Lawyer Commits to (possible) Big Error Over Borrowing to Cover Living Wage OPEX Cost

Letter in Herald should be reviewed

 

I have no idea why the Herald published this opinion piece from lawyer Catriona MacLennan when what they suggested could commit Council to an illegal act right off the bat and attract Government attention like ECAN and Kaipara.

 

From the New Zealand Herald:

Catriona MacLennan: The hypocrisy of the Auckland Council

……….

 

1. Freeze the pay of Auckland Council Group staff.

In the United Kingdom, Cornwall Council last year introduced a Living Wage for 1800 of its lowest-paid workers by freezing the pay of other employees until 2017. A pay freeze for Auckland Council ‘s staff would fit in perfectly with the council’s aim of reducing inequality in Auckland, and ensuring prosperity is shared among all residents.

2. A long-term freeze on increasing the pay of those on the highest incomes in Auckland Council Group and the Mayor and councillors.

In 2013, it was calculated that 7 per cent of the council workforce earned over $120,000, costing a total of $127 million, or 20 per cent of the total salary budget. A reduction of the amount paid to those on salaries above $120,000 by 5.5 per cent, would have been enough to meet the cost of the Living Wage in 2013. Paying a Living Wage to employees and contractors in 2016 would cost less than 0.02 per cent of the council’s budget, or under $8 million.

3. Defer or reduce some major infrastructure projects

The council plans to spend $5.3 billion on major infrastructure projects in the next decade. It will spend a further $5.8 billion between 2025 and 2045. Slightly reducing the scope of, or deferring, some major infrastructure projects would easily result in enough money to fund the Living Wage.

4, Defer or reduce some capital expenditure

Auckland Council projects it will allocate $18.7 billion of capital spending between 2015 and 2025. Once again, a small reduction would be ample to fund the cost of implementing the Living Wage.

5. Use efficiency programme savings

The council is aiming to reduce governance and support costs through an ongoing efficiency programme. This is forecast to achieve reductions of $21 million in year one, and $30 million from year two onwards. Savings in corporate costs are projected to reach $309 million a year by 2025. Allocating a small part of those savings to implementation of the Living Wage would allow it to be introduced both for employees and for councillors in 2016.

6. Reap the rewards of technology

The 10-year budget states that Auckland will improve its technology and processes to increase savings from $183 million for the 2014/2015 year, to more than $300 million per annum by 2025. Those technology savings could be partly used to fund the Living Wage.

7. Defer or cancel small local projects

The Annual Plan 2014/2015 records planned expenditure such as $17 million to upgrade public spaces in the CBD, including $900,000 on improvements to O’Connell Street to make it a people-friendly street; $2.1 million to upgrading Freyberg Square and $2.4 million to redeveloping Bledisloe Lane, including a new canopy. $11.5 million is budgeted for developing public spaces in the Wynyard Quarter, and $23 million for upgrading town centres. Deferring, downsizing or cancelling some of these projects would produce sufficient savings to pay for the Living Wage.

8. Reduce debt more slowly

The 10-year plan projects that the increase in Auckland Council’s debt will slow in the years to 2025. Reducing debt a fraction more slowly than projected, would be enough to fund the Living Wage and would have a negligible impact on the council’s overall debt.

9. Borrowing

The cost of the Living Wage could be funded through borrowing. The council’s debt is expected to be $11.6 billion by 2025, so borrowing a few million to pay for the Living Wage would result in only a fractional increase in the council’s overall debt.

10. Use the proceeds from the sale of surplus property assets

The council expects to sell an average of $66 million of surplus property assets each year in the next decade. That money could be used to finance the implementation of the Living Wage.

Auckland Council currently has an asset base of $42 billion and annual income of $3.6 billion. The council’s asset base is projected to rise to $60 billion by 2025. It’s not that the council can’t afford to pay a Living Wage. It simply chooses not to do so.

It’s time for councillors to put their money where their mouth is and adopt a Living Wage in 2016. If they can’t do that, they should stop calling Auckland “the world’s most liveable city.” For those on the lowest incomes, our city is not liveable at all.

Catriona MacLennan is a barrister and the co-winner of the 2015 Bruce Jesson Foundation Senior Journalism Award for her report on Auckland Council and the Living Wage

……..

Source and full piece: http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=11599292

 

So this is about the Living Wage which the Councillors struck down on a vote recently. However, what McLennan has proposed puts Auckland in a perilous situation.

 

The possible illegal act is to borrow to cover OPEX costs to pay for wages like the Living Wage. The Local Government Act makes it very clear that OPEX costs must be covered by all Council revenue. If there is a shortfall one year the Council must increase its revenue take to cover that shortfall. Borrowing to cover OPEX is generally not allowed and if done attracts Government attention very quickly (see bottom of post for policy directive). Borrowing is done for CAPEX expenditure – CAPEX being investment for adding assets to the City like new libraries, water mains and public transport investment. That borrowing is paid back through finance costs over the life time of the asset (through depreciation).

 

As for deferring infrastructure or even small Local Board projects from the CAPEX side of the ledger is just silly given we are both in infrastructure deficits already and those projects already get deferred every time a Long Term Plan is done every three years. Simply put we can not keep putting things off on the CAPEX side. Sure we can dump wasteful projects like the Mill Road defacto motorway but we still need to invest back into our infrastructure sooner rather than later.

 

Efficiency savings have already been achieved with $32m of savings (and an $80m OPEX surplus) produced over the last financial cycle. Given both those savings and the surplus on the OPEX side a slow implementation of the Living Wage could be brought through.

 

Pay for Mayors, Councillors and for that matter MPs is decided by the independent Remuneration Authority. That authority is an independent body to elected representatives insofar as the elected representatives do not set their own pay.

 

As for debt that one has been beaten to death black and blue. Council’s financial position is in better shape than even the Government given Council is running surpluses and Government has not since the Clark/Cullen era. Looking at the last set of interim finance results the increase of Council debt for CAPEX investment has slowed down while Government CAPEX into Auckland is speeding up.

 

Lawyers recommending Council commit to a possible illegal act to pay for the Living Wage is a rather big error.

 

From Auckland Council Revenue and Financing Policy:

Borrowing: Borrowing will not generally be used to fund operating expenses. The council may choose to borrow for an operating expense where it is providing a grant to an external community organisation that is building an asset such as a community facility or in other cases where operating expenditure provides enduring economic benefits. Borrowing may also be used to fund the interest expense accrued on borrowing during the period of construction of an asset; and to fund the cost of discovered liabilities such as the council’s share of weathertightness claims. In these cases borrowing and repaying the debt over time promotes intergenerational equity

……

Source: http://shapeauckland.co.nz/media/1172/section-91-draft-revenue-and-financing-policy.pdf (page 3)

 

Advertisements
%d bloggers like this: