Published 26 October 2009
Local Government Minister Rodney Hide said on Friday analysis of council long-term plans for 2009-19 showed councils’ operating costs would increase 39% over the next 10 years. Their planned capital expenditure would total $31.4 billion and their total debt was forecast to rise 56%, from $7 billion to $10.8 billion.
The bald ministerial pronouncement (minus a couple of the figures above and absent a few explanations derived from the report Mr Hide referred to) falls under my category of scary, meaningless & potentially misleading statistics and required a hunt through the report. A common perception is that councils merrily ignore CPI figures as they decide their budgets – the report helps understanding of this issue, too.
The figure does put figures in perspective – but that doesn’t mean they stop being scary. At the foot of this article, I’ve run figures from the Observations & trends report on rates & debt/dwelling for territorial authorities in the Auckland region. Both the figures & projected percentage increases vary widely.
Mr Hide said: "To help ratepayers stop their rates continuing to spiral out of control, the Government will soon announce changes to the Local Government Act. These changes have come from the review I set up to improve the transparency, accountability & financial management of local government.
"This work is about local government focusing on core functions, managing within a defined budget and adopting transparent & accountable decision-making processes. In these challenging economic times, councils need to think carefully about the impact of rates increases. There needs to be some serious thinking about the trade-offs between the services local communities want and what is an acceptable level of rates increases.
"The review is also looking at options to ensure local government operates within a defined budget, focuses on core activities and provides for ‘plain English’ financial disclosure."
The Observations & trends report, by the Department of Internal Affairs, noted that council costs are commonly compared with CPI (the consumers price index), but said this measure “does not factor in the cost of capital development and the operation of infrastructure, and therefore does not adequately reflect the drivers of costs facing councils for the delivery of their services. The CPI is a better proxy for the affordability of rates”.
It said part of the PPI – the producers production index, local government & civil defence components – was a better measure of council costs because it measured “price changes in the costs of production such as the prices of materials, fuels & electricity, transport & communication, rent & lease of land, buildings, vehicles & plant (excluding labour & depreciation). This is seen as a better proxy for understanding the drivers of council costs.”
The PPI showed an increase of 10.8% from June 2007-09 compared to 5.9% for the CPI. “This degree of change may help explain the size of some of the reported increases in council operating expenditure. The national price adjusters for local government developed by BERL (Business & Economic Research Ltd) also estimate an increase in costs of 31% over 10 years. This is a significantly higher rate than the CPI forecast of 20-25% for the same period.
“Much of the forecast increase in council costs therefore appears to relate to increases in costs related to the provision of services. These differ from those incurred by a household (as indicated by the CPI). Councils are likely to face increasing pressure to provide the same levels of service while attempting to keep rates at ‘affordable’ levels.”
The report said total operating costs (excluding depreciation) were forecast to increase by 7.8% over the first 3 years of the long-term plan period and 35% over the 10 years.
Some of the highest direct costs/dwelling were seen among rural & some provincial councils with low or negative population growth: “This could potentially signal issues for some councils to fund ongoing service delivery.”
Of the total $31.4 billion capital programme over 10 years, the report said: “Accounting for inflation & population growth, this suggests councils are planning a reduced capital programme to that identified 3 years ago (when the budget was for $29.5 billion).”
The report said the spike in the final year of the plan was similar to that seen in the
2006 plans and might represent a number of “wish-list” projects that councils would make a final decision on in a later long-term plan: “This increase is being driven primarily by metropolitan councils. It is not possible to assess how many of these projects will actually be completed.”
Perhaps the most important comparison in the report is between the forecasts for growth in rates income between the 2006 & 2009 long-term plans. In the first year of the 2009 plan there was a $5 million gap between the 2 but, by the end of the 2006 plan period, councils expected to pull in $356 million more in rates under their revised 2009 plans.
But that figure also needs to be put in perspective of how councils put together their incomes: “Councils look set to become more reliant on rates as a source of income, with the proportion of total operating income from rates rising from 54% to 59% over the 10-year period. Some of the larger percentage increases are seen in councils with negative population growth – this could have implications for rates affordability in the future.”
The Rates Inquiry suggested councils could look to use debt as a tool to fund development: “The level of increase in debt over the next 10 years hints that there has been a change in the attitude of many in the sector toward the use of debt. Total public debt for the sector is forecast to increase by 98%, from $5.5 billion at the beginning of July 2009 to $10.8 billion at the end of June 2019. The peak in total debt ($11.15 billion) occurs in 2016-17.The majority of debt, and the largest percentage increases, occur in the metropolitan council sector.
“The largest proportion of debt is raised over the early part of the plans, with 32% of total debt over the 10-year period ($4.13 billion) taken on in the first 2 years. This coincides with the period of greatest capital expenditure. Over time, the focus moves to debt repayment, with the peak in debt matching the years of lowest capital expenditure. This suggests councils will be consolidating their position and focusing on repayment in the latter years of the long-term plans.
“Across all territorial authorities, the average debt/dwelling is forecast to increase by 41%, from $3295 to $4658. It should be noted that these are cumulative and not annual figures and that by using per-dwelling they do not account for growth in non-residential properties.”
According to the departmental report, “debt is seen as a prudent way to achieve intergenerational equity. However councils where the interest/rates ratio is greater than 15% may see a reduction in their ability to be able to respond to emergencies.”
In its conclusion, the report said: “Communities have come to expect their council will continue to provide these services at an appropriate cost & quality. However, the cost of council services has been and is expected to increase at a greater rate than inflation as measured by the CPI. While council costs are more aligned with the PPI, the ability of ratepayers to afford council services may be better aligned with the CPI. If council costs continue to increase, councils may need to consider how (or if) some services might be funded or provided differently in the future.”
You can probably think of a dozen reasons why rates or debt in your area are higher/lower than elsewhere or than they ought to be. The arrival of a single council for the Auckland region will change the projections, but how equitable resolution will be remains a question.
Rates/dwelling for Auckland councils & the whole local government sector, and the percentage increase from 2010 to 2019, followed by debt/dwelling & the percentage increase:
Auckland City, rates $2220, $2824, 27.2%; debt $3712, $6126, Franklin, $1734, $2308, 33.1%; $3330, $4142, 24.4%Manukau, $1195, $1780, 49%; $1666, $2311, 38.7%North Shore, $2109, $3430, 62.6%; $4385, 6331, 44.4%Papakura, $1342, $2170, 61.7%; $1996, $3722, 86.5%Rodney, $2256, $3050, 35.2%; $6644, $7184, 8.1%Waitakere, $1509, $3283, 117.6%; $7042, $8813, 25.1%Whole sector, $2099, $3082, 46.8%; $3548, $5117, 44.2%
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Attribution: Ministerial release, Observations & trends report, story written by Bob Dey for the Bob Dey Property Report.