Have councils tried hard enough?

Hawke’s Bay Fruitgrowers recently held a forum to air members’ disgruntlement (my polite term) with the Regional Council’s rate increases. Four hardy councillors – Jerf van Beek, Will Foley, Jock Mackintosh and Xan Harding – attended to catch the brickbats, unassisted by any HBRC staff.

Political lesson #1: don’t offend in style when you must offend in substance. The mood in Twyford Hall … the bastards are hiding. Staff not showing up added insult to injury. 

BayBuzz videographer Patrick O’Sullivan recorded the event. See link to his report below for a flavour of the meeting.

Two clear themes emerged, one that cuts across all our councils from what I’m hearing, and one somewhat unique to HBRC (but related to all borrowing). Beginning with the first …

Cutting councils’ costs

Most ratepayers I encounter feel that councillors have not pressed nearly deeply enough into cost reductions to curb rate increases.

Yes, the various LTPs all insist that councils – councillors and staff – have combed through their budgets carefully and have identified the savings reasonably achievable without compromising expected levels of services. Well, yes and no. 

From my reading of the LTPs, I would say only CHBDC has really done that. The others have dangled a few specifics, possibly for shock value, but then rely mainly on un-specified deferrals of hiring, procurement or programme expansions. To this they then add the real kicker – promises that over the coming months they will get really serious and examine things like the debatably commercial operations they presently subsidise, elimination of non-core activities, rigorous evaluation of their various internal business units, and – ultimately – actual reductions in service levels.

But those future promises are not good enough.

When 20%+ average rate hikes (with many cases of substantially higher rates for some unlucky ratepayers) are on the table, everything needs to be on the table. Now. No sacred cows left alone; no BAU left unchallenged.

It’s time for Doomsday budgets!

Since ratepayers are demanding it, Councils should show us exactly what their ‘inflation-only’ budgets would look like. What activities would be terminated to enable that fiscal goal? Given how traumatic those budgets would be, councils should then be allowed, say, a 10% hike scenario. What would those budgets look like?

And in both scenarios – Doomsday and 10% — councils must be very explicit about what is truly ‘recovery’ spending and what is ‘normal’ operations. No hiding of the latter amidst the former.

If staffs were instructed to produce these scenarios for councillours and public review, three things would happen.

  1. Some additional reasonable cost savings would indeed be identified.
  2. Ratepayers would be forced to bite the bullet about their own expectations of what they want (or will give up) from local/regional councils and better understand how inescapable some spending increases are. 
  3. A greater degree of political permission might be granted to the elected councillors who will inevitably still need to make distasteful rate increases.

It’s called bringing people along, or at least trying to, with greater transparency and honesty about what it takes to provide local government.

And such a process would be far more consensus-building than idiotic battles over which propositions have the most submissions. Any decent lobbyist could generate 500 submissions on any side of any topic in a week!

Borrowing & spending assets

The second theme, pointedly raised regarding the HBRC’s $500 million asset portfolio,

boils down to which council activities should be rate versus loan financed. 

Most would agree that it’s best to fund current operations from rates, and multi-generational projects – e.g., rebuilding water infrastructure, coastal protection, flood protection – via long-term loans, spreading the costs over the life of the benefits. In this scenario, today’s ratepayers must pay for only the current interest charges and depreciation.

HBRC’s unique situation, given it holds considerable assets, adds a twist to this. To what extent, if any, should any of those assets be sold to fund HBRC’s infrastructure needs – the most-used example being stopbanks and other forms of flood protection.

Some less financially literate voices – or plain demagogues – would go further and sell assets to reduce current rates. These are ‘rainy day’ assets they say, and HB has had its rainy day, so let’s raid the cookie jar and shell out rate relief. Hopefully wiser heads will prevail on that one, for we’re going to face recurring ‘rainy days’, probably even more expensive ones. How about another cyclone next year? Or a 9.1 earthquake off our coast, as experts now warn is looming.

A portfolio of $500 million could expect to average, say, 7% annual returns, allowing for ups and downs. That’s $35 million per annum in potential revenue. Wouldn’t even half that be a nice annuity to HBRC ratepayers?! And if meantime HBRC can borrow at 4%, why would it not do that to pay for the infrastructure needs ahead, as opposed to liquidating assets returning more. The math is surely more complicated, but the principle stands as Money Management 101.

All of this is probably too much for most ratepayers to get their heads around. That’s why we have elected representatives, not plebiscites or rate-setting by submission count (former MP reborn as HBRC critic Anna Lorck’s favourite). 

I’ve yet to meet a councillor lusting after rate increases. Political lesson #2.

But, as someone noted at Twyford Hall, councillors do need to take full ownership of their rate-setting outcomes. And they have only about four weeks tops to demonstrate their cost-saving determination and earn some tolerance for their difficult choices.

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5 Comments

  1. Great editorial in the latest Bay Buzz!

    I have been trying to write something myself to tackle a glaring omission, an omission by the local Councils, when they present their glossy arguments regarding planned work and the impact on rates.

    The omission, and it is evident in all cases, is that the Councils present no analysis of their own operations. Are they economical and efficient? Are they overloaded with bureaucracy and red tape? Do they make timely decisions? Is the governance really effective? What about staffing levels?

    In brief, the issue is that the local authorities are NOT commercial businesses even though they might like to think they are. They do not have to compete for marketshare. They do not have to price their services competitively. They do not have to pursue revenue actively. In that respect they are like almost all other government departments too.

    Councils create, and sometimes consult on their future plans. But they can extract revenue for these projects, on DEMAND, from their “customers”. The customers have no choice other than to pay what is demanded. Do the councils actually listen to their customers? That is hardly demonstrated when 90% of respondents to the HBRC on their plans to change the basis for rating opposed the move to a capital value base.

    1. I couldn’t have said it any better…..and in the meantime, I am sitting on my verandah looking a the stop-bank that broke and wonder if , in this case, the HBRDC is going to do the right thing and increase it’s height to (better) protect my house and the rest of the village before the next Gabrielle hit.

    2. Hi Brian,
      I totally agree with you. Every household, family and business can only spend what they have.
      To build back the Hawke’s Bay safer, smarter and more resilient will take some time and available budget should be allocated accordingly to essential programs rather than trying to do it quickly. Allocating multi million dollar budgets requires very professional management in order to avoid wasting money. If the resources and capabilities are not available to spend huge amounts in a reasonable way funds should be saved or used for reducing debt.
      Our HBRC rate increase for 2023/24 will be 121.9% or +450.8% since 2020/21. An additional “hidden” increase will be included in the district council rate when they pass on their HBRC rate increase.
      LV to CV based rates change is out of proportion and needs a thorough review in order to achieve a responsible, efficient and trustworthy balanced budget for all rate payers or rates won’t be affordable anymore for some, eg. a pensioner on a single pension.

  2. Regarding selling some of the non strategic assets in the portfolio vs borrowing – as you say the concept is simple. It is about the difference between long run interest rates. However, these are different to your assumptions. Currently 10 year government bonds are at 4.7%, so the HBRC is likely to be paying closer to 5% rather than 4%. The performance of the existing portfolio investment has been shocking. It has not achieved anything like the NZ Super Fund returns (these returned 10% over the last year). I do not have any confidence that it will return anything like 7% in the long term. Last year was the year to prove it could be done and the HBRC failed.

    1. Hi Andrew,
      Councils have access to a special lending facility set up for local government that gives them lower interest rates. As for past performance, HBRC has reorganised the management of its portfolio … time will tell, but clearly 7% is not an outlandish expectation.

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