KEY POINTS:
Auckland City Council plans to borrow more and tax property developers harder to keep rates down. Bernard Orsman explains how the new policies will work.
DEBT
What is the old policy?
The previous council, under Mayor John Banks, sold airport shares and pensioner housing to pay off about $160 million of debt and introduce a zero net-debt policy.
The rationale for this policy is that new capital works can be funded by running large surpluses ($44 million this year, made up of a $15.5 million general surplus, $7.8 million in designated funds and $21 million targeted rates). The argument that the cost of projects should be spread across generations is met by fully funding depreciation through rates. Under this system, ratepayers pay each year for the upkeep and eventual replacement of assets such as libraries over the life of that asset - say 50 years.
What is proposed?
The council plans to take on debt from the 2007-2008 financial year. It proposes to borrow $23.3 million, which is the equivalent of the $15.5 million general surplus and $7.8 million designated funds that comes from rates.
Officers are looking at replacing the targeted rates with debt from next year, and over 10 years increasing debt to $1.35 billion.
Councillors say debt will spread the cost of major projects more fairly across the generations so that those who benefit in the future will also contribute.
But doesn't the current policy say spreading the cost of projects across generations is met by depreciation?
Correct. The fine print of the new policy shows that over the next 30 years ratepayers will pay twice to fund new assets - by funding the interest cost and principal repayments on top of depreciation. This would disadvantage them against ratepayers after that time, who would pay only depreciation costs. To reduce the "double pay" burden, officers have devised a way for ratepayers to pay 1.6 times the cost of new assets. They argue this is the "best balance" to spread costs fairly across generations.
How will the debt policy affect rates?
Rates will be less than planned in the 10-year budget and over the next 30 years. This year's budgeted overall rates increase of 8 per cent will reduce to 3.6 per cent, or 5.4 per cent for households. Rates will be higher after 2036.
Is the level of borrowing prudent?
Previous councils had an upper limit of 120 per cent of debt as a percentage of total revenue. This council is planning an upper limit of 300 per cent, which is in line with Hamilton City Council but greater than many private companies - for instance, Auckland Airport (281 per cent) and Telecom (61 per cent).
The council plans to have a "conservative" debt level of 120 per cent as a percentage of total revenue by 2016 to deal with unexpected shocks and give future councils flexibility to make bold decisions.
In terms of assets, council debt as a percentage of assets will be 11 per cent in 2016. Waitakere (20 per cent), Hamilton (18 per cent) and Tauranga (12 per cent) all plan to have higher levels of debt in 2016.
What can debt be used for?
Finance general manager Andrew McKenzie says the council will only use debt to pay for new assets, such as planned new libraries for Otahuhu and Waiheke and improvements to Westhaven Marina. As a rule of thumb, debt will not be used for operating costs or renewing existing assets. This is funded from depreciation, which ratepayers currently fund to the tune of $120 million a year.
If Citizens & Ratepayers Now regain control of the council at October's local body elections, will they go back to a zero net-debt policy?
Former finance committee chairman and C&R Now councillor Doug Armstrong says the existing policy acts as a discipline on councils. He says the council should only borrow money for assets such as car parking buildings with enough cashflow to pay back the money and as a last resort where there is overwhelming public support.
DEVELOPMENT LEVIES
Property developers face higher charges to meet the costs of population growth
What is proposed?
* Extending the public space development contribution to the central city to charge developers $239 million over 10 years for public space projects.
* $200 million in development contributions over 20 years across the city towards the council's $834 million share of the revised eastern motorway, known as the Auckland Manukau Eastern Transport Initiative.
* Higher development contributions on the Tank Farm waterfront development.
* Combined, these changes will increase the revenue from development contributions to the council from $357 million to $733 million over 10 years.
Why is the council hitting developers hard?
In a word, growth. Chief executive David Rankin says development contributions help cope with an expected population growth of 63,000 people over the next decade. Not only do development contributions contribute to the cost of infrastructure to support new houses, they manage the negative social, economic and environmental impacts. The money will be spent on parks, stormwater, transport and community facilities like libraries.
How are development contributions calculated?
Contributions are based on a number of fixed charges to provide community facilities, stormwater, transport and public space infrastructure, and a variable charge based on land value to buy land for public open space.
Will all development charges rise?
No. Medium and high value developments in the isthmus will pay between $5000 and $20,000 less.
Which developments will be hardest hit?
Central city apartments. Developers will find themselves being charged between $32,000 and $41,222 to contribute towards public space projects in the city.
When virtually no-one lived in the city, the council set low financial contributions (followed by development contributions in 2005) to encourage the construction of apartments. By early last year, the CBD had 13,500 apartments. The downside of this policy was a flood of tiny, cheap apartments. The council now wants to increase the quality of apartments and use higher development contributions to provide new parks and public infrastructure to improve the quality of life for the sizeable CBD population.
