Spending Envelope for 2007/08

The paper provides information on:

• the purpose of the spending envelope decision

• a forecast end of year financial position statement for 2006/07

• a number of options for the spending envelope for Budget 2007/08

• the consequences of each option in relation to the Financial Reserves policy.

Planning Cycle (as adopted by Council)

Purpose of the spending envelope decision

Council agreed after last year’s budget-setting problems that it wished to adopt a two phase process for Budget decisions. The first phase, in October each year, would see a high-level decision about the spending envelope for the following year’s budget. The purpose of this early decision is to:

• Provide information relevant to the DNC and NZRS in their fee-setting calculations.

• Provide an overall spending limit within which detailed budget and project planning can happen.

As such the decision is a broad and simple one: whether to increase, maintain or decrease the level of resources available for use in the coming financial year.

To maintain an appropriate level of discussion on this, it is important to consider only large (>$50k) items which might drive budget changes.

Item by item or project-by-project consideration is not appropriate at this meeting. Council will have an opportunity through committees to develop a line by line budget and business plan, which will be considered at future meetings.

End of Year Forecast Cash Position

The statement below is based on the following data:

• Actual financial results to 31 August

• Latest actuals available at 6 October

• Line by line forecast of estimated expenditure to 31 March 2007

At 31 March 2007, the financial position is forecast as follows:

Net Current Assets 31 March 06: $1,428,896

(excludes DNC reserve of $540,402)

Forecast:

Income 2006/07: $1,603,671

less Expenditure 2006/07: $1,648,170

less CapEx 2006/07: $115,000

plus Depreciation 2006/07: $51,041

Cash Surplus (Deficit) 2006/07: ($108,458)

Net Current Assets 31 March 2007: $1,320,438

(Forecast)

The Financial Reserves policy as adopted on 26 August 2006 (RN 75/06) specified an end-of-year reserve of $1.45m, not including the retained DNC litigation reserve of approximately $540k.

The forecast above shows that on current plans net current assets will be approximately $120,000 below the floor specified in the policy.

Note that the only implication from the cash forecast position, in respect of the setting of the spending envelope, is that it shows there is no surplus cash available to fund an operating deficit. Indeed a capital injection (or lower operating spending) is required in the current year to meet the level of net current assets specified in the financial reserves policy. In other words Council should note that next year’s budget should be fully funded by planned income.

Future Council meetings will discuss revenue sources and how to balance the budget; this meeting should not be concerned with that problem in considering the options presented below.

Options for Spending Envelope

I have developed three spending envelope options for Council to consider. These are summarised in the table below. Some further detail is available in the attached Appendix, but the composition of next year’s budget is unknown and cannot be detailed.

Please note that the figures above make no provision for any savings which may arise from the current Structural Review process.

Implications of above options for Financial Reserves Policy

As already noted, the Financial Reserves policy is likely to be met in 2006/07 according to forecast. For the three options presented above the following table applies.

* If Council maintains its previous policy to maintain a balanced budget. Decisions on revenue and budget balance will be made at a future Council meeting.

Discussion

My view is that the Society’s current projects and work programme are at approximately the right level. While there will be changes in priority arising from the new Strategic Plan, and while the detailed budget process will throw up new projects and discard some current ones, none of the discussions to date with Council indicate any desire for significant change of direction that would have any significant impact (either positively or negatively) on INZ’s finances.

It would seem prudent to focus on devising and implementing our new Strategic Plan, completing the Structural Review, and then allowing whatever emerges from these, prior to consideration to any ambitious new spending plans, or reductions in the scope of activity, in 2008/09.

Recommendations

THAT Council set the spending envelope for the 2007/08 Budget at $X.Xm.

THAT the Executive Director advise NZRS and NZOC of the spending envelope, signifying that Council intends to substantially fund the spending from the 2007/08 NZRS Dividend.

THAT Committees should meet to consider their financial requirements for the 2006/07 Budget and determine any new projects that will require funding, old projects that will cease to require funding, and any other budget matters, in preparation for a Council workshop on the 2007/08 Budget at the December Council meeting.

Keith Davidson

Executive Director

Appendix 1: Options for Spending Envelope

Notes:

“Committed Expenditure” includes staff and administrative costs (8 FTE staff, rent, overheads) and subscriptions to external organisations that are integral to the .nz delegation. It also includes contractually agreed commitments that the Society cannot easily rescind, or projects with other parties from which withdrawal would be very difficult to explain.

“Discretionary Expenditure” includes most other lines in the current budget adjusted as appropriate for known changes in the status quo option, and with a $250k expansion in Option 2 and a $250k contraction in Option 3. These scenarios would allow for an expansion in the issues InternetNZ tackles or a contraction of these.

“Project Fund and TCDF” is these two budget lines which allow for small project based spending.

“Net Capital Budget” is included to point out that all capital expenditure forecast by staff is covered by depreciation, so is net $0. If Council decides to invest in any new business opportunities or major capital plant, this should be adjusted.

“New Projects / Initiatives” is a provision under Option 2 which recognised that an expansion path for new spending likely includes new projects.