Council coffers fall short for rebuild funding
How should the council plug its financial black hole?
OPINION: Some tough and potentially politically unpalatable decisions will need to be made by the Christchurch City Council as it faces up to a $534 million funding shortfall that could balloon further.
Councillors are going to have to quickly accept the reality they cannot afford to do everything on their or the Government's wish lists.
Cuts and compromises are going to have to be made on all sides, projects will need to be re-examined for cost-savings, and new ideas for raising money looked at.
For example some roading projects may need to be canned or some community facilities left unrepaired.
Council-owned facilities include libraries, pools, sports pavilions, community halls, among others.
Inevitably that will cause conflict and disappointment but there is no ignoring the fact there is simply not enough money in the pot.
If KordaMentha's figures are to be relied on, the council needs another $1564 from every man, woman and child in Christchurch or $3236 from every ratepayer.
Borrowing that money is not really an option because it's near the limit of its credit.
It is going to have to raise the money by other means. Fortunately it has options.
Despite the financial predicament the council finds itself in because of the quakes, it has a strong asset base that it can fall back on and use to leverage funds.
This, for example, could take the form of partial asset sales or borrowing against those assets.
It is due to the council's strong balance sheet that finance committee chairman Cr Raf Manji is confident the organisation can weather the financial challenge it is facing.
There will be pressure from some quarters for the council to sell, or partially sell, some of its assets, but there are other ways for the council to raise capital.
It already has corporate advisory firm Cameron Partners exploring those and it hopes to announce those findings within the next couple of months.
By then the council may also have a clearer picture of how much more money it is likely to receive from its insurers.
Optimistically the previous council banked on receiving $1 billion through insurance payouts but to date the council has only received $356m.
How much more it gets will depend on whether it can reach agreement with its insurer over how much it is owed for damaged assets, and whether its insurer can extract more money out of its reinsurers by settling its legal disputes with them.
Earthquake Recovery Minister Gerry Brownlee's response to the council's challenging finance position has been predictably combative.
He has questioned the veracity of the figures used in the KordaMentha report and is now getting his own consultants to review them.
The outcome of that review is not expected for another fortnight, at which point Brownlee is likely to have a lot more to say.
Why? Because if the council is as short of funds as it claims to be then it may well turn to the Government and ask to renegotiate aspects of the Cost Sharing Agreement that was agreed to last year.
That is the last thing the Government is likely to want to do given the magnitude of funds it has already committed to the Christchurch rebuild.
THE MAIN ISSUES
The cost of fixing the city's broken roads and pipes has been underestimated and is likely to cost $3.59 billion, meaning the council could need to find another $413m. The council has only budgeted $10m for fixing community facilities because it was assuming insurance would cover 95 per cent of the costs.
To date insurance has only covered 45 per cent of the costs, meaning the council could need to find another $121m. Based on those figures the council is facing a cost over-run of $534m.
In reality the cost over-run is likely to be much higher because the amount the council's insurers will pay is likely to be lower than the $1b estimated and many of the cost estimates are "works in progress" so the total estimated cost will change.
The council has to pay $783m for the anchor projects regardless of how much it gets from its insurance because that is what it agreed to when it signed the Cost Sharing Agreement with the Crown. The council cannot borrow any more money.
The possible solutions:
- Reduce the rebuild costs - the council needs to consider not doing some of the work planned.
- Negotiate for the Crown to pay more money or for the council to pay less money for the anchor projects.
- Increase the council's core revenue through rate rises.
- Cut spending in other areas such as the capital programme.
- Improve the performance of council-owned assets and investments, or sell them.
Source: KordaMentha final report
- The Press
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