Amid the economic downturn caused by Covid-19, local government is under serious financial pressure. Alex Braae reports.
During his speech to announce the 2020 budget, finance minister Grant Robertson made it clear that there would be no return to the politics of austerity.
Central government would borrow huge sums, blowing out debt levels. The massive spending on programmes like the wage subsidy would be extended, huge new investments would be made in infrastructure, and there would be big increases for social services. In other words, the government would intervene heavily to prevent the worst effects of the downturn.
But the same hasn’t applied to local government. Here, austerity has suddenly become a defining concept for many local politicians to grapple with, even if the word itself isn’t really being used.
Local Government NZ head Dave Cull says “there is definitely a difference” in what central and local government are in a position to do right now, with central government putting up funding for big investments in recovery. “Whatever councils’ aspirations are around contributing to the recovery, their immediate attention is taken by the fact that they’ve lost an enormous amount of funding themselves.”
The pressure on revenues is a result of the way councils are funded. On average, just over half of council income comes from rates, which are paid by property owners and businesses. In the latter case especially, many are crying out for relief because they’re facing their own Covid-19 related economic downturn. Tauranga City Council, for example, will soon put out a consultation document to its ratepayers on a heavily revised annual plan, with a proposed $10m cut to operational spending in order to keep rates rises lower.
Along with that, councils get funding through development contributions – many of which are themselves now on hold over uncertainty about the prospects of new business parks and subdivisions. There will also be hits to revenue from various fees and charges not being taken from the public. For example, Wellington City Council temporarily suspended on-street parking charges, before reinstating them last month.
The other major source of funding for councils is through investments, and the dividends that come from those. There are also problems emerging here. For example, the Bay of Plenty Regional Council owns just over half of the Port of Tauranga, which has already seen an impact on revenue from the loss of cruise ships, and earlier in the year had to downgrade its profit guidance. Wellington City Council is also exposed here, as a third-share owner of Wellington Airport.
Overall, Local Government NZ’s most recent assessment is that councils will collectively suffer a drop in revenue of between 2.3% and 11% below pre-Covid forecasts. In dollar figures, that could mean up to $1.5bn.
Councils don’t have the ability to borrow like central government in order to get themselves out of revenue holes. They are required by statute to effectively balance their budgets each year, unlike the central government books in which the net debt to GDP ratio can be increased almost at will. In practice, it means that a loss of revenue can also result in a loss of ability for councils to borrow, because of debt ceilings.
The revenue crunch means that for many councils the only option left to balance their budget is cutting public services. Auckland Council is a particular case in point here. Under the proposed emergency budget to deal with a revenue shortfall of $525 million, there are savage cuts to public facilities like libraries, public parks and public toilets.
The plan to electrify the city’s bus fleet has been delayed even further, amid wider cuts to public transport services, road safety improvements, and a pause on new walking and cycling projects. This is taking place against the backdrop of rates rising by 2.5 – 3.5% anyway, and a recent 4% rise in public transport fare prices.
The other major effect for the SuperCity is that a large number of jobs will go – cutting against the central government’s desire to keep as many people in work as possible. So far more than a thousand employees and contractors of Auckland Council have lost their jobs, one of the largest individual workforce cuts in the country. Notably, many council staff will now be taking pay cuts – something that hasn’t been required of those working for central government departments.
Not everyone sees this as a bad thing. The Ratepayers Alliance, an Auckland group affiliated with the Taxpayers Union, say that the consultation process on the emergency budget is a “bit of a scam” because it doesn’t include the option for a freeze on rates rises altogether.
“The council thinks that by threatening cuts to road safety, it can guilt trip Aucklanders into supporting higher rates. The reality is there are plenty of other places to cancel or defer spending. Salary cuts need to go harder, deeper, and longer – 2831 Auckland Council staff are paid salaries higher than $100,000,” says Ratepayers Alliance spokesperson Jo Holmes.
There is a wide variance in how much Covid-19 has affected councils, and some are more exposed than others. The smaller rural councils, which already operated much more limited services, might end up faring better over time.
Clive Manley, the chief executive of the Ruapehu District Council, says his organisation hadn’t started with any luxuries in the first place, as services had already been “cut to the bone”. However, he says the council has still been in a position to help people and businesses going into hardship.
While the Ruapehu District Council has had more costs to bear over the period, it isn’t yet seeing a significant loss in revenue from the rating base – in part because a third of properties in the district are owned by non-residents, and because the economic base of the region is in primary industries. Cuts may have to be made over the next year, but they’ll be made with pruning clippers, rather than a chainsaw.
“The small rural councils – we’ve been criticised by the Productivity Commission for not doing enough user-pays, we don’t do enough targeted things for services. Well, that is why we’re not impacted as badly as Auckland. It’s because we’re not dependent on activities,” says Manley.
Central government has come to the table in one sense, through the call for “shovel-ready” infrastructure projects that need funding. This will mean some projects on council wishlists will end up being funded, however it won’t necessarily increase the ability for councils to spend on operations and services. As Dave Cull puts it, “it’s fine to borrow for your house mortgage, but it wouldn’t be wise to borrow for your groceries”. He says conversations are also taking place “in a variety of forums” about ongoing support, but that will be taking place on a case by case basis to suit individual council circumstances.
The crisis also highlights the ongoing concern in the local government sector around unfunded mandates – whereby responsibilities are delegated to local government, without corresponding money to manage them. “Central government often gives us extra work to do, but they don’t give us a funding line to pay for it,” says Cull
The full picture won’t become clear until nearer the end of June, when most councils put through their annual budget plans. But Cull says the immediate effect of this crunch could end up being a delay in vitally important long-term projects, right when they are most needed, and the narrow funding base for councils is getting less and less sustainable.
“They want to continue to provide services, and invest in things that were needed before the Covid crisis, like Wellington’s pipes under Lambton Quay still need replacement, or climate change adaptation that still needs to happen. Councils still want to get on with that, but they’ve had this loss in income, so where else do they get this funding from?”
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