Should we postpone some depreciation funding to reduce rates?

What is depreciation funding?

Assets such as bridges, roads, parks, and water treatment plants wear out over time and are eventually renewed or replaced. Depreciation is the method used to account for the cost of these assets over the asset’s lives. Funding this depreciation through rates each year means that ratepayers now (and in the future) pay their share of the use of assets.

What do we propose to change?

At the beginning of our Annual Plan 2023-24 process, depreciation funding alone contributed 4.9% to our rates increase. This percentage is a significant number and is mainly due to the increase in the costs of replacing our assets. If left unchanged, the increase in depreciation would increase our rates to a level we know is unaffordable for our communities.

We are recommending cutting depreciation funding in 2023-24 as a potential solution to smooth this increase over the next few years, reducing the rates impact in this Annual Plan and deferring it to the future when inflation has hopefully stabilised.

What will the consequences be?

Cutting funding for depreciation by up to 8 percent will significantly lessen the sting of the rates increase, reducing it by 2.5 percent. However, such a decision will have longer-term impacts on our District.

1. Non funding depreciation in 2023-24 will incur a subsequent depreciation funding deficit. This deficit will have to be reinstated over the following years, to ensure ratepayers, now and in the future, pay for their share of the assets use. The smoothing of this funding will lead to an additional increase on rates over the next 1-2 years.
2. If we reduce depreciation funding too much, this will add additional cost to future ratepayers and/or slow the rate at which infrastructure can be improved or replaced post 2023-24. Which is why we have proposed 8 percent as a maximum.

Have your say

We are asking for your support in helping us decide if a proposed smoothing of depreciation funding is worth doing, given we will be transferring cost to future years.

The Council believe this decision is worth the longer-term implications. However, we want to hear from the community on this proposed solution.

The proposed rates increase of 8.6 percent in this draft Annual Plan is the figure that would result if we apply the maximum amount of non-funding of depreciation. On the other hand, if depreciation is fully funded the proposed rate increase will be 11.1 percent.