In the short life of the inaugural Auckland Council, debt levels have soared.
The council's borrowings will increase from $5.5 billion to $6.7 billion in the current 2013/14 financial year. That's an increase of $1.2 billion in just 12 months, which is over $3 million a day. At the same time the cost of interest payments is forecast at $367 million, which is just over $1 million a day. These are huge numbers.
More worrying is that this is not just a one-off. The council's 2013 pre-election report revealed some worrying skyward escalation. While the 10-year Long Term Plan signed off just last year forecast debt to reach over $12.3 billion by 2022, it has now been revised up by another $598 million to $12.9 billion.
In late 2010, when Auckland's eight councils amalgamated, net debt for the group was put at $3.4 billion, with the expectation that costs would be better contained under one council.
However, the annual net interest costs alone are set to increase from $190 million to a staggering $752 million over the first decade of this amalgamated council - which will then take the equivalent of nearly 25 per cent of annual rates income to fund. That's based on the assumptions that borrowings will not be revised up again and, even more unlikely, interest rates remaining at between 5 and 6 per cent.
New Zealand is enjoying its lowest interest rates in about 50 years which, of course, won't last. What's more, if the council's strong credit rating is ever downgraded it will only add to our woes. Two years ago it was estimated that a one-notch credit downgrade alone could add $12.75 million to the annual interest bill.
When you consider these factors, not to mention the added cost of any future projects yet to be factored in and ongoing population and transport pressures, one thing is certain: the debt and interest numbers will only get bigger as we move through the decade.
A majority of Auckland councillors signed off a new debt ceiling in December 2011 just 12 months after setting the first one. Rewriting the three-year treasury management policy so soon saw the allowable ratio of net debt as a percentage of total council revenue extended from 175 per cent to 275 per cent.
The mayor and senior management argue that our level of debt remains prudent relative to our $3 billion of annual operating revenue and when compared to the council's growing asset base which currently sits at nearly $40 billion. This point, they claim, is evidenced by the council's high credit rating of AA from Standard and Poor's.
Some of us would argue that such a strong credit rating has more to do with the fact that councils are a very safe bet. If you don't pay your rates, the local authority can potentially sell your house. What's more it's somewhat disingenuous to point to the council's $40 billion of assets as proof of its capacity to meet all future financial commitments as the value of our transport network, infrastructure and parks could never be realised if the day of reckoning ever arrived.
So while councils have statutory powers to guarantee income certainty as well as significant asset portfolios, such a privileged position should not be used as a great excuse for unconstrained borrowing.
The mayor now needs to deliver a comprehensive long-term debt strategy for the community and commercial sector to have some real say on. He needs to show how much we're exactly in for, where specifically it's going to be spent, and when and how it will be paid back.
Cameron Brewer has been re-elected unopposed for a second term as the Auckland Councillor for Orakei. He is the chairman of the council's Business Advisory Panel and deputy chairman of the Economic Forum.