Submission to Auckland Council Emergency Budget - Annual Budget 2020/2021

Introduction

Heart of the City is the business association for Auckland’s city centre. We represent the interests of businesses and property owners in the city centre.

Key points of our submission

• This is a time for effective economic stimulus, not austerity.  Auckland Council must maintain spend on important projects that will aid economic recovery and meet agreed longer-term objectives. 
• Spending is required at the level at least envisaged by a 3.5% rates rise but we do not believe the ratepayer should be asked to pay more than a maximum rates rise of 2.5%.
• There is significant change required to achieve this and a more sustainable position going forward:
  • Auckland Council must transform its total organisation (incl. Council Controlled Organisations) to become efficient, effective and “customer” focused.  This is different from seeking operational savings across the existing organisation and we believe it will deliver savings well in excess of what is proposed in this budget.
  • Auckland Council must review its funding mechanisms and implement change in advance of the upcoming long-term planning process.  Heart of the City has been asking for this for a significant period and we continue to see piecemeal approaches to funding. 
  • Auckland Council should take the opportunity to increase borrowing in the short term.
  • Some of the assumptions in the Emergency Budget are more conservative than is currently the case and these should be reworked before the rate is set for the 2020/21 year.
  • Auckland Council must communicate its approach to strategic asset ownership more effectively and be prepared to review this in the long-term plan if there are compelling reasons to do so.
• Auckland Council must take a truly collaborative approach to working with stakeholders early in key projects.  This is a long-term systemic problem that creates significant waste (time, money and poor project outcomes) and the COVID-19 experience has reinforced the scale of this issue.
• The city centre has been particularly impacted by the loss of international tourism, students, large-scale events and the impact of people working from home.  Auckland Council must demonstrate its support for economic recovery and the utilisation of prior investment in the city centre by:
  • bringing its workforce back to the city centre immediately. 
  • addressing barriers to recovery and providing certainty for businesses as they tackle the impact of COVID-19.  For example, effective border control is vital to provide clarity around the impact on tourism, students, events and other resources required for growth. 
  • striving for a greater share of Government funding for domestic tourism, events of national significance, the arts and other initiatives that will support recovery and ensure support for those most impacted by COVID-19, including sustainable solutions for housing the homeless.
  • ensuring effective mitigation of the impacts of construction and support for those impacted by large-scale, long-term construction.
• Auckland Council must demonstrate greater transparency and respect for businesses that pay the City Centre Targeted Rate.  CCTR funding should be used for the purpose it was intended and not for Council’s cashflow purposes, and we would like a stronger rationale for the proposed deferral of projects. 
• Whilst the matters above are urgent and work must start immediately and have clear timeframes, we appreciate that some will take time to resolve.  However, in this environment rate increases should only be used if absolutely essential to fund activities that will help economic stimulation and recovery requirements in 2020/21 and once all other avenues have been exhausted. Knowing that the difference between a 2.5% and 3.5% rates rise is likely to be around $20m in revenue, Council should be able to identify at least a further $20m of further savings from internal organisational improvements (rather than service level reductions) and other opportunities outlined in this submission, so as to keep any increase in rates as low as possible.

Background

Council has outlined four key levers to respond to this financial challenge:

• Increased council borrowing
• Reduced capital investment
• Reductions in operating expenditure
• Asset recycling.

Our feedback responds to Council’s key questions for feedback:

• General rates increase for 2020/2021
• Rates postponement for ratepayers impacted by COVID-19
• Suspending the targeted rate paid by accommodation providers
• Other feedback

General rates increase for 2020/2021

Although we stress the severity of the economic impacts of COVID-19 on businesses, the financial outlook for Auckland Council should now be better than in April when the Emergency Budget was being prepared.

While the move to Level 1 means international borders remain closed, under Level 1, Auckland Council will not face the scale of financial challenges it assumed or modelled in early April 2020 as many Council facilities and transport services have returned earlier than expected.[1]

In addition, while the Emergency Budget assumed the worst in terms of loss of revenue, there are few assumptions made regarding the positive impacts of the $50B economic stimulus package in central government’s Budget 2020 or the likely funding of ‘shovel ready’ projects by central government. For example, the Emergency Budget assumes Council will still be required to contribute $395 million in 2020/2021 for construction of the City Rail Link, but this must be a reasonably likely candidate as a ‘shovel ready’ project.[2]

Earlier in the year, the government allocated $6.8 billion into transport ($5.3 billion on roads and $1.1 billion on rail) with Auckland receiving $3.48 billion of the transport funding.[3] We were also told then that Auckland Council was working with central government to establish the impact of this on Council’s budgets. However, we are concerned that the Emergency Budget has not included any assumptions about how this affects Council’s expenditure or revenue for 2020/21.

Council’s response

Council has identified four key levers to respond to the financial challenge in addition to the average general rates increase of either 2.5 per cent or 3.5 per cent.

Increased council borrowing

Council has indicated that the highest Council can responsibly go with additional borrowing is a debt to revenue ratio of 290 per cent for 2020/2021 before reducing back to 270 per cent the following year. Although we accept there are risks associated with further borrowing, these are exceptional times and we believe the Council should maximise the use of this lever.[4]

Council’s Supporting Information notes that it is entirely prudent and indeed necessary to temporarily depart from these policies. The intent of the policies and the related legislation is to promote long-term financial sustainability, not to require rigid adherence to fixed policy settings in time of crisis.[5] There must also be opportunities to temporarily relax other aspects of the balanced budget test (such as funding less depreciation in 2020/2021).[6]

Council’s Supporting Information acknowledges that “a projected debt to revenue ratio closer to 300 per cent for 2020/2021 would represent a better balance between maintaining long-term financial prudence and maintaining investment and critical services.”[7]

Again, although we accept there are risks, we believe a budget with a projected debt to revenue ratio of 300 per cent represents a better balance in these exceptional times.

Capital investment

We are concerned that Council has been too quick to reduce its building and construction projects. Maintaining or even increasing Council’s capital investment in these times of economic uncertainty is the best way Council can have a positive impact on jobs and business activity in Auckland and as a consequence we believe it should be maximised.[8]

We agree with the advice of the council’s Chief Economist that it is critically important to continue to invest in quality capital projects at this time to stimulate the Auckland economy, both in terms of maintaining business confidence, and the flow-on impact of this spending through the economy. Spending that achieves the twin goals of supporting direct employment and enabling significant further downstream employment should be supported wherever feasible.[9]

Overall, we believe that there is a compelling case for council to continue with as much capital investment as is prudently achievable. The maximum $2.5 billion scenario appears to be the better option. However, we do not agree that this necessarily requires a 3.5 per cent rates increase.  As noted above, adopting realistic assumptions about central government ‘shovel ready’ funding as well as further borrowing and cost reduction would allow a lower rates increase while still maximising capital investment.[10]

Reductions in operating expenditure

We note the Council’s observations that the current budget position reflects a $150 million reduction in operating expenditure. We further note that council staff have developed a list of additional savings and possible temporary reductions in services that could provide up to a further $100 million of operating cost mitigation. The advice of Council’s Chief Economist is that spending on operating activities will not have the same economic stimulatory impact as capital investment.[11]

Our view is that a much wider transformation of the organisation is required, as outlined in our summary at the start of this submission. 

Asset recycling

Section 2.5 of the Supporting Information identifies $200 million to $350 million of near-term opportunities for recycling capital from assets classed as both non-strategic and non-service assets. This is comprised of $150 million to $200 million of land, buildings and leasehold interests and $50 million to $100 million of opportunities related to city centre car park buildings.[12]

We agree with the current proposal of an additional asset recycling target of $200 million for 2020/2021.

In addition, we would like to see a more thorough review of asset ownership and the approval process for property disposals prior to the long-term planning process.

Given Council’s commitment to not sell carparking assets, we want to understand what may be proposed by the reference to selling concessions by 2023/24. It is important that accessible and affordable parking is maintained at least until improved public transport is available for more people to access the city centre. 

We believe the spending level of at least a 3.5% rates rise is required for economic recovery.  However, we want the actual rate to be reassessed based on:

• likely improved Council finances under COVID-19 Level 1, 
• likely central government stimulus funding (e.g. for shovel-ready projects)
• increased Council borrowing
• savings identified from reductions in Council operating expenditure (continued)

In the lead up to the long-term plan, we want Council to review its funding and asset strategies.

Our preference is to see a rates increase of no more than 2.5%.

Knowing that the difference between a 2.5% and 3.5% rates rise is likely to be around $20m in revenue, Council should be able to identify at least $20m of further savings from internal organisational improvements (rather than service level reductions) and other opportunities outlined above, so as to keep the average rates increase as low as possible.

Rates postponement for ratepayers impacted by COVID-19

We welcome the introduction of the COVID-19 Rates Postponement Scheme.

In terms of detail, although the Policy Conditions provide that: “The council may add a postponement fee for the rates for the 2020/2021 year and each of any subsequent year that the rates are postponed”, [13] the Consultation Document indicates that Council will always add these fees.[14] It would be appropriate to be clear on this point in the Policy Conditions.

Suspending the targeted rate paid by accommodation providers

Although we welcome Council suspending the Accommodation Provider Targeted Rate (APTR) until 31 March 2021, we do not accept that accommodation providers should pay the APTR at all. 

For some accommodation providers, the past application of the APTR has resulted in significant rates increases. Some providers have benefitted from exemptions while others have not and this contradicts the Council’s view that there should be rates stability.  Accommodation providers have also advised that it is unfair to shift the rates burden to them when only around 10% of the total visitor spend is on commercial accommodation.

Our preference is for the Government to introduce a levy on international visitors to fund tourism projects when the borders reopen.  In terms of the impact on ATEED, we’d like to see commitment of central government funding to support domestic tourism and major events through this period, and encourage the Council to advocate for such support.

Other feedback

Business differential

While we appreciate that the business differential is still being reduced in accordance with the long term differential strategy, fundamentally, we do not accept the view that a business differential should be applied to rates, especially for reasons that “businesses are better able to manage additional costs than residential properties” or because “businesses can claim back GST and expense rates against tax.”[15] These reasons do not justify the business differential, particularly for small businesses who make up most businesses in Auckland. By comparison, Tauranga City Council has no business rates differential at all.

Regional Fuel Tax

Our preference is to introduce initiatives that both manage demand and raise funding equitably as soon as possible, balanced with investment into affordable and more frequent public transport in order to effect sustainable behavioural change. We understand, for example, that technical work on the ‘Congestion Question’ project that has been examining the potential to apply congestion charging in Auckland is progressing. We understand that the technical investigatory phase of this project was to be completed in the first half of 2020 and subsequently to be reported to Government and Auckland Council for decisions on any further work. While COVID-19 may have interrupted this timing, we nonetheless ask for this work to become publicly available as soon as possible.

In the interim, while we have previously supported a regional fuel tax of 10 cents per litre (plus GST), we ask for greater transparency regarding the spending of this tax on specific transport projects and services in the Emergency Budget. We wish to avoid the regional fuel tax being used as a ‘top up’ for overall transport budgets.

We are also concerned about the underspend of the Regional Fuel Tax by $268m in its first year.  Although we appreciate that the spend of funds raised by the Regional Fuel Tax is planned over the ten-year term of the RFT and that in some years the spend will be less than the revenue (with the balance being held in a specific reserve to be released for projects scheduled later in the decade), we are concerned that businesses are being over-taxed if the RFT is being underspent or that infrastructure is not being built at the required pace and this may have been or will be exacerbated by the current crisis.

We also ask how the underspend of the Regional Fuel Tax by $268m has been factored into the Emergency Budget?

_{[1] We suggest that the outlook must be even more optimistic than the “more optimistic” scenario set out in your Emergency Budget Supporting Information, page 8. The reduction in council revenue was expected to be around $400 million rather than $550 million in the “most likely scenario”, and the net operating gap $275 million rather than $400 million.}

_{[2] The Office of the Auditor General has previously given clear guidance that any such budgetary assumptions must be supported by strong evidence that demonstrates the assumption is reasonably likely to occur. We believe there is strong evidence that demonstrates an assumption that Auckland Council will be reasonably likely to be the beneficiary of some ‘shovel ready projects’ (probably in proportion to population). See Emergency Budget Supporting Information, page 11.}

_{[3] Mayor Goff said this funding will be put toward the $1.3 billion Mill Road highway, the $411 million Penlink toll road, the widening of State Highway 1 between Papakura and Drury South and the $360 million SeaPath walking and cycling path across the Harbour Bridge.}

_{[4] Emergency Budget Consultation Document, pages 9-10.}

_{[5] Emergency Budget Supporting Information, page 8.}

_{[6] Emergency Budget Supporting Information, page 8.}

_{[7] Emergency Budget Supporting Information, page 9.}

_{[8] Emergency Budget Consultation Document, pages 9-10.}

_{[9] We also note that the Chief Economist considers that investing in capital projects with demonstrable downstream or catalysing benefits is particularly helpful.}

_{[10] Emergency Budget Supporting Information, page 11.}

_{[12] Emergency Budget Supporting Information, pages 13-14, 48-54. We agree that consideration be given to services that the council could exit, such as: i. gyms; ii. holiday parks; and iii. early childhood education. We also agree that the council should consider and reduce the scale of investment in certain activities, such as golf courses. Further, we agree to consideration being given to the optimisation and rationalisation of community facilities (land and buildings), such as: i. consolidation into community hubs; ii. land which is part of a community facility but is not currently used or needed to provide council services; iii. low use, poorly positioned assets (buildings and/or land); iv. alternative service delivery models which include a non-asset owning response to achieving outcomes; and v. the sale of assets to community groups.}

_{[13] See Criteria, Emergency Budget Supporting Information, pages 73-74.}

_{[14] Emergency Budget Consultation Document, Feedback Form, page 26.}

_{[15] As set out in the additional supporting information to the Long Term Plan 2018/2028. For example, if income for a small business is relatively flat, but there is a significant rates increase, the extra rates expense will impact negatively on the profitability of the business and may even force the business to run at a loss.}