought on altering the incidence of rates at an overall level. Staff will present options for how rates could be altered, including:

· Level of the UAGC – should we maximise the UAGC as we have done in the past or take a different approach?

· If the Quayside dividend continues to be used to subsidise rates, how should it be distributed? Public feedback on this topic has been received through the latest community engagement survey and results will be tabled at this workshop.

4.2 Consideration of transition arrangements

Council may also want to consider transition arrangements if changes to funding sources are material for some groups of ratepayers. This can also be considered as part of Step Two.

Attachments

Attachment 1 - Illustration of RFP Step One methodology ⇩

Attachment 2 - Activity assessments - RFP 2024 - draft Funding Needs Analysis ⇩

Attachment 3 - Rates Examples Properties ⇩

Attachment 4 - Allocation of QHL dividend - methodology ⇩


Informal Workshop Paper
To:	Regional Council
	25 October 2023
From:	Gillian Payne, Principal Advisor; Chris Ingle, General Manager, Integrated Catchments and Jo Pellew, Rates Manager
	Mat Taylor, General Manager, Corporate

Rates Remission Policy Review - potential new remission categories

1. Purpose

At a workshop on 25 May 2023 Councillors considered a range of ideas from staff for new rates remissions to incentivise environmental outcomes. Council direction at that workshop was to continue work on the ideas and bring back options for consideration. Feedback from this workshop will direct the development of a draft Rates Remission and Postponement Policy (RRP Policy) for public consultation in March-May 2024.

2. Guidance Sought from Councillors

Staff seek guidance on approaches for:

· Protected areas of ecological value not already receiving rates relief (Priority Biodiversity Sites [PBSs] and Significant Natural Areas [SNAs])

· Incentives to retire land and recognition of loss of productive potential of land as a result of:

o Room for the River

o Land affected by natural events

o Council assets on private land

o Retiring productive land for environmental benefit.

· Incentivising establishment of native forests or wetlands (including saltmarsh) on pastoral land retired from production.

3. Discussion

At the workshop on 25 May, Councillors gave direction to continue work to develop all seven of the new remission ideas presented and where possible to provide estimates of revenue foregone if the remissions were approved.

This paper presents financial modelling of remission cost where estimates are feasible, and recommendations for the policy approach and draft eligibility criteria for several new remissions.

3.1 Protected areas of ecological value not already receiving rates relief

3.1.1 Objective

To encourage landowners to fence, protect and restore/enhance land such as Significant Natural Areas (SNAs) and Priority Biodiversity Sites (PBSs). This would incentivise landowners to support biodiversity outcomes, and reward those that continue to do so.

Ecologically valuable Māori Freehold Land (MFL) and Conservation land is already exempt from rates along with QEII covenanted land. This policy would provide an opportunity to assess relative fairness among similar types of land use, provided the restrictions on the land (e.g., through covenants) were similar.

3.1.2 Strategic context

Priority Biodiversity Areas

Currently Council has 429 PBSs identified (totalling 48,514 hectares) of which 44% are actively managed through Environmental Programmes. The target for growing this percentage is an additional 1% per year (LTP 2021-2031), at current levels of service.

In addition to any rates remission incentives that may be proposed, PBS landowners are eligible for Council grants for activities including fencing, planting, and pest control under our Environmental Programme Grants Policy.

PBSs are split into three ‘priority levels’ based on the threat status of the ecosystem types they contain. The priority level assigned to a PBS dictates the level of grant funding available for active biodiversity management.

· Priority 1 PBS contain ecosystems reduced to <10% of their natural extent as well as ‘naturally uncommon’ ecosystems (NUE) that are Critically Endangered. Examples are frost flats, geothermal habitats, and very threatened forest types.

· Priority 2 PBS contain ecosystems reduced to 10-20% of their natural extent, along with NUE that are Endangered and Vulnerable. Examples are wetlands and sand dunes.

· Priority 3 PBS contain ecosystems that retain >20% of their natural extent, and NUE that are not threatened.

Of the total of 429 PBSs, there are 46 priority 1 sites (3,190 ha), 312 priority 2 sites (14,736 ha), and 71 priority 3 sites (31,588 ha).

Significant Natural Areas

SNAs are areas that support significant indigenous vegetation or significant habitat of indigenous fauna.

Under the National Policy Statement for Indigenous Biodiversity (NPS IB) councils are required to map SNAs using set assessment criteria. Adverse effects on SNAs must be avoided (except where an exception applies such as specified infrastructure). For exceptions, the effects management hierarchy must be applied (avoid, minimise, remedy, offset, or compensate, in that order).

Currently, SNAs cover 343,505 hectares, and some overlap with PBSs.

Table 1
Territorial Local Authority	Total SNA^{^[2]} areas (ha)
Tauranga	1,386
Western Bay of Plenty	18,498
Rotorua	16,416
Whakatāne	222,529
Ōpōtiki	80,413
Kawerau	261
Taupo	4,002
Total	343,505

Other incentives to protect biodiversity

Land management staff report that for landowners, recognition of their conservation efforts by local authorities and the public is a significant motivator, complementing any land management advice and financial assistance. This is especially true for PBSs on Māori Freehold Land (MFL) that are legislatively non-rateable.

Central government is currently consulting on a biodiversity credit system^{^[3]}, which in time could result in additional incentives for landowners. A draft BOPRC submission on this consultation will be considered at the Strategy & Policy workshop on 28 September 2023.

3.1.3 Approach, scope, criteria and exclusions

A rates remission provision could set broad eligibility criteria with clear objectives and matters for consideration and rely on staff (rates staff and land management staff) to assess the level of remission appropriate on a case-by-case basis.

Options for scope, eligibility and assessment criteria are summarised in the table below.

Table 2
A: Scope	i. Both SNAs and PBSs eligible	Staff consider PBSs are a higher priority for receiving rates relief compared to SNAs because they have already been assessed as having biodiversity value which is understood and prioritised. SNAs are typically identified by TLAs and may not have biodiversity value, even though they have been recognised as significant natural areas. Council direction sought
ii. Only PBSs eligible
iii. Only PBSs with Priorities 1 and 2 eligible (e.g. frost flats, geothermal habitats, and very threatened forest types, wetlands and sand dunes).
B: Eligibility requirements	i. Establishment and implementation of a management plan for ongoing maintenance of works and promotion of biodiversity	Working with land management staff to develop a plan, including potential for grants where eligible. Recommended
ii. Suitable protection of land and/or works	Land management staff would arrange suitable protection of land and/or works through legal instruments (covenant or agreement) to provide a level of protection proportionate to the rates relief being offered. Recommended
C: Size of remission	i. Consideration of the relativity of rates relief sought, compared to rates relief available through legislation or other avenues (e.g. QEII covenants).	Rates staff would have regard for the fairness of any rates relief granted, referencing the way similarly protected and ecologically important land in the Bay of Plenty land was rated. Recommended
ii. Ecological importance of the land and the impact of the potential extent of rates remission in incentivising behaviour change by the landowner	Land management staff would advise on these matters, based on their knowledge of the applicant’s situation and the requirements and provisions in the management plan in B(i) above. Recommended
	iii. Remission recommendations would take into account the extent of protected land within a rating unit. This could range between Option 1 – remission applies to proportion of general rates on land value, to Option 2 – remission applies to proportion of all rates (refer analysis in section 3.1.4 below)	If a rating apportionment or SRA has been established, then it would be appropriate to remit all the rates on the protected area, subject to the relativity considerations in C(i) above. Council direction sought

Table 2

Topic

Options

Notes and recommendations

A: Scope

i. Both SNAs and PBSs eligible

Staff consider PBSs are a higher priority for receiving rates relief compared to SNAs because they have already been assessed as having biodiversity value which is understood and prioritised.

SNAs are typically identified by TLAs and may not have biodiversity value, even though they have been recognised as significant natural areas.

Council direction sought

ii. Only PBSs eligible

iii. Only PBSs with Priorities 1 and 2 eligible (e.g. frost flats, geothermal habitats, and very threatened forest types, wetlands and sand dunes).

B: Eligibility requirements

i. Establishment and implementation of a management plan for ongoing maintenance of works and promotion of biodiversity

Working with land management staff to develop a plan, including potential for grants where eligible.

Recommended

ii. Suitable protection of land and/or works

Land management staff would arrange suitable protection of land and/or works through legal instruments (covenant or agreement) to provide a level of protection proportionate to the rates relief being offered.

Recommended

C: Size of remission

i. Consideration of the relativity of rates relief sought, compared to rates relief available through legislation or other avenues (e.g. QEII covenants).

Rates staff would have regard for the fairness of any rates relief granted, referencing the way similarly protected and ecologically important land in the Bay of Plenty land was rated.

Recommended

ii. Ecological importance of the land and the impact of the potential extent of rates remission in incentivising behaviour change by the landowner

Land management staff would advise on these matters, based on their knowledge of the applicant’s situation and the requirements and provisions in the management plan in B(i) above.

Recommended

iii. Remission recommendations would take into account the extent of protected land within a rating unit. This could range between

Option 1 – remission applies to proportion of general rates on land value, to

Option 2 – remission applies to proportion of all rates (refer analysis in section 3.1.4 below)

If a rating apportionment or SRA has been established, then it would be appropriate to remit all the rates on the protected area, subject to the relativity considerations in C(i) above.

Council direction sought

Land management staff do not recommend setting a minimum size of PBS or SNA to qualify for consideration. Many threatened ecosystems have already been reduced to small areas so excluding them from consideration would not support the objective of the policy.

Remissions could be for a fixed term with periodic renewal, or permanent. The intent would be to ensure that maintenance activity (such as pest control) is ongoing. This should reflect on the duration of the protection required, refer C(ii) in Table 2.

3.1.4 Financial implications

Staff seek Council direction on the scope of eligibility, and extent of remission possible (subject to staff recommendation) considering the potential rates foregone listed in Table 3 below. The figures below assume that all eligible rating units receive the maximum remission indicated by each option and that all rating units meet the other criteria recommended in Table 2.

Actual take-up of remissions would be limited by staff capacity to support the requirements of criteria B(i) and B(ii) in Table 2 above, for any properties that do not already meet those criteria.

Table 3
Eligibility options	Area	Option 1 – remission is General Rates on LV ($)	Option 2 – remission is relative proportion of total rates ($)
SNA and PBS	351,048 ha	384,240	904,625
All PBS	49,514 ha	156,735	337,498
PBS Priority 1	3,190 ha	7,178	42,489
PBS Priority 2	14,736 ha	120,206	221,586
PBS Priority 3	31,588 ha	29,349	73,422
SNA	343,523 ha	336,384	785,542

3.1.5 Way forward for policy development

Based on Councillors’ feedback on Table 1, and any other matters, a draft policy for consultation will be developed for further feedback and eventual adoption in early 2024.

3.2 Catchment management, Rivers and drainage - incentives to retire land and adjustments for loss of productive land

3.2.1 Objectives

The workshop paper considered on 25 May 2023 dealt with five topics separately:

- Room for the River

- Access compromised where river changes its course

- Land between rivers and stop banks

- Retired land with low or no ecological value

- Council assets on private land.

Further work on the five opportunities has indicated that a broadly scoped policy could deal with the similar objectives or impacts in each. This approach would simplify the implementation for both staff and applicants enabling a response to applicants’ circumstances in a proportionate way.

The objectives of the remission would include:

· recognising the reduction in productive land as a result of natural river movement, for example where a river changes course and formerly productive land is in the riverbed or becomes “stranded” without access on the other side of the river.

· incentivising the retirement of productive land to provide significant environmental benefits and/or enable natural river management approaches, for example:

o landowners work with Council to implement natural river management approaches that require the retirement of productive land, which may include planting trees on productive land to create buffer areas for river edge erosion.

o landowners work with Council to retire land between rivers and stop banks, to improve water quality and enhance river biodiversity.

o landowners work with Council to retire land that is expected to be affected by sea level rise, including salt marsh areas and land likely to return to wetlands.

· Recognising instances where Council assets located on private land may reduce the productive potential of private land.

3.2.2 Strategic context

Room for the River is a global approach to river and flood management that is expected to become more widely used in future and involves working more with natural river processes and relying less on hard protection structures. This approach may mean that some landowners, who formerly expected Council’s infrastructure to protect their land, would accept more frequent river edge erosion and be willing to use natural methods to manage the effects of the river on their land.

This approach would be less costly than the alternative, taken by some other regional councils, to buy the land in question, retire it and have Council manage it.

An enabling policy, to allow for staff discretion within broad guidelines, could be useful to support the management of the Kaituna Catchment Control Scheme, Waioeka-Otara Rivers Scheme, Whakatāne-Tauranga Rivers Scheme, and Rangitāiki-Tarawera River Schemes, over the next few years.

As river courses change, surveyed titles are not updated; although valuers would take account of the change and adjust land values, areas of title are not changed. For rates that are value-based there is automatic adjustment, but for area-based rates, they will continue to be charged on the area listed in the title, unless rating adjustments are made. These can either be made through altering the area defined as rateable, or by providing an avenue to apply for remission.

Where the loss is material, continuing to charge area-based river scheme rates on inaccessible or riverbed land could undermine the relationships with landowners which will be crucial in implementing new river management approaches.

Providing incentives for retiring formerly productive land with low or no ecological value (for example between rivers and stop banks, or former salt-marsh or wetlands) would provide environmental benefits, but is considered a lower priority compared pursuing other opportunities presented in this paper. This is because the areas that could be eligible are large and the administrative and monitoring effort required would be high, particularly where there are no existing environmental programmes established.

3.2.3 Approach, scope, criteria and exclusions

Approach and scope

Eligible land would be identified by staff involved in management of land, rivers or flood control as meeting any of the objectives in section 3.2.1 above. They would work with rates staff to establish the extent of loss of productive land, whether rates incentives are needed to change current land use or behaviour, noting that other incentives may be available, whether from Council or other sources.

Staff to recommend remission (size of remission and period) to the Group Manager responsible for land or river management and the Rates Manager for decision under delegation.

Regular monitoring by staff as part of their normal land, river and asset management activities would determine whether the remissions should continue, once established.

Criteria

Applications must be either

· part of a plan or programme supported or initiated by Council (e.g. environmental plan, level of service change, asset construction) that results in a significant loss of income on formerly productive land

· in response to an event that has already occurred, e.g. change in river course, which has resulted in a loss of formerly productive land.

Applications must be supported by evidence gathered by staff working with applicants to document the rationale for a remission, noting any environmental benefits, the extent of loss or compromise of productive land, or the consequences of a natural event.

The rationale and remission recommendation should

· be consistent with the principles of the RRFP, in particular:

§ Council may assist property owners to use or develop their property in a way that provides wider benefits to the community or assists Council with its core activities.

§ Some land is made non-rateable by the Local Government (Rating) Act 2002. Council wishes to extend relief by way of remission to rateable land that has characteristics similar to non-rateable land.

· Have regard for horizontal equity (similar properties are treated similarly) and vertical equity (those that can afford to pay more should do so)

· Consider whether the decision would create a precedent that would be unsustainable in the foreseeable future.

Exclusions

· Where only part of a rating unit met the criteria for remission, remissions will be limited to a proportionate reduction in land value or area-based rates. Area-based rates for river and drainage schemes would only be remitted to address issues of equity relating to re-assessment of benefit under the new land use.

· Flat charges would not be remitted as it is appropriate that they continue to be paid on the remaining portion of the property.

· Where an entire rating unit was eligible, all types of rates could be considered for remission, subject to rationale and staff recommendation.

· To the extent that the productive potential of land is compromised by a natural event or a change of use, but income can still be derived from the land, remissions will not be considered.

3.2.4 Financial implications

It is not possible to predict the likely uptake of remissions under such a policy because it would depend on the:

· occurrence of natural events

· willingness of landowners to change their land use and capacity of staff to work with them to develop environmental plans and recommendations for remission.

· progress on implementation of the Room for Rivers approach.

· the area and value of land that is intended for change of use and the impact of that change on productive potential.

To mitigate the risk that remissions could become cumulatively unsustainable, staff could regularly report to Council on the financial impact of the new remissions granted and the cumulative total under these provisions. Alternatively, Council could set a limit for new remissions under this category, annually.

3.2.5 Way forward for policy development

Based on Councillors’ feedback on the approach, scope, criteria and exclusions in section 3.2.3 above, and any other matters raised, a draft policy for consultation would be prepared for consideration and adoption in early 2024.

3.3 Incentivising establishment of native forests and wetlands on land retired from production.

3.3.1 Objective

Rate remissions could incentivise landowners that choose to (or are required to) retire marginal pastoral land, to establish native forests, as opposed to exotic forestry, or wetlands (including saltmarsh). This would support Council’s climate change and water quality aspirations.

3.3.2 Strategic context

Large scale conversion of pasture to pine (primarily for carbon farming) can result in significant financial returns. This type of land use change has been observed across the country, although not so much in the Bay of Plenty to date, and has resulted in concerns from environmental, rural community and farming interests.

Conversion of pasture to native forest generally has a much weaker financial performance, and often relies on additional support (e.g., Council grants, emissions trading scheme (ETS) income, etc.) so it is not as common. As a land use, native forest has greater environmental benefits compared to marginal pasture and pine. Likewise, wetlands do not generally provide any financial return for landowners, even though they can provide significant environmental benefits. A remission policy could be designed to provide an additional incentive to landowners that choose to retire marginal pastoral land into native forests or wetlands.

Although central government is considering or reviewing incentives provided for these types of land use changes^{^[4]}, at this stage there is no certainty about the outcome of these considerations and reviews.

3.3.3 Approach, scope, criteria and exclusions

Approach and scope

Eligible land would be portions of, or entire, properties where landowners retire pastoral land use and convert to a native forest or wetland land use, either voluntarily, or in response to central or local government environmental regulation (e.g., any new land use rules resulting from the Essential Freshwater Policy Programme).

Criteria

To ensure that Council was incentivising land use change that would make a material difference to environmental enhancement, Council could set a minimum area to be converted.

Remissions could be subject to a land covenant or encumbrance. Administration to establish covenants or encumbrances would be required as well as regular confirmation that the affected properties remain in a native forest or wetland use and are receiving suitable ongoing maintenance e.g weed control. This could be done through aerial or satellite imagery but may occasionally require ground-truthing. If land use changed from native forest or wetland, the rates remission would cease.

For properties that become registered as permanent forests under the ETS, covenants or encumbrances may not be required, because once registered they will be monitored by the Ministry for Primary Industries (MPI) and would be required to make an ETS return every five years. If owners of registered permanent forests change their land use, they are required under ETS to repay the value of the ETS credits they have received.

Exclusions

Land which has already been converted from pasture to native forests or wetlands should not be eligible for remission under this category because it is designed to incentivise choices that have not yet been made. Some existing native forests and wetlands, when adequately protected through covenants, may be eligible for remission under other Council policies (refer section 3.1 above) or be non-rated under legislation (QEII covenants or Conservation land). Existing native forest blocks and wetlands may have received already received Council grants to become established.

3.3.4 Financial implications

The financial impact of this remission policy on Council would be entirely dependent on landowners’ willingness to retire marginal pasture into native forests and wetlands and the rate at which that conversion occurs. This would be influenced by economic conditions and regulatory settings, as well as personal aspirations of the landowner and, where relevant, Council’s staff capacity and budgets for supporting the conversion with advice and establishment of Environmental Plans.

Drivers toward conversion would include regulatory settings to achieve environmental outcomes, other incentives (eg ETS, financial assistance to establish native forests or wetland, biodiversity credits etc.) and the relative cost of managing the land compared to other land uses.

Inhibitors of conversion include the opportunity cost of financial return on other land uses, cost and availability of finance to establish native forests or wetlands, and personal desire to continue with existing or traditional land use.

Council’s current operating expenditure budget for grants to support water quality improvements through the Focus Catchments programme is around $2 million per year, with funding rates usually ranging from 25% to 80% of the cost of eligible works, including native planting, depending on the location and the type of conversion, and up to 100% for estuarine coastal wetlands.

Factoring in current costs per hectare for conversion to native forests, Table 2 shows the maximum number of hectares in any year that could potentially receive grant funding if a new grants policy and prioritisation approach was considered to apply Council funding. This would also act as an effective limit on the area eligible for remissions in any one year. There is already an established prioritisation approach to grant administration for water quality that would need to be varied significantly if this approach was pursued.

Remissions limited to General Rate on Land Value

At an average land value of $40,000 per hectare for marginal land, the general rates on land value (GRLV) remitted each year is estimated at $9 per hectare^{^[5]}. The annual incremental remission, given the constraint of the $2 million environmental grants budget and different levels of support, are shown in Table 4.

Table 4
	Grant = 25% of cost	Grant = 50% of cost	Grant =80% of cost
Cost per ha	1,037	2,074	3,539
Ha funded	1,929	964	565
Annual incremental remission GRLV	$15,429	$7,715	$4,521

Financial modelling undertaken by the Environmental Strategy Team team examines the financial viability of choosing native forests (mānuka) over pine. The inclusion of a rates remission limited to GRLV makes a marginal impact on the choice between pine or native forests.

A summary of the economic analysis for mānuka forest is in Attachment 1, which shows the net present value of an annuity per hectare (NPV) for a range of discount rates, densities of planting, and carbon prices. For example, at a planting density of 833 stems per ha, a carbon price of $85 per tonne CO2-e and a discount rate of 5%, the annuity over 51 years for Mānuka carbon forest is $145 per hectare, and the annuity would increase to $267 with planting (50%) subsidy and rate remission. By comparison, the annuity for pine carbon forests is $1,402 per hectare and the difference represents the shortfall in the financial incentive for native forests if it is base only on GRLV. This analysis does not take into account the opportunity cost of the alternative pastoral land use or other potential income opportunities (e.g., honey, timber, etc.).

Widening the scope of remissions

A more generous remission would have a greater impact and including area-based rates in the remission scope is a logical step. However, the financial impact for Council is difficult to estimate given the uncertainty of the location of land undergoing conversion which affects the rates per hectare that would be foregone.

For 2023/24, area-based rates range widely, as listed in Table 5.

Table 5
	Range per ha, targeted rate
	Lowest rate	Highest rate
Kaituna Catchment Control Scheme	$1.02	$340.29
Rangitaiki-Tarawera Rivers Control Scheme	$1.31	$6,703.66
Whakatane-Tauranga Rivers Control Scheme	$1.57	$706.56
Waioeka-Otara Rivers Control Scheme	$1.28	$1,918.49
Rangitāiki Drainage	$10.11	$168.51

For this reason, staff do not recommend that area-based rates are included in the scope of this remission.

3.3.5 Way forward for policy development

Staff believe that despite the small impact of a GRLV based remission on the gap between financial returns on Mānuka and Pine, and likely also small incentive for establishment of other native forests or wetlands, it would be helpful to establish a policy for such remission because financial impact is not the only driver such land use changes. This is partly because it is possible that the gap may close further if alternative income (e.g., honey production) and other incentives or policies being considered by central government (e.g., biodiversity credits, forestry rules under the ETS, etc.) become available. Having a remission policy adopted, alongside other existing incentives:

§ may be sufficient to convince some landowners to voluntarily retire part of their land into native forests or wetlands;

§ would enable staff to be more responsive to changing circumstances when any new central government incentives become available; and

§ would slightly reduce costs on landowners from any relevant land use rules resulting from the Essential Freshwater Policy Programme (EFPP)^{^[6]}.

Subject to Council direction at this workshop, provision could be made in the draft policy for adoption for public consultation in early 2024.

4. Next Steps

Staff will take Council direction from this workshop and draft appropriate policy and/or prepare additional information for subsequent workshops, accordingly.

Public consultation on a draft policy would take place in February/March 2024, alongside the Long Term Plan consultation.

Attachments

Attachment 1 - Financial analysis - Conversion of Dry Stock to Carbon Forest ⇩

[2] SNAs are not the only places important for biodiversity. There are also management requirements for areas of indigenous biodiversity outside of SNAs and where there is specified highly mobile fauna.

[3] https://consult.environment.govt.nz/biodiversity/nz-biodiversity-credit-system/

[4] This includes a review of ETS forestry provisions, a possible biodiversity credit system and recognition of on-farm carbon sequestration under an eventual agricultural emissions pricing scheme.

[5] Changes to Council’s Revenue and Financing Policy could increase the GRLV component of rates materially, but to date there has been no direction from Council in this regard.

[6] Decisions on any such rules would be considered by Councillors separately in due course. However, during the current EFPP public engagement process, primary industry organisations have suggested consideration of rates remissions alongside land use rules.