Guest Post: New Zealand Council Debt … “My how its changed”

March 8th, 2013 at 3:00 pm by David Farrar

A guest post by Larry Mitchell:

It is sobering to reflect that at the time of the passage of the 2002 Government Act a working maximum Territorial Authority debt level was set, in 2002 nominal dollar terms at $1,500 per ratepayer, ($750 per capita). Looking back then there were few Councils challenging these limits, even fewer exceeding them.

Fast-forward to 2012 and average debt per ratepayer in today’s’ dollar terms have reached close to $4,000 per ratepayer. Sector-wide total debt, (including the Regional’s) has quadrupled from around $2 billion seven years ago to $8 Billion by 2011-2012.

Of greater concern, according to Council long terms plans forecast sector debt is scheduled in the period to reach around $25 Billion, with Auckland Council taking a disproportionate share of this at $16 or more billion … or over two thirds of the total.

And what have we got from this explosion of debt? The picture is murky as the dollar figure put on the infrastructure created and associated with this debt has been revalued-inflated due to accounting valuation adjustments, a number of times over the period. It is next to impossible to assign accurate values to the Council assets created that have been funded from debt sources.

The quality of this recent debt-driven capital infrastructural asset expenditure is also problematic. It has been a very mixed bag, consisting of a proliferation of low or no revenue-earning community assets amongst (exempting local roading), the creation of largely self-funding public utility assets.

Given these uncertainties of asset creation and quality, one thing though is “for sure”. In spite of Council’s bold business as usual long term 2012-2022 plans  …  plans set less than a year ago, they will not proceed. For one, the law has outlawed them and future affordability issues render them unrealistic and redundant.

Apart from the obvious perils and unreality of the proposed unsustainable blowouts of Council debt, there are two principal reasons why Council’s tomorrows will be very different from their yesterdays … in financial management terms. 

The law has changed

December 2012 saw major changes to Local Government law. Councils now are legally bound to realign their future plans and budgets to deliver “cost effective expenditures” spent upon “essential community based infrastructure”. This is a very explicit central government-directed shift to utilitarian purposes, a far cry from the much broader earlier free-for-all multi-purpose Council capital expenditures.

There are some concerns though, that Councils have “yet to get it”. Although the jury is still out, sector chatter at this early stage is that many Councils will not, at such short notice make the necessary budgetary or other shifts necessary or that they plan to ignore the new provisions in the belief that the law is drawn loosely enough to permit a continuation of their more expansive spending.

To counter this delinquent behaviour, the second stage of the reforms, planned for mid 2013 should include any necessary amendments to plug these apparent loopholes. To do otherwise would be to scupper the reforms while accepting the continuation of unsustainable Council debt levels and risking further poor quality expenditures.

We will not be able to afford it!

An aging population, (to say nothing of likely increases in future debt servicing costs) will with little doubt reduce our local community’s future capacity to carry increased (real dollar) Council rates and charges.

Authoritative assessments of looming demographic influences are plain scary. In Canada for example, where research on their comparable issues is deep, detailed and convincing, their affordability “Tsunami” is still some 12 to 15 years away.

In New Zealand, where Council debt limits have already been reached for many (a majority of) New Zealand Councils, our projections are that the crunch point will be reached in as little as 5-6 years time. Further detailed research of these issues is now urgent but the implications of the known facts are plain enough.

The new reality

To address these new financial realities, Council management policies must be adjusted to take account of the following sobering future realities.

  • New Zealand Council sustainable-affordable debt limits have been reached and must not be allowed to “blowout” further. Debt reduction programmes must match the altered budgetary frameworks

  • Future community affordability issues for Council rates and charges including those created by an aging ratepayer base insist upon a complete rethink and revised budgeting of all Council 2013 Annual Plans  …and then beyond to amended 2014 -2022 long term financial plans.

  •  Legislation including closing the existing legal loopholes (with “active” audit encouragement) must ensure that Council financial management policies recognise these new realities.

It isn’t just central Government that needs to live within its means. We must not burden future generations of taxpayers and ratepayers with massive interest bills on the debt we incur.

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15 Responses to “Guest Post: New Zealand Council Debt … “My how its changed””

  1. Redbaiter (8,234 comments) says:

    “It isn’t just central Government that needs to live within its means. We must not burden future generations of taxpayers and ratepayers with massive interest bills on the debt we incur.”

    Damn right. The current debt payments are bad enough.

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  2. labrator (1,890 comments) says:

    This for me is probably Labour’s biggest legacy. Unfortunately it also seems to be the one least associated with them.

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  3. Auberon (873 comments) says:

    This is very pertinent when you look at Tony Marryatt’s approach to Christchurch City Council borrowing.

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  4. WineOh (624 comments) says:

    Absolutely agree. But caused in the main (in my humble opinion) by central government divesting themselves of certain responsibilities like maintenance of key infrastructure, forcing the councils to do it, but not fund them to do so.

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  5. Black with a Vengeance (1,765 comments) says:

    Hahaha…Like this govt gives a shit about burdening future generations with debt.

    Or gouging them for profit by selling their rightful assets.

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  6. farmerdes (16 comments) says:

    Roll on local body elections.

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  7. krazykiwi (9,189 comments) says:

    It isn’t just central Government that needs to live within its means.

    But they don’t.

    We must not burden future generations of taxpayers and ratepayers with massive interest bills on the debt we incur

    But they do.

    That’s just the central governments of Greece, Spain and Italy. New Zealand, lead by the fearless Mr Key, is working hard to catch up.

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  8. Steve (North Shore) (4,538 comments) says:

    The corksoakers have spent all of the TAX that I have paid in the last 45 years and now they tell me I have not saved enough to support myself, and superannuation is becoming a dream?
    Now we will need more Taxpayers to fund the baby boomers retirement? There seems to be a middle person taking the cream, I wonder who that may be?

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  9. CharlieBrown (981 comments) says:

    labrator – “This for me is probably Labour’s biggest legacy. Unfortunately it also seems to be the one least associated with them.”

    Completly agree, unfortunately John Keys legacy will be akin to Neville Chamberlains legacy. We know that he will only tinker with it and make no substantial change to address all of Labours economic sabotage. It probably will be 27 years of socialism before anyone will address the mess we are building.

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  10. wiseowl (857 comments) says:

    Now we have a number of council leaders hell bent on amalgamation that will copy the disaster of Auckland and see expenditure increase ,more officials on $100,000 salaries and little spent on infrastructure and core functions.
    The Chair of local Government NZ is Mayor of council out of control and with around $100m debt.
    National don’t even understand local government and give special powers to people like Nick Smith who has been in the house too long.They want to control local government instead of recognising its relevant place in NZ.
    Ratepayers will not get relief for a long time to come.

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  11. Changeiscoming (176 comments) says:

    My local council the PNCC is so far in debt and getting worse each week, they were ranked 62 out of 67 in worst financial performance.

    All I can say is local govt elections are coming up…get out there and vote.

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  12. gazzmaniac (2,319 comments) says:

    Well that’s the problem – people don’t vote in the council election, and you end up with people on council who are only interested in getting their pet project done and not in running the city/district within its means.

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  13. barry (1,317 comments) says:

    Yes – Labour did make some important changes early last century when they bought in child allowance and welfare. These were really psitive imporvements.

    But in the 1980’s they undone a lot with rogernomics (yes society is relatively worse off today because of them) and in 2002 when they granted “General Competance” to councils.

    All that early good stuff was more than undone with these two idiotic changes later on.

    The “we know whats good for you” attitude of the left can be good or it can be awful…..

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  14. wat dabney (3,750 comments) says:

    yes society is relatively worse off today because of them

    Of course the fact is that Rogernomics saved NZ from complete bankrupty.

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  15. Paulus (2,589 comments) says:

    You should care – Tauranga Council has exploded with one of the per capita highest debts in the country.
    Now we have new CEO, whose former position as Wellington CEO was voted out by Wellington Council.
    He is now reorganising the senior Council roles in Tauranga on a commitee with the acting CEO Leigh Auton, Lying Brown’s pal from Manukau Council, who is too busy to actually do any work, (max 3 days a week) as he sits on a number of Brown’s external Boards (of which he owns one). Of course there is an unelected Maori on this committee also with two other hacks.
    Staff numbers have grown expotentially in the last year, as rates are increasing 10% on 10% for the next few years, as in the past.
    The debt is totally out of control – but what the heck Ratepayers will pay.

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