Prudent Councils Avoid Fiscal Cliffs

"Intergenerational Equity" Bankrupts Present Generation 

This article appeared as an edited version in NZ Herald 14 November 2012.

It is of concern that while individual home owners and property investors are being encouraged to reduce debt and increase personal savings, Councils throughout New Zealand are building fiscal cliffs that put ratepayers at financial risk.

An extraordinary example of this threatens Mangawhai ratepayers today. Kaipara District Council (KDC) borrowed $60,000,000 to build a large community wastewater system that would be funded by an assumed high rate of growth that would occur uninterrupted for the next thirty years. With the global financial crisis well underway KDC had ample warning to downsize the project - or even to stage it - but for reasons that still remain shrouded in secrecy, in 2009 Council decided to build the whole thing at once. As growth and development dried up Council went into panic mode to service the debt. Rates rocketed, ratepayers rebelled, and many are now engaged in a rates strike.

A Government appointed Review Team reported that the debt incurred by Council to fund the Mangawhai Scheme make it “one of the most indebted councils in New Zealand”, with a debt per capita of $4,436. The report advised that there had been a “failure of governance” within Kaipara District Council and recommended that commissioners be appointed “as soon as possible”.

Government has intervened, sacked the council, and appointed four commissioners to clean up the mess. An investigation by the Office of the Auditor General is expected next month.

This year Auckland Council adopted its first Long Term Plan. Among other things it provides for an $800,000,000 loan so that Watercare can build the Central Interceptor sewage project. Overall Council borrowings will almost double to $8,839,775,000 in the next five years – without even providing for the proposed City Central Rail Link project – resulting in a debt per capita across Auckland of almost $6,000.

In the 2017-18 year, the Auckland Council plan reveals that its cost of finance – interest in other words – will be equivalent to more than 30% of its rates revenue.

The Auckland Council Plan – like the Kaipara District Council Plan – assumes a very high rate of growth. It assumes that developer levy revenues for example will increase by a factor of four over the next five years, to $221,086,000 in 2017. It also assumes that Watercare’s revenues will increase by over 35% in the same period.

But what happens if that high rate of development and growth does not eventuate?

It is some comfort to hear the Mayor call for rate increases at or below inflation, but the truth is that Council is funding much of its activities from borrowing, based on the presumption of sharply increased developer levy revenues from sustained high growth and property development.

Savings suggested so far by Council are very much in the rats and mice category. Mowing of berms and suchlike.

The global financial crisis has not gone away, though New Zealand has sheltered from its immediate effects behind a growing pile of loans. But what happened in Mangawhai is a canary in the local government coalmine. A prudent Council should not be betting on growth today. Council’s should be acting incrementally and cautiously, and not embarking on major think-big projects funded by loans. The future risk to ratepayers is too great.

Sewage management and wastewater treatment is a core responsibility of local government in New Zealand. Many small communities are under pressure to switch from local onsite systems to council controlled community schemes, even though a cheap and reliable option can be the adoption of a bylaw enabling council to inspect onsite systems and require that minimum standards are met.

Large centralized sewage systems are typical in New Zealand’s urban environment. These are expensive to build and - as environmental expectations increase – alarmingly expensive to maintain. North Shore City Council discovered this when community pressure obliged Council to fix its network and prevent wet weather overflows from sewer pipes which were closing local beaches.

North Shore City Council investigated sewer augmentation options not unlike Watercare’s proposed Central Interceptor Tunnel, but rejected them on the basis of cost. Instead North Shore City Council adopted a dual programme to reduce stormwater infiltration into its sewer network, and to build underground storage tanks which collected the most damaging and frequent overflows. When the storm has passed and the sewer network has drained sufficiently, the collected wastewater that would otherwise have polluted beaches, can be pumped to the treatment plant.

The benefits of this approach were many. It was not capital intensive and could be funded from rates revenue. It was an approach that could be staged – environmental benefits were immediate when the first overflow storage tank was constructed. It allowed for a de-centralised approach to network management – which lent itself to computer control in response to concentrated weather events.

Watercare would do well to study North Shore’s experience. My assessment suggests savings of over $500,000,000 for the whole project, but it may be that through staging the project over time, the benefits might be even greater.

Auckland Council and Watercare need to identify new ways to do the same old jobs. And they need to operate within the community’s ability to pay – especially when their best growth assumptions turn to custard.