Thursday is Decision Day for the Auckland Council budget and the debate has almost come down to this: sell the airport shares, or raise rates above inflation?
Almost? In truth, it’s a bit more complex than that, as I’ll explain, but shares vs rates has emerged as the main faultline dividing councillors.
The trouble is, if one fails, it doesn’t follow the other will succeed. It’s likely only nine of the 21 votes will favour the shares sale, with a similar split also likely for raising rates above inflation.
That means they will both fail.
It’s stalemate and the clock is ticking. Mayor Wayne Brown and his councillors are required to adopt a budget for the 2023-24 financial year, before it starts on July 1.
The good news is a big majority will vote against most of the spending cuts proposed by the mayor in December. That debate is over and the advocates for frontline community services and related spending have won. Even Brown has changed his mind.
There will still be cuts, but funding has been largely restored for sports, the arts, cultural events, community activities, heritage, Citizens Advice Bureaus, care for the homeless, marae support, the Southern and Western Initiatives, major events and the tech, film and regional business growth sectors.
This debate has come an astonishingly long way. In addition to those proposed cuts, the mayor’s initial plan included a rates rise lower than inflation, sale of the council’s 18 per cent shareholding in Auckland International Airport, a small amount of new borrowing and higher fees and charges for some council services.
Together, these things constitute the “five levers”: spending, rates, asset sales, debt and other revenue. The mayor pulled all of them, but he put most of his weight into the spending cuts and asset sales.
The council sent the plan out for public consultation in February and received a record 41,146 responses. They revealed that views on the share sale are mixed and big rates rises are not popular. But there was clear public opposition to the cuts.
Credit is due to the councillors who skilfully negotiated the changes, among them Deputy Mayor Desley Simpson and planning committee chair Richard Hills. And the mayor should take credit too: Brown always said he would listen to public opinion and he has done that.
A few councillors are holding out. They include newbies Maurice Williamson and Ken Turner, who continue to argue there’s far too much “wastage”. But they’re almost on their own.
The new plan contains a couple of other notable elements, not least of them Auckland Transport (AT) getting $10 million back so it can reinstate cancelled bus services, among other things.
Brown has abandoned his earlier desire to raise residential rates by only 4.66 per cent and now proposes an average net rise of 6.7 per cent, which coincides with the rate of inflation. Most councillors support raising rates by at least this much.
He also proposes to borrow an extra $100m, up from the original $75m. This includes $20m for a “Storm Response Fund”. Most councillors are likely to support this too.
The fund includes better maintenance of culverts, parks and roads; a stronger emergency response capability including better public communications; and better planning of what can be built where. That’s all good news.
But the plan to sell the airport shares remains the cornerstone of Brown’s plan, despite his apparent concession last week that it will probably fail.
It’s extremely unusual for a mayor to take a budget to a vote knowing it doesn’t have enough support to be adopted.
But Brown is playing a high-stakes game, hoping to drag a couple of councillors over the line before Thursday. Strangely, he’s done this by publicly insulting several of them: they’re “financially illiterate”, he’s said, among other things.
Councillors have told me it’s even worse behind closed doors and some have gone public objecting to his personal attacks. At this point, things are so tense it would not be a surprise if even some of his supporters give up and vote against the shares sale.
Few councillors will want to send Brown any kind of signal that such behaviour is an acceptable or effective way to get things done.
Still, I do like the sense of humour with which the new budget has been presented. Usually, documents like this feature a cover photo of people enjoying themselves, perhaps on a beach, at a cultural event or in a playground. Brown’s effort, which is called “Final Budget Proposal: Fixing Auckland’s Budget. Planning for a greater future”, has a photo of road cones.
Mind you, it’s bold of him to call it “final”. It won’t be.
If the airport shares sale fails and he responds by proposing to reinstate all the cuts, that will be very poorly supported.
The shareholding is worth about $2.2 billion and Brown wants to use the money to pay down debt, thus reducing the amount of interest the council has to pay.
The mayor said last week this would “free up $100 million every year”, but there are two ways in which that isn’t true. First, the shares provide revenue. Even council officials, who advocate for the sale, say this will be about $42m next year, rising steadily to $79m by 2031. Subtract those amounts from the $100m saved on interest payments and you get a net benefit of $58m next year, falling to $21m.
Second, that $100m will also fall as inflation and interest rates ease off.
Selling the shares can be done quickly, which is one reason it has been proposed, and it frees up some capital for spending in the short term. There’s value in that. But within 10 years, perhaps even five years, it’s possible there will be no ongoing net benefit at all.
Not acknowledging this involves its own kind of “financial illiteracy”.
It’s been claimed that brokers’ fees would chew up tens of millions of dollars, but this isn’t true. Council officials expect the fees not to exceed 0.15 per cent of the sale price: if it’s a $2 billion sale, that’s no more than $3 million.
The budget debate produces at least three more big questions. Could they borrow more? Could the rates go higher? And is there potential for other revenue? The answer to all three is yes.
Council debt is not out of control or higher than it should safely be. On the contrary, it’s lower than it was pre-Covid and well enough managed to earn the council top ratings from the international credit agencies.
This makes Brown’s plan to borrow an additional $100m conservative. The council could bump it closer to $150m, while keeping its good credit ratings and remaining well within its debt-to-revenue limits.
However, there is a good argument for being conservative at this time. Debt is still relatively expensive and the council will soon face some big spending demands, including CRL costs and the potential buyout of properties ruined by the summer storms.
And rates? Without the airport shares sale, remember, the council expects next year it will be about $58m short. That’s equivalent to a little under 3 per cent on the rates. In future years, even less.
Add 3 per cent to Brown’s 6.7 per cent, and we would still come in under 10 per cent.
What about other revenue? As part of this budget exercise, the council has already revised a whole lot of fees and charges, including for such things as building consents, hall hire and dog registrations. But it hasn’t raised parking fees or extended the use of suburban parking permits. Nor has it reassessed its golf course landholdings.
These are controversial ideas, to be sure. But so is everything else about the budget. It’s too late to include the golf courses this year, because they weren’t consulted on. But they should be, for future budgets.
The obvious solution is to adjust almost all the levers: more debt and higher rates than Brown now proposes, but neither of them excessive, perhaps a part-sale of shares, and why not get serious about parking charges?
But not more cuts. Just for the record, there are still quite a lot of them. They fall heavily on council agencies and staff across the board, and include some climate action programmes, museum and educational spending. All up, $73.8 million is still being carved out of council spending. It’s less than the $125m originally proposed, but it’s still going to leave a hole.