Bigger City, Bigger Bills

In brief ...
The last posting outlined rapid spending growth by Auckland Council since created by amalgamating seven units of local government and one regional council.  This post demonstrates that while rates increased only a little ahead of population growth, the boost in investment by the Council since it was created has been funded by growing charges for services and by borrowing. While the finances have been well-managed and debt remains reasonable, there is a question-mark over how long the rapid growth and cost of council activities can outpace the growth of the community and economy.  

This raises a number of questions. The key question: at what point will excessive council spending begin to limit the growth it aims to cater for? 

Keeping rates down

Auckland Council costs have gone up by around 26% over just six years by my estimate. Surely the ratepayers will be rebelling against that? 

Well, not necessarily. Over the same period, rates collected only went up 17% (in 2018 dollars), or 2.6% per year, roughly in line with population growth of 15%.  (That’s not to say they didn’t go up by more in some areas as the Council sought to equalise them across the newly formed city [1]).

But total council revenue went up a lot more, by 51% (in 2018 dollars, based on council annual reports). So, rates accounted for a falling share of revenue, dropping from almost half of the total in 2012 to 38% in 2018 (Figure 1).

Figure 1: Auckland Rates and Other Income, 2012-2018

Citizens are paying in other ways

Charges for local services went up by 44%, or $385m. Most of this is also paid by residents, who have little choice when it comes to water and waste or transport charges.  At the same time, development and financial contributions went up $108m or 150%. While this reflects city growth (and maybe some catch-up from development delayed while the Council was trying to sort out where growth might go), these are paid for mainly by home buyers (especially first home buyers): current and future city ratepayers. 

Figure 2: Main Components of Revenue, 20-12-2018

Building assets – and liabilities

Interestingly, vested assets accounted for 33% of revenue growth reported and 13% of total revenue in 2018 ($510m), up from just 2% in 2012.  Roads, sewer and water pipes (and pumps), reserves and parks, and so forth are transferred to Council at “fair value”as development proceeds .  They are reflected in the balance sheet as a component of non-current assets.

Vested assets are ultimately funded from new property purchase (in addition to development fees, also passed on in property prices).

One way or another, residents pay.

Vested assets are also an ongoing liability given the commitment to maintain them and fund their depreciation.  It is critical that they are well-placed and of a standard that will carry them well into the future if rates are not to escalate indefinitely.

Lifting investment

The Council’s accounts tell a story of recent growth. To better understand how growth is funded, and sidestep accounting conventions which see, for example, expenditure reflected in a reduction in the value of assets and vested assets recorded as revenue, it is useful to look at cash flow figures (Figure 3).

Figure 3: Auckland Council Cash Flow, 2012-2018

They indicate a 36% increase in revenue from rates, grants, fees, and charges between 2012 and 2018, supplemented by borrowings.  Annual borrowing declined significantly over the period, from 26% of cash in 2012 to only 6% in 2018. Presumably increased fees and charges have facilitated this, together with adoption of more diverse financial instruments, the latter reflected in the growth of the Other category (including dividends, interest, and $218m from the Crown in 2018). 

Keeping the lid on – so far

At the same time, the ongoing business of the Council is reflected in just 6% growth in the costs of suppliers and employees, compared with 21% growth in investment.  The fastest growing costs have been interest payments, more than doubling, although at this stage they account for only 10% of total spending (Figure 3). Annual borrowings (net of repayments) have trended down. 

Figure 4: Annual Borrowing and Interest Payments, 2012-2018

Long-term debt was up by $3.3bn (70%) in 2018, to $7.9bn, and total borrowings up $4.3bn to $10.8bn.  Increased indebtedness is reflected in the increased value of assets, up $13bn (35%) including revaluations,  to $50.2bn. Overall, ratepayer equity remained a relatively high 67% in 2018, although well down from an even healthier 74% six years earlier.

It’s not clear, though, whether this debt is doing much for the community. It needs to be.  Total borrowing per head of population (using StatsNZ June population estimates) grew by 76%, from $3,631 in 2012 to $6,384 in 2018. 

One way of charting the value of debt is to plot it against GDP, with the expectation that any improvements in public infrastructure and services might be reflected in output some time later.  The time span considered and a lag in the availbality of regional GDP data limits such an assessment.  However, short-term movements offer no evidence of a productivity benefit yet. Comparing June council debt with regional GDP 21 months later (possible only from June 2011 for debt to the four years to March 2016 for GDP) shows a 62% increase in debt compared with a 20% increase in GDP .  As measured by Stats NZ, Auckland's GDP growth was strong, but not as strong as the growth in the Council’s indebtedness.

Where to from here? 

The Council has kept the lid on its finances, despite the growth of debt, through moderately higher rates and sharply increased fees and charges.  This year it introduced even more ways to pay.  It is set to selectively tax income (on properties providing tourism accommodation) and mobility (levying road user charges over and above road costs which are already funded by the Government’s Road User Charges).

The Super City is delivering for the moment – at least in volume – but at what long-term cost? An appetite for increasing charges and growing debt to support rapid spending growth raises questions.  For example:

·        How much of the spending addresses the Council’s core business and how much is discretionary? And how is spending prioritised?

·       What is the quality of investment, both by the Council and by developers in new public infrastructure ? What are the long-term implications of the new wave of infrastructure for long-term spending on maintenance and funding depreciation?

·       What happens if population-based demand falls below expectations?  The high population projections justifying much of the current spending are by no means guaranteed.  If growth in resident numbers falls short, the surge in civic investment could stymie growth through the costs it imposes on households and businesses.

·      How well will current investments meet the expectations of future Aucklanders about how and where they will live, work, and play?.  Or, are we cementing current preferences into a future about which we have far-from-perfect knowledge?

·        At what point will residents and ratepayers resist rising monopolistic charges for public services? And how will such charges impact on the rest of the economy? 

·        In what ways is council spending impacting on regional productivity and output?

It is only eight years since the Council was formed but if a rapid increase in council costs is placing growth at risk, it may be timely to revisit the question of how Auckland is, or should be, governed. 

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[1]              In Auckland the property rate charged is based on capital value -- land plus improvements -- and the consolidated council has been seeking to eliminate variations in the rate per dollar across the region

Local government restructuring – putting the cart before the horse?

The Quest

In March 2012 central government launched a multifaceted reform programme, Better Local Government. The aim is to “refocus” local councils in the interests of improving governance, efficiency, and management. It identified eight areas for action:

1.  refocus the purpose of local government;
2.   introduce additional fiscal responsibility requirements;
3.   strengthen governance provisions;
4.   streamline reorganisation procedures;
5.    establish a local government efficiency task force;
6.     develop a framework for central/local government regulatory roles;
7.      investigate the efficiency of local government infrastructure provision;
8.      review the use of development contributions.

This is a longer posting than usual.  In it I touch on the key components of the proposed reform and raise a question or two around why and how we are going about it.

Better Local Governance?

The programme is reductionist – breaking reform down into separate parts as if they can be acted on independently. The risk is that the sum of the various initiatives adds up to something less than a satisfactory whole.

For a start, none of the seven subsequent objectives can be considered independently of the first.

The recently issued Local Government Act 2002 Amendment Bill pursues their integration by introducing a new purpose statement. This seems a reasonable approach (whether or not the purpose statement is reasonable).  The purpose should shape local government  funding needs, governance, and management ; determine how it allocates and manages its resources; and influence what it regulates, and how. 

Promoting the Bill as the first step in the reform process also seems to take care of the first four objectives.  It offers the prospect of containing and streamlining what local government does, informed about how it might best do those things by the four reviews promised in the second four objectives.

Or More Central Direction?

The bill will change the  purpose of the Act from providing for :

local authorities to play a broad role in promoting the social, economic, environmental, and cultural well-being of their communities, taking a sustainable development approach (Part 1, 3 (d)).


to:

local authorities to play a broad role in meeting the current and future needs of their communities
for good-quality local infrastructure, local public services, and performance of regulatory functions

Reintroducing statutory limits to curb council (and community) discretion  at the outset of the reform process risks pre-empting what might emerge from those reviews.  The  Bill requires local government to focus on functions that only it can perform. This return to basics means that councils might only act where markets fail or where they can demonstrate collective benefits sufficient to justify local public action . This is a step back from accountability -- because council hands are tied -- and consequently from community democracy. It moves us closer to the strait-jacket 1974 Act that the 2002 Act was intended to unbind. . 

The inference is that since the 2002 Act councils have acted too broadly.  With only a small number of exceptions (the larger councils stand out in this respect), this is highly debatable.

Other provisions of the current Bill further reassert central over local authority. These include scope for setting prudential standards or benchmarks by Order in Council and much strengthened powers for the Minister to intervene in the affairs of councils considered to be “struggling”. 

Ironically, the provision also introduced in the Bill  for elected councillors to dictate staffing and remuneration policy increases the likelihood that councils will “struggle”, confusing roles and reducing executive accountability.  And allowing mayors more power in running their councils – which may be a worthwhile measure in its own right  –  is unlikely to offset the increased exposure to governance failure. In practice, tinkering with mayoral powers while limiting what councils might do may simply lift the tendency evident in our largest authorities towards divided councils and sectional alliances.

Is this the thin edge of the amalgamation wedge?

Perhaps the biggest concern for me is the much greater weight given by the Bill to restructuring. Unlike the reforms of 1989, which were geared towards increasing the effectiveness of local government by doing away with the redundancy, duplication, inefficiency, and excessive overheads of a fragmented, hide-bound system, the objective of these measures is not clear.  Lurking behind them, I suspect, is a commitment to further amalgamations, encouraged by provision for applications for restructuring rather than proposals. 

A preoccupation with amalgamation again raises the spectre of a solution looking for a problem. The evidence that better governance or enhanced efficiencies are delivered by larger units of local government is decidedly mixed. Internationally research suggests that efficiencies may be increased by moving from very small to medium-sized units of local government. But there is little evidence that moving from medium to large units will deliver the goods. 

Certainly I have seen no evidence to support such an approach across the board in New Zealand.  It doesn’t exist in the Department of Internal Affairs Regulatory Impact Assessment for the current Bill, which acknowledges an aim to facilitate more interests and more communities moving on the “union or abolition of councils or the creation of unitary authorities” (Paragraph 158).

Technical efficiencies may be available from merging, sharing, or jointly purchasing particular functions or services across jurisdictions.  That hardly requires amalgamations.  And  there is scant evidence of administrative efficiencies.  Mergers that lead to multiple tiers of management simply pile up the challenges of internal and cultural alignment within enlarged bureaucracies  already struggling to engage with their communities.

The Auckland Experiment – too soon to tell?

In New Zealand’s case we should at least wait to see if the Auckland Experiment works.  The Local Government Auckland Council Act (2009) sought to create a bigger, more influential, and more effective council from the eight that went before. 

Maybe it’s too early to judge the success or otherwise of this  experiment. However, there are sufficient  disquieting signs to suggest that the Government should make haste somewhat more slowly elsewhere. 

For example, the operating budget for Auckland Council in 2012/13 is $2.8 billion compared with the collective 2008/09 operating expenditure of the eight councils identified of $1.95 billion (see Royal Commission Report Appendix B).  Spending growth of 45% (or $721m in 2009 dollars) compares with just 8% inflation between 2009 and 2012.  Transition costs alone can’t explain such a jump in costs - the Royal Commission suggested that at most transition would cost  just $60 million a year for four years.

So much for operating and administrative efficiencies from amalgamation. What about capital expenditure? 

I have not compared collective capital expenditure by the prior councils with the plans of the new council. However, I have already raised doubts grounded in the evidence for Auckland over the Council’s planned capital programme. This is marked by an over-emphasis on the CBD and the $2-3billion it is throwing at an underground rail connection, the benefits from which are both constrained and uncertain.  That central government does not accept the arguments put forward by Auckland Council to justify this investment (despite the $500m already committed to the electrification necessary for under-grounding) is evident in its reluctance to support the proposed rail connection financially. 

The Risks of Amalgamations

These question-marks over Auckland’s capital programme highlight serious questions over the allocative efficiency of larger councils (and, as we often see in the private sector, of large corporations generally).

The creation of oversized municipalities does away with the sorts of checks and balances associated with medium-sized councils.  It raises the spectre of single minded spending of larger budgets on ever more ambitious – and unrealistic  –  pet projects.  Bigger councils with bigger budgets but the same old thinking risk serious misallocation of finite public funds.  And allocative inefficiency is  a greater threat to aggregate productivity with more far reaching consequences than any operating inefficiencies that might be associated with smaller organisations.

A more  cautious approach to restructuring, an approach which encourages modest reform and puts barriers in the way of building large,  bureaucracies  remote from their task environments may be called for.  I suspect that the Auckland Experiment will demonstrate sooner rather than later that restructuring is not the silver bullet that will  put an end to run-away council costs – or run away councils. 

Seeking out Efficiencies

Better Local Government also sets the stage for an expert group to advise the Government on how best to deliver good quality infrastructure at an economic cost.  We need this advice on how to achieve better allocative efficiency before going too far down the track on local government reform generally.  


This call for best practice in policy analysis and the decisions that sit behind infrastructure investment regardless of council size.  Improvements in allocative decisions may well be available before committing to the costs and uncertainties inherent in council amalgamations.

Operating efficiencies might be gleaned from improved process, procedures, training, investment, and, ultimately, purchasing. Administrative efficiencies might be husbanded through moderating the size of councils. But don't expect to make big gains in this area, especially if, in doing so, we further weaken the local government labour market. 

It’s early days yet, but it seems that the advice that emerges from any expert investigation should inform any local government reforms, suggesting that the Bill is premature within the wider programme.

Similarly, it seems premature to promote restructuring while the Local Government Efficiency Taskforce is only now looking at how to streamline consultation, planning, and financial reporting. Equally, the New Zealand Productivity Commission has only just commenced its inquiry into what regulations are best developed and administered at local government level.

Resource Management Review

Something else that bothers me about the Local Government Act 2002 Amendment Bill and how it is clearing the way for amalgamation is what happens to the environment under unitary councils? 

Again we have some experience here, and I would expect to see it brought to bear in the reform process. 

Prior to the 1989 reform of local government and the 1991 Resource Management Act it was all too easy for the environmental gamekeeper to also be the environmental poacher. We need to be aware of the risks of this happening again.  How far, I wonder, is the Technical Advisory Group exploring options for streamlining the RMA (convened by the Minister for the Environment) able to do so in the face of parallel initiatives likely to change both the shape and practice of local government in New Zealand?

Make haste slowly

There may well be merit in the wider programme of reforms the government has instituted, especially in the context of its economic development mandate.  But it seems important that multiple programmes and initiatives do not lead to conflicting outcomes.  An enthusiasm to reform – and restructure  –  local government should not pre-empt the efficiencies that might be achieved by simply boosting the quality of decision-making. Only when we have examined how infrastructure, regulation, and resource management might be delivered most effectively will we really know what sort of reforms might be needed in local (and central) government.

Auckland Spatial Plan – 1: A Plan for all Seasons

Resolving issues of governance, sustainability, economic development, etc, etc, etc

Building on the suggestion of an international review panel that Auckland should have just One Plan, the Royal Commission on Auckland Governance promoted the spatial plan as a unifying and integrating element for the region’s development under a single council.  The Commission commenced with the modest aim that the spatial plan would be “the starting point for the protection of Auckland’s environment and its heritage and the development of good urban design” (p199). 

However, it then set very high expectations for what the plan might achieve.

First, it suggested that the plan would “inform Auckland’s social and economic strategies, the regional policy statement and district plan developed under the Resource Management Act 1991, and specific service delivery strategies” but then it said that it should “coordinate plans for growth, economic development, and social well-being” (347).  It recommended an ambitious 30 to 50 year time frame. 

The Commission further stated that the spatial plan should:  

“analyse population, households, employment, major social infrastructure, open space networks, city-shaping infrastructure of roads, rapid transit, transport services, active transport networks including pedestrians and cyclists, water, wastewater, and stormwater networks, and major energy lines. It should identify the green and ecological network of the region, and areas that should be protected from all development and their natural values enhanced. It should identify growth areas for the region to accommodate urban population, and household and economic development, specifying timing, priority, methods, and agencies involved. The plan would address sustainability, outstanding urban design, a more efficient energy future, climate-resilient development, and the creation of cohesive communities” (531).

It said what tools should be used to prepare the plan, and proposed that it be informed by existing plans and by the new council’s own vision for Auckland, presuming concordance among them.  

It said that the Plan should feed “into the funding plans for key infrastructure (public transport, water, wastewater, stormwater, community facilities)”.  It would inform and be reinforced by an infrastructure plan for the region and be a tool for setting and enforcing Metropolitan Urban Limits. 

The compact city option

Peter Winder, CEO of the now defunct Auckland Regional Council outlined his take on Auckland’s spatial plan in September this year. He illustrated the incremental expansion of the urban area in the past, and its relationship to increasing mobility and an expanded transport network.

Peter highlighted the role of urban limits in planning for growth.  Initially, they were a tool for managing urban expansion.  Generous limits were drawn up in the 1950s in association with a commitment to major road network expansion.  Among other things, they helped open the north of the region to urbanisation following the construction of the Harbour Bridge.

In the 1970s, with revised planning legislation and growing economic uncertainty, a new concern to protect New Zealand’s primary sectors saw a hardening of metropolitan limits in a bid to preserve agricultural land in the region.

The rationale shifted again under the Resource Management Act 1991 as under the influence of Smart Growth proselytisers from North America, the Metropolitan Urban Limits (MUL) took on a life of their own in the interests of "sustainability".  No longer were they simply a tool for protecting valued rural or natural areas, but now they were an instrument for containing and reshaping the urban community.

To some commentators, this has been the source of problems – high cost land and poor housing affordability, a disincentive to industrial investment, traffic congestion and air pollution.  While there has been little definitive analysis to establish their merits in Auckland, MULs have been widely adopted as an urban planning tool.

Peter suggested that options for Auckland's future revolve around the pace at which expansion continues. Under these circumstances, the MUL would remain the defining feature of the spatial plan, whether that is the intention or not.

It was certainly explicit in the Royal Commission’s own policy stance:

“One of the key tools to secure a sustainable future for Auckland is to identify appropriate boundaries for urban expansion. The spatial plan will identify locations within existing urban areas where “densification” is appropriate in order to make public transport viable. Increasing sprawl would have an undermining effect on the provision of public transport and could make improvement unaffordable. Dense cities use less energy per person than the more dispersed model. For these reasons, the MUL is a key policy and the consequent control of land use will require significant enforcement efforts”.

This line of argument raises a number of questions. Despite the assertion that denser cities use less energy per resident, the costs and benefits of enforcing higher densities remains contested.  In any case, promoting land use plans to sustain a public transport preference smacks of the tail wagging the dog, a dangerous posture when public transport requires significant subsidy and its long term energy advantages remain unproven.

In any case, good public transport can lift long-distance commuting, enabling more people to dwell further from the centre.  This is not necessarily conducive to higher densities.  And given that commuting is a diminishing share of total transport use – and that public transport is an inferior option for non-commuting travel – the resulting dispersal may increase total transport demand .  

Peter’s options for the spatial plan echo the Royal Commission's argument.  They suggest that the rate of sprawl across the urban edge might be dictated only by the extent to which development can be forced upwards, and that this is desirable on the grounds that the higher the density the slower the pace of urban sprawl and the greater the prospect for viable public transport. 

Other than promoting increased densities, though, and protecting the obvious no-go areas, there is no sense of real changes or choices in the way we might live and work in Peter’s alternative maps.  Those that can afford nothing better will be confined to medium-rise living in crowded centres, and the others will do what they can to secure a place in existing suburbs, force their way over the city edge, or pick up a high amenity apartment on a central ridge-line or on the harbour edge.

Defending the city ramparts (keeping the hordes in rather than out) to support public transport is promoted as the means to shape infrastructure, dictate how we work and live, and incidentally, slow down an undifferentiated and undistinguished vision of growth by overspill.  Is that really what Aucklanders want?

Getting Real

I have raised concerns about Auckland’s spatial plan in previous blogs.   If it is seen as a panacea for all Auckland’s challenges – governance, sustainability, urban design, resource management, economic growth, community development – as the Commission seemed to think, the plan is bound to disappoint. 

The expectation that spatial regulation will determine economic and social behaviour echoes a long-discredited environmental determinism paradigm.  Its inadequacies have been well illustrated in the tortuous process of defending the 1999 Regional Growth Strategy with its own map and boundaries, and the long struggle since in getting Policy Change 6 in place so that the Regional Policy Statement might more effectively enforce this somewhat confined view of the world.

From ideology to expediency

We actually have the chance now to be more realistic in terms of what might be achieved through a spatial plan (and its bedfellow, the unitary district plan) and more pragmatic in our approach. Rather than defend our past positions,we might allow for the complexities of community and economic development and for the uncertainties that surround the future of housing demand, where we work, and where we play.

The Council’s commitment to completing the spatial plan quickly reflects a pragmatism and recognition, among other things, that any significant initiatives it might raise will need to be reflected in the Long Term Council Community Plan.

But haste also has its risks if expediency rather than reason prevails.  It could amount to little more than a recycling of a dated compact city paradigm; or designed simply to deliver the silver bullet of infrastructure spending.  It could inadvertently set up a master plan for locking down land use; or simply promote a planners’ view of how people should be obliged to live, a plan locked into the here and now of conventional wisdom.  That's what we need to avoid.

A framework for moving forward

Ree Anderson, Manager, Regional, Community & Cultural Strategy recently presented her thoughts on spatial planning to the New Zealand Planning Institute. In quoting the Torremolinos Charter she potentially turned two decades of spatial determinism in Auckland on its head:

Spatial planning gives geographical expression to the economic, social, cultural and ecological policies of society.

She brings four key components to the fore: balanced socio-economic development, an improved quality of life, responsible management of the environment, including built environment and heritage, and a rational land-use plan.  In effect, the spatial plan should be a reflection of society’s aspirations as these might be translated into policy, and not imposed on them to reflect a particular ideology or normative view of development.

Rather than proffering maps as options for her audiences to consider, she has invited responses around three possible elements of a spatial plan:

(1)    Big budget priorities – what public investments are needed, and where?

(2)    Place-based priorities – what needs to be done for individual localities?

(3)    Region wide themes – what needs to be done to make the region as a whole work better?

The notion of building up the spatial plan from understanding the physical limits to development, the communities’ aspirations, and the emerging character of local places, and those matters that require a region-wide perspective seems preferable to seeking region-wide conformity in development within a map of boundaries.

Keeping an open mind rather than extrapolating past preconceptions and practice is more likely to enable the region to deal with uncertainty and change.  Identifying what needs to be done and how – and what sits beyond the bounds of reasonableness – is likely to be more efficient and effective than exhaustive and fixed – and inevitably imperfect – prescriptions of land uses .  Getting the bare bones together, the foundations for planning, rather than trying to lock-down the future in master plan makes a lot of sense.

I might just try to respond to Ree’s challenge in my next posting.