Tuesday, March 19, 2013

Council rate increases

Local government finance and policy analyst Larry Mitchell has a short piece in The Truth about council rate increases:

New Zealand Councils, particularly in this election year, make great PR play by citing their proposed current year’s percentage rate increases, more so if an increase is considered modest.
Public interest is drawn to such statements. The problem with council rate increase announcements is that they need not be correct. In fact many are downright misleading and here’s why.
Right on cue here comes my council, Hutt City:

Hutt City Council is proposing an average annual rate rise of less than one per cent in its annual plan for 2013-2014, says Lower Hutt Mayor Ray Wallace.
Mayor Wallace says councillors have proposed increasing rates revenue by an average of 0.9 per cent reflecting the strong financial management of the Hutt City Council’s finances.
Strong financial management? With operating expenditure of around $126 million and debt of $67 million and a deficit for the past two years?

Larry also produces a League Table for the 67 local authorities in NZ. It measures economic sustainability and affordability. Hutt City rates 43rd. For financial performance it rates 'fair'. A few councils achieve a 'good' or even 'very good'.

He writes about the reasons for council indebtedness:

The “it’s not our money” coupled to “castle-building” attitudes of elected members. We have elected many Councillors over the last ten or so years whose debt-fuelled adventures with our money have lead to Council debt levels and gold plated community infrastructure without consideration of their basic affordability to ratepayers and their effect upon ongoing financial sustainability. Large stadia (Dunedin) expensive Council organisations with expensive tastes (with Auckland Council leading the way) and bloated payrolls have unfortunately become the norm. Audit meantime has stood idly by without exercising their wider mandate powers to ensure that public monies are not wasted. Elected members have failed to adequately set and supervise affordable policies that match the incomes and demographics of their ratepayer-electors....

And finally, the role played by the beauracrats. There are some very good people out their working for Councils. But far too many, starting at the top and with CEO leadership missing in action who have paid little heed to matters such as cost containment . They continue to project expenditure/rates increases that pay little heed to the realities of a persistent recession. Enough has been written already of inflated senior staff salaries. I would just add this. Within the relatively stable, secure, mostly risk free circumstances of their employment Council employee terms of engagement do not justify the present private sector competitive rates of payment.
And the following (included in the League Table report) referring to any effect of the GFC, is an article published in Local Government Magazine Feb 2011:

Mr Mitchell says longer term recovery strategies will be needed by 2012 or earlier. Financial plans must now
confront the budget realities of affordability and ‘cut the cloth’.
“These steps should be followed by meaningful and ongoing audit and performance assurance, coupled with
independent advice on the matters. Elected members must avoid ‘staff capture’ by insisting upon provision 
of independent advice covering a range of well understood and fully cost/benefited options.”
Mr Mitchell says he doesn’t accept that councils’ financial problems are principally due to the recession 
which has gripped New Zealand since the international banking crisis hit.“No, I don’t think so. This situation, 
let’s call it a crisis, for that it may well be, has been a long time in the making.
“A major reason that springs immediately to mind is a perverse and unforeseen consequence of the 2002 Act.
This legislation that promised so much has put councils into something of an inflexible and unresponsive
medium term (three to ten-year) straitjacket. It is called the Long Term Council Community Plan. While this
plan is regularly reviewed, it tends to build a model that has in its effect constrained councils’ ability to
readily react to the external financial-economic environment. And this is particularly so of course, when a
recession hits as quickly as this one has.“If you go back to the 2006 and earlier plans, all o
f their projections were for steady increases, as if there was no tomorrow, including − and this is the killer −
the failure to control maximum prudent-affordable-sustainable debt levels. The interest only content of an average residential rates bill for highly indebted councils is alreadyover 25 per cent of its total; a bit like some heavily mortgaged homeowners really to put this into some context."
He believes that current financial difficulties have been exacerbated by the effects of the
short term changesbrought about by a three-year election cycle, coupled with the hands-
off compliance and procedural nature of audits of the LTCCPs.
The LTCCP unfortunately has become a more prescriptive document than is desirable, he says.
“It tends not to stress the importance of affordability and sustainability issues; it pays only passing regard for
the need to adopt accountable economic and financial performance measurement and to cap that lot off its
legislative structure limits the flexibility of councils to make changes even when they see the tsunami coming.
“I believe councils tend to get locked into their plans. If it was a private-sector company, it could react within
a month or at most within a quarter. Given council inertia linked to their legislative and operational
environment it’s like turning around the Titanic.
“Councils are going to have to get pretty active in the next 12 to 24 months because they won’t have many
easy options left. And now they just have! to take the correct actions.”

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