Why Mangawhai is in the shit

Previous blog postings about Mangawhai this year - which you can see at:

• Mangawhai Bankrupts KDC
• Bankruptcy Looms for Ponzi Mangawhai
• Rates Strike at Mangawhai
• Mangawhai Ratepayer Rort Continues...

give a flavour of what is happening, and provide some background. But for this post I have taken time out to rake through all of Kaipara District Council's Annual Plans and Long Term Council Community Plans since 2006, to try and make sense of why Mangawhai (by that I mean Kaipara District Council) is in the mess that it is.

This is a bit boring, so I have extracted the most salient decisions and commentary from those planning documents, to keep it to the point.

Just by way of explanation, a District Council "must prepare and adopt an Annual Plan each financial year....". The purpose of an annual plan (extracts drawn from Local Govt Act 2002) is to:

• contain the proposed budget...
• identify any variation from the financial statements... included in the Council's Long Term Council Community Plan for the year
• contribute to the accountability of the Council to the community
• extend opportunities for participation by the public in decision-making processes relating to the costs and funding of activities....

You can see from that explanation that there are two sorts of plans. There is an Annual Plan each year. But every three years the Council has to prepare a Long Term Council Community Plan which is to provide a long term focus for what is happening in the Council area, and must cover a period of not less than ten years. So. What did KDC put in its plans....

The 2006-2016 Long Term Council Community Plan (LTCCP 06/16) for Kaipara

When this plan was put out for public consultation in early 2006 it also contained KDC's Statement of Proposal about the EcoCare scheme. Only 37 submissions were received. Of those 18 related to non-residential pan charges (toilets in places like schools and motels), while other submissions "sought clarification and details on EcoCare". It appears that most submitters ran accommodation businesses. It also appears that most ratepayers had no idea what it meant for them.

The LTCCP 06/16 contains these critical extracts, about the proposed EcoCare project:

• in relation to the existing Mangawhai urban area the projected development rate is assumed at 2% per annum for the next 25 years
• it is anticipated that by 2030 Mangawhai could have up to approximately 3,300 residential sections
• after a lengthy process of tendering and public consulation, the EcoCare project has advanced to a point where in October 2005 KDC signed a contract with Earthtech Engineering to design, construct and operate the scheme
• the capital costs of the project are $35.6 million..... in addition to the capital costs of the project the cost of financing the loan must also be addressed as this is a significant component of the overall cost.
• Council has decided the financing of the Mangawhai EcoCare project using a combination of uniform targeted rates, uniform annual charges, and development contributions which equitably spreads the burden of paying for the project across the Mangwahi community
• the uniform annual charge is $630 per annum for residential properties... will include recovery of operating cost of council and a contribution to the capital costs....
• the uniform targeted rate is an 'availability' charge for services to the property and access rights to the reticulation network, treatment and disposal process. It will also include physical connection of existing households to the network. This will be $6,862 per section.
• development contributions will be levied when consent is granted for subdivision or resource consent, and will be $11,060 per section.

I take from this that Council had already let the contract to build EcoCare. It was already committed. This "consultation" was only about how it would be paid for.

NB: These charges and rates exclude the effect of the Sanitation Subsidy. This was a substantial grant from central government to be used in subsidising the cost of existing ratepayers to connect to the network. You will see in the next plan how the subsidy reduced the $6,862 per section charge.

The 2007-2008 Annual Plan for Kaipara

The crucial information reported in this plan is that the uniform targeted rate revenue from wastewater - instead of being around $8,298,000 as planned in the LTCCP 06/16, was reforecast to be a mere $959,000. But you have to wait several years before you find out why. In fact it was because a huge number of ratepayers chose to have their connection charge (the targeted rate) spread over 25 years. (Other options included a one off lump sum, or having it spread over two years.)

NB: The LTCCP 06/06 assumed that a chunk of capital would be paid off each year from these targeted rates. But this didn't happen because ratepayers chose to pay it slowly.

The 2008-2009 Annual Plan for Kaipara

The CEO commented in Part 1 of the this year's Annual Plan documents that “a record number of submissions had been received”. 817 in fact. But his summary list of the issues raised in those submissions makes no mention of EcoCare or wastewater. Presumably it was still not an issue at that time. The Annual Plan contains this information:

• "...construction of EcoCare has commenced. The projected startup date for treatment is February 2009 for the first stage...."
• three growth scenarios are described: 4,000 lots, 4,500 lots, and 5,000 lots, and the different targeted rates and development contributions tabulated. Council opts for the 4,500 lot scenario.
• the targeted rate for existing ratepayers is reduced from the original $6,862 that was decided in the LTCCP 06/16, to just $2,654, following the application of the subsidy (from Government's sanitation subsidy). The subsidy being $4,862.50 per property if it had existed before March 2002.
• "...Council has adopted 4,500 lots as the number that will be serviced at the end of a 25 year period (2033)... today there are 2,500 lots titled. We are aware of a further 1,000 lots for which developments are being processed.... we have adopted 4,500... conservative figure in this time of fiscal and development uncertainty. We can, every three years, review this and adjust the financial model to reflect our assessment of future development at that time..."

Again, in the financial statements, we see a continuing pattern of targeted rate revenue being forecast downward from what was contained in the LTCCP 06/16.  (From a projected $4,615,000 in 08/09 reforecast down to $1,703,000).

The 2009-2019 Long Term Council Community Plan for Kaipara

Three years have elapsed, and so KDC was required to revisit its LTCCP.

The introduction notes: "the EcoCare system will be operational in July 2009 with 600 sewers functioning in the first areas with the final completion date for the initial reticulation area in August 2009. The scope of work is being expanded to encompass subdivisions and areas that have built up since the initial reticulation scope was set..."

Under the "funding" section of the LTCCP 09/19 we read: "the operations of this scheme are funded by user charges that are calculated over the life of the asset, an average of 40 years... charges will only increase by inflation during this time...".

It goes on to describe the funding: "...the first five years of borrowings are on an interest-only basis, and Council believes it has certainty as to the rate of interest for that period. Thereafter, principal payments will commence, and a new interest rate regime will be negotiated..."

My reading of this LTCCP 09/19 suggests that none of the critical assumptions that were contained in the LTCCP 06/16 were revisited or altered. This is despite the fact that only 600 sewers had been connected, that development was slowing, and that many ratepayers had decided to pay their targeted rate over a 25 year period - starving the Council of revenue.

The 2010-2011 Annual Plan for Kaipara

The CEO's comments begin brightly and the "Activities" report states that "the Mangawhai wastewater network currently has 1,870 connections..."

It also states: "development contributions for Mangawhai have been revised downwards to reflect the impact of the Global Financial Crisis..."

Again the financial statements warn that wastewater revenues continue to lag behind long term plans. ($5,811,000 for 2010/2011 according to LTCCP, reforecast to $2,955,000 for that year in the Annual Plan.)  This is the first time the full cost of Ecocare can be seen on KDC's balance sheet. Public debt expands to $77,599,000.... "a significant contributor to the debt level was the Mangawhai Wastewater Scheme which totalled just under $53,000,000....". No information is provided explaining the EcoCare cost increase from $35.6 million to $53 million. Presumably this was partly caused by the decision to serve 4,500 sections, rather than the original 3,300.

The 2011-2012 Annual Plan for Kaipara

It states: "The Mangawhai Wastewater System is a state of the art collection and treatment system. The network currently has 1,870 connections and some 40 kilometres of sewer lines... the system is managed and operated by Water Infrastructure Group, the designers and builders, who have a 10 year contract with an option for a further 5 years expiring in 2024..."

The prospective balance sheet continues to note significant variances from the Long Term Plan and what was actually happening. In terms of working capital, the LTCCP planned for a healthy balance of $21,734,000 for the year 2011/2012 (which would go toward the debt), but this has been reforecast to just $6,432,000. And finally there is an explanation: "...an unprecedented number of ratepayers opted to pay the rate over 25 years instead, resulting in substantially less up-front cash at the start of the scheme..."

This Annual Plan notes that the planned level of public debt (from the LTCCP) of $78,059,000, would  be reforecast to: $80,729,000 - a bad sign if ever there was one. Debt was increasing.

And finally I draw attention to the declaration that appears at the end of each of these plans. This states: "Council is required to report any variation between its Annual Plan and Revenue and Financing, Investment or Liability Management policies. There are no variances this year..."

Viewed in this light it is easy to see what happened at Mangawhai. Perhaps this is because hindsight is always 20/20 vision. However, the prospect now in front of the Mangawhai community is bleak. The figures that now appear in the Annual Plan for 2012/2013, and that can be expected for 2013/2014, make what has happened already look cheap by comparison.

Endnote:  Quoting from the LTCCP above:

"..... the uniform targeted rate is an 'availability' charge for services to the property and access rights to the reticulation network, treatment and disposal process. It will also include physical connection of existing households to the network. This will be $6,862 per section...."

That is what residents were told in the statement of proposal and in the LTCCP 2006/2016. They were also told of the subsidy and that it would reduce this charge....

They have been given little warning that KDC now wants more. Much, much more.