Call for city council to increase borrowing as it stares down the barrel of multi-billion-dollar bills
Friday, 23 October 2020
Wellington City Council is facing a 'perfect storm' of economic pressures over the next 30 years, with long-delayed infrastructure and transport upgrades crashing into unexpected costs like earthquake strengthening for some of the capital's most notable buildings.
But the council says it can manage its costs without using the full debt allowance available to it under easier pandemic-related borrowing. That means its options are increases in rates or fees, or asking the central government or private investors for help.
'It's a bit of a perfect storm for Wellington,' said Victoria University senior lecturer in public management Dr Barbara Allen.
Councils around the world had historically under-invested in infrastructure to keep rates down, and those decisions were now coming back to bite them.
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'These are brutally hard decisions that, if you can put aside at a council meeting, you do. At some point it comes to pass, and that time is now,' she said.
Councils had been reluctant for many years to spend money on infrastructure because 'politicians like to spend on things you can see'.
In Wellington's case, the cash-strapped council will need to find up to $6.5 billion over the next 30 years to fund major projects such as the Let's Get Wellington Moving transport programme and a massive upgrade of the city's ageing water pipes.
That figure also includes up to $264 million to strengthen the earthquake-prone central library and Municipal Office Building in Te Ngākau Civic Square.
None of these projects are yet accounted for, meaning the council will need to borrow or raise rates or fees, as well as potentially ask the central government or private investors for help.
Borrowing more is an option.
City councils borrow almost all their money through the Local Government Funding Agency, which temporarily increased its debt limits for councils in July, in response to the coronavirus pandemic.
The cap is usually set at 250 percent of revenue, but that has been raised to 300 per cent over the next two years. That means the Wellington City Council can now borrow up to $1.63b.
However, it currently has forecast debt of $860m by June next year, meaning it could be borrowing up to $770m more than it currently plans to.
The council's chief financial officer Sara Hay said the borrowing cap should be considered the 'absolute maximum' and the council's internal limit was significantly below that, at 175 per cent.
There was 'headroom' to borrow more, and the council's internal borrowing cap would be reviewed through the Long-Term Plan process, she said.
But economic commentator Bernard Hickey said with the council facing bills of up to $5b for new and upgraded water pipe infrastructure and $1.3b for its share in the Let's Get Wellington Moving programme, the organisation needed to change its thinking around borrowing, which nowadays had very low risk.
Interest rates on council borrowing were now as low as 0.35 per cent, meaning even if the council borrowed its full allowance, it would still only be paying $5.7m a year in interest, he said.
'Councils and the Local Government Funding Agency are being way too timid and way too fearful about rising debt and any lowering of credit ratings, at a time when central banks have printed $US27 trillion and bought all of the world's government bonds and council bonds,' Hickey said.
'There is enormous demand, and extremely low interest rates for councils to rely on when they think about solving their infrastructure problems.'
Traditional fears that councils would be punished by international markets should they increase their debt were 'completely out of date', Hickey said.
'They should all reassess their borrowing capacities and reconfigure their mental maps about New Zealand's ability to service debt.'
Council chief executive Barbara McKerrow acknowledged the organisation was facing considerable cost pressures, but strived to be a prudent and efficient organisation.
'Councils around the country are thinking about the pressures on their infrastructure. Wellington City Council is not unique in that,' she said.
'The way councils deal with that will vary depending on local communities and tradeoffs, but elected members ultimately decide.'
While the council was facing a huge number of ongoing and future costs, McKerrow said most of them were already budgeted for through the council's Annual Plan or Long-Term Plan.
Those included things like earthquake-strengthening of the Town Hall and St James Theatre, construction of a new Convention Centre, and the 35 million-litre Omāroro water reservoir in Mt Cook.
But that still left up to $6.5b in non-budgeted costs, including up to $5b to repair and construct water pipes.
In 2014, an Auditor-General's report claimed councils had systematically under-invested in pipes across the country, with the gap between asset depreciation and reinvestment tracking towards between $6b and $7b.
McKerrow said the council's current situation was the result of a very long history.
'As a chief executive, I don't think it's for me to give an opinion about what individual councils have or haven't done,' she said. 'In my experience, I know that councils really did their best with the information available to them at that time to make adequate provision, and really, that knowledge has just been enhanced over a lot of years.'
Up to $4.5b of the estimated $5b pipe spend would need to go towards new infrastructure to match population growth. But that figure could be as low as $2.2b, depending on actual growth.
Hay added the burden would fall not entirely on ratepayers, because the council could impose some of the costs on developers. There was also an assumption that 'growth pays for growth,' she said.
But Mayor Andy Foster recently said the forecast rates increase for 2021-22 looks 'horrific', likely to be more than 15 per cent.
That would be the largest increase for residential ratepayers since 1995-96, when rates were put up by 16 per cent hike.
Despite expecting a $70m shortfall in revenue this year because of Covid-19, the council kept the average rates increase to 5.1 per cent.
Allen, the Victoria University expert, said that these problems couldn't be ignored any longer.
'Earthquake-strengthening in Wellington is always there, too, and again, it's not always acted on that quickly and doesn't really get first priority,' she said. 'We've been spending on other things. People don't get that excited about water pipes.'
Wellington ratepayers had enjoyed low rates for many years, but 'you can't keep rates low forever', she said.
Local Government New Zealand president Stuart Crosby said coronavirus had put immense pressure on councils' non-rates revenues, but he was confident they could manage that pressure while also meeting infrastructure obligations.
However, councils needed to be smart about how they did that, he said.
'If we want to shift to a more sustainable model, we need to have a joined up conversation with central government now. We can't wait to until the ramp-up in demand for infrastructure is already on us to try to work out who pays,' Crosby said.
'Our population ramped up by half a million people in half a decade, and the public infrastructure system – that's roads, water pipes, schools, hospitals, highways – almost cracked as result, and no wants a repeat of that.'
Wellington City’s projects
New water pipe infrastructure - $2.2b - $4.5b over 30 years
Existing water pipe maintenance - $578m over 10 years
Let’s Get Wellington Moving (LGWM) - $1.3b over 20 years
Central library earthquake-strengthening - $180m
New Convention Centre - $179m
Town Hall earthquake strengthening - $112m ($35m already spent)
Omāroro water reservoir - $68m
Municipal Office Building (MOB) earthquake-strengthening - up to $84m
St James Theatre earthquake-strengthening - $34m ($16m already spent)
Frank Kitts Park redevelopment - $30m
Cycleways programme - $75m ($39m already spent)
Social housing Healthy Homes Standards upgrades - $18m
Ngaio Gorge Rd stabilisation - $11m
Funding has yet to be allocated for the water pipe infrastructure, library strengthening, MOB strengthening, and healthy homes upgrades. LGWM does not have allocated funding beyond June 2021.