LOCAL GOVERNMENT with Schnauer & Co
RATING THE RATES
A few weeks ago, Mayor Len Brown released his financial policies for
the Council’s Long Term Plan for 2012-2022. Amongst those was the
rating policy.
Although Councils throughout the country have different rating policies, they remain very similar in one aspect: Councils set their budget by firstly planning their spending, and then adjusting their rates to meet the forecast expenditure programme.
In some ways, this is an anomaly. Most organisations and businesses structure their budgets around their forecast revenue, and then set their spending accordingly. Councils do it in reverse.
This allows spendthrift Councils to essentially do what they want, knowing there is a rating base underlying it to guarantee such spending.
Indeed, when Standard & Poors placed the Council on Negative CreditWatch in early November, the Council’s Chief Financial Officer issued a press release saying that “the Negative CreditWatch does not reflect any change in the security in Auckland Council or its ability to pay interest and refinance the existing loans” because “Council’s existing loans are secured by its ability to rate and that has not changed”.
Throughout Europe, what were once highly regarded governments are being reduced to insolvent positions because of those governments’ failure to curb spending and borrowing. Is that type of problem an issue for this Council?
When the Mayor issued his long-term plan proposal in October, he noted to the Council committee that received it that there was a risk that the Council’s debt limit of 175% of total revenue could be exceeded. If that was the case, the Mayor confirmed that this would have a significant impact on the interest rate the Council pays on its borrowings. IIn light of that limit, council’s Treasury
team is reviewing that ratio to ensure the Council is able to fund its capital
works programme.
That the Treasury team is reviewing the 175% limit is somewhat worrying. When individuals go to a bank to raise a mortgage to purchase a home, the bank will usually ensure that repayments are no more than about 50% of the household income. This ensures that the debt servicing can be maintained by the borrower. The house owner has no ability to say to the bank that it should not worry because 1.4 million ratepayers are guaranteeing that loan. Council can.
In times of austerity, which we must have now, the answer is not for that debt to revenue ratio to be exceeded so that greater spending can occur. Surely the answer must be to reduce spending. Another solution would be to sell some of the Council’s $24Billion worth of assets, which is what the government is looking at doing through its mixed ownership model.
Constantly running to the ratepayer and asking them to fund profligacy has a limited time span. What we also suggest must have a limited time span is the ability of the Council to set its budget by firstly setting its spending, and then raising revenue through rates.
The Shand report on rates prepared by the last Labour government came to the overwhelming conclusion that the rating system as it is, is unsustainable. Ratepayers know this, and feel it about four times a year when they write out their rates cheque to the Council.
The issue of rates rises contributed to the loss of the 2007 North Shore Mayoral election of George Wood when his budget proposed a doubling of the rates over a ten-year period.
A few years before that, excessive rates increases produced a rates rebellion when the then ARC proposed increases over 300 per cent, in some cases.
The writing is on the wall in terms of excessive rates increases but are the politicians sitting around the table paying attention?
State King Of The Bays LEADS WAY...
