Local Government Minister Nick Smith has laid down a challenge to the local government sector to explain why labour costs in that sector which have outstripped those of the central government and private sectors.
And although Smith said he had sympathy for councils facing cost pressures due to new government legislation, he hit out at officials at Local Government New Zealand who last week critisised comments he made to The Listener about pending reforms the government is looking to impose on the sector.
Smith is set to deliver a set of policies in the next two months focussed on how local government can better control costs in light of rates increases which outstripped the general costs faced by households over the last decade, as measured by the Consumers Price Index.
Talking to journalists in Parliament Buildings on Tuesday afternoon, Smith said he was wary about councils increasing the amount of debt they had, and that options to control council debt levels would be discussed by Cabinet over coming months.
Smith used the example of the Kaipara District Council as one that had got out of control in terms of the amount of debt it had, saying about a third of that council's rates income was now being used to service its debt. The Auditor-General was last week called in to review the council's decision-making, financial and contract management processes in light of a debt blow-out stemming from a wastewater scheme.
Kaipara residents are now facing 20% rates increase as the council faces debts of NZ$85 million, largely as a result of costs for the wastewater scheme.
Smith said he was concerned about the rate at which councils around the country were accumulating debt.
“We’ve gone from about NZ$2 billion nationwide in 2002, to now over NZ$8 billion worth of debt. I’ve got a council like Kaipara which is at a point where its debt is, in my view, unsustainable relative to its rating base," Smith said.
The Auckland City Council, which noted this week its debt was set to rise from an expected NZ$4.6 billion at June 30 this year to a peak of NZ$12.5 billion in 2021/22, was "a long way from that position [Kaipara was in]," although it was still an "enormous increase" for the Auckland Council to be forecasting.
"Debt is the issue of our age; households, farmers, businesses and central government are very focussed on pulling back their levels of debt, and I am concerned that the level of borrowing in the local government sector is continuing to escalate,” Smith said.
Asked whether government was looking at introducing a cap for how much debt a council could take on, Smith said he was exploring options around how to get better fiscal control within councils, including what options there might be for managing debt. There had been no concrete decisions on those reforms yet.
Smith said he would be meeting with Auckland mayor Len Brown on Friday, and that discussions would include the issue of council debt.
"I think all communities need to be quite cautious about the level of debt that they incur. Ultimately debt is rates deferred with interest as well. I certainly do not want to see a large number of councils [get] into the sort of position that Kaipara’s at, where a very large proportion – over a third – of that community’s rates are now having to go into paying interest on debt,” he said.
They need to look at their costs
Meanwhile, Local Government New Zealand (LGNZ) hit back at an article in the Listener last week in which Smith outlined the govenrment was looking at major reforms for the sector.
LGNZ argued against comparing rates increases to the Consumers Price Index, saying costs faced by councils were not the same as those faced by households.
"Council costs are heavily weighted by the cost of bitumen and construction materials. Councils need to purchase these in order to maintain their roading network. The price of bitumen has increased by 95 per cent over the past ten years. This is just one example of the different price pressures councils face," LGNZ Principal advisor Michael Reid said in a media release.
"Besides, rates aren't the fastest increasing component of the CPI - others are increasing faster, including petrol and household insurance," Reid said.
Smith had noted in the article, and in comments made in Parliament, that local authority rates had risen by an average 6.8% per annum, according to the Consumers Price Index, in the decade since the Local Government Act 2002 became law. Over that time, the headline CPI, a measure of general prices faced by households, including rates payments, had average annual rises of just under 3%.
“I don’t think the argument stacks up in saying that all of the rates increases [are] consequences of infrastructure [costs], or individual items like bitumen. Bitumen’s just a very small percentage of total council expenditure,” Smith said.
“My challenge back to the local government sector [is]: Why is the Labour Cost Index for the local government sector at nearly twice the rate for the central government sector? Why [is] the labour cost index within the local government sector significantly above the private sector? Why has there been an increase at more than twice the rate of the private sector in the salaries costs for local government?" he said.
Those salary figures were well beyond being associated with infrastructure costs.
Local Government New Zealand also took issue with comments made in the Listener article about the need to control council debt saying, "despite sensationalist claims by some commentators, the average cost of servicing council debt in 2010 was 5.5 percent of council income".
"That’s well short of the international benchmark of 10 per cent and is on par with the cost of servicing central government’s current debt levels," LGNZ's Reid said.
"Debt is an internationally accepted way of spreading costs over future generations and ensuring the present generation doesn’t pay more than its share. Debt is not the demon it is made out to be and is needed to fund councils’ long term infrastructure plans," he said.