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Auckland Council says the economic fallout from COVID-19 is threatening its ability to deliver a balanced budget and comply with its debt to revenue ratio policy

Auckland Council says the economic fallout from COVID-19 is threatening its ability to deliver a balanced budget and comply with its debt to revenue ratio policy

Auckland Council says it will be talking to credit ratings agencies, warning if economic fallout from the COVID-19 pandemic stretches into its 2021 financial year, which begins in July, this will threaten the Council's ability to deliver a balanced budget and comply with its debt to revenue ratio policy.

The Council also says it will undertake public consultation on changes to its 2020/2021 Annual Budget, including some proposals for rates. Aucklanders will be asked if they support options including an average general rates increase of either 2.5% or 3.5% for the Council's June 2021 financial year. 

"Council currently has credit ratings of AA/Aa2 from S&P Global and Moody’s respectively, both on stable outlook. Given the financial impact of the COVID-19 crisis, Council will hold discussions with the rating agencies regarding its proposals for managing the financial impacts of the crisis. At a time of uncertainty in global financial markets, Council will do everything it can to maintain a prudent and sustainable approach to long-term financial management and ensure that the COVID-19 situation does not materially impact its long-term financial outlook," Auckland Council says.

Credit ratings downgrades can result in higher borrowing costs for the rated entity. See credit ratings explained here.

The Council says its "strong financial and liquidity position" going into the downturn mean the impacts should be manageable for the remainder of its 2020 financial year which ends in June.

"However, ongoing disruption into FY2021 will present challenges for Council’s core financial strategy parameters in the near-term. Specifically, it would be unlikely that we can achieve a balanced budget and compliance with Council’s 270% debt to revenue ratio policy limit in FY2021 without substantial cuts to Council’s services and capital expenditure (over and above the spending reductions and delays to expenditure caused by the disruption itself)."

In response to the crisis the Council has established an Emergency Committee comprising Mayor Phil Goff and all councillors to assume the functions and powers of all Council committees except for the Audit and Risk Committee.

"Financial scenario modelling considered by the Emergency Committee yesterday suggested that if a high degree of disruption persists over a six month period (March 2020 to September 2020) before beginning to return to normal, and the council decides to maintain average general rates of 3.5% per annum and not make substantial cuts to services and capital expenditure then the impacts to current budgets for FY2021 might be:

• a reduction in cash operating revenue for the group of around $450 million
• a reduction in net operating cashflow of around $250 million, as operating expenditure would also reduce due to lower activity levels from disruption
• a reduction in capital delivery in the period of around $300 million due to delays caused by disruption
• a debt to revenue ratio of between 280% and 290% as at 30 June 2021."

Auckland Council says a range of other scenarios with more severe disruption and for longer duration were also considered.

"While the magnitude of the reductions in revenue, operating and capital expenditure all increased with more disruption, in all scenarios considered the projected debt to revenue ratio remained below 300% in FY2021 and returned to be within the 270% policy limit by the following financial year."

The Council says it's experiencing "unprecedented impacts" from the COVID-19 pandemic. These include reduced revenue, including from public transport, regulatory revenue, fuel tax receipts, revenue from events and community facilities and dividends from Auckland International Airport. It's also experiencing a reduction in operating expenditure, and slower delivery of capital expenditure.

In response so far the Council has taken steps to:

• reduce spending on external contracts and contract staff in non-essential services
• suspend non-essential work such as non-essential asset maintenance, fleet servicing, and internal business improvement projects
• suspend recruitment of permanent staff until further notice
• redeploy under-utilised permanent staff into roles currently filled by contingent workers.

To arrive at a “most likely scenario” for the Annual Budget, Auckland Council says staff will assess the latest emerging information from central government, the local government sector, economic forecasters and international experience. They will also continue to engage with government officials on opportunities to work in partnership with central government to progress capital investment for Auckland in a way that is not limited by the council’s debt constraints.

An expansion of the Council’s rates postponement policy to include businesses experiencing financial hardship has been agreed, as has a suspension of the Council’s Accommodation Provider Targeted Rate (APTR), and the expenditure it would fund, until 31 March 2021.

"The Emergency Committee also requested staff to undertake further analysis of the impact different rates increases between 0% and 3.5% would have on council services and business activity in Auckland. This analysis will help inform the public consultation process. In addition, the committee also agreed to a suite of other more immediate measures in the current financial year to assist all ratepayers, including businesses, facing hardship due to the crisis. This includes waiving the APTR payment from 1 April to 30 June 2020 for all accommodation businesses and offering all ratepayers experiencing financial hardship the opportunity to defer payment of their fourth quarter rates instalments," the Council says.

On April 7 Auckland Council said it was reducing spending on external contracts and contract staff in non-essential services. This had identified about 1100 contingent workers providing support across a range of business areas who it said may be eligible for the government’s wage subsidy package, depending on their individual circumstances. As part of its quantitative easing programme the Reserve Bank is buying up to $3 billion of Local Government Funding Agency bonds to support the local government sector. This represents about 30% of all the LGFA bonds on offer.

Auckland Council says it will schedule an investor update within the next two weeks to further inform its bondholders.

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24 Comments

NZ Herald published a few years back that Auckland Council had over 2000 staff on 100K+ salary. Wonder what that figure will be now!

It's barely a tenth of a typical Auckland house price.

Soon will be about one-eighth..

Actually, 2473 staff on more than $100,000. Perhaps vaguely acceptable if the Council worked efficiently, but as anyone who has attempted to do "business" with Auckland Council, the reverse is so true.
They and their so-called "Council Controlled Organisations" are a sick joke.
Given their superior job security, staff paid higher than the NZ median income,...plus our amply remunnerated elected representatives, need to take a substantial pay cut for the term of this virus emergency, ....surely a 'no brainer'.

Tourism, events, festivals and other 'social and cultural well-being' spend should be the first on the chopping block. Compared to the must-have core (3 waters, roads, bridges, some parks, some libraries) the rest is nice-to-have.

Like many people in my sector, I cannot help but be amazed by the high number of people on very good salaries employed in pr, marketing, spin etc. Fair play to them, wish I hadn’t been so critical of the council and decidedly dodgy dealings in a previous life...then I could be on the gravy train with them.

Double-up, sorry✌️

And another

11
up

This is the possibility for the Auckland Council to significantly reduce its huge wastage, including hundreds of managers and consultants, flocks of pen pushers, crowds of marketers and strategists, coordinators and reviewers, Powerpoint virtuoso's, and project managers of over-priced "projects" or "initiatives"of very dubious utility. The so-called SuperCity was created with the promise of significant cost cutting, including excess personnel, which never eventuated. It is a disgrace. Now is the time. There are so many areas that are not essential to the core mission of a council, or that should be left to central government agencies such as Work and Income and Housing New Zealand.
Unfortunately Phil Goff will never have the balls to do any of it: it is easier to just keep milking the ratepayers : after all, it is a captive market, ain't it.

Just remember, this was the brainchild of a National government, and orchestrated by Act leader Rodney Hide. They thought their crony John Banks was a shoe-in as Uberfuhrer. Might have been less of a snafu if he had won. Brown was a disaster, while Goff doesnt seem to exert any control. Interesting to see Cr Chris Darby, usually a loyalist, having a go at him yesterday.

Unfortunately I think you might find the opposite. Council, Crown entity and Govt staff retained and even more employed to help with employment numbers (just watch the wage subsidy morph into ongoing help).

Bailouts will be given to public companies on the condition they promise to keep staff (thus preventing the recipient entity to ever becoming an efficient business and forever being noncompetitive).

I had a dream that when the dust settles on Covid-19, only those working real jobs would be left standing.
It's just not fair, time for a song:
https://www.youtube.com/watch?v=fUYaosyR4bE

Paycuts across the board is what privately owned businesses and the prime minister have done. Hello Auckland Council - thinking beyond the self interest & genuine leadership required here, especially those on high salaries ...

Its all good because when the Auckland house prices go down 25% in the next 12 months your rates will go down 25% right ? Oh what do you mean they have still gone up ? WTF

Council property revaluation will happen late 2020. I predict they will defer it for 12 months with a lame excuse like we can't afford it. When property market values decrease how will council spin their way out of having to reduce CV?

Property prices going down won’t affect rates. Your valuation determines the proportion you pay, not the amount. A median point is set: those below pay less of an increase, even get a decrease, while those above pay more. It’s a very arbitrary process, but easy to administer and impossible to avoid. Interesting, though, if rates keep going up at 2-3 times the rate of inflation, when will they exceed actual incomes?

RV not CV, my bad. Agree with you on some points other than, my RV goes up, then my rates increase. My point is based on https://qvgroup.qv.co.nz/qvcorp/pdf/Understanding%20your%20Rating%20Valu...
How can the council spin that rates will increase if the RV decreases, significantly.

How is RV arbitrary ?

If the council can't man up and take wage cuts then at the very least cut personal expenses. Why are rates being spent on working lunches, taxi,s, entertainment? When it's likely many won't be able to afford rates payments little own lunch!

Deferring rates?, they sound like a financial institution. Spin the 'we are all about helping you' message whilst they fixate on credit ratings to borrow more at lower rates. Stop spending on non-core infrastructure council!

Could we just have a recall referendum like they did it California? Auckland Council is a money wasting Hydra.

The kind of seriously hard look at their finances that was needed.

1100 contingent workers?! What the heck!

Sell some golf courses.

https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=120...

When Chris Darby was a North Shore Councillor he coined the phrase "turtle city" ie that the north shore was overly paved (developed). He now changes his tune to support the way more densely packed development. And no doubt is keen on your idea of selling off golf courses as well.

This indicates that Auckland owning the port and owning substantial shares in Auckland Airport has made it uniquely vulnerably. Anyone screaming we should own these assets willing to apologise?

Assets can become liabilities, if you don't have the resilience to see that through then you need to accept the consequences, as you took the risk. There may be a 10% chance of this occurring, but once it occurs there is 100% impact not a risk weighted average.

What has not been made clear here is that Goffs plan for residential rates is not a 3.5% increase it is 4.5% due to businesses facing a lower increase.
What Goff does is also to increase water rates, rubbish bin tags etc by the residential increase.
Actually, last time, the sewerage component of the water rates went up an even higher amount than everything else which the media did not pick up on.