March 8, 2013 3:00pm by David Farrar

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

It is sobering to reflect that at the time of the passage of the 2002 Local Government Act a working maximum Territorial Local 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.