Infrastructure

Covid’s tough toll on Auckland Council’s books

A new report from the Department of Internal Affairs delves into the financial strategies councils have deployed to balance their books and support their regional economies after Covid-19

Auckland Council is among the worst-affected councils when it comes to the state of its books and the impact of Covid-19.

The Department of Internal Affairs has released a third report looking at council finances and how they've been affected by Covid-19. 

It reveals most councils have chosen not to cut back on capital expenditure and made up for the lost income with increased borrowing and rates rises.

However, while councils levied higher rates, a lot of them were much lower rises than they had originally planned to put into their annual plans.

"Most councils did not approve a zero rates increase because they considered they could not do so without reducing essential services and/or work on critical infrastructure," they said.

A quarter of the report is dedicated to Auckland Council and the increased financial stress it faced from the pandemic - which ripped a hole through investment and service revenue - and a drought which required more emergency investment.

Councils with a large amount of tourism were the worst affected by Covid-19. This was followed by those councils dominated by large urban areas.

Rural councils with regional economies dominated by primary industries were the least affected.

Infometrics economist Brad Olsen said council budgets reflected regional economic prospects and performance:

"[Councils have] recognised where their own economies are likely to go and therefore what that means for investment spending and activity in the local area and the flow-on effects for revenues and costs."

Government called on councils to 'keep money turning'

Local Government NZ President Stuart Crosby is in the minority. His Bay of Plenty Regional Council is one of a small number of councils who voted to give their ratepayers a zero percent rates rise. 

"We were fortunate - as were some others - that we had reserves to call on."

However, others have had to make an exception to a long-held rule not to borrow for operational expenditure. 

"You don't go and borrow some money to buy the groceries because it's not sustainable, but in the short-term you could possibly do it ... but you don't do it all the time."

Crosby said councils had come under pressure from the Government to lower rates and keep money "turning around in the community" through spending. In other words, minimising cutbacks and rates rises. 

"Most mayors I spoke to understood the situation and while they might have had a rates rise they tried to keep it to a bare minimum."

It's not all bad news though. A drop in interest rates has also seen councils pay less in financing costs. Across 74 councils $508m had been forecast, but they now expected to pay only $373m thanks to historically low borrowing costs.

Government subsidies compensate for drop-off

Auckland Council was badly hit because it receives a large proportion of its income through non-rates sources. 

For most councils, non-rates revenue means either customer transactions (like bus fares or swimming pool fees) or regulatory fees (building consents and licensing).

Customer transactions can be affected both by the economy and Covid-19 restrictions on things like public transport. Regulatory fees can be affected too if building and construction work slows.

However, an expected drop-off in non-rates revenue had been counterbalanced by more government subsidies. 

In some cases councils had received a 50 percent increase in the level of subsidies they had originally budgeted to receive from central government.

Seventy four councils in the report expected to received $976m worth of central government subsidies in their long-term plans, but now expected to receive $1.275b (a 23 percent increase) between them.

A lot of this extra subsidy had come thanks to the bringing forward of infrastructure projects part-funded through the New Zealand Transport Agency (NZTA) or the Provincial Growth Fund.

Auckland had budgeted for $310m less revenue through services, but this had been counterbalanced by additional subsidy income of $83m - largely thanks to NZTA support for the Mill Rd and Penlink projects.

Auckland Council also predicted development contributions would drop by 56 percent from $306m to $136m thanks to a major slowdown in building activity.

If Auckland Council had tried to rebalance this year's expected 15 percent dip in non-rates revenue through rates rises alone it would have had to raise rates by 23 percent.

Not much room to move for Auckland

Instead, Auckland Council split the difference between debt, rates rises, and service cuts because it had less headroom available than almost any other council. 

A drought had added an extra problem into the mix. Auckland Council had to redirect $148m of planned transport investment into water infrastructure to meet the extra $224m required for it.

However, the report found Auckland Council wasn't the only council to cut back on spending. Most councils had reduced staffing costs by freezing staff pay or delaying job promotions. 

"We've removed a hard number at least for something like Auckland because we don't believe it's around a debt number. We believe it's around how the council is actually managing that number."

While newly-revised debt covenants bound Auckland Council to a 300 percent net debt to revenue limit through Local Government Funding Agency (LGFA) covenants, the council also has its own debt target of 270 percent.

Auckland Council has said the 270 percent target is important to maintain its credit rating, but the actual rating agency involved (Standard & Poors) has historically disputed the importance of this.

S&P Global Ratings credit analyst Anthony Walker told Newsroom in May that councils here had a misconception credit agencies had a hard debt to revenue number attached to their credit ratings.

"We've removed a hard number at least for something like Auckland because we don't believe it's around a debt number. We believe it's around how the council is actually managing that number."

Infometrics economist Brad Olsen said it might be time for Auckland Council to review the self-imposed debt target given the current circumstances brought on by Covid-19 and the drought.

More borrowing on Auckland Council's books is something Finance Minister Grant Robertson has also encouraged.

Olsen said the conversation was changing from whether entities like central government should borrow more, to how much each entity should.

"Robertson is saying that councils should possibly look to borrow more on their own balance sheet.

"If Auckland Council has a self-imposed limit then that is their call ... [but] that's a decision. That's a call that has been made.

"The question becomes: is that call still viable?"

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