Ratepayers foot bill for ‘balancedbudget’
OPINION: Why are council rates rising stratospherically? If you listen to the council PR machine it’s all about ‘‘getting back to basics’’.
While we are investing more in infrastructure, that’s not the primary driver of higher rates. The real culprit is a 2020 change in the way council calculates its compliance with the Local Government Act’s requirement for a ‘‘balanced budget’’.
One change has generated massive overcharging of ratepayers for depreciation.
The previous treatment of depreciation supported low rates increases, and had the international credit rating company, Standard and Poor’s, commending council on its strong financial management.
The previous approach also always passed the official Audit New Zealand audit with flying colours.
Strangely, the new approach passes too, because overtaxing ratepayers which is not of concern to these agencies, which focus on compliance with accounting standards and ability to repay debt.
Confused? You and many. Let’s use an actual example. From borrowings, the council built a new administration building for $26m. Assume a building life of 50 years. Depreciation is charged at 1/50th of the ‘‘depreciated replacement cost’’. So, in the first year, the depreciation is 1/50th of $26m. Revaluations of replacement costs occur every three years.
Over time, construction cost increases raise the depreciation cost basis from $26m to $30m to $40m and so on. Depreciation is charged on the inflated figure.
Over 50 years what cost ratepayers $26m will be depreciated by $57m, fully funded by rates (cash from ratepayers) to ensure a ‘balanced budget’ under the new formula.
To put it another way, ratepayers will be overcharged by $31m (or 220 per cent) over what they borrowed to fund the construction of the building.
This isn’t a ‘balanced budget’ – it’s highway robbery.
Confused? Then here’s something everyone understands.
Imagine you buy a house for $700k – $200k deposit plus $500k mortgage.
Five years later your house valuation is $1m.
Your mortgage is still $500k, less what you’ve paid off over five years.
But if you are the council then under the new ‘balanced budget’ treatment of depreciation the increase in your house valuation gets added to your mortgage!
You now have to pay back to the bank both what you originally borrowed and the valuation increase. In this example, your mortgage would increase from $500k to $800k, even though you only originally borrowed $500k.
Your repayments go up accordingly.
Why should you pay $800k to the bank when you only borrowed $500k? Good question.
It gets worse. Take Naenae Pool. It’s budgeted to cost $68m. The government paid council $27m as a Covid ‘‘shovel ready project’’.
So the cost to ratepayers is $41m.
But the depreciation charged to ratepayers is based on $68m.
Over the life of the pool ratepayers will be charged $149m in rates to fund depreciation – 360 per cent more than the true $41m cost to council. And this does not include the millions of dollars of operating deficits (entry fees don’t cover running costs) of the pool – subsidies – which are also paid out of rates.
It gets worse. Where central government subsidises capital projects by 50 per cent – very common for roads and bridges – the eventual rates take is over 700 per cent more than the original cost.
So where does all the extra cash go?
Not into a fund ready to replace these assets when they reach the end of their lives.
When the asset needs replacement the whole cycle starts again. Meanwhile, all the cash has been squandered on a myriad of pet projects, too many to list here.
Interested? – go tomy FB page (facebook.com/CrChrisMilne) where links to the calculating spreadsheet and assumptions are available.