How does Auckland Council’s budget compare to that of an ordinary household?
We are deep into the middle of an election campaign and there are numerous claims that Auckland Council’s finances are in a terrible state. Sure it has been a difficult couple of years. Dealing with the consequences of a once in a century health crisis have obviously left a mark.
How big a problem is it? The latest Council report containing figures to December 31, 2021 suggests that net borrowing was $11.8 billion, other debts were $4.8 billion and total assets were $63.9 billion. Income to June 30, 2021 was $5.32 billion.
Of the other debts $710 million related to derivatives something that I have commented on before.
To put this into a household context it is comparable to a family owning a million dollar home with a $185,000 mortgage and HP and credit card debts and tax debts of $75,000 when the household earns $83,000 a year.
The comparison is admittedly a bit messy. A household just sells the house if things get really desperate. A council cannot sell all of its assets. For instance Watercare assets would be impossible to sell. Who is going to pay for a bunch of old pipes in the ground that it will cost to get out?
But the conventional responses are still the same. To respond you can obviously cut back on expenses, borrow more or sell stuff. Or put off the house extensions that you were planning to do until you can afford to fund them.
Philosophically I am opposed to Council selling any strategic assets and by this I include land holdings in growth areas. Too often I have seen this end in tears. Like the property in the middle of Glen Eden which Railcorp’s predecessor sold for $150,000 and Council then rented back from the landowner.
Eventually Council was paying in rent each year the same amount of money that Railcorp’s predecessor received from the sale. And the land is now worth millions.
The interests of the taxpayer and the ratepayer would be better served by Council taking a longer term view. It always seemed bizarre to me that Council would sell something to corporate interests and expect to do well from the transaction. Corporate interests are not known to do things out of the goodness of their collective hearts.
Should Council defer projects?
Again philosophically I am opposed as deferring projects will also have an adverse effect on the local economy. But it seems inevitable that Auckland’s population will grow slower than previously anticipated. And the Government is ready to step in with projects of its own. Some deferrals particularly of growth projects could therefore be justified. Although any project that assists the mitigation of and adaption to climate change should not be delayed as we are running out of time to deal with this most pressing of challenges.
Which leaves further borrowing as a possible response.
I think that Council’s self imposed debt ceiling policy is difficult to understand and somewhat irrational. Economist Shamubeel Eaqub thinks the same. From Dileepa Fonseka at Newsroom:
“I have no idea why that debt cap is where it is at anyway … it makes no sense to me. I think it’s idiotic.
“Essentially the current rules stop you from being able to invest in the future at a time when interest rates are very low [and] the private sector investment cycle is in a slump.””
The comment is from a couple of years ago and clearly the building sector is no longer in a slump but the general comment on borrowing stands.
To expand on my individual analogy and using ASB Bank’s eligibility calculator if Auckland Council was a single income family of two parents and five kids it could borrow $424,000 which is twice the amount of the current borrowings and other liabilities that Auckland Council have.
The figures are big but the proportions are manageable.
Now is not the time for major service cuts or selling council assets. We have to reform our city and get it ready for climate change. But don’t get too upset by the figures. They are large. But they are manageable.