Key issue 2: Budget pressures

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Uncertainty created by both the COVID-19 pandemic and unfavourable economic trends are placing pressure on our budget. The ongoing impacts are hard to predict. The key to managing this will be having the flexibility to respond using a range of financial levers.

1. COVID-19 – the sting in the tail

Graphic of a carona virus.

COVID-19 is having a larger and more persistent impact on our revenue than previously projected. This includes:

  • A slower recovery of ports revenue and dividends from Auckland International Airport Limited.
  • An ongoing reduction in public transport usage due to more people working from home and some people being hesitant to return to using public transport.
  • Less revenue from facilities and events due to border restrictions and a reluctance to gather.

2. The economy is looking different

Graphic of a dollar symbol and and arrow pointing up.

Projections for key economic indicators are looking sharply different to when the 10-year budget was agreed.

A rebounding domestic economy and global supply chain constraints are leading to higher inflation, higher interest rates and increasing costs for both supplies and staff.

3. Government policy is changing rapidly

Graphic of the Beehive, one of New Zealand's parliament buildings.

There continues to be uncertainty around further COVID-related restrictions and behaviours and also around other government policy changes such as water reform.

4. Growth and demand

Graphic of a plus symbol.

Despite short-term disruptions, the longer-term pressures of an increasingly diverse and rapidly growing city have not gone away.

There continues to be pressure on us to invest more in key priority areas such as transport, housing, environmental protection and supporting our communities.

Overall pressures

Overall, it is estimated these budget pressures would give rise to a $85 million operational funding gap for 2022/2023 that needs to be resolved to comply with the prudent financial policy parameters set out in our 10-year budget.

The ongoing nature of many of these pressures mean that an estimated $65 million per annum gap will also need to be resolved in each subsequent financial year.

The current high levels of uncertainty mean that there is a risk that these numbers could be materially higher by the time this annual budget is finalised later this year.

Proposed budget levers

We have several levers and options to manage budget pressures.

Each of these levers have different limitations and impacts on community outcomes, affordability, and/or long-term financial sustainability.

The options can be used in combination with each other.

Operational spending

Graphic of a key and a dollar symbol.

Since amalgamation we have achieved $2 billion of savings. In the 10-year budget, a $90 million annual cost reduction target was locked in from 2021/2022 onwards.

We are proposing to implement a further $15 million of permanent cost reductions in the form of efficiency saving and reductions to low-priority services across the group in 2023/2024, growing to $30 million per annum from 2024/2025 onward.

These targets may need to be reviewed if more budget pressures eventuate.

For more information on our proposed criteria for deciding which services will be affected, see Service prioritisation.

Borrowing

Graphic of a money bag and a hand reaching out for it.

We need to maintain a strong commitment to long-term financial prudence.

A weakening of this commitment could lead to a credit rating downgrade which would increase interest costs and make it more difficult for us to access capital funding when needed to help deliver on key strategic objectives.

The key policy settings that ensure financial prudence are set out in our 10-year budget and include our debt-to-revenue limit and our balanced budget approach.

These policies set annual targets and state that the council does not generally use borrowing to pay for the proportion of operating expense (including depreciation) that we will fund from current operating revenue.

While we propose to make some additional use of borrowings in 2022/2023 within our policy parameters, there is no proposal to change or depart from our key financial prudence policy settings.

Capital investment

Graphic of a dollar symbol and a builder's hard hat.

We can reduce operating costs such as interest, running costs, maintenance and depreciation by deferring some capital projects. Project deferrals may be needed simply to offset the impact of rising construction costs.

The 10-year budget included a $31.8 billion capital investment programme which was prioritised on the basis of risk. In deciding on any project deferrals, we will continue to prioritise critical and high-risk projects.

Delaying investment could mean delays to achieving the intended service levels benefits and it might cost us more to deliver that investment in the future.

Asset recycling

Graphic of a house within a circle of arrows.

Asset recycling is the sale or long-term lease of underutilised assets to enable more investment into other assets that provide greater benefits for Auckland.

Targets of up to $70 million per annum were set in the 10-year budget for the recycling of non-strategic assets.

This existing target may need to be increased if further budget pressures eventuate.

We are not currently proposing to sell or alter our ownership of any strategic assets such as our investments in Ports of Auckland Limited or Auckland International Airport Limited.

Revenue

Graphic of a dollar symbol.

We are expecting to receive around $127 million of “better off” funding from 1 July 2022 as part of central government’s Three Waters Reform Programme.

This funding is intended to support a wide range of objectives and local wellbeing outcomes and can be used to meet either operating and/or capital expenditure requirements.

There are no plans to increase general rates beyond the 3.5 per cent proposed overall average increase for 2022/2023 signalled in the 10-year budget.

Most other fees and charges will be adjusted in line with inflation, aside from water and wastewater tariffs which Watercare’s board of directors have resolved to increase by 7 per cent on 1 July 2022.

You should know

This information on budget pressures is an edited version of the Annual Budget 2022/2023 pages.

See pages 20-21 and 24 of the Annual Budget 2022/2023 document (PDF 10MB) for more information information.

Uncertainty created by both the COVID-19 pandemic and unfavourable economic trends are placing pressure on our budget. The ongoing impacts are hard to predict. The key to managing this will be having the flexibility to respond using a range of financial levers.

1. COVID-19 – the sting in the tail

Graphic of a carona virus.

COVID-19 is having a larger and more persistent impact on our revenue than previously projected. This includes:

  • A slower recovery of ports revenue and dividends from Auckland International Airport Limited.
  • An ongoing reduction in public transport usage due to more people working from home and some people being hesitant to return to using public transport.
  • Less revenue from facilities and events due to border restrictions and a reluctance to gather.

2. The economy is looking different

Graphic of a dollar symbol and and arrow pointing up.

Projections for key economic indicators are looking sharply different to when the 10-year budget was agreed.

A rebounding domestic economy and global supply chain constraints are leading to higher inflation, higher interest rates and increasing costs for both supplies and staff.

3. Government policy is changing rapidly

Graphic of the Beehive, one of New Zealand's parliament buildings.

There continues to be uncertainty around further COVID-related restrictions and behaviours and also around other government policy changes such as water reform.

4. Growth and demand

Graphic of a plus symbol.

Despite short-term disruptions, the longer-term pressures of an increasingly diverse and rapidly growing city have not gone away.

There continues to be pressure on us to invest more in key priority areas such as transport, housing, environmental protection and supporting our communities.

Overall pressures

Overall, it is estimated these budget pressures would give rise to a $85 million operational funding gap for 2022/2023 that needs to be resolved to comply with the prudent financial policy parameters set out in our 10-year budget.

The ongoing nature of many of these pressures mean that an estimated $65 million per annum gap will also need to be resolved in each subsequent financial year.

The current high levels of uncertainty mean that there is a risk that these numbers could be materially higher by the time this annual budget is finalised later this year.

Proposed budget levers

We have several levers and options to manage budget pressures.

Each of these levers have different limitations and impacts on community outcomes, affordability, and/or long-term financial sustainability.

The options can be used in combination with each other.

Operational spending

Graphic of a key and a dollar symbol.

Since amalgamation we have achieved $2 billion of savings. In the 10-year budget, a $90 million annual cost reduction target was locked in from 2021/2022 onwards.

We are proposing to implement a further $15 million of permanent cost reductions in the form of efficiency saving and reductions to low-priority services across the group in 2023/2024, growing to $30 million per annum from 2024/2025 onward.

These targets may need to be reviewed if more budget pressures eventuate.

For more information on our proposed criteria for deciding which services will be affected, see Service prioritisation.

Borrowing

Graphic of a money bag and a hand reaching out for it.

We need to maintain a strong commitment to long-term financial prudence.

A weakening of this commitment could lead to a credit rating downgrade which would increase interest costs and make it more difficult for us to access capital funding when needed to help deliver on key strategic objectives.

The key policy settings that ensure financial prudence are set out in our 10-year budget and include our debt-to-revenue limit and our balanced budget approach.

These policies set annual targets and state that the council does not generally use borrowing to pay for the proportion of operating expense (including depreciation) that we will fund from current operating revenue.

While we propose to make some additional use of borrowings in 2022/2023 within our policy parameters, there is no proposal to change or depart from our key financial prudence policy settings.

Capital investment

Graphic of a dollar symbol and a builder's hard hat.

We can reduce operating costs such as interest, running costs, maintenance and depreciation by deferring some capital projects. Project deferrals may be needed simply to offset the impact of rising construction costs.

The 10-year budget included a $31.8 billion capital investment programme which was prioritised on the basis of risk. In deciding on any project deferrals, we will continue to prioritise critical and high-risk projects.

Delaying investment could mean delays to achieving the intended service levels benefits and it might cost us more to deliver that investment in the future.

Asset recycling

Graphic of a house within a circle of arrows.

Asset recycling is the sale or long-term lease of underutilised assets to enable more investment into other assets that provide greater benefits for Auckland.

Targets of up to $70 million per annum were set in the 10-year budget for the recycling of non-strategic assets.

This existing target may need to be increased if further budget pressures eventuate.

We are not currently proposing to sell or alter our ownership of any strategic assets such as our investments in Ports of Auckland Limited or Auckland International Airport Limited.

Revenue

Graphic of a dollar symbol.

We are expecting to receive around $127 million of “better off” funding from 1 July 2022 as part of central government’s Three Waters Reform Programme.

This funding is intended to support a wide range of objectives and local wellbeing outcomes and can be used to meet either operating and/or capital expenditure requirements.

There are no plans to increase general rates beyond the 3.5 per cent proposed overall average increase for 2022/2023 signalled in the 10-year budget.

Most other fees and charges will be adjusted in line with inflation, aside from water and wastewater tariffs which Watercare’s board of directors have resolved to increase by 7 per cent on 1 July 2022.

You should know

This information on budget pressures is an edited version of the Annual Budget 2022/2023 pages.

See pages 20-21 and 24 of the Annual Budget 2022/2023 document (PDF 10MB) for more information information.

Page last updated: 28 Mar 2022, 06:35 PM