David Schnauer: Auckland Council finances in a very deep hole

Work under way on the City Rail Link's Aotea Station, in downtown Auckland. Photo / Michael Craig

OPINION:

The year 1984 was a momentous one for New Zealand. Hopefully, history from that year is not about to repeat itself.

The Muldoon Government had been in office for nine years. An election was due at the end of 1984. The New Zealand economy was unravelling. The country had a fixed exchange rate. The Reserve Bank advised the Government to devalue the NZ dollar. Their advice was not accepted.

In June 1984, a snap election was called for July 14. This caused a run on the New Zealand dollar. But the Government said nothing publicly. This was partly understandable, as telling the electorate there was a run on the dollar would probably have increased speculation. But it also meant the 1984 election campaign took place with voters unaware an economic crisis was under way.

Elections where voters don't know key economic facts are not fair elections. It was wrong that voters in 1984 cast their votes not knowing the value of the New Zealand dollar was under threat.

The Lange Labour Government won the 1984 election. It quickly devalued, and floated the dollar within eight months. To ensure disclosure of all economic material for future elections, Section 26T of the Public Finance Act 1989 was passed. This requires a Treasury economic update (including fiscal risks) to be published 20-30 days before a general election. Had the legislation been in force in 1984, the run on the NZ dollar would have to have been disclosed.

All very interesting you say, and yes, 2022 is local body election year, but what has this all got to do with Auckland Council? Quite a lot, actually.

First, it is apparent from its 2022-23 budget that the council's finances are not in good shape. That budget discloses a number of changes made to improve the books. A policy to fund 100 per cent of depreciation by 2025 has been deferred to 2028. Planned capital expenditure has been reduced by $230 million during 2022-25. The council intends to reduce its operating costs by $80m each year, beginning in 2023-24. Its borrowing ceiling has been raised from 270 per cent to 290 per cent of revenue. The budget includes as revenue, a one-off payment of $127m received in connection with Three Waters.

Even with all these adjustments, the council's books still don't balance. The budget goes on to say "the ongoing budget gap the council will need to address in future years (ie after 2022-23) could be $90 million to $150 million." Clearly, Auckland Council's finances are already significantly overspent.

What is not included in this budget, is any cost overrun on the City Rail Link (CRL) project. With work-from-home increasing and many retail stores leaving Queen St, the CRL may yet prove a disappointing investment. With central government, the council is 50/50 funding the CRL, this country's largest transport infrastructure project.

The council has kept details of CRL finances off its books, saying "the appropriate accounting treatment is for the assets (and the associated costs) to remain in CRL Ltd. This is accounted for in [Auckland Council] using equity-accounting".

In 2014, the estimated cost of the CRL was $3.4 billion. In April 2019, the "revised cost envelope" was $4.419b. In addition, $1.11b of wider rail network improvements are needed. This $1.11b was surprisingly not included as a cost in the business case for the project, but must be spent to realise the rail link's benefits.

The Auditor-General has recently reviewed the governance of CRL (but not its finances).

The report notes costs will rise unless budgeted revenue is realised from sales of land around stations. An escalation claim is being sought by the CRL contractor which "could be significant". Further funding for Britomart East station is required. The report recognises "further investment might need to be committed".

The CRL website gives no updated cost estimate after April 2019 — more than three years during which building costs have increased significantly. The CRL's costs have surely increased since 2019, and the council must pay half of any increase.

The council's 2022-23 budget (pages 66 and 80) provides for lower payments to CRL " ... as a result of timing changes to the project". The budget also states, " Given the high level of uncertainty of the new projected cost of CRL, AC budgets will not be updated until more information is known".

Paying for the CRL later than anticipated indicates project delay. There will be an updated cost for CRL, but the amount is not in the council's 2022-23 annual budget because it is currently too uncertain.

Neither does any CRL cost escalation appear in the council's 2021-31 10-year plan.

Indeed (on page 58), only $408m appears to have been allowed towards the council's 50 per cent share of the $1.11b network improvement cost — a $147m shortfall. The 10-year plan (page 59) acknowledges "Different projected ... CRL ... costs could affect ... AC's ... overall funding requirement".

Do voters face a situation that is analogous to the 1984 election? Auckland Council's finances are already under real pressure, before any CRL cost increase. The CRL cost overrun will likely be material for Auckland Council budgets. It could potentially exceed the entire $683m cost of the recently approved Christchurch stadium. A CRL overrun is currently the ignored elephant in the room.

Will voters receive an updated cost estimate for CRL before September 18, when postal voting begins for the October election? Mayoral candidates are already talking free public transport, a new $3b waterfront stadium and moving the port — none of which initially look affordable. But voters lack complete financial information against which to assess the prudence of such policies.

What must absolutely be avoided is any parallel with the 1984 general election. The October 2022 local body elections must take place with voters knowing all aspects of Auckland Council's finances, including the best possible estimate of its increased commitments to the CRL.

For its part, Auckland Council says it encourages both prospective candidates and voters to read the pre-election Report (published in April), which highlights issues that will need to be considered in the next council term.

"Our budget notes the council might need to adjust for impacts of a wide range of issues on its budget over time, and these can be both positive and negative," Auckland Council group chief financial officer Peter Gudsell said.

- David Schnauer is an economist, retired lawyer and the author of Covid, Catalyst for Change.