'Horror show': Auckland Council meets to slash $550m from budget

Auckland councillors will earn their $100,000-plus salaries tomorrow when they finalise a draft 'emergency budget' that will cut jobs, delay pet projects and reduce services.

Covid-19 has wiped $550 million from the council's revenue - and councillors face the tough job of plugging the gaping hole.

One councillor likened tomorrow's remote meeting, to be held behind closed doors, to a "horror show".

By law, the budget must be balanced or thereabouts when it goes out for public consultation on Friday.

As well as options for the originally planned 3.5 per cent rates increase alongside a 2.5 per increase will be options to balance the books. Some will come as a shock, like cuts to service levels. Think libraries, gyms and community centres.

Hundreds of jobs are potentially on the line and there's no certainty projects like the $1.4 billion Eastern Busway and Takapuna's Town Centre upgrade will go ahead as planned.

In a statement to the New Zealand stock exchange last week, Auckland Council said many capital investments will be delayed or slowed down and a sell-off of non-strategic assets will be ramped up.

'Tough decisions', Goff warns

Council chief executive Stephen Town has flagged a wide-ranging review that one source said will lead to hundreds of job losses.

Auckland mayor Phil Goff. Photo / Michael Craig

Mayor Phil Goff said Auckland was facing probably the biggest loss of revenue any council has experienced, warning there is no easy way to find half a billion dollars of lost revenue.

"We are going to have to take tough decisions. This is an extraordinary, unprecedented situation.

"The bigger the revenue loss is and the smaller the rates rise is, the more services and capital projects would have to be deferred. That's the balancing act councillors are looking to do."

Goff said the first principle on councillors' minds was to target support to those in most severe hardship and unable to pay their rates, followed by maintaining essential services such as waste, water and urgent repairs, and making progress on capital projects to deal with the city's problems and provide jobs.

What has been the impact from Covid for council?

Revenue has fallen dramatically, damage to the economy has been profound and this will impact on the council's income for several years to come, Town told staff last week.

All up, said chief finance officer Kevin Ramsay, the council and its five council-controlled organisations (CCOs) will take a $550m revenue hit in the next financial year starting on July 1.

Big concerts at Western Springs and Mt Smart will be out, zoo revenue will be down $5m, leisure centres, swimming pools, holidays parks and other community services are forecast to be down $30m. Ports of Auckland and Auckland Airport dividends of $60m each have been cancelled.

Covid is forecast to cost Auckland Council $5m in lost revenue at Auckland Zoo. Photo / Grace Watson

Ramsay also pointed to transport, where having to space people out on buses and a reluctance by people to use public transport will see revenue fall by $40m, reduced parking and enforcement revenue will be down $40m and people working from home will reduce the annual regional petrol tax of $150m by $20m.

Last week, Fletcher Challenge predicted residential building consents will shrink by about 30 per cent over the next year. The council is factoring in $50m in lost revenue from consenting and licence work. That flows through to Watercare, which is expecting a $75m shortfall from infrastructure growth charges and other revenue.

"Uncertainty is the key theme at the moment," said Ramsay.

What's being done to shelter ratepayers from the shock?

Households and business struggling to pay the last quarterly rates bill this financial year - and the same goes for next year - will be able to postpone payment later than normal without penalties.

However, ratepayers facing hardship still have to pay rates. A sum of $65m has been put aside for rates deferrals next year.

"Rates usually end up being collected at some stage. Very, very seldom are they not paid at all," said Ramsay.

How is the council managing the $550m shortfall?

Auckland Council has five 'levers' it can pull: rates, reducing running costs, cancelling or deferring capital projects, debt and selling assets.

When Covid first hit and the country went into lockdown, budget papers show the council adopted a conservative mindset.

The priority was to maintain critical services and capital investments to support economic recovery. Officers said lowering the budgeted rates increase of 3.5 per cent would have "significant long-term consequences", particularly if not caught up the following year.

Fast forward to last week and the tone and messages from council changed to reflect the growing need to preserve cash and the hardship facing Aucklanders. A rewritten version of the draft budget contained plans to delay or slow down projects.

Auckland Council chief executive Stephen Town. New Zealand Herald Photograph by Sarah Ivey

Town told his 7000-plus staff they were the council's greatest asset, but also the greatest cost and a review of how council operates and delivers services would lead to job losses.

This will create uncertainty at an already difficult time, but council and CCOs have to find significant savings. Council's share of the savings is $120m, Town said.

Rates

Auckland is one of many councils considering the option to lower rates as a result of Covid. Other councils, like Rotorua and Dunedin councils, have considered freezing rates.

The council has decided to consult on a previous plan for a 3.5 per cent rates increase alongside a 2.5 per cent increase following a marathon 11-hour meeting in mid-April.

Before Covid hit, rising costs for waste management and lowering rates for businesses would have seen household rates rise by 4.5 per cent and 2.6 per cent for businesses. This would take the average household rates bill to nearly $2800, a rise of $126.

Goff said the council was sticking with the higher waste charges and lower business rates.

In late April, Goff publicly backed a 3.5 per cent rates rise, saying those who wanted to cut rates would only dig a deeper hole and limit the council's ability to borrow to build infrastructure and help the economy.

Last week, he softened this position, saying the council needed to be mindful of the impact of Covid on incomes and he could support a 2.5 per cent rates increase if that's what ratepayers want.

Reduce running costs

It costs $4.2b to run Auckland Council and the five CCOs, which includes operating the city's public transport, libraries, parks, community centres, caring for the environment and the issue that really rankles with many Aucklanders - council salaries.

In the first full year of the Super City in 2011-2012, 1165 staff were paid more than $100,000 and 31 earned more than $300,000.

In the latest 2019 financial year, 2831 staff were paid more than $100,000 and 60 earned more than $300,000.

The plan is to temporarily reduce some council service levels, but nothing has been signalled. Pressed on possible cuts to popular services like libraries and community centres, Goff said "in the main we will seek to maintain those services".

Town has signalled job losses at council, and CCOs like Auckland Regional Facilities and Auckland Tourism, Events and Economic Development, who have seen much of their income and work wiped out by Covid, have begun the process of downsizing.

Auckland Transport is also hugely impacted by Covid and rethinking the new world of fewer people using public transport and working from home, which throws up challenges and opportunities.

Work on the City Rail Link (CRL) is proceeding after lockdown. New Zealand Herald photograph by Dean Purcell.

Capital projects

The council group has budgeted to spend $2.76b in the current financial year on capital projects, but says many capital investments will be delayed or slowed down in the new financial year.

There is a strong desire to maintain levels of capital investment to support economic activity and stimulate employment, but that is no longer feasible.

Councillors will be faced with a list of pet projects that cannot go ahead as planned, ranging from small projects in their community to big ticket items. One source said the $1.4b Eastern Busway may be deferred and a big question mark hangs over town centre upgrades.

The $4.4b City Rail Link, jointly funded by the council and the Government, is proceeding, albeit with a warning it faces extra costs, and there's pressure on council to continue pouring $98.5m into the America's Cup.

The council has also got its fingers crossed for funding from the Government's $3b "shovel ready" infrastructure fund to pay for some of the projects on its books.

Debt

Auckland Council started life in 2010 with debt of $3.9b. Now it is close to $9.6b.

Council's ability to borrow money is tied to its credit rating and a debt-to-revenue ratio of 270 per cent. The council is right up against this debt ceiling, which, if breached could lead to a credit rating downgrade and higher interest costs.

Because of the $550m revenue fall, council has been in talks with the credit rating agencies about raising the debt to revenue ratio to 290 per cent for the next financial year to avoid a possible downgrade. The alternative would be to slash capital spending and cancel construction contracts to maintain debt below 270 per cent.

Council Treasurer John Bishop did not believe the agencies will have a problem with the new parameters, saying the plan is to return to the 270 per cent debt to revenue level the following year.

Delays could hold up turning Takapuna car park into a new town centre. Photo / Herald

Asset sales

The council has an ongoing programme of selling non-strategic assets, such as surplus property or land. Most of these sales are handled by its property arm Panuku, which reinvests proceeds into town centre upgrades and regeneration projects.

The council plans to ramp up sales, but instead of investing the proceeds in neighbourhoods across the city it is understood most of the money will go towards plugging the revenue hole.

This could see work deferred on many projects, such as the new Takapuna Town Centre and revitalising Henderson.

There are no plans to sell strategic assets such as the 100 per cent-owned Ports of Auckland or council's 22.4 per cent shareholding in Auckland Airport.