Council considers response to increased depreciation costs
Council today (Wednesday 14 December) considered how to handle the increase in depreciation related to both its roading and three waters assets, arising from recent asset revaluations.
The roading revaluation for 30 June 2022 showed an increase in the depreciable replacement cost of assets by 14% to $589.16M and annual depreciation by 19% to $7.29M since the previous revaluation on 1 July 2020.
The three waters revaluation for the same period also showed a large increase in asset values with an increase in gross replacement cost of 40.1% or $102M, and annual depreciation of $1.64M, increase of 44.5%.
Depreciation expense is an operating expense that reflects the use of an asset over its useful life. Depreciation in most cases is fully rate funded with the rate funded depreciation being used to fund renewal capital works and for the repayment of loans used to fund capital works.
The increase in revaluations were largely driven by inflation, the rising cost of construction and replacing assets, and the addition of vested assets and new assets constructed since the last valuations in 2020.
The increase in rates required to fund the depreciation shortfall resulting from this issue was estimated to equate to a 4.07% rates increase in roading and a 7.31% rates increase in three waters.
Council resolved to adjust the depreciation expense in the 2023/24 year to ensure rate-funded depreciation only covers the roading capital works programme and three waters renewal programme in the Draft 2023-24 Annual Plan. This is consistent with Council’s financial strategy as set out in its Long-term Plan and ensures depreciation expenses align with an achievable work programme, so Council is recuperating what it needs and maintaining a balanced budget.
Deputy Mayor Neil Gillespie said the key thing for him in making the decision was “consistency”.
“Every time there’s an asset revaluation, we see an impact on depreciation and we seem to be regularly having this conversation. We are adopting a consistent approach that we have adopted in the past,” Councillor Gillespie said.
“It is an approach that has served us well and we do it so that our ratepayer’s don’t get hit. With the considerable financial pressures currently being faced by our community, it is important we don’t increase that by rating for revenue that we cannot reasonably expect to then spend on the renewal of three waters and roading infrastructure.”
As part of the decision-making the Council directed that funding of depreciation in the long-term would be addressed as part of renewing its infrastructure and financial strategies as part of the Long-term Plan 2024-34 process, allowing it to both talk to its community and take the time to look at a phased approach.
