2.4 Development contributions

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Many local authorities introduced development contributions policies as part of their 2006-16 Long-Term Council Community Plans (LTCCPs). However, a number of policies were either deferred or subject to almost immediate amendment in early 2006/07. The High Court recently found aspects of North Shore City Council’s development contributions policy unlawful.¹ This will require local authorities that took similar approaches to reconsider their policies, which may lead to further amendments to the 2006-16 LTCCPs.

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This article highlights some of the issues arising from the development and implementation of development contributions policies in LTCCPs, and potential implications from their use as a funding source. In particular, we draw together our observations from:

• auditing the 2006-16 LTCCPs; and
• auditing proposed amendments to LTCCPs related to development contributions since 1 July 2006.

Background

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The Local Government Act 2002 (the Act) authorised local authorities to impose development contributions, giving local authorities a direct mechanism to fund asset costs caused by growth. Levied as money, land, or both money and land, contributions may be charged on any development, such as a subdivision that generates a demand for reserves, network infrastructure (roads and transport, water, and wastewater and storm water collection and management), or community infrastructure (land and public amenities).

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Development contributions are established through a development contributions policy. As with all of the funding and financial policies required under the Act, the development contributions policy must be adopted using the special consultative procedure and included in the LTCCP. It may be amended only as an amendment to the LTCCP.

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As a funding mechanism, development contributions policies seek to recover costs from parties such as property developers. The sums sought can be significant, with contributions of up to $30,000 for each section of land in some areas. Consequently, developers do closely monitor development contribution policies and are generally prepared to aggressively challenge a policy, including the process to develop and adopt a policy.

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The provisions of the Act are reasonably complex. Local authorities must make a number of assumptions and significant judgements in applying them.

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Initial guidance on the application of the Act was provided in the form of a local government “KnowHow” guide on developer contributions. The guide set out some of the background to those provisions of the Act, explained how they are intended to work in practice, and set out recommendations of good practice in managing the necessary systems. The guide was prepared in 2005.

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The High Court decision in the North Shore City Council case is the only available authority on how the courts will approach the review of a development contributions policy. The Court found that the council had made errors of law in developing its policy. The council’s policy had attributed the capital expenditure for particular projects or activities in its LTCCP primarily to growth. The Court held that this “causation” or “exacerbator pays” approach was too narrow, and the council had not sufficiently factored in the benefits to existing ratepayers of some capital projects. This finding involved the Court reviewing the council’s approach to weighing the principles in section 101(3) of the Act in its funding decisions.

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The Court also found that the North Shore City Council’s policy did not meet the requirement of the Act to assess development contributions against a “development” that creates a demand for reserves, network infrastructure, or community infrastructure. In some instances, the policy provided for contributions to be charged against developments that did not create such demand.

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The sector will follow closely how North Shore City Council responds to the judgment. Other local authorities that have taken the same approach as North Shore will need to consider their policies in the light of the judgment.

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The existing sector guidance, in the form of the KnowHow guide, will need to be updated to reflect the judgment and other developments resulting from the 2006-16 LTCCPs.

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Given the complexity and financial significance of development contributions policies, and the high level of interest from developers directly affected by the policies, it is not surprising that the development of, and consultation on, the policies by local authorities was one of the most challenging aspects of the LTCCPs.

Complexity of matters to be considered

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At its most basic level, a development contributions policy seeks to recover some or all of the asset costs caused by growth from those who caused the growth.

A local authority needs to make judgements in several areas.² A local authority needs to:

• consider whether it will impose development contributions as part of its overall revenue and financing policy. The use or non-use of development contributions as a funding source is a funding decision that needs to be considered and explained in terms of section 101(3) of the Act, which includes the equitable allocation of responsibility for funding throughout the asset’s useful life, whether all or only a part of the community benefits, and the extent to which the actions or inactions of particular people have contributed to the funding need;
• identify the expected growth within the district or city. In many instances, this has resulted in local authorities identifying different pockets of growth for different townships or locations within their boundaries;
• determine what assets are required in full or in part because of growth. This requires it to consider the existing capacity and location of its infrastructure compared to the areas where growth is expected and increased capacity resulting from the growth will be needed;
• define what the relevant asset costs include, for both future assets and assets that have already been completed;
• develop an appropriate methodology for differentiating between costs caused by growth and other costs. This is especially difficult where a new asset is required and only a portion of that need is attributable to growth. The Act does not provide guidance as to whether costs should be pro-rated or apportioned on a marginal costing basis in assessing this split; and
• calculate the contributions payable, including whether the local authority should set them by location or on a city-wide or district-wide basis. Although the Act caps the maximum contribution payable for reserves, local authorities may consider a lower contribution level to be appropriate when considering the revenue and financing policy and other funding equity issues.

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Preparing this information and making these judgements takes a substantial amount of time and effort. Some local authorities did not appreciate the time it would take to prepare a development contributions policy for the draft 2006-16 LTCCP.

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The assessments made at each point in the creation of a development contributions policy are heavily dependent on the reliability of the forecast information available, the local authority’s underlying funding principles, and the judgement of the members and management.

Consultation

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Some local authorities appeared to underestimate the level and complexity of submissions made on new development contributions policies. Local authorities introducing a development contributions policy for the first time in their 2006-16 LTCCP typically received numerous submissions. In some instances, this resulted in the policies being delayed or altered before they were adopted in the final LTCCP, including varying policies so that the contributions sought from the policy were introduced in stages rather than as a one-off charge.

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Those local authorities that adopted development contributions policies in the 2006-16 LTCCP with comparatively minimal submissions and alteration to their policy typically either had an existing policy completed at an earlier stage or had started the process of developing their first policy up to two years before including it in the draft LTCCP. This included discussions with interested parties, such as developers, to explain the effect and methodologies adopted.

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Three local authorities began amendment processes to their LTCCPs almost immediately after adopting the LTCCP, to put their development contributions policies into the LTCCP. This was because of lack of time to complete the policy for inclusion in the draft LTCCP, or significant concerns being raised during the consultation process that required further work on the policy.

Inconsistencies between policies and other information in the Long-Term Council Community Plan

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In auditing the draft LTCCPs, we noted inconsistencies in the LTCCPs between the stated policies and other information, including:

• differences between growth assumptions in the development contributions policy and growth assumptions used elsewhere in the LTCCP; and
• capital expenditure schedules used in the development contributions policy differing in total and for individual items from the capital expenditure figures included in the financial projections.

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Any issues identified were corrected before the document went for consultation. However, these points further highlight the difficulties in preparing a development contributions policy in an integrated LTCCP – especially in instances where development contributions policies were prepared by staff working in isolation on different components of the final LTCCP. It was also symptomatic of the time and pressure many local authorities faced in preparing the LTCCP.

Financial significance

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The LTCCPs forecast increases in revenue from development contributions for the local authority sector from about $275 million to $480 million during the 10 years of the LTCCP. On average, development contributions are expected to form about 5% of revenue for the overall sector. However, for local authorities in high growth areas, development contributions represent up to 20% of all revenue.

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The timing and scale of the construction of growth assets is critical. In a highgrowth environment, the assets are often needed at the beginning of, or early in, the growth phase. Delayed construction of the assets means that services cannot be provided or growth is constrained. Conversely, building an asset on the expectation of a certain level of growth that does not eventuate may result in a shortfall of contributions, which means that a local authority will need to use other funding sources to fund asset construction. For local authorities incurring substantial borrowing to construct growth-related assets that have already substantially increased rates, this represents a particular risk to their overall financial strategy. This risk is exacerbated if local authorities are already charging the maximum allowable for each unit under the Act.

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Managing and monitoring the actual growth, compared to forecast growth, and considering the implications on the capital programme and resulting development contributions will be critical to managing this risk.

Conclusion

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Development contributions policies are still in their infancy in the local government sector. Additional or updated guidance on the interpretation and application of the relevant provisions of the Act would help the sector to adopt a consistent methodology to developing and applying the policies. The outcome from the North Shore City Council High Court case may assist.

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There is also the opportunity for the sector to provide national leadership in developing standard approaches to development contributions policies.

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Although development contributions represent a significant source of funding, their use as a financing mechanism is not without risks, especially where assets are constructed in anticipation of growth. Close monitoring of growth is essential for confirming that the timing and scale of projects and resulting contributions remain appropriate.

1: Neil Construction Limited and others v North Shore City Council (unreported, High Court, Auckland, CIV 2005-404- 4690, 21 March 2007, Potter J).

2: This is a discussion of some of the options local authorities need to consider. It is not intended to be exhaustive, nor is it intended to be advice about how to prepare a development contributions policy.