Section 3: Council Activities

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Management of Investments and Funding

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Responsibility

Steve Taylor (General Manager Support Services)

Description of service

This activity covers the management of all council-owned investments, sources of income not assignable to other activities and the management of the Council's borrowing requirements.

Scale of service

This describes the size and scope of the Council-controlled Organisations. These are:

• Airport Joint Venture (50 per cent interest).
• Production forestry on Council-owned land (247ha) and in joint venture with land owned by others (138ha).
• Taranaki Investment Management Limited - management of the Council's Perpetual Investment Fund (PIF).
• Tasman Farms Limited (part of the Perpetual Investment Fund but also a Council-controlled Organisation by virtue of its 88 per cent shareholding by the Council) plus Tasman's subsidiary (98.14 per cent shareholding) Van Diemen's Land Company.
• Administer 780 ground leases.
• Administer commercial leases in the Civic Centre building.

Rationale for activity

This activity has an internal financial focus on investments and borrowings but due to its significance is included as a significant activity in its own right. Management of Investments and Funding contributes to the economic well-being.

The rationales for the investments/borrowing are covered in the Investment Policy and Liability Management Policy (see summaries of both these documents in Volume 2 of the Community Plan 2009-2019).

These items are key funding sources for present and future funding needs and this activity aims to provide a long term and financially sustainable contribution to those funding needs.

Contribution to Community Outcomes

Management of Investments and Funding primarily contributes to the Prosperous Community Outcome by financially supporting other significant activities. The level of income from investments is a significant portion of the Council's overall sources of income, and hence its provision of services to the community.

Prosperous

A district that boasts a sustainable, resilient and innovative economy that prospers within the natural and social environment.

P6 People are confident and are happy to invest in the future.

Negative impacts on community well-being

This activity has no particular negative impacts.

Facing the challenges - assumptions and risks

Assumptions

The key assumptions underpinning this activity are:

• Average return on the Council's Perpetual Investment Fund is 9.5 per cent per year over the forecast period.
• Little or no return from the forestry joint ventures or airport joint venture.
• Weighted average cost of borrowings is 6.3 to 6.5 per cent over the forecast period.
• The Council will continue production forestry on its own land (including replanting following harvest) in the absence of any demand for alternate uses of the lands.
• The Council will continue to meet its contractual joint venture forestry obligations through to harvest and subsequent termination of each of the respective joint ventures.
• The Council will retain the existing operational property portfolio and associated rental income.

These assumptions are outlined in greater detail in the financial assumptions outlined within this document.

Risks

• Changing market conditions can have an impact on the returns realised by the Council's investments and consequently its ability to financially support the Council's other significant activities.
• Volatile markets can also have an impact on the Council's ability to minimise its cost of borrowing.
• Loss of forestry investment through tree disease, forest fire or other adverse incidents.
• Loss of rental income on a short-term basis if tenants vacate the Civic Centre.

• While there is still some uncertainty regarding the Emissions Trading Scheme and its impact on the Council's investments, particularly its production forestry ventures, the Council has assessed the financial risk as being low and largely able to be mitigated. The only real impact would be that arising from the non-replanting of land required for development of a new cemetery site and this has been factored into the project cost. The joint venture forestry is being retained until harvest in about 10 years time.

Managing risks

Management of the Perpetual Investment Fund is contracted to Taranaki Investment Management Limited (TIML). TIML operates within general risk management parameters outlined in the Investment Policy and more specifically in terms of its operating policy. The fund is a diversified portfolio of income and growth investments and given the fund's perpetual focus a long-term view is able to be taken on the mitigation of risks associated with such investments, while the level of annual release is governed by a release rule2 that aims to provide a higher degree of sustainability and certainty to the Council's general revenue streams in the longer term.

Should the above measures be insufficient to prevent a decline in release, a range of other measures are available depending on the severity and sustainability of any reduction (short-term borrowing, deferral/reduction in more discretionary expenditures, increase other funding sources if sustainable, liquidation of the fund if extremely severe).

Mitigation of risks associated with the management of the Council's debt is carried out internally (with external benchmarking and advice) in accordance with the liability management policy. This sets prudential limits within which the Council manages both the level and cost of debt. The Council is currently well within these limits and currently maintains a Standard and Poor's credit rating of AA+ as the key external benchmark reflecting its very strong financial position relative to its debt obligations.

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2 The release rule for the PIF is a formula that determines the annual release to be made from the PIF ahead of the year it will apply to. It has two components:

• Eighty per cent of the previous year's release, inflation adjusted for the year prior to that to be budgeted for; plus
• Twenty per cent of a 5.6 per cent portion of the year-end audited capital value of the PIF, inflation adjusted for the year prior to that to be budgeted for.

The 5.6 per cent is a long-term release target that strikes a balance between the sustainability of the annual release and the real capital value of the PIF.

The release rule smoothes the potential annual fluctuations that would otherwise occur if a straight percentage of annual value was used. As such it provides greater certainty for the Council on annual release levels for budgeting purposes.

The Council contracts the management of all its forests (including JV's) to a professional forestry manager. The services of a registered forestry consultant are employed to provide independent advice about forest health, production and management strategies. The consultant maintains an annual forestry plan.

With the advent of an Emissions Trading Scheme the Council obtained independent expert advice which concluded there was minimal real financial impact associated with the Council's forestry estate given the ongoing rotational harvest. The impact for joint venture forestry will be re-assessed nearer its harvest period.

Levels of service and performance measures

The following levels of service and performance measures outline the objectives we will set and how we will measure our progress.

Service objective	Related Community Outcome(s)	Performance measures	Performance targets
			2010/11	2011/12
Manage the Perpetual Investment Fund to provide for sustainable revenue flows to the Council.	Prosperous 6	A release to the Council (after costs) from the Perpetual Investment Fund in accordance with the release rule*.	$20.5m	$19.5m
Manage the Council's borrowing programme in compliance with the liability management policy.	Prosperous 6	Debt levels and costs within limits set by policy. Gross debt not to exceed 20 per cent of total assets. Net debt not to exceed 150 per cent of total revenues including rates. Pretax funds from operations to exceed net interest expense by at least 2.5 times.	All measures met	All measures met

* See previous page for explanation of release rule.

FINANCIAL PLAN	LTCCP 2011/12 ($000)	Budget 2011/12 ($000)
OPERATIONS
Activity expenditure
Investment management	2,717	1,129
Afforestation	379	377
Afforestation joint ventures	28	33
Operational property	898	895
Total activity expenditure	4,022	2,434
Activity revenue
Investment management	(24,383)	(22,752)
Afforestation	(437)	(440)
Operational property	(1,478)	(1,592)
Total activity revenue	(26,298)	(24,784)
Net cost of operations	(22,276)	(22,350)
Appropriations and reserves
Depreciation unfunded/deferred	0	(27)
Transfer to reserves	774	1,712
Transfer from reserves	0	(87)
Total appropriations and reserves	774	1,598
RATES REQUIREMENT FOR OPERATIONS	(21,502)	(20,752)
CAPITAL EXPENDITURE
Total loan repayments	1,796	1,529
Total capital expenditure	1,796	1,529
Capital funding
Corporate loan	(6,182)	(3,777)
Other	0	(2,330)
Total capital funding	(6,182)	(6,107)
Net cost of capital activities	(4,386)	(4,578)
Appropriations and reserves
Transfer to reserves	293	293
Total appropriations and reserves	293	293
FUNDING REQUIREMENT FOR CAPITAL	(4,093)	(4,285)
RATES AND FUNDING REQUIREMENT
Rates requirement for operations	(21,502)	(20,752)
Funding requirement for capital	(4,093)	(4,285)
TOTAL RATES AND FUNDING REQUIREMENT	(25,595)	(25,037)