Michael Barnett: Time to look outside square

As councils unashamedly announce annual rate increases of 10 per cent for the foreseeable future - more than 300 per cent above the annual inflation rate the Reserve Bank is tasked to stay within - the time would seem to have arrived to inject some "outside the square" thinking to discover less costly alternatives to milking ratepayers for the worthwhile projects needed to secure Auckland's future.

Obvious supplementary options that have been mentioned include:

* Central Government picking up a greater share of the cost.

* Greater use of targeted rates so ratepayers can see exactly what worthwhile services they are paying for.

* A more equitable spread so more of the region's 1.2 million residents are not getting a free ride on the "lucky 450,000" who own property and pay rates.

* The private sector funding more projects and recouping the investment through user-pays.

All these factors could make a contribution, together with the long-standing suggestion put forward by business groups - including the Chamber of Commerce - that the Government amend the Local Government Act to limit rate increases to inflation plus population growth.

Doing this would certainly help to cut costs to ratepayers, but it would also destroy a lot of benefits, especially in areas where the Government and the private sector are not prepared to fund but which a local community may regard as a worthwhile asset.

Maybe we all - including the Chamber of Commerce - need to step back from our traditional vested positions on rates and look for new thinking and options.

The findings of some initial research provide a glimmer of hope that the high rates impasse can be overcome.

Viewed as a whole, Auckland councils are lightly indebted. Ratepayers' equity funds 92 per cent of total assets, while total debt finances just 4 per cent of total assets.

Interest expense accounts for 5 per cent of total rates and just 2 per cent of total operating revenue. Councils have significant surpluses and investments that could be used to accelerate infrastructure investment.

What emerges from these findings is the very strong impression that Auckland's councils have a huge untapped capacity, opportunity - and, arguably, duty - to borrow to fund worthwhile infrastructure.

Most ratepayers have to borrow money to buy the property they regard as worthwhile and pay back the loan over many years.

Surely councils have a duty to ensure that investment that is genuinely worthwhile from an overall community perspective is not subject to rationing on budgetary grounds. In other words, a duty of care to ratepayers and other citizens to fund worthwhile infrastructure if there is the capacity to do so.

A second important discovery arises from a comparison of these findings with those of a Government Officials Local Government Funding Project report.

Among the findings is that most local authorities could or should make more use of debt than they do at present.

The report says: "Almost 70 per cent of local authorities do not come within 20 per cent of their self-imposed debt limits at any time between now and 2012-13.

"Although we acknowledge debt is a tool for spreading revenue-raising needs, it appears some local authorities are currently expecting today's ratepayers to meet more than their share of infrastructure costs, and expecting too little from future ratepayers."

The report points out that many of the assets owned and operated by councils have very long lives - 50 years or more.

"Paying for a road, or a water scheme, or a stadium solely from current revenue sources such as rates effectively means that today's ratepayers and users of the service are paying for the benefits that accrue to future ratepayers," the report says.

It suggests that this practice is contrary to intergenerational equity, which the Local Government Act requires local authorities to consider when making funding decisions.

As with anyone buying a house, it is not just the amount of debt that is relevant in deciding whether a council should make more use of debt funding but its ability to service the debt.

Financial rating agencies for local authorities indicate that a "comfortable" ratio of debt to income is 150 per cent; and on the measure of ratio of interest to rates revenue, 20 per cent.

The chamber's high-level findings indicate that Auckland councils' ratio of debt to revenue is 48.5 per cent, and of interest to rates revenue 5.4 per cent - well inside the measures used by financial rating agencies for local authorities.

It seems, then, that the case made here for injecting some new thinking into how we fund worthwhile infrastructure needs to be taken inside the councils themselves.

Those who set rates have yet to discover how to make full use of the opportunities and benefits the local government reform of 1984 has created.

But one thing is becoming very clear: without a rapid injection of new thinking by councils into the rates debate, the growing revolt will spread far and wide and have unpredictable consequences as we approach next year's local government elections.

* Michael Barnett is chief executive of the Auckland Chamber of Commerce and is on the Auckland Regional Council.