Govt warns councils on debt levels

Local Govt Minister Nick Smith warns councils on increasing debt levels, hits back at figures from Local Government NZ on costs faced by councils

28th Feb 12, 5:21pm by Alex Tarrant

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.

Defending debt

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.

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43 Comments

by 69er | 28th Feb 12, 6:05pm 1330405543

Just for a laugh, ring your local council building section and ask a question like 'how do you define the footprint of a building'? The person I got didn't know, so rang me three days later to book an appointment for me to come in and discuss it with his boss. Just one ginormous wishy washy make work scheme where the ratepayer is spun around and around till the cash flies out of his pockets.

by Kate | 28th Feb 12, 6:29pm 1330406984

But you're going to an appointment and I'm guessing you won't be billed for the bosses time.

In most council's less than 50% of the cost of the building and consents staff is non-recoverable - meaning the general rates/ratepayers pay to get your question answered.

To my mind - the building and consents divisions should be 0900 numbers. That would get most people reading the volumes of planning documents and other such online information for applicants that are made publicly available (made publicly available courtesy of the general rate again I might add).

After all - TradeMe did it and they're doing alright!

by 69er | 28th Feb 12, 7:19pm 1330409959

What is the point of employing someone to answer queries when they don't have a clue? I never made an appointment as I couldn't wait any longer. Good luck getting an answer through an 0900 number, you'd be on hold for a while. A few years ago I installed a logburner in an old fireplace. Council fees were $130. A friend of mine now wants to replace their old log burner with a new one, installed by a professional. Cost of council fees @ $500. A council inspector will have to turn up at their address, yawn and sign on a piece of paper somewhere.

by bob | 29th Feb 12, 1:31pm 1330475470

The volumes of planning documents and other such online information are so obtuse and obfuscated that normal people couldn't really extract the answer to a basic question from them.

Even planning professionals couldn't give an answer to a question such as "can I build a carport outside my Res 1 villa?". To answer such a question involves investing $1000's and spending 6-12 months on a journey of discovery at the end of which one may find out if the answer is yes or no. Then possibly another 6-12 months and $10,000's required to confirm this answer in the environment court if any party disagrees with the original answer.

by Wolly | 29th Feb 12, 1:36pm 1330475804

No worries Bob, just drive the heap through the wall of a front room and park her inside.

by bob | 29th Feb 12, 1:50pm 1330476647

No Wolly. Driving through the front wall would constitute a change to the external skin of the building therefore triggering the requirement for a resource consent. Unless the hole was sympathetic to the villa form, in sympathetic materials and done sympathetically with the streetscape consent would be declined.

by Wolly | 29th Feb 12, 5:20pm 1330489240

So hit the wall in a Model A....same era....must give you a sympathetic hole!

Do what a mate did when he extended his Evans bay boatshed...built the extension inside the shed..painted the old and the new the same ...then bolted on the extra two metres in the middle of the night...still standing today...funny as a F---t

by Wolly | 28th Feb 12, 6:24pm 1330406649

Nick Smith is really concerned...he's giving it some serious thought....he's had over three years and managed to do nout....the Cabinet will now give the matter of council debt some serious thought...and in the end they will do nout.....

"Debt is an internationally accepted way of spreading costs over future generations" Michael Reid LGNZ Principal Advisor......

With a principal advisor like this...local govt needs some serious govt intervention...like fast.

by Chris-M | 28th Feb 12, 6:45pm 1330407939

That would suggest that they have the competence to intervene positively. Highly unlikely?

by Andy Rodgers | 28th Feb 12, 6:35pm 1330407305

That's easy Nick, if you don't pay your rates the LA either takes you to court or puts it on the house title, so that when it eventually is sold they get their money. It is impossible to avoid paying rates, therefore you are an easy target and virtually have no say in the matter. Voting every 3 years makes no difference as the same people are voted in year in year out by the sheeple.

by powerdownkiwi | 28th Feb 12, 7:28pm 1330410528

Yep, over the other side it's a different story.

Local Govt - more than Central, provides infrastructure, and that is neither going to get any cheaper, not any younger. Welcome to the new paradigm. As usual, we will blame-shift rather than address.

I'm pretty sure Smith, and Key for that matter, know very well what is happening, anthough they wont have any better handle on the timescale than any of us. What they could do, is show some leadership. Tell it like it is. Come up with a strategy.

Not this lot, nor the red lot either, currently.

by Kate | 28th Feb 12, 8:18pm 1330413519

pdk, given you were previously an elected LG official - did you by any chance follow that LG Rate Inquiry some years ago? If I recall they made recommendations and then the Govt changed to the Nats who responded with amendments to the LGA.

If I recall, there was a ecommendation that LAs should fund depreciation on a different basis - as was the case at the time the present generation of ratepayers was both funding the interest on borrowing as well as the depreciation costs on rapidly rising infrastructure values. Their thought was that created intergenerational inequity - i.e. the present generation was paying the double whammy (interest over a 20 year loan and depreciation at a similar rate when much of the infrastucture lasts more than 20 years).

Do you have any idea whether LAs have changed their manner of depreciation? There was also this perverse sort of "benefit" there for LAs in terms of infrastructure revaluations exceeding the CPI and therefore depreciation costs (and the rates revenue charged to pay for it) on top of the more fundamental issue as to whether it should be charged in the first place.

by powerdownkiwi | 28th Feb 12, 9:28pm 1330417734

After my time - we were the era of putting the fire out when it erupted, of the seal stopping at the County Chaiman's driveway, of.......

Yes, they were told to fund for depreciation, and given a fair template to do so. Even then, i pointed out that it would be like trying to roller-skate backwards uphill on a gondola (think I lost them).

by Andy Rodgers | 28th Feb 12, 8:16pm 1330413368

Hugh - Let's not forget who was the guest of honour when Bob Parker launched his ChCh mayoral campaign in late 2010 - none other than John Key.

by Justice | 28th Feb 12, 10:06pm 1330420016

I take it this is the same sort of 'warning' that toothless Brownlee gave the Power companies after they were found guilty of years of price gouging?

Smith as I remember is another gutless wonder who talks alot but rarely actually walks due to the huge pile of s*** surrounding him........wonder where it all came from?....hmmm

by waymad | 28th Feb 12, 10:25pm 1330421136

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I'm an old grizzled ex-County Treasurer who remembers fondly the good old days before the dopey Sandra Lee LG Act 2002 injected 'Social and Cultural Wellbeings' into Councils spending arena.

In a later but abandoned life, I've worked with a few of the data structures which hold Council LTP budgets, assumptions, models and financial statements. They're massive, interlocked data cubes which run in server memory and give instant results. At the top of the accounts dimension is always the critical parent node which gets everyone's undivided attention: Rates Required....In short - how much can we take the rubes for This year?

The biggest influence in total LG spend is the Social and Cultural well-beings. If you take Christchurch as a recent example, the split between S&C and the rest is around 50/50. P18 of this summary bears this out. And guess what S&C spend involves: grants to local organisations (otherwise known as rent-seekers), staff, support for staff, events, learning events (they used ter be called libraries), and so on. Hard to argue with (popular) and damned hard to wind back (staff and unions).

Take S&C out of the equation, revert to the pre-2002 status quo, and watch those ratios right themselves.....

But contain your enthusiasm, don't hold yer breath, because a lot of Voters won't like this, and recall that Tax Takers well outnumber Tax Makers.....

PrxRST();

by Wolly | 28th Feb 12, 11:15pm 1330424110

Smith is just hot air. The rates thieving and LG splurging madness will only be stopped by the credit creators ending the game..raising the cost...then the massive debts will fall on the poor sods still resident in the areas. Kaipara just happens to be the sharp end of the wedge. More will follow as the attitude of Reid continues to hold sway over the idiots who go to him for advice....he clearly think debt is ok...no worries...the more the better.

Currently the LG game is to create work for those taken on during the credit bubble but now sitting round twiddling thumbs...and so all manner of research and studies are carried out... into why snails leave trails and into how to make every puddle in the the rural regions an environmental sanctuary with a costly fence.

by Hamish | 29th Feb 12, 11:15am 1330467327

The cynical side of me, which is most of me, thinks that central government is just getting a bit concerned that local government is continuing to take bigger slices of the average paye pay packet, therefore less for central government to get their hands on. You can only slice up the pay packet so many ways....

by philthy | 29th Feb 12, 7:27am 1330453676

Maybe Nick Smith should have a chat to Bill English as well, hasn't English increased government debt by the fastest rate in NZ's history? so much for being responsible

by powerdownkiwi | 29th Feb 12, 8:22am 1330456978

It's probably time that we had a conversation that was above partisan politics, and ex-vested interests like Hugheys.

Local Govt has to address what it does in the future, not the past. It has to ascertain whether the much-referred-to median multiple will change (it will) and by how much. It then has to triage what it supplies.

Unfortunately, much of the physical stuff it supplies, will be subject to crossing trend-lines - a reduced availability crossing a resultant cost increase crossing aging of the existing infrastructure.

A rock and a hard place doesn't even come close to describing that, and the pace of change will catch most unawares. The Gaussian says that if you chew into a resource (oil for pipe-work for example), the time from peak to finito is approximately 1/5 of the time from start to peak. Oil's been roughly 100 years: expect 20 more. Alkathene in-ground starts to cost more in patching at 20-years, than replacement costs. Try costing that point in time.....

Then, of course, what is 'cost' if your monetary system falls apart? At that point, you just have to do what you have to do. Rates rebates for x hours on a shovel, perhaps. There are a few around here seem practised enough at shovelling.....

by Kunst | 29th Feb 12, 8:42am 1330458152

NZgovernments are becoming increasingly divorced from the public.

Without a nation wide “Intellectual Revolution” soon – the financial and social suffering will be here and will trigger a far more worse scenario – riots in the streets.

In a worsening worldwide situation affecting New Zealand – where are the leaders, the media to bring the nation together ? It all goes in silence.

by Wolly | 29th Feb 12, 8:46am 1330458378

Banging on that drum again Walter....I thought you were busy organising the LG down there to put in an inner rail loop round Kaikoura....! Think of the jobs it would create and you lot are all wealthy so the rates burden would be a doddle.

by Kunst | 29th Feb 12, 8:59am 1330459145

Yeah – how can a government create jobs, when they import most everything ?

..and under that scenario – how can the private sector improve production (create jobs) with a government without an economic strategy – long term ?

by Wolly | 29th Feb 12, 9:47am 1330462034

Local level Walter...get with the scene man...build that inner Kaikoura rail loop with a LG loan that Reid will suggest is the right way to go because it get paid off by the following generations of Kaikoura residents...employ all those work enthusiasts the police are constantly putting in handcuffs down your way...reduce Kaikoura's unemployment numbers to zero and you get a rail loop...heck you might even be able to fund a railway repair workshop...So what if you rates double and double again and again....think of the future man.

by Kunst | 29th Feb 12, 11:18am 1330467503

Government’s illusion.

Yes Wolly – I can see the PM sitting in a Gondola imported from Korea with Minister Joyce from Kaikoura town up to Mt Manukau 2608m – saying: “Wow – what do you think John, I believe we are on an absolute high”

by Wolly | 29th Feb 12, 9:41am 1330461663

Having once been in Foreign Affairs SL, I can assure you that what you are suggesting is close to 99% accurate...you left out the taxpayer funding of schooling and the flights home for hols and the taxfree van loads of goodies shipped home by these hard working state servants...and hard work it is going to all the dinners and balls and parties and oh you get the point.

by Chairman Moa | 29th Feb 12, 3:40pm 1330483229

Yes done my stint at MFAT! What about those who got their posting in Russia? Bought their private luxury cars duty free and then sold them to the rich locals at a huge profits, payment made in local currencies. Then sold their million of rubbles back to NZ govt offical exchange rate - 200K+ profit wasn't uncommon!

by Wolly | 29th Feb 12, 3:53pm 1330483980

It's a grand govt dept for lining the pockets CM....imagine how many van loads of antiques and new cars and plonk made the journey into NZ right behind the returning bureaucrat who was back for some R&R, a debrief and then reposted to another city one step up the scale if he or she had behaved themselves, and drank their tea with the pinky out.

Of course the admin staff were less important...just there to do the paperwork...yessir the real swingers were and are the 'diplomatic staff'....hence the pool in Tokyo...notice how nobody has the guts to ask for a list of facilities at all the other overseas posts!!!!

by Chairman Moa | 29th Feb 12, 4:17pm 1330485441

I was once at one of their Pacific Posts. One of the LAN socket wasn't workind and we discovered the cable has been chewd up by a rat. We weren't allowed to call the local IT company to replace the cable at the cost of $145 NZD. Noooooo we had to request a communication techician from Wellington, who flew over in business class, spent less than 30 mins on the job and then stayed in a luxury hotel for two days waiting for his flight back to Wellington. Rough cost for the job... $6500+. Now go figure who paid for all that! me, you, you , you and you...the tax payers

by Boatman | 29th Feb 12, 9:59am 1330462761

Talking about waste , I watched the local authority re-lay the bitumen on about 1km of Kyle Road Greenhithe ( residential street ) last year . What a fiasco , everyone milling about for days on end . Two dudes doing the stop/ go sign with not a scrap of actual work being done. Putting up and taking down barriers each day morning and evening .

Neck minute .....all the work being done on Saturday and Sunday .

All up it took nearly two weeks for something it takes about 24 hours to do on the Motorway at night

by Wolly | 29th Feb 12, 10:16am 1330463771

It's called make work Boatman...Keynesian madness...err perhaps that should read Key madness.!

by classic | 29th Feb 12, 10:52am 1330465965

Complaining to each other is not going to resolve the problem. LG needs to be put under the spotlight so to speak and made to explain why they need more rates etc. What did they do with the rates money.

Irate dog owners are onto the Auckland Council to justify their imposed new controls and fees. There will be alot of heat over this. The method can be applied to other departments of Councils the same way and target elected representatives.

As for Kiapara, we had a block of land near Mangawhai. The Council in its wisdom under the new CEO at the time ( 1990's) decided to buy a quarry near to us and turn it in to a landfill.

I attended the meetings on the subject and said to all at the time that the limestone would allow leaching from quarry wastes. No it would be lined. What about bird control as aerial topdressing airfields were nearby-- hadn't thought of that.

Landfill went ahead, we sold up as were downhill from it. Result, leaching from the quarry means the landfill waste has to be recovered at cost to ratepayers,now the site is a transfer station.

Mangawhai for years had a trust for wastewater it was a hot subject, now the whole of Kaipara is in debt for over $50 million for the Mangawhai scheme. What happened to the original trust I wonder???? Or maybe I will find out.

Don't be indifferent to all this, get stuck in.

by wtf | 29th Feb 12, 11:13am 1330467210

Mangawhai is interesting. Was the wastewater scheme built to cater for all the subdivisions that now sit mostly unsold or unbuilt on? Going to be hard to pay back via rates when land values there have halved and still no buyers. Maybe they need to halve again. Another result of an unsustainable property bubble and the "build it and they will come" mentality. Efficient allocation of resources not!

by Andrew R | 29th Feb 12, 7:23pm 1330496633

Isn't the Mangawhai wastewater scheme one of those private build and operate and transfer schemes. A public private partnership in action?

by bob | 29th Feb 12, 1:45pm 1330476327

Looks like Auckland Council is planning to make tons of money by introducing a new fee of $190 per annum to keep bees. As the number of bees and beekeepers is already in steep decline this should help get rid of the remaining ones. Once the beekeepers are gone the bees will be gone ('cos they can't live in the wild any more thanks to Varroa) and the 1/3 of our diet that needs bees for pollination (fruit and veges) will be gone too - then the arguements about GST on fruit and veges will be moot.

Does anyone know if Auckland Council was dropped on it's head as a baby?

by Hamish | 29th Feb 12, 4:42pm 1330486963

Oh dear.

What bees? Those bees? They're not my bees. Yes, that's my beehive, but I didn't give those bees permissions to occupy it. Sod off.

by Chairman Moa | 29th Feb 12, 1:52pm 1330476770

I had a few interesting emails from Auckland Council, I have a big oak tree in my back yard. I rang them back in January asking if I can trim a branch - the answer was NO but please ring back in Feb when we have clearer policy. I emailed them again in Feb, the answer was again NO because we are under Residential 1 Zone, they also asked me to read their website for further info on tree trimming policy. So I went to read their website, time after time I found no reference about the restriction on residential zone 1.

Luckily, I was in Auckland last few days so I popped into Auckland Council office, after a 45 mins wait. I got to see a planning officer and she confirmed that YEs I can trim the tree up to 20% by myself or 30% by an approved qualified tree trimmer.… WTF, so why do they employ people who have absolutely no clue of what’s going on.. no wonder our council rates are going up..

by meh | 29th Feb 12, 3:19pm 1330481979

Because they're too busy brainstorming about what else they can spend our money on.

I completed a survey today on run by the Akl Council. What was my knowledge of Aucklands volcanoes. Did I know how many there are? What was my understanding of their geological, cultural and archaeological significance? How important are the volcanic cones to me? How important are they to Auckland? Are any more important than others? How concerned am I about them? What level of care and protection would I like for the geological and archaeological features? What level of access did I think should be appropriate who should be allowed access? Did I agree with the following strategies "Continue to prevent adjoining development from obscuring views of the cones?" "Continue to protect key views and vistas from the cones?" How interested am I and my family in learning more about the cones and have I shown interest in the last 12 months? Where would I go if I wanted to learn more? How likely am I to visit the Akl Museum to learn more? How many had I visited in the last 12 months? What are they up to?

I don't think Local Govt. has any idea about what their role actually is in the community. I don't think the people know either though. Our so called leaders seem to lack any accountability and show no ability to really understand what is important and what is wasteful and inefficient.

by Wolly | 29th Feb 12, 3:28pm 1330482535

Cut 20% out of the trunk near the bottom...problem solved.

by Hamish | 29th Feb 12, 4:44pm 1330487056

Makes me start day dreaming again about selling up, buying a yacht and living on that. Is there local government out on the ocean that can extract rates from you out there?

by powerdownkiwi | 29th Feb 12, 5:10pm 1330488653

Hamish - I'm afraid so. We sailed Auckland - Tahiti - Hawaii late last year. Tahiti, they wanted a 'bond' equivalent to airfares for each of the crew, to wherever their passports originated from. That had to be put into the Bank (Socredo, from memory). After Customs took it's fee.Then each person had to present to the bank, be identified, for refund. After they'd taken their 'fee'. The money was paid out - in French Polynesion francs, squillions of them. Sod-all use in Hawaii. So, you have to back to the teller (next-cubicle to the one you've got the francs from). They charge you a fee for exchanging that which was just given to you, no say in the denomination, one metre away. For a further fee. Three days non-stop in the in and out paperwork.

Short and curlies material. Visas and documentation are serious dosh now, gone are the days of south seas dream-ships. You're seen as being 'richer', and therefore fair game. Can't blame them, I'd probably do the same.

by Wolly | 29th Feb 12, 5:14pm 1330488898

Serves you right for going there. Far nicer destinations in the Pacific.

by powerdownkiwi | 29th Feb 12, 6:35pm 1330493731

No choice, t'was a delivery to Hawaii. You have to stay below the trades, then hard on the wind going N.

I dunno, though. I don't fancy Samoa, Fiji, PNG, all of French Ploy is the same boat - there was a 9mm Glock on the hip of the Customs man in Hawaii (he was a nice fellow, but we called him sir). Moorea was pretty cool, though. I'd go back there again.