Whoops someone is upset business rates are going to increase to a rate of “more than double the rates of comparable residential properties.”
This also got spotted in the same article:
Property Council chief Connal Townsend says it’s unfair and will drag down the city’s economy.
He’s also unhappy with plans to borrow more money, which he says contradict the Better Local Government plan.
“What strikes us as so ridiculous is Auckland Council asking for submissions on its long term plan virtually the same week as central government have come out expressing major national concerns with this sort of approach.”
Connal Townsend wonders who apart from ratepayers, will fund the extra borrowing.
Personally I do not think it will contradict the Better Government Plan per-se. That document from Central Government allows for debt and borrowing especially on capital expenditure such as infrastructure. What the document does indicate though some fiscal responsibility aspects in keeping expenditure under control through strengthening what a Council can and can not do.
As with the Draft Long Term Plan being called for submissions at the same time the Better Local Government 2012 paper came out; I would say more daft on Wellington than Auckland for releasing the paper. The Better Local Government paper should have been released last year or have a delay clause so it wont “start” until the 2015-2025 Long Term Plan comes up for consultation.
In regards to debt, I did take into consideration the Better Government Plan and came up with this idea for Auckland Council and the Draft Long Term Plan 2012-2022. The idea being keeping budgets Fiscally Neutral, existing debt at no more than 67% of Council assets (currently at $34.29b as on page 174 of Volume Two of the Draft Long Term Plan 2012-2022), repayment of debt should be no more than 20% of one’s rates bill, and that any new debt taken on should not exceed 200% of the annual revenue to Auckland Council. Although somewhat simplistic and generalist, the proposal as in my LTP submission can be found here:
Council Finances and Debt
Note, my submission in regards to Council finances and debt takes into account the Better Local Government Paper 2011 recently released by the New Zealand Government.
The control of Auckland Council finances and debt is extremely important to the viability of this city. Simply put; if finances and debt get out of control, the ratepayer and every other person living in Auckland suffers. Suffers through increased costs placed upon them to bring bad finances under control and repay bad debts. Those increased costs also means opportunity cost applies, which means in trade for repaying bad and dumb debt – we get reduced services in return, affecting the viability and liveability of Auckland. It is of my opinion that looking at the finance figures produced in this Draft Long Term Plan 2012-2022, that Auckland Council is leading the city down the path of bad finances and high, dumb debt. As a result of this, I call on Council to reign in the city finances and take a more cautious approach with taking on more debt.
This section on Council finances and debt is divided into three sub-sections:
- The Operating Budget (OPEX)
- The Capital Budget (CAPEX)
General Remarks on Council Finance and Debt
Upon looking at Volume Three of the Draft Long Term Plan, it was pointed out that some budget lines had deficits while total debt was forecast to $8.4 billion by 2021 – an increase from around $3.1 billion as of 2010. Using figures from page 14 of the New Zealand Government’s ‘Better Local Government 2011’ paper; since 2002 the average rate increase for the Auckland ratepayer has been 7.8% per annum, with debt increasing 380% of the same 2002-2010 period. The figures on page 14 also state that the average rates per capita is $908 (although the range of rates varies highly) with council debt sitting around $2,134 per capita (as of 2010). One could interpret as of 2010, the individual ratepayer/household was in a situation where the city was spending more than what it was earning.
Moving through to the 2012-2022 period (the life of the first Long Term Plan), the average rate rise for ratepayers is around the 3.9% – 4.6% mark with council debt (as mentioned earlier) ballooning out to $8.4b by 2021. What the average rates rise figure hides is the range of ‘rates to be paid’ movement of the life of this LTP. Rates movement for business and household range from a 5.6% approx. DECREASE to a 10% INCREASE on last year’s rates – OUCH! Furthermore ratepayers are due to be “slugged” with a $350 per annum Uniform Annual Charge to help cover the budget deficits over the next ten years.
To sound a word of warning and how council need to restore the Council Budget back to a fiscal neutral position I point out how the $8.4b debt will affect the average ratepayer. In the year 2021 Council debt is due to hit $8.4b, which means we as a city have borrowed a total amount of $8.4b to cover capital and operating expenditure (not enough income coming in) – that debt HAS to be repaid back and with interest too. On calculations it means in the year 2021 that at prevailing interest rates, $524 MILLION of our money will be paid back to the lenders for JUST THE INTEREST of that $8.4b debt pile. Or simply put 25% of your total rates bill will be paying just the interest of the $8.4 debt – no principle, just interest. If Council were to also pay principle I would be at a guess that 30-37% of your rates will be going to that debt pile in order to reduce the debt!
In paying that amount of ratepayers dollars to pay down a rather large debt bill ‘opportunity cost’ applies to the city. Opportunity cost being according to Wikipedia:
Opportunity cost is the cost of any activity measured in terms of the value of the next best alternative forgone (that is not chosen). It is the sacrifice related to the second best choice available to someone, or group, who has picked among several mutually exclusive choices.
 The opportunity cost is also the cost of the forgone products after making a choice. Opportunity cost is a key concept in economics, and has been described as expressing “the basic relationship between scarcity and choice”.
 The notion of opportunity cost plays a crucial part in ensuring that scarce resources are used efficiently.
 Thus, opportunity costs are not restricted to monetary or financial costs: the real cost of output forgone, lost time, pleasure or any other benefit that provides utility should also be considered opportunity costs.
Basically means that the money spent on interest repayments is money expenditure on items such as services or rates reductions foregone! So the tough question has to be called: Time to go through the budget line by line and trim provision of services or capital expenditure in order to bring the Main Budget back towards a fiscally neutral position – or find other revenue sources – or both.
In Point Four of the Council Finances and Debt section, I will outline some recommendations for Council to consider in order keeping debt under control and restore the Budget back to a fiscally neutral position.
The Operating Expenditure Budget (The Opex)
Going through the OPEX budget lines in Volume Three, I noticed that at least 60% of the individual OPEX budget lines were or are planning to run a deficit over the life of the Draft LTP. It means that individual Council departments were spending more than what was budgeted for and as a result having to borrow money to cover their expenses (as revenue brought in was unable to).
The continued running of deficits for the OPEX budget which leads to an increase of the total debt pile (that needs to be repaid back) is unacceptable. Council will either need to raise more revenue or cut back expenditure on the OPEX lines in order to restore the OPEX to a fiscal neutral position. If the OPEX does need to go into deficit, then I recommend that it be short-term and that any money borrowed to cover the OPEX shortfall be repaid within five years of the deficit occurring.
As a rule of thumb the OPEX should always be fiscally neutral however if borrowing is needed, then repayment costs should be no more that 5% of the total rates bill in any given financial cycle.
The Capital Expenditure Budget (The CAPEX)
Capital expenditure is required if council wishes to invest on new assets or renew/replace existing assets – just as businesses and households do. To fund the CAPEX lines like businesses and households do, Council take on debt (borrowing) and repay it back over a period of time (like a mortgage or loan). I do not mind Council taking on debt to fund the CAPEX lines – but what I do mind is when that debt is running away and repayments become rather high. As I mentioned above: Council debt is due to hit $8.4b, that means we as a city have borrowed a total amount of $8.4b to cover capital and operating expenditure (not enough income coming in) – that debt HAS to be repaid back and with interest too. On calculations it means in the year 2021 that at prevailing interest rates, $524 MILLION of our money will be paid back to the lenders for JUST THE INTEREST of that $8.4b debt pile. Or simply put 25% of your total rates bill will be paying just the interest of the $8.4 debt – no principle, just interest. If Council were to also pay principle I would be at a guess that 30-37% of your rates will be going to that debt pile in order to reduce the debt!
To me, that is “rather high” and some tough choices need to be made; as I believe (and suggest) that total repayment of debt should be no more that 15% of one’s rates bill in any given financial cycle. So where does Council draw the line on CAPEX spending in order to keep debt under control (and now cause high rate rises as a result)? Ironically the City Rail Link at a cost of $3.6b (after the rail fallacy has been applied) contributes to most of the $8.4b forecast debt. It is the reason why I have called for in my submission that the CRL be delayed or pushed back as a priority two project with completion by 2032 rather than 2021. The push back allows Auckland Council to get its finances in reasonable order (including maybe saving for a “deposit”) and better secure alternative funding (including from central government) for such a large project. The push back also allows other important CAPEX projects to be carried out and keeping debt under control.
I urge Auckland Council to consider all CAPEX projects that are listed in the 2012-2022 Draft LTP to avoid a debt blow out and 25% of our ratepayers’ dollars being sunk into dumb debt (interest repayments).
I strongly believe in a Fiscal Neutral Budget at all times – that is we spend as much as we earn. I do not mind Fiscal Surplus Budgets, but it must not come at the expense of the viability and wellbeing of the city. With Fiscal Deficit Budgets I am strongly against them when the city is operating under normal conditions (that is no disasters like Christchurch), however I can tolerate them for short periods of time (that being in a given LTP period – Fiscal Deficit budgets do not occur for more than two years out of ten and the money borrowed to cover the deficit is repaid in full with three years of that deficit occurring). Thus I recommend the Council adopt the following general guidelines when it comes to the OPEX and CAPEX budgets:
Assuming all revenue collected = 1 or 100%, then total outgoings should not exceed 1 or 100% from both the OPEX and CAPEX Lines.
With debt repayments the following guidelines are suggested:
All revenue collected = 1
1) Total debt repayment including interest from the OPEX Line should be no more than 0.05 to 1 (meaning a 5% maximum of total revenue gained should be spent repaying OPEX debt).
2) Total debt repayment including interest from the CAPEX Line should be no more than 0.15 to 1 (meaning a 15% maximum of total revenue should be spent repaying CAPEX debt)
3) Total debt repayment from both CAPEX and OPEX thus should not exceed 0.2 to 1 (meaning no more that 20% of total revenue gained should be expended on debt repayment including interest)
4) If you need more that the maximum percentages given to repay OPEX/CAPEX debt then it means you have borrowed or spent too much – get costs under control!
5) If all annual revenue collected = 1 then annual expenditure including servicing debt) should not exceed 1, if annual expenditure does exceed 1 (meaning a fiscal deficit budget) then that deficit should not exceed 1.1x total annual revenue collected in that given financial cycle – the debt thus accumulated repaid within three years of occurring.
6) In regards to total existing debt verse assets – to keep the 1:0.2 (revenue : % paid of total revenue to debt) feasible; total existing (plus the addition of new) debt should not exceed total Council assets by the 67% mark to avoid negative gearing) – AND/OR In regards to total new debt acquired verse total annual income, total new debt acquired over a standard financial cycle should not exceed 200% of total annual income over that same standard financial cycle (1:2). This section includes both CAPEX and OPEX borrowings/debt
In regards to revenue gathering, the council has these methods either available or should be advocating for supplementing standard rates income:
- Targeted Rates (more likely to be in the CBD for the CRL and Wynyard Quarter), areas next to the Northern Bus-way, and most likely Manukau, Panmure and Botany for large infrastructure projects either being built or planned to be built)
- Bed Tax in the CBD (cover the City Centre Renewal)
- Advocate for GST Revenue sharing with Central Government (50% of all GST raised should be shared with Local Authorities based on population)
- Congestion Charge on the motorway network between Mt Wellington, Great North Road and Takapuna. However this would only work if the Eastern Highway and Second Harbour Crossing was built plus the completion of the Western Ring Route to allow viable bypassing of the CBD inner motorway network
- Lowering the Development Contribution Fees and liberalise planning rules per the SLPD DURT Busting campaign to allow development to be responsive to demand and allow the private sector to assist in providing infrastructure via the Municipal Utilities District program like in Huston, Texas.
These measures above in regards to repayments, debt : assets, debt : income, and revenue : expenditure is designed to keep the Council Books in a healthy position and not creating extra burden on struggling ratepayers. These measures are “tough,” but coupled with what is proposed in the ‘Better Local Government 2011’ paper, quality services while keeping the cost to ratepayers reasonable is achievable.
That would be my policy for consideration and debate if I were to ever run for Auckland Council.
As a final remark, we need to watch our earning and spending. If we (that is Auckland Council) can not then it might be time to allow someone else who can. 😉