Proposal 1: How should Council fund the increased cost to deliver Three Water Services?
Background
The new Government has reversed legislation to transfer drinking water, wastewater, and stormwater assets and services to regionalised entities. This means we will continue to own and operate these assets and debt belonging to these assets (over $110 million) will not be repaid as expected.
We have a $4.7 million funding shortfall to fully cover the costs of our three waters services in 2024/25. This is because we applied $3.2 million of “Better Off” government funding in 2023/24 to cover three waters operating costs.
At the time of making this decision we didn’t “kick the can down the road”, so to speak, because we were advised that we would no longer be responsible for the three waters from 1 July 2024. We felt it was prudent to use this “Better Off” funding to benefit ratepayers in 2023/24.
In addition, we expect an increase in depreciation of $1.5 million for these assets as a direct result of our planned asset revaluation as at 30 June 2024.
We proposed two options for you to consider to fully fund three waters operating costs:
Option 1: Rates fund three waters shortfall of $4.7 million (our preferred option)
This is our preferred option.
While we were initially comfortable with borrowing to cover the $4.7 million shortfall in favour of a lower rates increase, this was only because we were expecting central government to repay our debt related to three waters assets.
Now this is no longer happening, we believe the most sensible option is to fund this shortfall through a 5% increase in rates for the first year of the Long-term Plan (LTP). This would bring the average rates increase for 2024/25 to 17% after growth.
This is a big jump, but it means we can fully meet the cost of delivering drinking water, wastewater, and stormwater services without having to borrow to do it.
Impact on rates and debt
Rates will increase by a further 5% in Year 1. This means that our total average rates increase will be 17% for 2024/25. Note that if we increase total rates revenue by $4.7 million to $107 million in 2024/25, this shortfall funding is included in the total rates revenue for Years 2 to 10. There is no impact on debt for this option.
Option 2: Debt fund three waters shortfall of $4.7 million
The alternative is to debt fund the $4.7 million shortfall. If we did that, the average rates increase for 2024/25 would drop to 12% after growth, but this would add to our debt every year and increase interest costs in subsequent years.
We do not currently recover our total asset depreciation* charge through rates. We currently have a depreciation funding gap of $3.5 million per annum.
For every $1 of depreciation* we do not recover from rates we need to fund from borrowing. More than $50 million of our net debt relates to not fully funding depreciation.
*We spread the cost of our assets across their useful service lives. This is called depreciation.
Impact on rates and debt
Debt will increase by $4.7 million each year to fund this annual funding shortfall to deliver our three waters services. Across the 10 years, total debt will increase by $47 million. Rates will be impacted by the increase in our interest costs in subsequent years.
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