Auckland Council’s finances – there is no crisis
At the risk of being described as financially illiterate I thought I would revise my earlier post and set out why I think Auckland Council selling its airport shares is a particularly silly thing to do and why Council’s finances are not in a status of crisis.
There has been a lot of talk suggesting that the Council is in a financial crisis. Debt is apparently out of control and there is a “massive” deficit that needs to be resolved.
I don’t share that level of concern. The figures are large but so is Council’s overall asset base.
The last Annual Report indicated that assets were $70.4 billion and borrowings were $11.4 billion.
This is like a household having a million dollar house and a $162,000 mortgage.
And the debt to revenue ratio, as shown by this graph, is within Council’s usual expectations. During Covid Council decided to allow debt to go up to 290% of revenue. It less than 250% currently. Using my earlier household analogy this is like a family having a million dollar house, a mortgage of $162,000 and income of $65,000 per year.
So do we actually need to sell the shares?
In my view there are a number of reasons why we should not.
Historically the shares have performed well. Apart from the Covid period they have consistently provided dividend revenue and they have also appreciated considerably in value since the beginning of Super City as this graph shows.
They dipped during Covid but since the lockdowns have ended the shares are moving up in price. Following is a graph showing the share price over the past 12 months. As can be seen their value has significantly increased over the past six months. The 200 day moving average trend (grey line) is strongly positive. Given their historical performance and their recent performance now may not be a good time to sell.
For an entity that has not paid a dividend for a couple of years AIAL’s share price is surprisingly resilient. And I would have thought that the prospect of 18% of a public company’s shares hitting the market would cause nervousness. But the price is clearly trending upward.
Repeating the household example this is like a family having a million dollar house, a mortgage of $162,000, income of $65,000 per year and Kiwisaver worth $31,800. Except you get about $650 a year paid into your bank account as well as the capital gains.
And the income from the dividends is expected to increase significantly in the next few years. This graphic from a Council shows the analysis which backs the claim that the sale is the appropriate thing to do.
There are two things to note about the analysis. First of all the anticipated interest cost savings are static, despite interest rates being predicted to drop significantly in the next few years. This graphic from the recent Government budget shows by how much.
I appreciate that Council’s finances are complex and that the use of derivatives smooths Council’s interest rate out but to not allow for a reasonably significant reduction in the interest saved by applying any share sale proceeds to debt over time appears to me to be wrong.
And on the income side there is a healthy increase in dividend income until 2028 when the anticipated income flattens. This graph shows Council’s projected increase and what would happen if the gains for the first four years were extrapolated out.
I understand this is because staff anticipated that following 2028 increases would match the rate of inflation. With respect this is very cautious.
The graph indicates that there is a short term benefit in selling the shares and paying down debt. But after a few years of anticipated dividend growth Auckland Council and the region will be all the poorer for any decision to sell.
And it raises into question the Mayor’s rhetoric where he says that selling the shares will save the Council $100 million each year in interest costs. The net figure in year one is $58 million and it then keeps going down, even on Council’s figures.
One other figure, currently Council spends about 10% of its income on interest payments. Given Auckland’s growth and the need to provide infrastructure using borrowing to achieve this is not unusual.
There were other interesting aspects to the Mayor’s budget. He announced further funding for bus driver salaries to move their salaries to $30 per hour. Interestingly this matched the proposal made by Central Government in the recent budget. I wonder who is actually funding it?
He also wants to reduce the Natural Environment Targeted Rate. Given the environmental challenges facing the city in my view now is not the time to do this.
If I had control of the Council’s finances I would accept the Mayor’s proposed savings of $70 million, pump up the increase in rates to 10% to realise a further $110 million and borrow the balance of $145 million. The debt to income ratio would increase to just over 250% but would still be within currently allowed parameters.
And Council does not have to balance the books. Sudden shocks such as two one in five hundred year storms within a week of each other can justify more radical steps being taken.
Selling the shares will in the long term undermine the city’s ability to develop and maintain its assets. Big corporations are lining up to purchase the shares because they realise that in the long term they are a good buy.
I trust that Council will do the right thing this week and keep the shares. And I wish that the decision making process adopted was more conciliatory and less confrontational.
There appears to be shortfall in the Mayors budget of about $310 million dollars. If the shortfall is understood and approved by councli there would be no need to dispose of ALL the shares in question.. JUST… SELL 310 MILLION DOLLARS worth of shares to get out of the problem. And from that point on aim towards the shortfall of that size not re occurrng
Good idea. With $100 million in rates rises and $75 million in efficiencies the figure only has to be $150 million.
It is not right in principle to sell the country or the city’s primary assets to commercial investors especially multinational corporates. The Neo-Liberalism economic system over the last 30 years is selling off too much of NZ public resources, often due to debt or and at a cheap price. The loss of land, forests, water etc to foreign buyers or for BIG business use, means NZ loses far more long term than it gains from short term relief, but government allows it under ‘market rules’ right wing globalism.
The 18% Auckland airport shares should in principle be retained by Auckland Council and ratepayers. However, the real issue with Auckland Airport is the 1billion dollars being spent for a grandiose terminal walkway extension. I hope that is being paid for by the multinational corporates who control the majority of Auckland Airport shares
(not ratepayers). The other problem is the 100,000 migrants that are due to settle in NZ this year and thousands of tourists. Does a totally commercialised airport open the floodgates to everyone to maximise profitability? without any real restraints or protection for the land and people of Aotearoa?
Even if the airport can be regarded as mainly a ‘commercial enterprise’ and thus it is reasonable to sell it, this should not apply to water or food for the people of this land.
The privatisiation of water should only be for commercial uses whereas the prime drinking water supply for homes and families should be kept separate, in public ratepayer ownership. The same principle should be applied to other services -those who profit from use or those who use alot of the resources (water, electricity, etc) -pay more.
The rating system should work in a similar way with high income BIG property owners (more than 2 houses) or properties values at $2million can pay higher rates. The idea that all ratepayers on all properties must pay higher rates seems wrong in principle. A similar argument applies to taxation in general. Surely the billionaires and multinational corporates should pay a higher tax rate than people who earn un der $150,000 p.a.
As for reducing Auckland City Council costs it seems the wrong services are being proposed to cut (eg. CAB, Libraries, community environment and social services etc) I notice there is no reduction on poisonous sprays used in parks and roads. Also tearing up perfectly servicable children’s playgrounds to build new ones. One could list many more examples of non-essential and wasteful spending.
Of course the worst example was on security guards, surveillance, endless signage and advertising for COVID and Vaccines etc etc. Another massive budget blow-out at present is money spent on MORE Maori SIGNAGE everywhere-this is not-essential at this time.
Excellent analysis Greg. You make perfect sense. Council should not sell its airport shares and councillors should vote against it. They should not bow down to the mayor’s brutal approach. Once you sell assets you never get them back and they are lost for the long-term and for future generations.
Do ratepayers need to be remaindered that John Banks sold off 18% of the airport shares for $1.90 a share some twenty years ago…for the ideological short term reasons…
The airport shares are now in the regions of $8.85….they would be worth considerably more if not for COVID and current high finance costs …both temporary matters…
The airport is a monopoly business whose ownership should be kept in local hands…outside interests will just abuse it’s position to maximize profit and socialize the loss….just like the Australian branded banks…with politicians to gutless to do anything about it….
Hi Greg,
Thank you for your analysis. I support your stand.
I am concerned in this debate by
1) The potential loss of strategic publicly owned assets for short term gains and longer term losses
2) The avoidance of including the significant capital gains in these shares over time.
3) What appears to be selective use of data.
Thank you
Lawrence
There appears to me to be a degree of naivety when talking about capital gains. AIA has essentially regulated income with the Commerce Commision making sure it does not make excess profits.
The capex has blown out significantly and potential additional equity may be required which could come from DRP. The companys 2024 PE at 39x v’s global comco at 25.9x suggests it is rather expensive. On other multiples such as EV/EBITDA and EV/EBIT it also looks expensive versus its peers.
Lets not forget Auck City is a minority shareholder and doesn’t have board representation thus has no influence with regards to how this company operates.
The 2024 return on equity is forecast at 4%, the 10yr NZ Government bond rate is 4.42%. Selling when the share price is full looks like not a bad idea, especially when the council borrows at over the NZ Government bond rate!
AIA is only regulated as to its airport assets. Its other assets are privately held and have no restriction.
https://www.rnz.co.nz/national/programmes/ninetonoon/audio/2018893697/airlines-see-red-over-auckland-airport-fees-and-expansion-plans
ROE is only part of it. Dividend income will continue to increase in the medium term.