Rates Increase or Zero Rates Increase?

There’s been a lot of talk of zero rates increases for the upcoming council budget and heaps of political pressure to do it. A few people have asked me my thoughts on the matter and how I think the council would do it. I completed my Masters research on the Council post Earthquake finances and I was a member of the Councils finance committee last term so have a pretty good understanding of the state of play. It is a minefield to navigate with no simple answer and I don’t have access to the latest info but here is a very high level thought piece on my mulling.

Regardless of your views on the matter, given the situation what ever way the council moves it is going to cost, and cost a lot. My initial thoughts on the push for no rates rises is there is no better way to get the bureaucratic machine to focus and deliver. There will be an interlinking expense for every action, the question will be of who. Rate payers, residents, capital projects, service levels or staff numbers?

So what was the situation before Covid-19

Putting it bluntly, the budget was tightly balanced. There was still around $1 billion of rebuild work to go which did not include any of the extra nice to haves everyone wanted.

The city was woefully under-insured to pay for the earthquake repair bill. The governments have not provided well for the city contrary to the rhetoric of x billions spent that comes from the various ministers. So to pay debt at all levels has gone up considerably alongside a more than doubling of the rates taken in with a small increase in population to spread that over.

Next financial year the council planned to spend nearly $1.2 billion, roughly made up 50/50 between Opex (operational) and Capex (capital work). (the council only ever expect to spend 80% of the Capex at best). So how is this currently funded.

• Rates would increase by 4.65% making the take $550 million
• $50 million of grants and subsidies (these are for things like road repairs etc and make up only 10% of the Capex spend).
• $50 million of cash reserves (this reduces the councils liquidity). After this $50 million draw down there will only be $150 million buffer left before the debt liquidity limits will be exceeded. Not ideal!
• About $170 million in fees etc.
• A further $250 million of borrowing. (that will put the ccc group borrowing at about $2.2 billion)
• And $79 million from dividends. (This is where it is going to become very challenging for council) - I'd say there will be approx $30 million at risk.

I am going to make some assumptions from what I have read and understand of the situation facing the council.

1. There will be a significant income reduction from dividends. I am assuming the airport will follow Auckland airport and cancel its dividend.
2. The port was not paying dividends, instead forgoing this to build the cruise ship berth (sheeeze)
3. I will assume the other companys (Red Bus, Enable, VBase, Eco Central, Orion etc) will take a dividend hit and potentially need a rate payer top up.
4. There will be a reduction in rates income as people defer their rates payments. Lets assume this to be roughly $2 million for the period allowed.
5. There will be increased costs, a significant one is more recycling going to the dump. This may cost upwards of $2 million for the period.
6. There will be a reduction of council operational income. Council estimates this to be about $5 million for the 3 month period from March to June.

There could be upwards of $50 million direct Covid-19 related income hit for the city.

This does not include the extra $30 million the council has budgeted to take for rates next financial year. As most of the costs are immediate and operational if council continued the annual budget as was planned and passed the Covid-19 cost on to rate payers it could increase rates by upwards 10% on top of the existing proposed increase. This would amount to an increase next year of at a minimum 15%. To even stay at the proposed rate increase is going to take some big changes.

Zero rates increase. How can that be done:

Reducing costs or increasing income. Not all costs are equal. About $5 million of Opex equates to approx 1% of rates and about $50 million of Capex costs about 1% of rates.

If reduction was the only method available then it means the council will need to raise probably close to $100 million of income or reduce Opex by the same amount. CCC has a wage bill of over $200 million a year with an average wage of approx. $73,000 across all staff. If staff cuts were the way to go zero rates it would lead to upwards of 750 job losses. Not great at a time when jobs are important for the flow on economy. More likely is a mixture of cuts to maintenance budgets, levels of service at council facilities as these also make up Operational expenditure.

Cutting levels of service. This is another way, which is likely that some of the costs will be recovered. What does this look like? More pot holes, parks not mowed (however I do think communities can do this at a fraction of the cost), riverways not cared for, gardens not maintained, playgrounds shut, rubbish collection reduced. The other thing this looks like is costs for things like pools and library books go up and up.

CCC could keep everything operationally the same but reduce more than $500 million in Capex to get to zero rates. This would literally mean stopping all capital work for the year. No new roads, pools, flood protection work, water network improvements, cycle ways, the big anchor projects such as the metro sport and stadium being put back indefinitely. Bad news for the thousands of workers out there that rely on that work.

Or CCC could borrow its way out of this, but with reducing income and soaring debt for the wider group at over $2 billion, even with a pretty solidy asset base liquidity will become the handbrake. The money budgeted to be borrowed in the next few years to build the metro sports facility, the stadium and other essential infrastructure repairs already hits the liquidity limits so there are problems here.

What a storm.

The government is sending pretty mixed messages, one hand the local government minister is saying councils need to cut spending and on the other the minister for infrastructure is saying if councils cut costs the govt will pull partnership funding. Gee wizz!

I look forward to seeing what shovel ready projects the government will choose to fund. If the fund 100% the stadium then this will go half way to balancing the books for the next financial year. Whatever way you look at it, to get a zero rates increase without borrowing more, cutting jobs, reducing maintenance, reducing service levels, deferring projects or selling assets won’t happen unless there’s at least an injection of $500 million for the capital works program.

Some big changes are going to happen to the budgets. In line with the local government rules, the level of changes that are likely will trigger need for an amended long term plan with appropriate consultation somehow. I can’t even begin to think what that looks like legally. But it will be the same for all councils across the country.

Solutions?

Rather than a knee-jerk policy of saying zero rates increase, there needs to be a bloody good look at four basic things. Extra income generation, operational efficiencies, overhauling the capital program and better advocacy for cost sharing from the government. A few things I would throw around as starter for 10 would be:

• Having nearly half the rates going to wages could be a start. Average wage of $73,000 - if there was a 15% reduction across the board scaled so those earning less aren't as adversly affected there could be more than $30 million saved. At 20% this could be more than $40 million. Half the problem
• It is time for CCC to claw in what it is owed. There is considerable money owed to the council from the government and another few institutions which someone should look into.
• Capital budgets are out of control. If you look at the Town Hall, so much of the blow out caused by mismanagement was buried by report after report after report. Does the CCC need to be project manager and client?
• A Christchurch card, the city now pays millions for services to others who have moved to the areas outside the city that were allowed to expand extra rapidly. The double hit of income loss and increased cost needs to be balanced. A Christchurch card gives access to residents who pay through rates. Or we just take over Rolleston, Rangiora, Lincoln and Kaiapoi.
• Could the city get rid of Banks Peninsula? City rate payers subsidise residents of Banks Peninsula by a factor of about 2.25 times.
• Consolidate community and corporate grants, several million could be saved from staff doubling up and efficiencies there without actually reducing the impact for those who have come to depend on them.
• Governance. Every company and organisation has a governance board, a well paid ceo and executive staff and staff to manage them and report writers to write reports to people who write reports to report on the reports. Given the council does need a business approach in some places there can be millions saved here.
• Compliance costs. Goodness how much could be saved there if councils didn’t have to write reports for reports on how good their report was. Sadly some take the micky, but have you noticed that line item every 3 years for several million? That is to audit the long term plan alone.

• Give the waters back to the government. This accounts for nearly a third of the cost for council. Give it back, the Director General of Health before Covid-19 wanted to chlorinate the water, let them pay for that, and the improvements and also pay for the billion dollar bill coming to keep the nitrates out. Waste water processing and consenting costs a mint, this needs to be looked at for efficiencies.
• Charging for our water use? It is political suicide, but it is more than likely going to happen one day. But how about Christchurch set up a Fiji Water type company and create a brand for the city and use what we have here to offset the cost of living here while building the best and safest city water network in the world. Sustainably of course. Could potentially bring in several hundred million every year of income to the city offsetting a large chunk of the current rates demand.

• There is another one many have talked about, the tax on the tax. Scrap the GST on rates. In one foul swoop, CCC could find themselves with an extra $70 million on cash on hand. If other things were looked at, we could even see a reduction in rates over time. Now there is food for thought.

Longer term, in the absence of thinking outside the box to bring extra income to the council there will be cuts, and it is likely to be both projects and jobs. The need to find upwards of $100 million for a one year budget is no small task. I certainly do not envy the job and decisions that councils will need to make, and make quite quickly.