Tackling our rising rates

By Jane Clifton In Current Affairs

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Photo David White

They say you can’t fight city hall – but for politicians, it’s a different story. No one who has witnessed the recent ratepayer fury at council chief executives’ pay rises can doubt that local authority spending is one of this year’s big steam-gathering issues.

But in an unexpected lightning-strike on the sector, the Government is about to announce a top-to-bottom reform of local authorities, the principal aim being to restrict the ambit of council activities, their ability to borrow, and their ability to keep cranking up rates. Although Local Government Minister Nick Smith is keen to stress that he wants to work with councils, rather than against them, he has also made it clear radical change is on the agenda. Like abolishing regional councils, for example, and encouraging more amalgamation.

Despite only taking over the portfolio in December, Smith has Cabinet support to pass legislation this year that will take away a number of key obligations introduced in 2002 – in large measure because the sector has become a worrying drain on the national economy. He says it’s an issue he and other senior ministers have quietly been working on for some time.

According to Smith, rates have become the biggest single upward pressure on the Consumer Price Index (a measure of inflation through household spending). If it feels like you have less in your pocket these days, one of the reasons is that rates have grown on average nearly 7% a year over the past decade – well ahead of inflation. In the same period, council debt has risen from $1.8 billion to more than $7 billion. And council staffing costs are still rising well ahead of private and state sector increases.

Although there are a number of reasons for this, not least the deteriorating state of much local infrastructure, the Government has fingered the 2002 reforms for loading councils with inappropriate responsibilities, expansion opportunities and burdensome bureaucracy. Before 2002, Smith claims, rates rises were only just ahead of the CPI, averaging 3.9% a year.

The Government is seriously worried about the situation, he says, fearing that some councils could even become insolvent. He concedes, however, that this isn’t entirely the councils’ fault, as the 2002 reforms gave them a plethora of almost open-ended responsibilities, including charging them with ensuring “four pillars” of well-being: social, environmental, cultural and economic.

“This has led to some incredible things. For instance, in the Auckland Council’s 10-year plan, it says it wants to raise the NCEA pass-rate. It’s a laudable aim, but that’s what we have the Ministry of Education for. It’s not the business of a local authority.” Also in the Government’s sights are reporting and consultation requirements. Vast resources go into producing district plans and 10-year plans that Smith suspects are largely ignored by the public – “not even the councillors”, he believes, pore over them – and that contain a preposterous level of detail. “People cannot be expected to be familiar with a document that’s several hundred pages long.”

The consultation provisions were well meant, he agrees, but in practice they are unwieldy and seldom achieve meaningful consultation. “You get situations like one I experienced where you have a public meeting with 16 staff and councillors, and three ratepayers.”

The 2002 legislation tried to take the politics out of local body politics, he believes. “You can’t now campaign for the council and say, ‘If I’m elected I’ll push for a new swimming pool’, because under the law, you’ll be prohibited from sitting on the committee considering the pool because you’ve already got a view on it. Now, that’s just ridiculous.

“Councillors have been reduced to consultation facilitators. We’ve desexed them to the point where, if I wanted to change something in my district of Nelson, I’d be better off becoming a full-time submitter than becoming a councillor.” Although Smith does not seem to be hinting that the Government plans to take over council responsibilities, he does seem to be wondering aloud about what would happen if a council became insolvent, and whether this would inevitably be seen as “the Government’s problem to sort out”.

“It’s like the situation with Greece. We don’t actually know what will happen if a local authority becomes insolvent.”

Local Government Minister Nick Smith, photo Mark Mitchell/NZH

Central to his plan to avert such a crisis is a back-to-basics approach, with councils made to stick to traditional services such as rubbish collection, footpath maintenance, libraries, public toilets and sewerage. “At the moment we have councils that run dairy farms. Manawatu District Council, which has responsibility for the most polluted river in the country, invested $10 million in a dairy farm. New Plymouth owns farms in Tasmania. That’s far from what councils were intended to do.”

Smith says although it’s plain there has been profligacy in council spending, much of it was based on a simple misapprehension of what the balance sheet could support. “People have said, ‘Why would you worry about debt of $8 billion when the sector has assets of $100 billion?’” The trouble is, those assets are mostly unrealisable, he says. On average, only 8% of each council’s assets could actually be sold. To be blunt: you can’t sell footpaths, sewage treatment plants and the like. And in this economic environment, even saleable assets such as buildings and land would be hard to shift.

New legislation could introduce strong new prudential limits on council indebtedness, although Smith says for some, it’s already too late. He mentions the Kaipara District Council, which according to him owes $87 million – more than $4000 for every local resident – largely as a result of having to replace a sewage plant. Other debt-plagued councils he mentions include Waitomo, Western Bay of Plenty, Tasman and Buller.

Besides the imperative of fixing or replacing ageing infrastructure, local bodies argue they are under ratepayer pressure to upgrade leisure facilities and sponsor events to discourage people moving to other regions. They also face what can feel like gratuitous costs from regional councils. That, on top of a growing list of government-imposed obligations, makes much council spending irreducible in a practical sense.

But Smith takes encouragement from his experience of dealing with the finances of the Accident Compensation Corporation last parliamentary term. “They said there was no way they could cut costs, but look, they’ve even lowered premiums.” In that case he was accused of overdramatising ACC’s problems for later political effect. Could similar scaremongering be going on here? He insists that the target of his present attentions is unambiguously worrying, and the sector needs “a reality check”.

“What’s often not realised is that local government is not like central government, in having a very big income. We [the Government] actually have quite a small asset base, but a huge income stream. Councils are the opposite.” Local government can, however, simply raise rates and fees. “It’s because it has a monopoly,” Smith says. “No other sector can do this any more. If petrol goes up, business doesn’t just get to build that into its pricing any more. But councils still think they can get away with it. It’s just a nonsense that this sector, at 3% of GDP, can escape the reprioritisation that the rest of the economy has had to go through.”

Smith won’t give details, but the Government is working on a “carrot and stick” approach to rating. He hopes that will make councils realise they have to try harder to prune their costs, and they cannot simply increase rates to cover their spending and debt-servicing costs. The legislation will build in incentives for rates restraint, and penalties for rates increases beyond a certain level.

The Government will not be requiring asset sales, he insists, nor does it intend to force councils out of activities that could now be deemed beyond their scope. There will be “grandfathering” of the changes over time. “It’s not really a question of divesting, but of narrowing the focus to the things that really matter. It’s like [Finance Minister] Bill English has said, for central government we’re not having a Budget process as normal this time, because ­everything you want to do has to be funded from savings made somewhere else.”

Bob Harvey, photo Doug Sherring/HoS

It will also be hard to be too prescriptive about what activities councils can and cannot undertake. But he says the Government will be making it clear that councils should not be risking ratepayers’ money in “nice to have” commercial ventures in the events-management realm, such as the ill-fated V8 Supercars event, musicals, visits by football stars and other expensive flops that have cost local authorities tens of millions of dollars.

Another part of the restructuring process will be laying out the parameters for further amalgamation of existing councils. “We’re not going to have a forced amalgamation driven from central government, as happened in the 1980s. And we don’t say bigger is necessarily better. But I think the Auckland Council’s efficiencies pose a challenge to other local authorities.”

Smith says a key reform will be abolishing the regional council system, because he believes it has unhelpfully separated issues that need to be tackled on a more co-operative basis, such as water and land management. “We just don’t need that extra layer of bureaucracy.” He has also mooted establishing a remuneration authority to tackle the fraught issue of council executives’ pay. But he wants to restore to councillors the responsibility for restraint in overall salary rates for council staff. At present, councillors decide the chief executive’s salary, but the CEO controls everyone else’s pay.

If there’s one part of this package that probably won’t come as a surprise or disappointment to many mayors, it’s the abolition of regional councils. “It was supposed to be a sort of monitoring system, I suppose, but it hasn’t worked,” says former Waitakere mayor Bob Harvey. “We just can’t afford a two-tier system. It doesn’t achieve anything – except more often than not stopping councils doing what needs to be done.”

Far North District Mayor Wayne Brown agrees. He says regional councils mostly gobble up money that should be going on infrastructure. Brown is sore, for example, that in his area, his council had to pay $1 million for resource consent to the regional council for the Ruakaka wastewater project. “That’s money that should be going on pipes.” According to Brown, what district councils want is for both central government and the regional councils to give them more autonomy to get on with their jobs. “We’re still driving on dirt roads up here. All these other things do is add unnecessary cost and delay us doing the things that need to be done.”

It will be no surprise to anyone who is familiar with Brown’s style that he describes the existing law’s consultation and reporting requirements as “a bloody waste of everybody’s time” – and of considerable amounts of money. “It takes a lot of staff to write those reports, and no one reads them. Where’s the Government’s 10-year plan, might I ask? Our biggest spend is on roading, and the Land Transport Authority only plans three years out, so you can see why I’m not impressed by the need to plan 10 years out. Especially when we want to be changed to a unitary authority, thereby making the plan obsolete overnight.”

Brown and Harvey are both fans of further amalgamation – but not if it’s imposed from Wellington. “There has to be a community of interest. The Far North council is more than 42 towns and villages. We’ve got nothing in common with Whangarei.” Harvey, once a vehement opponent of the Auckland amalgamation, now goes so far as to say he wishes “Roger Douglas had finished the job back in the 80s”.

“We were lucky, I guess, with the Rugby World Cup giving us the spur to get things done in Auckland, otherwise we’d still all be backbiting and bickering among ourselves. People had a hard time letting go of their fiefdoms, but I think now everyone can see it’s been a magical journey. It was ludicrous to have all those different computer systems that didn’t talk to one another, and in one street you could burn rubbish in your back yard, but in the next they’d put you in jail for it.”

But Harvey is unconvinced by arguments for restraining council activity and rating ability. He says although councils do sometimes go beyond their sensible remit, it’s vitally important that they provide facilities and events that give life to their cities. “Cities should be places of regular celebration. Yes, it all costs money. But that’s where you need big leadership. You have to be honest with people, and tell them: Auckland, for instance, is a wonderful place, and because of that, it’s expensive to live here. If you don’t like it, you can go somewhere else. But you won’t have these parks, this waterfront … [if] you want to be able to fly to work on a good motorway, you have to pay for it. You decide whether it’s worth it or not.

“The reality is, we’re paying for generations of meanness. Everything in Auckland was done on the cheap, not done properly. It’s time to start facing up to these costs, and it will be worth it.”

Council hot spots

HAMILTON CITY COUNCIL

Spent almost $40 million hosting the V8 Supercars events, resulting in an Audit New Zealand probe. The 2011 report found that former chief executive Michael Redman spent millions of dollars of council money without councillors’ knowledge or authorisation; that councillors had agreed to deals without seeing copies of the contract; and too many decisions were made in non-public meetings. Then-Local Government Minister Rodney Hide chastised councillors for ™poor decision-making and appalling governance∫. A round of spending cuts by the council has now cut the 10-year debt outlook from almost $1 billion to $420 million, with a decade of rates increases trimmed to 3.8% a year.

INVERCARGILL CITY COUNCIL

A 7.19% rates rise is planned for this year, prompting pensioner Alison Taylor to deliver a 950-signature petition protesting at hardship caused by rates rises. She says the council should concentrate on core responsibilities and stop trying to be entrepreneurs. “This is not a time to go out and spend money on new things. We are quite happy with what we have got. We aren’t trying to keep up with the Joneses up north.”

NEW PLYMOUTH DISTRICT COUNCIL

An average 5.5% rate increase each year for the next 10 years is part of a long-term plan currently under debate. Some of the increase is going to cover a new Waitara pipeline and the New Plymouth wastewater treatment plant. The council’s spending plans, which include a redevelopment of the TSB Stadium/Pukekura Raceway, are “progress with restraint”, according to council chief executive Barbara McKerrow.

KAIPARA DISTRICT COUNCIL

Has run up a net debt of $81 million, equivalent to $4395 per person, despite a small low-income rating base. This is mostly a result of a $57 million sewerage system at Mangawhai and the costs of a district plan review. A 2011 independent review says the level of debt poses future risks to the council, and any future infrastructure spending will require additional loan funding. The review found the council’s monthly financial reports do not provide sufficient information, such as balance sheets and cash flow, to properly monitor the financial health of the organisation, and there is an urgent need for regular financial monitoring, robust forecasting and detailed reporting.

AUCKLAND COUNCIL

The amalgamation of eight Auckland councils into one super-city was always going to be politically fraught, and many tough decisions have still to be made. For example, new legislation may be needed to smooth out potential rate rises of more than 10% for some residents and more than 18% for some businesses. Complicating this are Auckland’s transport woes. Although ministers are wary of the billions being talked about, Auckland Mayor Len Brown is convinced this problem has to be solved sooner rather than later. Brown has floated 13 options, including tolling new roads, a regional fuel tax, congestion charging and raising rates, as well as higher income taxes, a rise in GST for Aucklanders, a hotel/motel bed tax and raising the airport departure tax.

Roads, rates and rubbish

The head of a rates inquiry says there are ways to cut rates and lighten councils’ load.

Infrastructure spending drives rates rises, photo Tracey Grant/WGC

The last man to take a long hard look at rocketing local-body rates was former World Bank public financial management specialist and local company director David Shand, who headed a wide-ranging 2007 inquiry. He emerged from it with a 300-page report and the view that local authorities provide a good service for a reasonable cost.

“My own view is people whinge too much about rates,” he says. “What do you expect? You get all this stuff for nothing? You turn on the tap, water comes out. You’ve got free libraries around the place. You’ve got sport and recreational facilities, you don’t expect them for nothing.” Local authority rates cost households an average of $23 a week, or less than 2% of average gross household income, according to 2010 figures. “Do people know how much they spend on GST in a year?”

Shand, who is a former Labour Party candidate, agrees with new Local Government Minister Nick Smith that rates are rising too fast, but he disagrees vehemently with what the minister thinks should be done about it. Contrary to what Smith seems to be saying, Shand found that local authorities had very low levels of debt and were financially sound, and that their low borrowing meant they were pushing too many costs onto rates. And he found no evidence that a widening of local authority functions had anything to do with the rates rises.

“It’s unclear on what factual basis the minister’s obsession with debt has been founded,” says Shand. He says a pre­occupation with unsustainable debt seems a feature of local government debate. “When John Banks was mayor of Auckland, he made a big fuss about the fact he had made Auckland debt-free. Our view was, well, he’s crazy: this means your rates are higher than they need be, and that debt is a very sensible and equitable way of funding long-term assets, within certain limits.”

The rates inquiry concluded that rates bills could be cut by 10% if local authorities took two big steps: taking on more long-term debt, and stopping using cash to fund depreciation. At that time, local authorities were putting aside money from their income to cover depreciating assets – to the extent it was gobbling up one out of every five dollars of operating expenditure. Local authorities were accumulating huge cash reserves as a result. “It means you’re saving up money to put in a bank account for future capital expenditure. So you’re taking the money off the ratepayers earlier than you need to.”

Since the Shand report, local authorities have indeed loosened up, with debt rising and cash reserves dropping. Debt has been rising since 2005, and is projected to peak in 2016 and then fall, according to a June 2011 report by Department of Internal Affairs officials. The officials saw little cause for concern: interest costs on debt were forecast to peak at 12% of rates in 2016, “well under the average 20% ratio generally seen as the prudent limit”. The largest increases in debt have been for councils with rapid population growth. The officials concluded that “while debt levels and ratios appear to not be a problem for the sector at this stage, some councils are forecasting debt and ratio levels that could be of concern”.

A few local authorities were picked out as having risky debt positions, notably Waitomo District Council. Its debt is set to peak at $5781 per person, but its population is expected shrink by 3%, meaning there will be fewer people to repay debt in the future. But Shand says the overall ratio of local authority debt to assets hardly seems to be out of control.

The Shand report called for the Government to lighten the load for local authorities by paying rates on government properties, stumping up with $100 million a year for water infrastructure projects, and to give local authorities access to a 2c a litre rise in petrol tax. None of this happened, and the petrol tax was instead used for regional roading. However, some authorities have begun to pick up the recommendation of greater use of water charges.

The Shand report also dismissed the view that a major driver of rates rises had been the 2002 widening of local government powers, which encouraged councils to move outside their core business. It concluded that the Local Government Act of 2002 was little different from the 1974 one. Councils had been involved for many years in such activities as social housing, backing major cultural and sporting activities, and commercial operations such as parking buildings and other enterprises. “Only involvement in economic development strategies appears relatively new, and this does not account for a significant portion of expenditure.”

David Shand

The inquiry also weighed up the claim that rates rises were a result of the Government passing on new responsibilities without appropriate funding. It found there was some basis to this, but that local authorities had a great deal of scope to recover costs under the Resource Management Act and the Building Act through user charges.

Instead, the inquiry found that infrastructure spending – such as on roads, parks, water supply and waste­water – was the biggest driver of rates rises. Construction costs for infrastructure were rising faster than the consumer price index, which accounted for some of the excess rates rises. However, the inquiry was unable to pin down how much of the infrastructure spending was necessary and how much merely desirable.

Overall, Shand found that local authority spending as a percentage of GDP had remained relatively constant for many years. “This does not suggest that local government spending is out of control.” The inquiry said a cap on rates would be a blunt instrument and would only cover 60% of council revenue anyway. Shand says the risk is that councils would simply recover costs some other way. “If you start to cap expenditures, you’re getting into real intrusion of elected councils. I don’t think these people are incompetent or spendthrift – they’re just people who are elected to do a job and most of them try to do a fairly honest job of it. I don’t see the argument for assuming that they’re all mad spendthrifts.”

Meanwhile, some critics remain unconvinced that going “back to the future” by considering further amalgamation will be any kind of answer. Town planning consultant Owen McShane recently suggested in his regular newsletter that the idea seems to be back in vogue as a result of major upheavals in Auckland and Christchurch: the former as a result of mega-amalgamation, the latter because of natural disaster.

“With Christchurch and Auckland now both suffering from ‘destructive waves of destruction’, can we really afford to have any more local economies undermined by years of paralysis by analysis?” he asked. McShane’s view is that there is “virtually no evidence” to support the view that bigger is better. – Ruth Laugesen


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2 Responses to “Tackling our rising rates”

  1. murray grimwood Mar 5 2012, 3:42pm

    Of course rates have exceeded the CPI. Funding for depreciation - as is mentioned - is one part of that, aging infrastructure maintenance another, and the specific demands (more bias towards oil-based products than the CPI) of that infrastructure, another.
    That said, this a discussion about deckchairs, and the article fails to address either the slope of the deck, or the imminence of the sinking. Local Authorities, like all businesses, have evolved in a growth period, where debts could be eclipsed in order-of-magnitude over time. At the top of the - entirely predictable and indeed predicted - gaussian (http://www.hubbertpeak.com/bartlett/hubbert.htm,) that ceases to be a 'given'. Real costs have to be addressed real-time, but it gets worse; on the way down (the right-hand side of the gaussian), the ability to pay at all times lags the payment required, and the gap widens.
    It's about time the NZ media facilitated this debate - the 'Limits to Growth and their consequences for the current fiscal system' one. I've been making (totally unreported) representations to the DCC for 6 years, suggesting it wasn't a good idea to go into major debt, and why. The recent release of the oxymoronic 'Green Growth' report, is another facet of the same problem. At the point where fossil fuels peak, there will be more infrastructure that ever before, that's a 'given'. Anyone expecting infrastructure to get cheaper to obtain/maintain from that point on, has a flawed understanding of physical realities.
    Or maybe they're just an economist.
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  2. Peter Sefton Feb 23 2012, 4:27pm

    It's a good article but where are the home owners in this? I would guess most support the existing rating system however we can not live with rate rises that perennially exceed the CPI. In Auckland we expected to see economies of scale kick in to achieve massive savings and there is precious little evidence of that to date. Nevertheless one local body for the region at least means they aren't wasting money fighting each other in court. I'd personally like to see a mental shift from "local authority" or "local government" to "local service provider" to put the emphasis where it really ought to be.There should be an independent audit of every proposed Council project of more than $1million to ensure it meets a nationally set cost/benefit criteria. Anything outside that to need the Local Government Minister's specific approval.
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