Is there a crisis?
It’s election time — so expect to hear a lot about a debt crisis and runaway rates at Auckland Council. But is that really the case? Simon Wilson takes a look
Wow, Auckland Council and its finances, eh? “There’s a billion-dollar debt blowout and it’s got this guy’s fingerprints all over it,” said John Tamihere at a debate in Newmarket last week.
“JT”, who wants to be the mayor, was pointing one of his own fingers at the man who currently is the mayor, Phil Goff. Tamihere also said Goff was levying “stealth taxes”, and council spending is “out of control”, and council management is “the most secretive ever”. Is any of it true?
I talked to councillor Desley Simpson, who is deputy chair of the council’s finance and performance committee — and no particular friend of Goff. As the councillor for O¯ ra¯ kei, which includes Remuera and eastern beach suburbs like Mission Bay and St Heliers, she belongs to Communities and Residents, aka the National Party in the Suburbs. While Goff’s been Labour all his life, she’s true blue. Their voting records on council are very different.
As Simpson explained, the council’s full 2018/19 accounts won’t be available until September (the financial year runs July-June). Still, the third-quarter report was presented in June, along with some projections for the full year. It’s publicly available, and so are the council’s previous annual reports, along with its 10-year budget, also known as the Long Term Plan. I’ve pulled them all apart.
Is spending out of control?
No. At the end of the third quarter of 2018/19, Auckland Council was $56 million better off than budget. That was caused by $24m in additional income and $32m less spending.
That’s part of a trend. Over the three-year term of the current council, it has reduced general spending by $69m. For the next three years, savings of a further $62m are projected. Since the Super City’s first full budget back in 2011/12, the council has made general savings of $293m.
What about that budget blowout on the City Rail Link?
In May, the council voted another $500m to the CRL and the Government did the same. Goff doesn’t like calling it a blowout, but he’s only partly right about that.
Of the extra $1 billion, $327m will cover increased construction costs, $250m will pay for longer platforms to take longer trains, and $310m has gone to a contingency fund, raising that fund to $460m in total.
The contingency and the longer platforms help future-proof the CRL, which is good. The building costs are a blowout on early estimates.
To find the extra money, the council did not raise rates or increase borrowing. It rearranged some of its existing debt and reduced its cash reserves, and is investigating other measures.
Is the debt level high?
Yes. The council’s total debt at the end of 2018/19 will be $8.96b. It’s a lot of money. New borrowing for the 2019/20 year is forecast at $764m, which will push the total to $9.72b. The council will also refinance some debt as it matures, a process Simpson describes as “no different to when a mortgage on a house rolls over”.
She says the council borrows money to allow “the costs of infrastructure to be spread over the life of the asset and paid for by the beneficiaries of the asset across generations”.
Is borrowing out of control?
No. Auckland Council operates within a debt ceiling, which is set, on advice from credit rating agencies, at 270 per cent of revenue.
The council’s credit ratings are the highest of any NZ organisation except the Government: Aa2 from Moody’s and AA from Standard & Poor’s.
If it breaches the 270 per cent ceiling it will probably lose those ratings, which will make borrowing more expensive. The rest of New Zealand will also be affected, because the credit rating of all local bodies is influenced by Auckland Council’s.
To avoid this, the council has set its own debt ceiling, at 265 per cent of revenue, to create some “headroom” if something goes wrong. The council operates under this selfimposed ceiling.
It’s true the council borrows a lot of money. But it’s also true the debt level is under control. Everyone’s free to decide which of those statements means more to them.
Is council spending subject to any kind of review?
Yes. Under a law passed by the previous Government, councils are required to review their service delivery models every six years. It’s called a 17a review, named after the relevant clause in the Local Government Act. Auckland Council began this process in mid-2017.
The process is not internal: Independent analysts are asked to scrutinise spending, looking for more efficient approaches. Since 2017, eight reviews have been conducted, resulting in operational savings of $260m. This is in addition to the general savings noted above.
And they haven’t finished: More areas are scheduled for the same 17a review process.
Still, more can always be done. Goff tried to establish a “value for money” committee in 2017, but couldn’t get enough councillors to support it. Simpson said they seemed to think it would be an unwelcome slash-andburn exercise.
Is the council building its asset base?
Yes. At the end of 2017/18 the council’s total assets were worth $51.4b. That’s expected to rise to $52.5b when the 2018/19 accounts are released and $55.3b by the end of 2019/20.
In 2010/11, when the Super City was formed, it owned $34b worth of assets. That will have increased by 54 per cent to the end of 2018/19.
Are rates rising too fast?
Rates rose an average 2.5 per cent per year in the past three years, which is what Goff promised in the 2016 election campaign. The 10-year budget assumes rises of 3.5 per cent from the 2020/21 year: the election this year is voters’ chance to say yes or no to that.
Rates are rising for several reasons, none of which relates directly to the value of your property. The council’s costs are rising, especially anything related to construction. Also, it is moving to fully fund depreciation, and spending on more things.
But Auckland rates are not rising as fast as its costs, and not nearly as fast as rates in other New Zealand cities. In Hamilton they went up by 9.7 per cent this year; in Dunedin 7.8 per cent; in Tauranga 5.8 per cent.
As a general rule, where cities lift rates moderately and regularly, they don’t have to alter that pattern and they can get things done. Where they freeze rates, infrastructure and services become run down and at a certain point big rises are necessary.
The long-term neglect of water infrastructure in Auckland is an obvious example. That neglect is the reason parts of Auckland keep flooding in heavy rain, and human waste turns up on beaches. It’s now being addressed, with urgency, with a targeted rate (see next point).
What about those “stealth taxes”?
In addition to rates and water rates, Aucklanders now pay 11.5 cents a litre for fuel, which helps pay for the council and Government’s record $28b spend over 10 years on transport in the city. This fuel tax replaces a flat transport levy charged to all households.
We also pay two special targeted rates, for environmental projects like fighting kauri dieback, and to improve the water infrastructure (as mentioned above).
The fuel tax and targeted rates are extra to the general rates, so you can argue they push the increase over Goff’s 2.5 per cent limit.
But they’re not “stealth taxes”. The targeted rates were proposed through the council’s largest-ever public input process and gained a solid two-thirds support. The fuel tax was imposed by the Government at the request of the council, after fierce and very public debates. There’s nothing secretive about any of them.
Does the council use innovative tools to manage its finances?
Yes. The Green Bond offered last year gave investors the chance to put their money into projects like electric trains and fixing water infrastructure. It was the first of its type by any New Zealand institution, sold quickly and won international awards in the finance sector.
This year a second Green Bond was also fully subscribed. Together, they’ve raised $350m: that’s economic and environmental goals meeting as one. With council support, the Government is developing new financial tools for funding development projects that will not risk council breaking its debt ceiling. The ball’s in the Government’s
court.
Are staff levels rising?
Yes. Full-time equivalent staff numbers across the whole council grew by about 4 per cent last year, to something over 10,500.
Much of the increase came in two areas. One is regulatory services, especially building consents, where the council has been dealing with record levels of consent applications. The other is infrastructure and environmental services, where the targeted rates have unleashed big new work programmes.
Is there a problem with council spending?
Yes. It underspends. Auckland Council will not have fully spent its budget by the end of 2018/19, a pattern repeated from earlier years.
One example is Auckland Transport, which is likely to have spent only $650m of its $744m capital works programme.
From cycleways to roads, there are frustrations at the slow pace of construction in every part of the transport infrastructure. But AT doesn’t seem to be able to go faster.
At the same time, AT will have a $26m blowout on its operating budget — running the buses and trains — and has had to ask the NZ Transport Agency for more money.
Council chief executive Stephen Town told the Herald last month that the complexities of planning and getting consents meant it was inevitable there would be “unders and overs”, perhaps around 10 per cent. Even so, unders are common and overs much less so.
Usually the unrealised projects are rolled into the next financial year, so they still get done, but progress is slower than it should be.
What’s going to happen next term?
The council forecasts $26b capital expenditure in the current 10-year period, from 2018. It’s the largest spend ever on transport, and on water and the environment, and there’s enormous pressure to spend even more.
Is there really enough for roads and rail? Have we heard the last of cost overruns for the America’s Cup? And what are the budget implications of the climate emergency?
Are council officials secretive and out of control?
Yes and no. Among the staff of about 10,000 are some people who do their jobs badly. Some are driven by personal risk avoidance rather than public service. Some have been promoted beyond their abilities and are out of their depth. Some just don’t
care enough. Some may be personally corrupt.
But do they set the tone? There’s little evidence for it.
One measure of council officials’ work comes from the NZ Institute of Economic Research, which reviews the quality of advice from officials to decision-makers in many organisations. NZIER gives the advice from Auckland Council officials a top score.
Another clue comes from the council’s audit and risk committee, which is chaired by an independent non-councillor and has two other non-council members. They are not sounding alarm bells.
As for the council’s 10-year budget, it goes to the Audit Office, which has to decide if its financial forecasts are based on accurate information and reasonable assumptions. The office is currently satisfied that is the case.
There are all sorts of things the council doesn’t do as well as it could or should. None of us will approve of everything it spends our money on. But the financial management and planning aren’t nuts. They’re coherent and they make sense.