Debt

My Belief on Debt

 

I have a view on debt, that is it is required to fund certain things like for example our first house and some minor renovations to it (Paint, HRV, Garden). Those who have mortgages and credit cards are using debt instruments to fund their acquisitions. The private sector (businesses) use debt (ideally) to fund their CAPEX (capital expenditure) lines on new assets – although debt can be used in the short-term for OPEX (Operating Expenditure) short falls when costs are more than revenue (long-term continuous OPEX debt means trouble).  The Public Sector also uses debt to fund the CAPEX line and from time to time the OPEX lines when revenue does not quite make it. Then there is the issue  of repaying the debt without bankrupting yourself from excessive debt and subsequent repayments.

In a perfect world a budget should always be neutral/balanced – however that is not possible. There are times when the budget goes into deficit and you need to borrow, there are times when the budget runs into a surplus and you get savings. The main objective is to try to maintain a balanced budget HOWEVER if you have deficits occurring then that deficit needs to be rectified, the debt serviced and the budget restored to a neutral position. Thus the quote that sits on the Whale Oil site always brings a smile to my face when I see it – as I believe in it all the way.

“The budget should be balanced, the Treasury should be refilled. Public debt should be reduced. The arrogance of officialdom should be tempered and controlled. The assistance to foreign lands should be curtailed lest Rome become bankrupt. People must again learn to work, instead of living on public assistance.”— Marcus Tullius Cicero

 

With that quote in mind – I drew up some Debt Guidelines for Auckland Council in my submission to the Draft Long Term Plan.

Lets hope Council can keep debt down and the budgets neutral.

Advertisements

A Waterfront where we can touch the Water-frontier?

Imagine a waterfront that lives up to the City of Sails – National – NZ Herald News.

 

Saw this particular while cruising through the Herald Online this morning (and while having a chuckle over ghost bridges).

I must say it is a beautiful article and it actually tugged on my heart-strings – probably because the article covered something in such a wide-scope that is very close to me as I “battle-on” in doing my part for a better Auckland.

I for one want to see the Port relocated away from the waterfront so that Auckland and the world can enjoy this harbour frontier right on the door steps of the CBD – rather than be fenced off as of current. I did notice this in the article:

There was fury last month when it was revealed that the draft Auckland plan – a hefty document bringing together the plans of all the city’s previous councils under the new Super City – included plans for the port to increase markedly in size and capacity, from 77ha to 95ha.

The area being eyed for expansion is 50 per cent bigger than the Auckland Domain and stretches into the harbour.

Outraged, some groups hit back by questioning whether there needs to be a port in downtown Auckland at all. Some suggest it be moved to the Firth of Thames on the eastern fringe of the city, as London has done with Thurrock, 45km east of the CBD.

Others say the Government should beef up the Port of Tauranga, where there is more space, or even move the shipping to Whangarei where there is a deep-water port ready to handle the bigger boats.

Basically sums up the entire argument in a nutshell – with me personally wanting to see the Port relocated to that Firth of Thames location in the south-east of the city.

There was some concerns though in relocating the Port away from its current position:

Swney concedes the loss of an inner-city port would mean a loss to the Auckland Council in the dividends it currently gets, which, it could be argued, will put more strain on the rates coffers. The port currently hands over a dividend of 6 per cent and has been told to increase that to 12.

Maritime Union spokesman Garry Parsloe points out that, on top of that, the port creates manufacturing jobs and factories and helps the city grow.

“It’s very important for the city’s revenue,” he says. “It returns many millions to Auckland every year.”

There’s also the issue of jobs. Parsloe says without the port there would be massive unemployment.

Auckland Mayor Len Brown has said a working port is critical to the health of Auckland economy.

Ports of Auckland chief executive Tony Gibson has said the port needs to grow to meet economic growth goals in the council’s own plan, not be sidelined

 

Gentlemen – you concerns are well founded but somewhat misplaced. If the port was relocated to south-east Auckland at the Firth of Thames, the port would be still within Auckland territorial authority limits. Thus there would be no revenue loss to Auckland Council at all, if anything there would be a revenue gain from a larger, more efficient, more productive port. Same to Mr Parsloe of MUNZ, relocating the Port to south-east Auckland actually allows for growth at the port as well our manufacturing and transport facilities. Commercial and industrial development would follow the relocated port to flat, blank, virgin Greenfield sites between the new relocated Port and the eastern fringes of Takanini/Papakura. New road and rail links would also bolster urban development creating more jobs and revenue for the city. Mayor Brown, relocating the Port to south-east Auckland would still allow a functioning if not BETTER functioning port which as you said “critical to the health of the Auckland economy.” I challenge you Mr Mayor to lead and facilitate all that is required in conducting that Independent Enquiry I have repeatedly asked for on POAL to see and prepare for any port relocations. Mr Gibson – I think you have other things to worry about right now such as your job and the industrial relations dispute that is not helping the city.

 

So then, its time to get some serious (earth) moving going and deal with this waterfront issue once and for all.

The following links lead to commentary or work on Port of Auckland relocation ideas:

Draft Drawings of a relocated port in south-east Auckland. Note requires Google Earth for the file extension attached in the post

The Port Relocation Options and Letter to Auckland Council on The Independent Enquiry – as part of my submission to the Draft Long Term Plan

For those who can not access Google Earth, a smaller picture of the first draft drawing on relocating POAL to South East Auckland – note there are no annotations in this picture

Draft Non Annotated Drawing on POAL Relocation to SE Auckland

Whoops at Sunnynook Station

Ghost Bridge?

This came across my Facebook Box this morning:

Bridge – where?

Apparently according to Councillor George Wood of the North Shore Ward, there is no such bridge – in existence yet. It is planned and most likely being built (or about to) however the point being it is not quite there just yet.

Bit of a typo? VOAKL thinks so in jumping the gun with ghost bridges and bridges to no-where.

But then again – the typo in the picture above was not as bad as the typo I saw on Friday – and that one had far more serious consequences.

Oh well – back to reality folks?

Issues with Raising Business Rates in Auckland

Auckland Council ‘arrogant’ for raising rates – National – NZ Herald News.

 

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:

  1. General
  2. The Operating Budget (OPEX)
  3. The Capital Budget (CAPEX)
  4. Recommendations

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.

[1] 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”.

[2] The notion of opportunity cost plays a crucial part in ensuring that scarce resources are used efficiently.

[3] 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).

 

Suggestions

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. 😉

Submission Complete

Submission to Draft Long Term Plan 2012-2022 and Regional Land Transport Program 2012-2015 Complete

 

Yes I have finally completed my dual submissions and sent them to Auckland Council just a few moments ago. You can read the submissions in the embedded documents below. Focus was on my Local Board, Transport, Port of Auckland and Council Finances. Unfortunately the submission I consider somewhat lightweight compared to my submission to the Draft Auckland Plan.

Never mind, I still have the Hearings sometime next month where I will be hitting my main points home for six.

With the submissions now complete, I can refocus back to VOAKL and all the important issues happening in Auckland.

The Submission

Fringe Benefit Tax for Carparks?

A (rare) bouquet for NZTA « Auckland Transport Blog.

 

Now this came across the Auckland Transport Blog feed last night while I was having tea at work.

Basically it is this:

A report prepared for the New Zealand Transport Agency (NZTA) is recommending the government investigate changing the fringe benefit tax to include employer-subsidised parking because of concerns employers are undermining attempts to ”encourage more efficient commuting behaviour”.

More than half the country’s workforce are estimated to have access to free parks provided by their employer.

”The [tax] exemption of employer-provided parking is a widespread benefit that has a significant impact on transport choices,” the NZTA report says.

It calculates the value of employer-provided car parking in Auckland, Wellington and Christchurch at around $2700 per employee and suggests the untaxed benefits total at least $675m annually.

”The availability of ‘free’ employer-provided parking in the CBDs of New Zealand’s main cities provides a direct incentive to drive to the very destinations that are most congested and best served by public transport,” the report says.

”There is a major focus on reducing congestion and increasing the use of public transport in Auckland, Wellington and Christchurch, yet parking provided on premises by employers is tax-free and at no cost to employees.”

 

It would work something like this:

In Australia, employer-provided car parking is taxed as a benefit but employers only have to pay it if there is a commercial car park within 1km of their business which charges more than $7 for all-day parking. That $7 threshold has been set so as to isolate the tax to urban areas where parking is valuable, congestion problems exist, and public transport alternatives are available.

”A similar amendment to New Zealand tax law would assist in aligning Australian and New Zealand tax law, and reduce the significant tax revenue loss that this untaxed benefit currently represents,” the NZTA report says.

 

I like the idea in general, however I would get caught out (via my employer) through such a scheme if the boss decides to pass the costs directly on to us workers.

The nature of my work can having me arriving or leaving the CBD outside public transport hours – to which the CBD car-park is needed. The boys at Auckland Transport Blog would have to think very carefully how such a scheme would work. The idea is not to piss off those who work in public transport but need to park in the CBD for various reasons (including working outside of public transport hours.

 

Although I can see the Citizen and Ratepayers group kicking a fuss over this?

Designed to Fail – Honolulu Rail Saga Ctd

Designed to Fail

via Designed to Fail.

After I had posted on Honolulu’s rail woes on Sunday here at VOAKL, Councillor Quax had passed on a blog link giving further insight on Honolulu’s woes.

I can not comment much on it for various reasons. Needless to say Auckland with its rail is not in the same situation – especially with our peak commuters going from A to B and our off-peak commuters doing the same.

Put it this way, a heavy rail line replacing the Northern Busway with our brand new 3-car EMU‘s running as 6-car (double) sets running every 4-7 mins would increase the capacity of that particular line upwards of the 1000% mark. This is based on replacing a 72 seater large bus travelling down that bus way every 2-4 minutes (any more frequent and you get bus-jams) with a 6-car EMU holding 800 passengers every 4-7 minutes. So 15 buses an hour (bus every 4 minutes) at 72 seats each means a capacity of 1,080 potential passengers down that bus way an hour – double if every two minutes. 6-car EMU holding 800 passengers travelling every 5 minutes would mean 12 trains an hour – so 12×800 =  9,600 passengers on the move.  Looking at those numbers – you are going to need some serious crowd control at Britomart and the CRL stations 😛

Auckland's Northern Busway adjacent to the Nor...
Auckland's Northern Busway adjacent to the Northern Motorway, State Highway 1. Passengers boarding a 'Maxx Northern Express' service operated by Ritchies Coachlines. (Photo credit: Wikipedia)

In any case – Auckland can learn from Honolulu – BEFORE the ratepayers revolt!

Local Government Reforms

Minister of Local Government has Begun the Ball Rolling on Local Government Reforms.

 

And bang on cue, the Minister of Local Government – the Hon. Dr Nick Smith has released the ‘Better Local Government’ initiative. This initiative is designed to bring council debt and expenditure under control by giving black and white prescriptions on what councils can and can not do. There is also a door now open for other regional and territorial authorities to merge just as Auckland did in 2010.

I have not had a chance to read the paper yet from Nick Smith – busy flat-out trying to cover everything including a submission to the Draft Long Term Plan. However I will run commentary on it most likely this weekend after some time digesting the paper – and allowing the pure ideological shit-storm-cock fight to calm down as well (simply put let’s try for an objective debate, not a subjective one).

In the mean time some media articles on the proposed reforms, with the actual paper embedded below.

New Zealand Herald

The National Business Review

Scoop

 

Rates, Roads, Rubbish – the cry of the Centre-Right. How far will these reforms go without further buggering up the city…

 

The Better Local Government – March 2012 paper.

Dr Smith – It will Simply NOT WORK

Minister eyes 10 per cent cap on Super City rates rises – National – NZ Herald News.

Any feeble attempt at capping rates will be nothing short of an utter failure – ok? You need to address the cause of runaway Council debt and expenditure

 

Local and Central Government need to effectively get rid of the Local Government Act 2002 and restart it with very black and white prescriptions on what Council can and can not do. None of this ‘General Powers of Competence (or rather Incompetence as the late Owen McShane said) which gives councils a free rein (without the money to back it up) seeming the Central Government shirk its responsibilities and plays pass the buck.

If one wants a starting point in some council budget reviews; ask yourself what should be CORE Council responsibilities? Do we include social aspects as outlined in Volume Two of the Draft Long Term Plan? If we were to wipe the Lifestyle and Culture budget line – could the $5.5b saved be of net benefit to the city fiscal and social wise?

 

These are all questions we need think of and answer before taking off on follies such as capping rates.

History is about to Repeat itself – AGAIN

Housing boom coming, says Key – Property – NZ Herald News.

 

Talk about Clowns here – the Prime Minister says one thing and his Minister of Finance says the exact opposite. Who on Earth are we meant to believe here?

More to the point the apparent housing boom is already here in Auckland – that is The Housing PRICE Boom that is.

 

Cause? Lack of supply from Stalinist Auckland Council Planning Rules to allow the market to meet the demand of where people want to simply live.

Effect: Go search the NZ Herald on rent prices running amok – or simply put housing becomes even more unaffordable.

Solution: Go read my submission on land use. 

 

It seems history is about to repeat itself – again, condemning even more Aucklander‘s out of the housing market and their first or even second choice on where they want to live…