Significant forecasting assumptions | Matapae ōhaka nui

Assumption

From March 2020, a COVID-19 lockdown impacted the DCC, the local economy and the community.

Dunedin will face challenges if a significant or protracted COVID-19 community outbreak occurs within the city or region. Migration, visitor numbers and the economy have been, and will continue to be, impacted as a result of the pandemic.

COVID-19 vaccines are starting to be rolled out in New Zealand to border workers and is a plan in place for vaccinating the broader community. This will reduce the chance of future outbreaks and starts to signal the potential end point of this phase of the COVID-19 pandemic.

Level of uncertainty      

Medium/ high

Reason for uncertainty

A number of factors contribute to the uncertainty, including the extent of community transmission over time, new COVID variants, and the extent of on-going border restrictions

Effects of the uncertainty

The potential impacts of the uncertainty arising from COVID-19 are described below.

Assumption

Impacts of COVID-19 on DCC revenue

In the 2020/21 Annual Plan, the DCC anticipated a reduction in operating revenue of $6.5 million. The DCC may experience further revenue challenges as a result of a significant or protracted outbreak of COVID-19.

There is also a risk of reduced revenue from the Waipori Fund and DCC companies as a result of national and global economic changes arising from COVID-19.

It is assumed that revenue will slowly recover as visitor numbers return to pre-COVID levels.

Level of uncertainty

Medium

Reason for uncertainty

A number of factors contribute to the uncertainty, including the extent of community transmission over time, new COVID variants, the timing of a vaccine rollout and the extent of on-going border restrictions.

Effects of the uncertainty

Potential impacts of a significant or protracted outbreak on DCC’s revenue are:

• loss in revenue due to reduced activity
• financial impacts on the DCC, Waipori Fund and DCC companies as a result of changing market conditions

Assumption

Impacts of COVID-19 on DCC services and capital delivery

In 2019/20, there was a delay in delivery of some services and capital programmes due to COVID-19 alert levels.

DCC services and delivery would be impacted by escalating COVID-19 alert levels and continuing impacts on supply chains.

Level of uncertainty

Medium

Reason for uncertainty

A number of factors contribute to the uncertainty, including the extent of community transmission over time, new COVID variants, the timing of a vaccine rollout and the extent of on-going border restrictions.

Effects of the uncertainty

Potential impacts of a significant or protracted outbreak are:

• delay in critical DCC work, including the delivery of infrastructure projects, and impacts from disruptions in the supply chain
• increased pressure and risk to the DCC’s digital infrastructure
• increased costs to respond to changes in central government, Council and community needs, priorities and obligations.

Assumption

Impacts of COVID-19 on DCC staff

During 2020, DCC staff faced increased pressure to deliver functions under stringent business continuity protocols. This included working from home, managing changes, delays or the closure of business activities, ensuring health and safety and wellbeing of staff and contractors, redeployment and adopting civil defence roles in a changing environment.

A significant or protracted outbreak will impact DCC staff and recruitment.

Level of uncertainty

Medium

Reason for uncertainty

A number of factors contribute to the uncertainty, including the extent of community transmission over time, new COVID variants, the timing of a vaccine rollout and the extent of on-going border restrictions.

Effects of the uncertainty

Potential uncertainty in planning for and responding to a changing environment and working conditions for DCC staff.

Potential for recruitment challenges due to on-going border restrictions

Assumption

Impacts of COVID-19 on DCC population, dwelling and rating projections

The DCC’s growth scenarios were reviewed in June 2020 by external consultants Infometrics to assess the potential impact of the pandemic on the growth assumptions. Infometrics suggested minimal impact on population, dwelling and rating unit projections post-COVID-19 outbreak, in part due to the longer term planning horizons for these projections. Infometrics projected the increase in returning New Zealanders would offset a decline in international migration

Level of uncertainty      

High

Reason for uncertainty

A number of factors contribute to the uncertainty, including the extent of community transmission over time, new COVID variants, the timing of a vaccine rollout and the extent of on-going border restrictions.

Effects of the uncertainty

Impacts of higher or lower growth than projected are an increase or decrease in demand for services and infrastructure creating potential for under or overspend of the 10 year plan budget.

Assumption

Impacts of COVID-19 on projected visitor numbers on a peak day

In June 2020, Infometrics prepared post- COVID-19 visitor projections.

Infometrics predicts international visitors to Dunedin are not expected to return to pre- COVID-19 (2019) levels until 2031, although total visitors will recover earlier due to growth in domestic visitors.

Source: DCC Post COVID-19 growth projections update

Level of uncertainty      

High

Reason for uncertainty

There is increased uncertainty over projected visitor numbers post COVID-19.

Uncertainty over the timing of the border reopening will influence visitor numbers.

Effects of the uncertainty

The potential impact of lower or higher than anticipated visitor growth are impacts on the timing/demand for infrastructure and on the composition of the Dunedin economy.

Assumption

Impacts of COVID-19 on the Dunedin economy

Economic activity in Dunedin city remained resilient in 2020 post-lockdown, despite the stringent public health restrictions put in place nationally.

Although there is uncertainty regarding the pathway to recovery from COVID-19 and its impacts, the Dunedin economy is expected to hold up and recover relatively well due to public sector funded projects.

In particular, the new Dunedin Hospital rebuild as well as Council and University led projects are likely to boost Dunedin’s wider economic activity.

As the rebuild and other major projects get underway, increased demand within the construction, engineering, manufacturing, ICT and technology sectors is anticipated. This will likely further stimulate job opportunities in these sectors.

Level of uncertainty      

High

Reason for uncertainty

The medium to longer term impacts of COVID-19 on the Dunedin economy are unknown.

Effects of the uncertainty

Potential impacts of slower than anticipated economic growth are:

• Increased unemployment
• Financial pressure on DCC and communities
• Longer term changes in the composition of the Dunedin economy
• Greater need for support for Dunedin businesses and workers

Assumption

Impacts of COVID-19 on the Dunedin economy cont'd

Over the next 15 years Coastal Otago is expected to have $3.3b of construction projects (valued at $20m or over) almost all of which will be located in Dunedin. Current forecasts suggest this work is 90% public sector driven, with the new Dunedin Hospital expecting to make up 42% of spend and the remainder coming from investment in infrastructure and education.

Level of uncertainty

High

Reason for uncertainty

The medium to longer term impacts of COVID-19 on the Dunedin economy are unknown

Effects of the uncertainty

Young people, Māori, Pasifika, and women are more likely to be disproportionately impacted by job losses in a recession when compared to other groups, based on historical trends. The extent of this impact and on longer term outcomes is yet to be determined

Assumption

Impacts of COVID-19 on the community

The Dunedin community will be impacted by a significant or protracted outbreak of COVID-19.

Māori, Pasifika, and other groups may be disproportionately impacted by COVID-19.

Level of uncertainty      

Medium

Reason for uncertainty

Impact of the pandemic on groups within the community is unknown

Effects of the uncertainty

The potential impacts on the community of a significant outbreak include pressure on community wellbeing, including increased demands on support services and agencies.

Greater monitoring of the socio-economic impacts of the pandemic is needed.

Assumption

Projected usually resident population growth

Dunedin’s population will grow at a higher rate until 2038 reaching 142,318. From 2038 onwards the population rate will then return to a medium growth scenario

Source:DCC Post COVID-19 growth projections update

Level of uncertainty

Medium/ High

Reason for uncertainty

That resident population growth is higher or lower than projected.

There is increased uncertainty post- COVID-19

Effects of the uncertainty

Potential impacts of higher or lower than anticipated population growth are:

• increased or decreased demand on regulatory services
• increased or decreased demand for services
• higher or lower demand for housing and infrastructure
• higher or lower city emissions
• a larger or smaller than anticipated rating base to fund services.

Assumption

Ageing population

Dunedin’s population is ageing, with 21% of the population projected to be 65 years or over by 2028 (compared to 16% in 2018). By 2038 the 65 years and over demographic will be Dunedin’s second largest age group (after the 25 years and under age group).

Source: DCC Post COVID-19 growth projections update

Level of uncertainty

Low

Reason for uncertainty

Demographic changes are influenced by many external variables and may happen faster than projected, changing demand for DCC services

Effects of the uncertainty

Potential impacts of the population ageing at a faster rate than anticipated are:

• increased demand for services and infrastructure for older people
• higher demand for housing suitable for an older population
• a higher than anticipated proportion of ratepayers on a fixed income

Assumption

National Policy Statement for Urban Development

Under the National Policy Statement for Urban Development (NPS-UD), Dunedin is categorised as a tier 2 urban environment.

It is assumed the DCC will meet its requirements to provide sufficient development capacity under the NPS-UD.

Level of uncertainty      

Low

Reason for uncertainty

That dwelling growth is higher than anticipated resulting in more demand than anticipated.

That infrastructure delivery/ funding constraints result in a delay in provision of serviced land.

Effects of the uncertainty

Potential effects of Dunedin not meeting its NPS-UD requirements are constrained growth (population and economic) resulting in greater housing affordability issues, widening wealth inequality due to high house prices and potential risk of legal challenge (such as appeals on planning decisions e.g. plan changes).

Assumption

Projected dwelling growth

Dunedin’s dwelling numbers will grow until 2038 reaching a total of 60,511 dwellings. Dwelling growth will then slow.

Source:DCC Post COVID-19 growth projections update

Level of uncertainty

Medium/ High

Reason for uncertainty

That dwelling growth is higher or lower than projected.

There is increased uncertainty post- COVID-19.

Effects of the uncertainty

Potential effects of higher or lower than anticipated dwelling growth are increased or decreased demand on regulatory services to process resource and building consents, increased or decreased demand for services and higher or lower demand for new infrastructure.

Slower than anticipated growth may result in a delay in recovering growth infrastructure costs through development contributions.

Assumption

Carbon Zero 2030 target

The DCC has declared a climate emergency and adopted a ‘Zero Carbon 2030’ target for Dunedin’s emissions, in two parts:

• net zero emissions of all greenhouse gases other than biogenic methane by 2030, and
• 24 to 47 percent reduction below 2017 biogenic methane emissions by 2050, including 10 per cent reduction below 2017 biogenic methane emissions by 2030.

The DCC also has a commitment to reduce emissions from its own operations, with targets currently under review.

It is assumed the DCC will meet its organisational and city-wide carbon emission targets

Level of uncertainty

High

Reason for uncertainty

The steps and funding needed to achieve the internal and city-wide emissions targets have not been fully scoped.

The DCC faces higher than anticipated financial costs to reduce emissions.

The DCC has difficulty aligning business practices and activity with emissions reduction targets and plans.

Potential lack of community support for emissions reduction plans and projects.

Effects of the uncertainty

The potential impacts of Dunedin not meeting its emissions reduction targets are:

• misalignment with national emissions reduction targets and policy direction
• misalignment with community expectations, leading to negative effects on political and organisational reputation
• potential increase in financial costs due to the need to offset emissions to meet targets or legislative requirements.

Assumption

Climate change projections

The DCC projections are based on two RCPS (global climate models), RCP4.5 and RCP8.5 (outlined below) and are calculated on a 1986 – 2005 baseline year. RCPs are scenarios that describe the alternative pathways of greenhouse gas emissions and are based on different assumptions about population, economic growth, energy consumption and land use over this century.

RCP 4.5: Global emissions peak around mid- century at around 50% higher than 2000 levels and then decline rapidly over 30 years. Population and economic growth are moderate.

RCP 8.5: Global emissions continue to increase rapidly through the early and mid-parts of the century stabilising at 2100 at just over 4 times 2000 levels. Population reaches 12 billion by centuries end. Economic growth is high but assumes much lower incomes and per capita growth in developing countries.

Level of uncertainty

Medium/ High

Reason for uncertainty

Climate change may occur at a faster or slower rate than anticipated.

Effects of the uncertainty

The potential impacts of greater than projected climate change, particularly sea level rise and extreme rain events are:

• a rapid change in the environment and ecosystems
• a requirement for the DCC to accelerate its adaptation plans to reduce the harm on communities
• an increased cost of adaptation in the short to medium term
• less time for engagement, and planning with the community
• potential for widening wealth inequality and a reduction in social cohesion in affected communities.

Assumption

Resilience to emergencies

Dunedin is at risk of natural disasters, the key risks for the city are:

• flooding due to heavy rain event
• tsunami due to offshore earthquake
• earthquakes and land instability due to fault line shifts
• fires due to hot days.

It is assumed the DCC and community will be impacted by civil defence emergencies.

Level of uncertainty

High

Reason for uncertainty

The number and scale of civil defence emergencies is unknown

Effects of the uncertainty

If a significant disaster occurs that exceeds the DCC’s ability to respond, this will result in:

• risks to infrastructure, property and essential services
• risks to DCC supply chains
• increased pressure on DCC staff to respond while continuing to provide DCC services
• financial impact
• changes to Council priorities in response to emergencies

Assumption

Where resource consents are required for DCC projects, it is assumed the conditions of those resource consents will not significantly alter the operating or capital expenditure required to undertake the programmes or projects

Level of uncertainty

Low

Reason for uncertainty

That unexpected resource consent conditions are imposed on DCC projects.

Effects of the uncertainty

Unexpected resource consent conditions could result in unbudgeted capital and/or operating expenditure to progress impacted projects

Assumption

While there are some levels of service changes in this 10 year plan e.g. kerbside and Mosgiel Pool, it is assumed existing levels of service will be maintained unless otherwise stated for the duration of the 10 year plan.

Level of uncertainty

Low

Reason for uncertainty

That unexpected changes to levels of service occur

Effects of the uncertainty

Unplanned improvements to service levels require unbudgeted capital and/or operating expenditure.

Assumption

Proposed 3 Waters reform

The detail of the 3 Waters reform is still being developed.

In line with central government guidance, for the purposes of this 10 year plan it is assumed that the DCC will deliver 3 Waters services over the life of the 10 year plan.

Any flow on impacts of the 3 Waters reform on the DCC will be assessed as part of the analysis of the proposal from central government.

Level of uncertainty

High

Reason for uncertainty

The scope and timing of 3 Waters reform is unknown.

Effects of the uncertainty

The 10 year plan financial assumptions and infrastructure strategy plans specific to 3 Waters do not account for potential changes resulting from future 3 Waters reforms.

Assumption

Proposed RMA changes

Significant changes to the Resource Management Act (RMA) have been signalled by central government. A comprehensive review (New Directions for Resource Management in New Zealand) has proposed replacing the RMA with three separate pieces of legislation:

• Natural Built Environments Act
• Strategic Planning Act
• Managed Retreat and Climate Change Adaptation Act.

It is assumed that reform of the RMA will impact on the DCC’s activities

Level of uncertainty

Low

Reason for uncertainty

The scope, specifics and timing of RMA changes are unknown.

Effects of the uncertainty

Potential impacts of significant RMA reform include:

• revision of the District Plan or district planning framework
• changes to DCC consenting processes
• unforeseen requirements for additional operating and capital expenditure.

Assumption

Proposed building regulation changes

Changes to building regulations and/or consenting requirements have been signalled by central Government. Some changes include the Building Law Reform programme and Building for Climate Change.

Level of uncertainty

Medium

Reason for uncertainty

The scope and timing of building regulation changes are unknown

Effects of the uncertainty

Any changes to building regulations and or consenting requirements would impact the DCC as a Building Consent Authority.

Assumption

Climate change related legislative changes

Changes in legislation related to climate change have been signalled by central government.

Level of uncertainty

Medium

Reason for uncertainty

The scope and timing of changes in climate change related legislation are unknown.

Effects of the uncertainty

Significant changes to the climate change related legislation may impact (positively or negatively) on the DCC’s ability to both mitigate and adapt to climate change

Assumption

Green Island landfill’s existing resource consents will in October 2023. Provision has been made for the operating costs of securing a possible extension to this resource consent.

Capacity issues mean a new landfill or alternative waste disposal facility will be required to accommodate Dunedin’s residual waste in future.

The capital programme includes provision for a new landfill at Smooth Hill.

Level of uncertainty

Low

Reason for uncertainty

The timing of a resource consent extension for the Green Island landfill and the new landfill is uncertain (see also the assumption regarding ‘resource consents’ above). The lead time for the development of a new landfill or alternative waste disposal facility is significant and work is currently underway

Effects of the uncertainty

There may be delays or increased costs due to consenting issues and community unease about the location of the new landfill.

Assumption

Capital expenditure budget for renewals

The levels of renewals budgeted in this 10 year plan and 50 year Infrastructure Strategy will ensure the long term integrity of infrastructure assets.

Level of uncertainty

Low

Reason for uncertainty

Generally, the DCC can determine budgets for renewals, subject to market forces, and legislative and regulatory changes

Effects of the uncertainty

Long term deferral of renewals poses a risk of asset deterioration and compromise of network integrity and requires unbudgeted capital and/or operating expenditure.

Assumption

Internal capacity and capability

Ongoing improvements to work and procurement practices will allow delivery of operational and capital expenditure programmes and projects.

The COVID-19 pandemic may impact on internal capacity and capability to deliver.

Level of uncertainty

Low/ Medium

Reason for uncertainty

Generally, the DCC can determine resourcing for programme and project delivery, subject to market forces.

There is uncertainty about the impact of the pandemic on internal capacity.

Effects of the uncertainty

Failure to adequately resource capital expenditure programmes and projects may impact on delivery, which may result in future unbudgeted capital and/or operating expenditures.

A significant or protracted outbreak of COVID-19 and flow on effects from the pandemic may impact the delivery of the capital programme.

Assumption

External capacity and capability

Sufficient design, engineering and construction capacity, including availability of construction materials, exists to undertake contracted operational and capital expenditure programmes.

The COVID-19 pandemic may impact on external capacity and capability to deliver.

Level of uncertainty

Low/ Medium

Reason for uncertainty

That other large- scale national or local projects (e.g. Christchurch or Dunedin Hospital rebuilds) impact on local industry capacity and capability.

There is uncertainty about the impact of the pandemic on external capacity.

Effects of the uncertainty

Issues with the availability of contractors may cause delays or require unbudgeted capital and/ or operating expenditures.

A significant or protracted outbreak of COVID-19 and flow on effects from the pandemic may impact the delivery of the capital programme.

Assumption

Useful lives of significant assets

The useful lives of significant assets shown in accounting policies and asset management plans have been appropriately assessed.

Level of uncertainty

Low

Reason for uncertainty

Appropriate practices are followed.

Effects of the uncertainty

An unexpected failure of an asset due to an inadequate assessment of the remaining useful life may require unbudgeted capital and/or operating expenditures.

Assumption

Fixed asset valuations

Scheduled revaluations of assets and forecast asset values in the budget are based on the DCC’s valuation policies, which are consistent with accounting standards for Public Benefit Entities.

Level of uncertainty

Low

Reason for uncertainty

Revaluations are scheduled regularly to ensure minimal variation of asset values between valuations. The DCC’s Statement of Accounting policies describes how potential variances are managed within the financial statements.

Effects of the uncertainty

Revaluations are significantly different from the forecasts, which would impact depreciation.

Assumption

Inflation

Inflation adjustors are applied as per the price level adjustors schedule provided below.

Level of uncertainty      

Low

Reason for uncertainty

Inflation levels and prices may vary from those projected.

Effects of the uncertainty

Unexpected inflation may require unbudgeted capital and/or operating expenditures.

Assumption

Borrowing Costs

Interest on existing and new debt is calculated at 2.85% per annum for floating debt.

Level of uncertainty      

Low

Reason for uncertainty

There is uncertainty on the floating rate debt, but the expectation is that interest rates will stay relatively low for a considerable  period.

Effects of the uncertainty

Interest rates may vary from those projected and  require unbudgeted financing expenditures.

Assumption

Waka Kotahi New Zealand Transport Agency subsidy rates

Revenue from the Waka Kotahi New Zealand Transport Agency (Waka Kotahi) is calculated at the normal funding assistance rates. These are 53% for 2021/22, 52% for 2022/23 and 51% per annum from the 2023/24 year.

Subsidy rates vary depending on the nature of the work being completed.

Waka Kotahi funding constraints (partly driven by the impact of the COVID-19 pandemic and current income shortfalls in petrol tax) along with changing priorities for Waka Kotahi funding, means that in the short term at least, renewals funding will be limited to $7 – $8 million per annum, short of the $10 – $14 million per annum based on standard Waka Kotahi subsidy rates of 51% – 53%. We need to continue investing in the renewal of the network to ensure levels of service are maintained, therefore it is anticipated that in the short term at least there will be an additional funding requirement from the DCC. This will be financed through a combination of debt and rates funding over the course of the 10  year plan.

Level of uncertainty      

Medium

Reason for uncertainty

Subsidy levels may vary from those projected and NZTA agency priorities areas may differ from the DCC’s renewal and capital programme

Effects of the uncertainty

Subsidy revenue may be less than expected and require changes to levels of service and/or unbudgeted capital and expenditures

Assumption

Forecast return on investments

Refer to the Financial Strategy for information on returns from Council-owned companies, the Waipori Fund and the Investment property portfolio.

The target from the Waipori Fund is inflation adjusted using the price level adjustor provided below. The return from Council-owned companies is not inflation adjusted.

Level of uncertainty      

Low

Reason for uncertainty

Income from investments may vary from those projected.

Effects of the uncertainty

Investment income may be less than expected requiring changes to levels of service and/or an increase in revenue.

Assumption

Sources of funds for future replacement of significant assets

The Revenue and Financing Policy outlines the funding sources for capital expenditure.

The Financial Strategy outlines the use of debt and other sources to deliver the capital programme while limiting debt to within the debt  limits outlined in the Financial Strategy.

Level of uncertainty      

Low

Reason for uncertainty

The timing and/ or cost of the  capital expenditure programme may vary.

Effects of the uncertainty

Variation to the timing and/or cost of the capital expenditure programme may require changes to levels of service and/ or an increase in revenue

The projections have been developed to comply with Schedule 10 section 15A of the LGA 2002 and to allow DCC to use these projections in their long term planning process

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The average annual increase in total rating units for the 10 year plan 2021-31 period is just under 418 rating units per year, approximately 0.7% per year. The approach differs for each type of rating unit, which is discussed below. The growth projection data used is from the 2020 Post COVID-19 DCC Growth Projections 2018 to 2068.

Residential and Lifestyle – the assumption is that each new dwelling creates a new rating unit. This means that in the long term, the current provision of vacant properties will be replenished as they are utilised. The 2018 rating unit base data is calculated using the DCC’s rating information on land uses. The number of Residential and Lifestyle rating units was then increased by the percentage of growth in dwellings for each five-year period.

Commercial Rating Units – The future demand for Commercial rating units is based on the projected number of people working within the applicable industry sectors. The projected growth rate of commercial rating units is assumed to be equivalent to the projected growth rate in the modified employee count. This presumes that the ratio of commercial rating units to employees remains static. The unit of employment is the Modified Employment Count developed by Market Economics using the Economic Futures Model.

Other rating units – The remaining rating unit categories (Farmland, Churches, Schools, other) make up less than 4% of the total rating units. For simplicity, these rating units are assumed to remain the same.