Intervention due on local body debt
IN THE last nine years, the average burden of local authority rates per household has risen 69 per cent from $1604 to $2711. This is more than twice the 28 per cent rise in the Consumers Price Index during the same period.
Yet local government operating spending rose even faster. Aggregate operating surpluses have turned into deficits, and local authority debt has increased from under $2 billion to over $8 billion.
The debt is now over $5000 per household, but perhaps the more striking fact from a debt servicing perspective is that local authorities generated aggregate ‘‘sales and other income’’ of only $1.1 billion in the last financial year from about $100b of assets. That revenue does not even cover depreciation of $1.5b.
Local authorities in aggregate now have insufficient interest and dividend income to service that debt. Interest and dividend income in the year ended June 2011 of $337 million was well below interest paid of $468 million. The growing gap will be an increasing burden on ratepayers unless something is done.
Why the focus on the last nine years? Well, rates per household rose only 28 per cent in the nine years ended June 2002, as against a 19 per cent rise in the Consumers Price Index. Something special happened around 2002.
What happened was that Local Government Act 2002 conferred a new power of general competence on local authorities. A key section permitted them to spend on virtually anything that took their fancy in order to promote the ‘‘social, economic, environmental well-being of their communities, taking a sustainable development approach’’.
One district council decided that funding a hip-hop concert met this undemanding requirement, apparently on the basis that the concert was a cultural activity that would educate youth usefully about the environment and empower them to achieve social cohesion and cultural well-being.
The act also requires local authorities to consult excessively with ‘‘the community’’ on expensive, ambitious and cumbersome long-term plans and policies. Hamilton’s mayor commented this week that councils were obliged to produce forests of planning documents which ‘‘very few people, if any, would actually read’’ and engage in drawn-out consultation processes in which very few people participated.
Last year the Business Roundtable had a close look at the Auckland Council’s draft Auckland Plan. (This ‘‘spatial plan’’ is additional to its required long-term plan and must provide a long-term strategy for Auckland’s growth and development.) The new plan proposed a greatly expanded role for the council, including into new areas for which it was ill suited, such as education and income and wealth distribution. The goal of achieving the world’s most liveable city was contradicted by the policy of making land less affordable by tightly controlling its supply.
Our submission concluded that the plan was bound to fail to achieve most if not all its objectives, despite its high costs. There needed to be a much greater focus on excelling in core council activities and allowing central government and voluntary initiatives to excel elsewhere.
The act lists core local services as comprising local network infrastructure, public transport services, solid waste collection and disposal, the avoidance or mitigation of natural hazards, libraries, museums, reserves, recreational facilities and other community infrastructure. The details can be debated, but many would agree that the boundaries should be determined at a local level through democratic processes.
A critical point is that excellence in core council activities does not always require the council to be the provider.
Consideration should always be given to harnessing competitive processes, such as contracting out or full or partial privatisation.
The current highly political dispute with Ports of Auckland workers illustrates the problems that arise when councils own assets unnecessarily.
Even partial privatisation of the Ports of Auckland would have made it easier for the mayor of Auckland to resist the political pressures to intervene at the expense of the port’s productivity.
This is because the port’s board of directors would then have had a commercial duty to private shareholders. The Port of Tauranga is only partly owned by its local authority and it achieved many years ago the contractual stevedoring arrangements that Auckland is now trying to achieve, without anything like the strife being seen in Auckland.
It is very pleasing to see in recent weeks that the Minister of Local Government is acknowledging the need to address the fundamental flaws in the 2002 legislation, and is demonstrating a real determination to do so in a manner that balances the need for greater restraint with the need for local democracy. The overwhelmingly favourable response to date from newspaper editorials indicates that his views are in accord with public opinion.
Implementation will be a challenge, but a worthy one. Dr Bryce Wilkinson is acting executive director of the New Zealand Business Roundtable