Setting aside issues surrounding spending on this or that specific project or activity, arguably there are more generic questions to consider about councils’ spending levels, financing methods, engagement in commercial activities, and – these days – even their role in fighting recession.
I invited Nick Stewart, Executive Director of the Stewart Financial Group, to take on some of these questions. Who better to ask than a hard-nosed financial manager who’s also a ratepayer?! Here’s what he had to say.
BayBuzz: Should there be an overall “target” in terms of rate increases? If so, how determined? Is it “good enough” to simply not hike rates above the inflation rate?” How should Councils take into account declining property values, which might eventually depress the rate base?
I believe there should be an overall set target for the increase in rates. However, we all need to appreciate that there is a cost to providing the services we all enjoy and tend to take for granted. The only way to fund these costs is through rates, so it is a user pays basis. The only variable being the value of your land holding, which determines the amount you actually pay.
As, and if, land values decrease it does not mean your rates will decrease, as a large portion of Council costs are fixed. It concerns me that essential Council services are linked to the value of land owned by members of the community. In recent times, Councils have been lucky because land price inflation has been more than both CPI (Consumer Price Index) and wage inflation.
It is interesting to note that one of the Council’s largest costs are human resources in the form of wages/salaries. If there was to come a time when we had low land price inflation, but higher wage inflation, this would create an issue for Council when controlling its expenses versus its revenue.
Many New Zealanders will look at the recent Quotable Value figures showing an 8.9% (on average) nationwide decline in house prices and assume their rates will come down by this amount. However it is not that simple. Councils have managed to pull back some of their increases in recent years. Therefore, they would argue that at the current time there wouldn’t be a decrease in rates given they haven’t put up rates at the exact percentage increase of land over the past decade.
Furthermore, rates are assessed on land value only, not improvements, and the Quotable Value split between the improvements and the land portion is the key. It is incorrect to assume both the land value and improvement’s value both declined at the same rate as the average house price.
It would be fair to say on reviewing advice from the RBNZ, and individuals such as former Reserve Bank Governor Dr Brash, that New Zealand house prices need to substantially retreat further or we will enter a period of prolonged static growth, in both land and house price appreciation, which in turn will create a cap on Council revenue.
What should be Council’s role in running entrepreneurial ventures like Splash Planet or property development companies (HDC proposes to create the latter)?
Private enterprise, on average, always delivers the most efficient and cost effective business projects. Evidence of this was shown two weeks ago with the Government’s review of State Owned Enterprises, where the economic return of New Zealand’s $24 billion of State Owned Enterprise investment/equity was yielding a return of only 4% per annum. By comparison, a private enterprise would be expected to deliver a return of between 8-10% on equity or shareholders would revolt and vote with their feet.
CCMAU (Crown Company Monitoring Unit Association) at times can struggle to find the right calibre of individuals with the right skills to meet its requirements. Therefore you would question whether a small rural Council can source, incentivise and maintain the right managerial and governorship skills to be in the entrepreneurial sector of the economy.
Furthermore, entrepreneurial businesses tend not to have political bias in appointments. Many ratepayers have questioned some of the aspects of the running of entrepreneurial Council activities and some projects appear to gain traction given Councils, with their semi-government status, can access investment capital (in the form of borrowings) much cheaper than the private sector.
Instead of the Council getting directly involved in entrepreneurial activities, you would wonder if they would be better to take an approach, successfully implemented overseas, whereby to attract certain activities Councils give substantial rate relief for a set period of time to encourage that specific activity. On that basis, an entrepreneurial business would assess and make up its mind whether the business was a viable unit with the reduced rate burden.
What activities are appropriately financed by debt versus current rates, and what level of debt is “enough”?
I don’t think it is appropriate to only focus on the level of debt the Council should have. The life of the project we are borrowing capital for and how long the duration of that investment is should also be considered. For example, for a new water plant or sewerage treatment facility (with an expected life of 50 years), I believe the debt level could be allowed to increase above normal levels, given its long duration, as it is an infrastructure project where the benefit is multi-generational. However, when you are talking about tidying up a street, which receives a cosmetic revamp every five years, I question the value of taking on long-term borrowings to achieve that outcome.
Is there an “economic stimulus” role for Local Government spending in present circumstances, if so, within what parameters focus?
I don’t believe it is in the Local Government’s interest to look at economic stimulation in the current climate. Council revenue is limited. Its means of borrowing versus Central Government is limited and its ability to foster economic growth, in my view, is also limited.
It is better Councils focus on their core services and keep these maintained, and in turn let Central Government work on the economic stimulus, as it has more resources in the form of intellectual horsepower and both monetary and fiscal stimulants.
Finally, if you wish, are there some specific spends that seem particularly ill-considered to you?
Whilst Council have become more transparent in their documentation relating to the breakdown of rates, many ratepayers and members of the community still fail to understand the cost of delivery of these services. Many ratepayers also bemoan the local Council rates versus the Regional Council rates. Yet, they fail to understand the subsidy effect of substantial Regional Council assets (e.g., The Port of Napier investment) and therefore dividends received by the Regional Council, which directly subsidise the rates.
Presently there is a slightly unfair playing field on this basis as it would be appropriate for the Regional Council to disclose on its rates notices what the true rates would be: $x less the subsidy from Regional Council investments, giving you a net rate of $x.
[Editor’s Note: According to the HB Regional Council’s LTCCP, 54% of the funding required over its ten-year plan will be met by those deemed to benefit directly from the work to be carried out. A further 38% of funding will be provided by the income earned on Council investments, and Council reserves and loans, leaving 8% to be provided by general funding rates.]