Councils facing debt covenant headwinds faced with finding new revenue streams or increasing rates. But will today's ratepayers be happy funding the next generation's infrastructure costs?

By Alex Tarrant

An inter-generational debate could be festering at the local government level over who pays for tomorrow’s infrastructure.

Auckland and other fast-growing councils are rubbing up to the Local Government Funding Agency’s (LGFA) debt affordability covenants, meaning they need to find new revenue streams before being allowed to take on extra debt.

The alternative is accepting lower credit ratings to be able to take on extra borrowings.

The problem: Both lines of conversation could lead to higher rates. Now.

In the first instance, if new revenue streams outside the rates model cannot be found, and in the second, due to paying higher interest costs on borrowings secured under lower credit ratings.

The question is, are today’s ratepayers prepared to take that hit for tomorrow’s infrastructure?

That trade-off will become starker unless something can be done to find alternative revenue streams for these councils, Local Government New Zealand (LGNZ) officials told a briefing Tuesday.

Looking at the local government sector overall, it’s in a pretty good position to take on more debt. The problem is that those in need the most don’t have the headroom smaller councils might. In fact, 70 of New Zealand’s 78 councils are fine when it comes to their debt positions.

The LGFA represents 52 of those councils, accounting for 61% of the sector’s borrowings (72% if Auckland Council is excluded – Auckland is allowed to borrow under its own name).

Total LGFA lending to the sector of $7.2bn at 28 February 2017 was up $384m from December 2016, with a significant portion of this being councils refinancing other debt on better terms through the LGFA.

And there is demand for that debt. LGFA officials said December turnover of about $550m on $1.5bn of debt issued per year was keeping them happy.

They have seen competition from rising bank deposit rates, and a handful of well-paying energy company bonds issued recently, but they’re confident of being able to borrow about $1bn per year going forward.

Overall debt issued by local councils is not expected to increase much over the coming year, officials said. And it looks like there won’t be many surprises in the pipeline – a review of Draft Annual Plans for the 2017-18 year showed them all looking pretty sensible.

Every LGFA council member had net debt levels at June 2016 lower than forecast in a 2015-2025 long term plan.

So as a whole, the sector’s looking great.

It’s just the eight that are a bit stuck. The LGFA is adamant it won’t shift its covenant goal-posts for them. They were pretty clear that councils needed to grow revenue streams other than from rates to address their constraints.

But with Finance Minister Steven Joyce and Local Government Minister Anne Tolley pouring cold water all over LGNZ’s call for a share of the government’s GST revenue for tourism infrastructure, it could be back to the drawing board.

One ray of light is the growing discussion about targeted rates, urban development authorities and municipal utility districts. Bed levies, visitor taxes and regional fuel taxes should all be on the table as well, LGNZ president Lawrence Yule said Tuesday.

Either that or a tough discussion with current ratepayers that they need to pay more to help out future generations.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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32 Comments

We really do need a tourism infrastructure tax from which LAs and DoC receive direct funding. 3.5 million tourists annually at a $35.00 levy each returns 1.2 billion pa in revenue - roughly equal to the revenue the Govt collects on withholding tax annually (4% of total tax revenue);

https://en.wikipedia.org/wiki/Taxation_in_New_Zealand#/media/File:New_Ze...

We really don't want tourists to view the place as run down and poorly maintained as per this look at long distance bus travel infrastructure;

http://pureadvantage.org/news/2017/02/24/first-world-travel-third-world-...

If tourists are charged before they leave home as part of their incoming travel bookings - they will have long forgotten about it by the time they get here - completely different to a bed tax, which just give folks something to complain about while they are here.

No one is going to decide not to come to NZ because of a reasonably small tax in the greater scheme of the cost of a holiday. And if we exempted children under 18 from the tax, we'd leave the impression of being family friendly.

I don't know why we don't just make life easier for ourselves. Tourists are placing large demands on our facilities and we're not keeping pace - everyone remembers yucky toilet facilities and poorly maintained lookouts/rest stops. Clean, modern and convenient tourist facilities will do masses for our overall reputation.

I absolutely agree that we need tourist levies. Some parts of the country are swamped with tourists of all spending levels.
Queenstown is being ground into the dirt with people overload. The marvellous Wakatipu is being ruined for no good purpose or benefit of citizens. And if it doesn't benefit citizens, why do it at all.
Tourism is a great industry to have but what if the council received a large contribution ( Speculatively $50 a day ?? $100 ! ! !)
Rates like that would cut out the impoverished travellers - who do place a big load locally. And overall would cut back numbers.
If Wakatipu visitors number went to 60-70%, speculatively, of the present number they would be the bigger spenders, wanting better quality, and more profitable to the industry.
Meanwhile Queenstowb is building a new sewerage plant, which I am told has only half the capacity really required. I guess that tragedy is because of cost.

So todays ratepayers dont want to pay for infrastructure to be used by their children, but are quite happy to use existing infrastructure built by their parents?

Well...this is many of the older generation in a nutshell (NOT all, mind).

Received the benefits of previous generations' work and investment. Now living selfishly and claiming to have done it all "on their own two feet" without recognising what they were given, and refusing to pass a decent lot to future generations.

Housing being the prime example of this, where many need to read this: http://bwb.co.nz/books/home-truths

Hey, even lottery winners come to believe they earned their windfall.

It all comes back to Auckland having an overly expensive mode of development. The planning is so pro-sprawl that it costs way more in infrastructure than it needs to.

Auckland is building an immense sprawl housing in such places as Orewa, Kumeu. Warkworth, Pukekohe, Clarks Beach, Wellsford, Beachlands. These are all miles away from the city and miles away from each other. Each of these sprawls will need new infrastructure, duplicated across each separate sprawl. It unsurprisingly costs an epic amount.

Auckland could have built new suburbs next to the city and utilised the existing infrastructure with marginal improvements, it would cost a lot less. But no, instead Auckland Council has decided to go for immense exurban sprawl.

So here we are debating rates increases or tax increases. Just to subsidise Auckland's sprawl addiction.

Maybe the country would be better off telling Auckland Council to make some improvements to its planning.

I suspect amalgamation (i.e., the Super City) has been extremely detrimental to planning outputs and outcomes, as well as the housing market. Just a feeling and someone will no doubt do the case study in the future - but I don't think the case for centralisation will be made - certainly not in the near to medium (i.e., 10-25 year) term.

Simply on the question of reaching its debt limit - an uncentralised Auckland and surrounds might well have seen some councils doing better than others - such that where progress stalled due to debt load in one LA, it would be no problem in another.

We simply haven't got local experience in planning or managing this sort of large metropolitan/mega-city. Seems to me that generally one could imagine that everyone up there is quite a bit out of their depth.

I'm pretty sure we have the planning ability in this country. Several other places in NZ have been able to progress the building of houses much faster than Auckland. Plus there are lots of cities in the world that are larger than Auckland.

I think, we lack experience in dealing with corruption.

The Auckland transport agency was getting paid $millions in bribes, whilst it drew up the plans for Auckland. 3 people were convicted, 6 resigned after an internal investigation. And yet the plan that was concocted whilst the corruption occurred is still in place - indeed it has been expanded upon.

I think in other places, where there is a bit more familiarity with corruption, the standard practice is to take a very critical look at the work product of a corrupt organisation. Here doesn't have much experience of corruption and have a much more happy go lucky mentality.

1/ Auckland rates or property taxation was cheap when I lived there Around $3500 for a 1.5mill house
Overseas that would be at least 15K a yr property tax on top of the initial 1.5% transfer tax upon purchase.
The reason Auckland hasn't charged higher rates on expensive homes is probably because of politics.
Those who have nice homes have connections to keep rates low
The transport problems Auckland has were being dealt with by using bus lanes & transit stations you could park all day in but they were slow to enlarge the car parking !
I lived there witnessing the invasion and got out.
Maybe many of you should too !

Indeed - UAGC (universal annual general charge) is one example of a rating tool designed to make rates less progressive, by way of taking pressure off the General Rate which is valuation based.

.

It is an age old problem, politicians and staff thinking that the pot of money is bottomless because they have the power to simply raise taxes. Councils and Government are not very efficient organisations and seriously need to be operated as a business, without the reliance on a captive customer base. Also modern accounting practices mean they outsource a lot of their work, but do so to private organisations who expect to make a profit, but seldom ask the question that if a private organisation con do it at that cost and make a profit, why they can't do it cheaper?

Reason for outsourcing is to transfer responsibility
& initially at least it makes the books look good until
the private companies ( many large global organizations in city maintenance & city transportation who specialize in milking city halls) up their charges.
That's once these hapless fool councillors have no
other workforce to turn to to keep their cities running

For heavens sake Aucklands problems are seen worldwide yet nobody in power seems to have the wit to address the issues .

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It's not tomorrow's infrastructure. It's infrastructure that should already have been built.

Totally correct. It highlights the problem of deferred maintenance ... everywhere, let alone new infrastructure.
There is a huge amount of infrastructure which was build (yesterday) at great cost of energy & resources ... it all needs ongoing maintenance ... and industrial society keeps adding more ...
Its pretty obvious we are deferring maintenance of what we already have ... because energy & resource wise. we actually cant afford it.

The rates debate in Auckland is ridiculous.

People whinging about a couple hundred bucks in rates p.a. when their home(s) has increased by 6 figures.

A captive market. If a few hundred dollars in rates per year is going to make them go broke, the rates aren't the problem. They can always sell their house, or fight with the Council and have them sell it for them.

Just the regular garden-variety entitlement mentality.

They're entitled to buy houses cheap, sell them expensive. They're entitled to lots of services but cheap rates. They're entitled to an unconditional social welfare handout once reaching 65, but begrudge their taxes helping the poor. They're entitled to a tax cut because "it's my money".

Chat You are 100% correct
Auckland rates are CHEAP and there is no land transfer tax either !
No wonder the city is in extreme debt
The low rate environment has been allowed to drift on for decades and now the poor city cannot even find money for a second harbour bridge or a rapid transit system

Make the rates a percentage of the homes value we'll see how long house prices are $2m+ in central suburbs

Gareth Morgan/TOP agree with you (as income tax though rather than rates)

How about the council does more with less. Too much non core activities at the ACCwith severe over funding. Maori Stat Board a good place to start.
How about a mix of a Poll tax and rates. More user pays then.

The over-riding issue is that councils have to live within their means , and this includes :-

Stopping all the nice to have stuff like ATEED.
Eliminating all wasteful expenditure ( of which there is much)
Not having so many public servants in Auckland earning over $100 k per annum ( many of these jobs could be outsourced )

On this note, though, it's terribly sad to see the Council cutting funding to Auckland's libraries.

I hadn't been in them the last few years, but going back to them - it's amazing what a great service they do provide to many people, especially those less fortunate ones who may not have similar access elsewhere. Including their electronic library resources.

I'd agree with getting rid of ATEED but not cutting library resourcing.

@Rick , you know back in the day Councils stuck to basic stuff , running libraries , approving building plans and subdivisions, providing potable water , building and fixing streets and street lighting , collecting rubbish, processing sewage , maintaining parks, providing paid street parking , and providing public transport

Now everything is charged for separately , they dont collect the rubbish its outsourced and you have to buy stupid orange bags, the dont own or run a single bus and they do all sorts of stuff that is simply nonsense like running ATEED and running poorly attended seminars and events for all sorts of causes and special interest groups .

The fruitless and wasteful expenditure is astonishing .

Agree. And am glad you included running libraries in that list of basic stuff. Auckland Libraries was established in the 1880s. Source

I reckon it's a tremendously important resource. I can afford the books I want, but not everyone is as fortunate as I am.

Screwing with libraries is a total voting deal-breaker for me.

Screwing with libraries is a total voting deal-breaker for me.

Murray The property taxation is too low PERIOD
No land transfer tax Low city rates(property taxes) =a constant struggle to achieve anything in Auckland
if there had been a decent land transfer tax of 1.5% and a doubling of rates then Auckland might not be struggling to meet the demands of its outdated infrastructure
The city was stupid enough to let government remove toll booths on Auckland Harbour bridge & now it can't find the money to build a second bridge (which it should be Not a expensive tunnel).
Funny place my home town but certainly not alone in being disorganized
Everywhere else is too

Debt may be manageable today, but what about those future interest rates??

council should just increase the rates by 12% per year for the next 10 years. A three fold increase if my math serves me. Offer a 15% reduction per year for owner occupiers. The government did after-all shirk responsibility for housing and offload it to the council.

Actually Auckland doesnt want 50,000 new residents each year, 200,000 estimated in the last 4 year. The city is already clogged and has an infrastructure deficit, travel times get worse and worse due to the growth. And residents don't want to pay for a whole lot of new infrastructure for new unwanted suburbs and residents.Solution don't build more houses, and people can move elsewhere. Auckland is not a dumping ground.

Artificial population growth is the problem. 200 immigrants per day, a city the size of Rotorua each year. We give away the countries infrastructure as though it has no value and then expect the tax payers and rate payers to provide the infrastructure that this new population of people needs. Wake up!!!
Our media has a mantra that NZ needs more people, What for??
Do the maths. Our government has sold almost everything and is also selling our low population statistic, accept in reality, where not selling it, where giving it away.
The extra population has not made NZ more productive, our export earnings are going down, not up. The government spanks on about some extra GST tax collected as though that is going to pay for anything.
The population growth has fed the housing ponzi scheme and that is another financial disaster for your average NZer.