Tuesday, 10 September 2013

Column for media release

Auckland Councillor Cameron Brewer

Soaring Council debt needs urgent focus

By Cameron Brewer

In the relatively short life of the inaugural Auckland Council debt levels have soared.

The council’s borrowings will increase from $5.5 billion to $6.7 billion in the current 2013/14 financial year. That’s an increase of $1.2 billion in just 12 months, which is over $3 million a day. At the same time the cost of interest payments is forecast at $367 million, which is just over $1 million a day. These are huge numbers.

More worryingly is that this is not just a one off. The council’s 2013 pre-election report revealed some worrying skyward escalation. While the 10-year Long Term Plan signed off just last year forecast debt to reach over $12.3 billion by 2022, it has now been revised up another $598m to $12.9 billion. In late 2010 when Auckland’s eight councils amalgamated net debt for the group (which includes the council controlled organisations) was put at $3.4 billion, with the expectation that costs would be better contained under one council. 

However the annual net interest costs alone are set to increase from $190m to a staggering $752m over the first decade of this amalgamated council – which will then take the equivalent of nearly 25% of annual rates income to fund. That’s based on the assumptions that borrowings will not be revised up again and even more unlikely, interest rates remaining at between five and six percent.

Let’s not forget that New Zealand is enjoying its lowest interest rates in about 50 years, which of course won’t last. What’s more if the council’s strong credit rating is ever downgraded, it will only add to our woes. Two years ago it was estimated that a one notch credit downgrade alone could add an additional $12.75m to the growing annual interest bill. 

When you consider these factors, not to mention the added cost of any future projects yet to be factored in and on-going population and transport pressures, one thing’s certain: the debt and interest numbers will only get bigger as we move through the decade. 

A majority of Auckland councillors signed off a new debt ceiling in December 2011 just 12 months after setting the first one. Rewriting the three-year treasury management policy so soon saw the allowable ratio of net debt as a percentage of total council revenue extended from 175% to 275%.

The Mayor and senior management argue that our level of debt remains prudent relative to our $3 billion annual budget and when compared to council’s growing asset base which currently sits at nearly $40 billion. This point, they claim, is evidenced by the council’s high credit rating of AA from Standard and Poor’s, which is slightly below the Government’s but above the likes of Fonterra, BNZ and Telecom.

Some of us would argue that such a strong credit rating has more to do with the fact that councils are a very safe bet. If you don’t pay your rates, the local authority can potentially sell your house. What’s more it’s somewhat disingenuous to point to the council’s $40b of assets as proof of its capacity to meet all future financial commitments as the value of our transport network, underground infrastructure, and hundreds of parks could never be realised if the day of reckoning ever arrived. 

So while councils have statutory powers to guarantee income certainty as well significant asset portfolios, such a privileged position should not used as a great excuse for unconstrained borrowing. With the Government recently establishing the Local Government Funding Agency for councils to have better access to cheaper foreign debt, it is now even more important to manage temptation. 

Last month New Zealand Stock Exchange CEO Tim Bennett presented at the council’s Economic Forum. He raised some real concerns over just how debt dependent Auckland Council’s big expenditure plans were, which would really limit options for future administrations.

Yes prudent and strategic borrowing to fund major transformational and inter-generational capital projects to lift Auckland’s economic prospects makes sense. However when I asked staff for some clarity on where the one billion dollars of borrowed money was spent in the council’s first full financial year of 2011/12, it was revealed that it had been scattered right across the organisation on what I described as bits and bobs.

Alarmingly, all this borrowing comes before we’ve even started the big stuff. The region still doesn’t know how it is going to address its $12 billion transport funding shortfall, including how Auckland is going fund its share of the $2.9b Central Rail Link. It’s time to start prioritising.

Ratepayers are increasingly concerned about soaring debt levels. They’ve read about Detroit’s recent bankruptcy and seen commissioners take charge at Kaipara District Council when debt per capita reached the highest in the land – a tragic first place Auckland will take in the coming years.

The Mayor now needs to deliver a comprehensive long-term debt strategy for the community and commercial sector to have some real say on. He needs to show how much we’re exactly in for, where specifically it’s going to be spent, and when and how it will be paid back. 

Unless Auckland Council urgently puts its borrowing policy under the microscope and under real constraint, paralysing debt will sadly be its lasting legacy for our children and grandchildren.

ENDS

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