5 ways Auckland Council can manage its $550m shortfall

Auckland Council has five “levers” it can pull: Rates; reducing running costs; cancelling or deferring capital projects; debt; and selling assets.

When Covid-19 first hit and the country went into lockdown, budget papers show the council adopted a conservative mindset.

The priority was to maintain critical services and capital investments to support economic recovery. Officers said lowering the budgeted rates increase of 3.5 per cent would have “significant longterm consequences”, particularly if not caught up the following year.

Fast forward to last week and the tone and messages from the council changed to reflect the growing need to preserve cash, and the hardship facing Aucklanders. A rewritten version of the draft budget contained plans to delay or slow down projects.

Stephen Town told his 7000-plus staff they were the council’s greatest asset, but also the greatest cost and a review of how council operates and delivers services would lead to job losses.

This will create more uncertainty at an already difficult time, but the council and CCOs have to find serious savings. The council’s share of the savings is $120 million, Town said.

Rates

Auckland is one of many councils considering the option to lower rates as a result of Covid. Other councils, like Rotorua and Dunedin, have considered freezing rates.

The council has decided to consult on a previous plan for a 3.5 per cent rates increase alongside a 2.5 per cent increase following a marathon 11-hour meeting in mid-April.

Before Covid hit, rising costs for waste management and lowering rates for businesses would have seen household rates rise by 4.5 per cent and 2.6 per cent for businesses. This would take the average household rates bill to nearly $2800, a rise of $126.

Goff said the council was sticking with the higher waste charges and lower business rates.

In late April, Goff publicly backed a 3.5 per cent rates rise, saying those who wanted to cut rates would only dig a deeper hole and limit the council’s ability to borrow to build infrastructure and help the economy.

Last week, he softened this position, saying the council needed to be mindful of the impact of Covid on incomes and he could support a 2.5 per cent rates increase if that’s what ratepayers want.

Reduce running costs

It costs $4.2 billion to run Auckland Council and the five CCOs, which includes operating the city’s public transport, libraries, parks, community centres, caring for the environment and the issue that really rankles with many Aucklanders — council salaries.

In the first full year of the Super City in 2011-12, 1165 staff were paid more than $100,000 and 31 earned more than $300,000. In the latest 2019 financial year, 2831 staff were paid more than $100,000 and 60 earned more than $300,000.

The plan is to temporarily reduce some council service levels, but nothing has been signalled. Pressed on possible cuts to popular services like libraries and community centres, Goff said “in the main we will seek to maintain those services”.

Town has signalled job losses at the council, and CCOs like Auckland Regional Facilities and Auckland Tourism, Events and Economic Development, which have seen much of their income and work wiped out by Covid, have begun the downsizing process.

Auckland Transport is rethinking the new world of fewer people using public transport and more working from home, which throws up challenges and opportunities.

Capital projects

The council group has budgeted to spend $2.76b in the current financial year on capital projects, but says many capital investments will be delayed or slowed down in the new financial year.

There is a strong desire to maintain levels of capital investment to support economic activity and stimulate employment, but that is no longer feasible.

Councillors will be faced with a list of pet projects that cannot go ahead as planned, ranging from small projects in their community to bigticket items. One source said the $1.4b Eastern Busway may be deferred and a big question mark hangs over town centre upgrades.

The $4.4b City Rail Link, jointly funded by the council and the Government, is proceeding, albeit with a warning that it faces extra costs, and there’s pressure on the council to continue pouring $98.5m into the America’s Cup.

The council also has its fingers crossed for funding from the Government’s $3b “shovel ready” infrastructure fund to pay for some of the projects on its books.

Debt

The Auckland Council started life in 2010 with debt of $3.9b. Now it is close to $9.6b.

The council’s ability to borrow money is tied to its credit rating and a debt-to-revenue ratio of 270 per cent. The council is right up against this debt ceiling, which, if breached, could lead to a credit rating downgrade and higher interest costs.

Because of the $550m revenue fall, the council has been in talks with the credit rating agencies about raising the debt-to-revenue ratio to 290 per cent for the next financial year to avoid a possible downgrade.

The alternative would be to slash capital spending and cancel construction contracts to maintain debt below 270 per cent.

Council treasurer John Bishop did not believe the agencies would have a problem with the new parameters, saying the plan is to return to the 270 per cent debt-to-revenue level the following year.

Asset sales

The council has an ongoing programme of selling non-strategic assets, such as surplus property or land. Most of these sales are handled by its property arm, Panuku, which reinvests proceeds into town centre upgrades and regeneration projects.

The council plans to ramp up sales, but instead of investing the proceeds in neighbourhoods across the city it is understood most of the money will go towards plugging the revenue hole.

This could see work deferred on many projects, such as the new Takapuna Town Centre and revitalising Henderson.

There are no plans to sell strategic assets such as the 100 per centowned Ports of Auckland or council’s 22.4 per cent shareholding in Auckland Airport.