Finances under-rated

ROD ORAM
Last updated 05:00 20/07/2014

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The fight is on for the future of Auckland. The choice is: a healthy one driven by ambition, or a dysfunctional one dragged down by a penny-pinching mentality.

The issue has come starkly to a head with the deliberations over the council's 10-year budget. The decisions the council will make over coming months, guided by public opinion, will set Auckland's course for years to come.

So far the pessimists have dominated the debate with their wildly inaccurate and irresponsible claims that the council's finances are shambolic. Only savage budget cuts can save it, they say.

To set the record straight:

The council runs a budget surplus on operating expenses. In 2012/13 it was $246m.

Rates provide only half the revenues for the council's $3 billion annual budget. The rest come from a variety of sources.

To upgrade existing assets and to build new ones, the council borrows money. It is fair to spread the cost this way since the assets will benefit people for decades to come.

Auckland's patchwork of previous councils was very stingy on debt, resulting in the city's inadequate infrastructure and amenities. Worse, building things piecemeal and late was an inefficient and expensive way to work.

Under the new council structure, debt will have risen from $4b in 2010 to $7.2b next June.

The borrowing has funded projects in town centres around the city, in the city centre, on the waterfront and in transport that have measurably improved the city and its life.

Debt remains well within the limits the council has set itself. For example, interest this financial year will take 11 per cent of revenues and 19 per cent of rates, versus limits of 15 per cent and 25 per cent.

The council has an AA credit rating, better than all but one of our banks.

Hopefully investment to date has given people a sense of Auckland's potential, of what other great things it can achieve. Much of this is expressed in the Auckland Plan, devised by the council and public over the past three years. It is a 30-year view of the city's opportunities and what it would need to do to realise them.

To ensure Auckland can afford to invest in its future, the council drew up in its previous term a 10-year budget. But given the very tight deadlines mandated by the Government, this was only a first shot, based mainly on all the previous council's plans and priorities.

What's on the table now is a 10-year Long Term Plan and budget that fully express and support the city's ambitions. Funding everything in the plan and budget would require average rate increases of 4.9 per cent a year for 10 years and a rise in debt to around $13b in 2022.

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But it's important to bear in mind that the city's population and economy will also grow over the decade. Assuming inflation of about 2.5 per cent and economic growth of 2.5 per cent a year, the city's economy will be 60 per cent bigger by 2022.

Household incomes will rise too. If rates increased by 4.9 per cent a year, their share of household income would rise from 4.4 per cent to 4.9 per cent, the council estimates.

Mayor Len Brown has decided, however, that rate increases should be kept to 2.5 per cent a year, which is the level for the current financial year. Compared to rates increases of 4.9 per cent a year, this would reduce council revenues by $90 million in the first year of the plan, rising to $630m in the 10th year. This would require the council to take $2.8b out of its planned capital expenditures over the first seven years of the plan.

The council is also considering a scenario of a 3.5 per cent rate cap, which would reduce revenues by $430m in the 10th year. It would require a $2b cut in capex.

The council has a variety of ways to achieve these financial outcomes.

For example, the new council structure has exceeded its targets of savings through efficiencies since its outset four years ago. It's lifting its current target of $188m of savings a year by a further $63m.

The council can also reprioritise and reduce some elements of operational spending; sell some assets generating sub-optimal returns; and develop some new ways to fund investment such as public-private partnerships, which will be used, for example, to build a walk and cycle way across the harbour bridge in the next few yers.

All those are useful decisions to make. But we, citizens and council, need to make them based on well-informed debate rather than on the current wilful and hysterical false information.

The much bigger discussion we need, though, is about capital spending.

Almost 50 per cent of capex is on transport, with the City Rail Link as the dominant item. Any significant cuts in capex will deeply compromise Auckland's ability to serve its growing population or grow its economy.

The rail link is the absolute priority. It is essential to achieving the council's goal of doubling public transport boardings to 140m a year by 2022.

The link will enable a fundamental realignment of the bus routes so more will serve suburbs and end at local train stations, rather than going, as now, into the city centre.

This would enable 40 per cent of Aucklanders to be within walking distance of public transport, versus 15 per cent now. Thus the rail link will benefit all people. Without it, we'll suffer ever-worsening road congestion.

All the other planned major investments would generate wide-ranging benefits for the economic, social and environmental vitality of the city. But the most disturbing aspect of the debate so far is how disengaged major organisations across the city are.

In particular, the business community is largely absent from the discussion. It should be even more ambitious than the council. But it is leaving to the council all the tough planning and investment decisions.

We could turn this around very quickly over the next crucial few months while the council wrestles with these decisions. If business and community groups got excited about their city and got their heads around the issues, they would help the council make wise, long-term decisions. Together we would build an exemplary city.

Disclosure: Rod Oram is MCing some council workshops on the Long Term Plan.

- Sunday Star Times

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