The underinsurance risk that Wellington City Council is carrying has improved dramatically, partly because of new earthquake modelling, but it’s still not enough to solve the council’s financial woes.
Central to the case for selling the council’s stake in the airport was its href="https://www.nzherald.co.nz/nz/tory-whanaus-airport-share-sale-at-risk-all-you-need-to-know-ahead-of-crucial-vote/JXJDCM3ENRHVZDGHWWUZNXFUQA/" target="_self">$2.6 billion underinsurance problem.
The proceeds from the sale were to be reinvested into a perpetual investment fund to help plug the insurance gap.
But the sale failed, upending the Long-Term Plan, triggering between $400 million and $600m in budget cuts and prompting the Government to appoint a Crown observer at the council.
New advice has revealed the council’s underinsurance problem isn’t as large as first thought and is more like $1.8b.
Chief strategy and finance officer Andrea Reeves said it was “a good news story”.
She also warned: “$1.8b is still a significant amount of risk, which cannot be managed on the balance sheet alone.”
Local Government Minister Simeon Brown has appointed Lindsay McKenzie (inset) as Wellington City Council's Crown Observer.
So, how has the council’s underinsurance risk decreased by $800m in an economic climate where costs seem to go in only one direction?
In the past, the council has used something called deterministic loss modelling. It’s a blunt tool that forecasts the worst-case scenario after an earthquake.
It also takes into account surge demand.
“[This is] where you have numerous assets all being rebuilt at the same time with limited construction capacity and there’s an element of increased costs that comes with that,” Reeves said.
The council has recently moved to a different type of modelling that provides a more probable scenario and is better suited to financial planning.
It takes into account new modelling released by GNS Science in 2022. It uses a catalogue of more than 100,000 earthquakes to test scenarios.
Reeves said it was more sophisticated.
“It’s much more specific than saying there’s a whole big event right across the city. It gives us a more refined kind of view of what could happen.”
This scenario does not currently include surge demand.
There has also been work to improve council data sets to increase the level of detail in the modelling.
This has resulted in the overall insurance gap being reduced, including $80m from Three Waters assets.
“That’s largely because those assets are dispersed across the city. They’re not necessarily in one place where an earthquake would have intensity, so you’d expect the damage to those assets to be less affected in certain places,” Reeves said.
Naylor Love site manager Matt Turnbull in the auditorium of the Wellington Town Hall in 2022. Photo / Mark Mitchell
A decreased risk to the transport portfolio shaved off $147m.
A further $400m came off the council’s building portfolio. The council has invested hundreds of millions of dollars in building resilience, whether that’s high-quality new builds like the Tākina exhibition and convention centre or earthquake-strengthening the Town Hall and Central Library.
The council has also successfully secured an additional $120m of insurance by being more transparent with the market about the risks it was facing and what it was doing about them.
However, Reeves said the worst-case scenario modelling was still useful for understanding potential risks the council faced.
Her advice remained the same in the wake of the failed airport shares sale, regardless of the change in underinsurance: the council needs to create $500m of debt headroom.
“There will not be sufficient overall headroom to completely mitigate this risk, either at $1.8b or $2.6b. Therefore, the reduction of the underinsurance risk based on updated modelling does not impact [council] officers’ recommendations,” she said.
Alfie Picker and his brother Henry campaigned to save Khandallah Pool from closure earlier this year - it's now back on the chopping block to free up debt headroom. Photo / Mark Mitchell
This headroom and the ability to borrow above the council’s self-imposed debt-to-revenue limit of 225% up to 280% gives the council a total headroom of about $1b to respond to a major event such as an earthquake.
City councillors will meet today to debate which community projects they will cut to create this $500m of debt headroom.
Mayor Tory Whanau has previously revealed which projects she has asked for advice on reducing, deferring or removing.
A new skatepark in Kilbirnie is also on the list, as well as a zoo masterplan, upgrades to the Begonia House, the demolition of the Frank Kitts car park and landscaping for the Fale Male and Chinese Garden.
Whanau acknowledged some of these projects were strongly supported by their communities.
“We will fully engage and listen to them throughout this process. In reviewing these projects, I am endeavouring to stand by those key principles I set out of not increasing rates, fixing our water and not cutting social housing or critical climate action.”
