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Choosing 4.95% or 2.15%

by Dr Jenny Condie
At our meeting last Thursday, Wellington city councillors approved a timeline to finalise and consult on our annual plan, which includes our city’s budget. We voted for officers to prepare two options for rates increases – 4.95% or 2.15%. When the plan and budget are out for consultation in May, the biggest question for you is probably the choice between these two scenarios.

For context, a 4.95% rates increase would mean the average residential ratepayer would pay an extra $135 per year.

Why have we asked to take two options out for consultation? Shouldn’t we just make a decision based on the best evidence? And honestly, why would anyone choose a 4.95% increase when a lower increase is being offered instead?

This year we find ourselves in extraordinary circumstances. As a city, we lost a lot of momentum following the Kaikoura Earthquake in 2016. The national lockdown in response to the Covid-19 pandemic has applied the brakes again, just as we were starting to gear up.

Our city’s success depends on substantial investments to futureproof our transport and water infrastructure, and an effective response to Covid-19 to cushion the impact on our people and businesses. All of this is in addition to increasing costs of the services we already provide.

So the 2020/21 rates are not just about this year – it’s about the next several years.

This week we received advice from council officers that a 4.95% rates increase for 2020/21 will mean a rates increase of around 10% for the following year. If we choose a 2.15% rates increase for 2020/21 the increase for the next year will need to be around 16%. These estimates are based on the existing long term plan approved by the previous council plus the extra costs of the Covid-19 lockdown. They don’t include new projects such as fixing the central library, extra investment in our city’s water pipes, and paying our share of Let’s Get Wellington Moving.

Why this huge jump?

Due to the Covid-19 lockdown, the WCC has lost almost all of its revenue from fees and charges. To keep this year’s rates increase as low as 4.95%, we are already borrowing a huge amount to keep our services operating. The following year we will need to get back to a more balanced budget.

The Council usually only borrows to pay for capital projects, like the new convention centre or replacing aging water pipes. This is like getting a mortgage to buy a home – the house will last you for 30+ years so it is okay to spread the cost of paying for it over 30 years.

Normally we would never borrow to cover our operating costs. For a family this would be like borrowing to pay for the groceries. You can get yourself under an oppressive amount of debt really quickly behaving like that.

However, there is absolutely nothing normal about this year. To get our city through the lockdown and its aftermath, we will be borrowing around $70 million to keep our basic services up and running. We can only do this for one year during this extreme crisis. We need to have a plan for getting back to a balanced budget in the following years. Hence the higher increases in future years.

We will also be after some feedback on the proposal for extra borrowing that would get us from 4.95% down to 2.15%. This involves some technical accounting shenanigans to defer funding $11 million of depreciation related to asset revaluations. If you understood that sentence then: greetings my fellow nerd! If it didn’t mean anything to you, congratulations on being a normal person and don’t worry, the draft consultation document will fully explain it in a few weeks.

Many people might prefer a lower rates rise next year during the immediate crisis, and would be willing to have the pain of higher rates the following year. On the other hand, economist Brad Olsen argues that it’s better to take the pain of a higher rates rise right away, because getting big rates rises in following years could damage the momentum of the recovery just as people and businesses are getting back on their feet.

You will be able to let us know whether you agree or not during May, so keep an eye out for the consultation.

Dr Jenny Condie is a city councillor for Wellington’s northern ward.

24 comments:

  1. Andrew, 12. April 2020, 19:52

    Hi Jenny. You have identified the solution to your quandary in your own words. You mention the money being spent on the Convention Centre, but as you no doubt realise such buildings no longer have any real place in the current environment, so that expenditure can be redirected to such things as pipes and libraries, things that all Wellingtonions use on a daily or weekly basis (as opposed to a convention centre which will not really be used by anybody). I suggest you go back to your officials with this and get them to come back with some updated numbers which reflect the current reality.

     
  2. Don M, 12. April 2020, 20:21

    That’s fantastic Jenny, but noticeably missing is any reference to prioritising or making savings. They are both things that individual ratepayers have to do when costs go up (as they are, not least due to the rates increase). Ratepayers have to review their expenditure, and then decide what has to be dropped so as to operate within budget. Is the council doing that at all? What in the existing budget is being dropped? What about staffing freezes, and some of the spending discipline shown by other councils eg in Auckland. What gets up ratepayers’ noses is that the usual cost-plus mentality continues as normal, and there is no attempt to exert budgetary discipline. Exacerbated by the usual problem of the council spending other peoples’ (ie ratepayers’) money on pet projects that are more appropriately the responsibility of central government.

     
  3. michael, 12. April 2020, 21:33

    Councillor Condie, once more I want to know why the council is continuing with the $200million Convention Centre. The justification that it provides employment does not cut it – once finished it is going to be an expensive white elephant that will be a huge drain on Wellington ratepayers for years to come. Councillors must act fiscally responsibly and make hard decisions. Wellingtonians want comprehensive, clear and concise information as to how and where the WCC is cutting costs.

     
  4. Northland, 12. April 2020, 23:34

    Dr Condie, New Zealand and Wellington are heading for a deep recession. In the light if this, it would be prudent to save money by stopping any further spending on the Convention Centre. In terms of the rates hike, I would like to see the option of a zero percent rates increase alongside proposals for how such a budget could be achieved.

     
  5. NigelTwo, 12. April 2020, 23:47

    I’m with you Northland. A zero rates change should definitely still be an option. Some negative options too, maybe?

     
  6. Traveller, 13. April 2020, 1:11

    How about the example from Upper Hutt – an increase of 1.5 per cent.

     
  7. Cytokine Storm, 13. April 2020, 8:17

    I imagine the people who have lost their jobs, homes and businesses will be thrilled that rates are only going up a little bit this year. I can see them at the ribbon cutting ceremony for the convention centre and the latest cycleway. Perhaps they’ll be celebrating the extra funding for social engineering, but they might appreciate additional funding for the homeless and soup kitchen though.

    It’s time to slash the operational budget wherever possible and cancel all nice-to- haves until the city returns to normal, whenever that may be.

     
  8. TrevorH, 13. April 2020, 8:29

    Jenny: the “existing long term plan” is no longer relevant. The council needs to rip it up and start afresh, beginning with essential infrastructure like the “3 waters”. The airport runway extension and the convention centre are now of another era, before COVID 19. You also need to look for reductions in the existing budget. According to figures published last September, the WCC employs more than 260 staff on salaries over $100,000 per annum. That seems hard to justify, even in good times, when so many of its services are contracted out. The council has a large and difficult job ahead, because the status quo is no more.

     
  9. Jill, 13. April 2020, 9:20

    When times are tough at home we have to reallocate the budget, make cuts, decide if we need a brand new kitchen! The council doesn’t seem to be willing to do that. The convention centre needs a rethink. We have a whole heap of council staff paid high salaries as well as excess staff at other facilities, such as the asb centre. Building inspectors who seem more interested in ticking boxes than helping get projects built safely, ask any builder. We need some rethinking within staff and councillors, away from business as usual.
    My rates have gone up by considerably more than 4.95% – 13% more like, because it’s been revalued. I have no more cash. I would like the council to concentrate on core services and infrastructure that will benefit the majority and the environment. Not vanity projects and over-staffing.

     
  10. Dr Jenny Condie, 13. April 2020, 9:48

    Substantial savings are planned across the organisation. Funding is being reprioritised in response to the pandemic. At the moment our staff are so busy making that happen they haven’t really had time to report on the details yet, to us or to the public. One of the things we voted on was having the CE conduct a thorough review of all spending before we sign off on the annual plan in June. You will be hearing more about this as our staff get out of crisis mode and have more time to plan a detailed response. [via twitter]

     
  11. Ms Green, 13. April 2020, 9:52

    “Due to the Covid 19 lockdown the Council has lost almost all of its revenue from fees and charges.” The Covid lockdown has not yet been three weeks. This is a budget for a year. Now that the business of international tourism and students and education has ground to a halt, surely WREDA (the Wellington regional economic Development Agency) should be disbanded, and replaced by an inhouse business unit for domestic tourism and economic development. Which councillors will propose that and what savings would be made? The WREDA CEO’s huge salary for starters should go, and significant operational savings could be made.

     
  12. Mavis, 13. April 2020, 10:03

    Rule number one. Do not borrow for operational expenses.
    Rule number two: Focus on basic infrastructure and services, which includes at a minimum Central Library fix, and the three waters, housing, parks, natural environment and new quality thoroughfares for walking, cycling. The Council seems to be planning for a budget of more of the same when it won’t be the same ever again.

     
  13. Don M, 13. April 2020, 10:59

    Why are the two rates options being put out to consultation, if substantial savings across the organisation are still being worked on? Surely the rates options will be affected by the savings, assuming there is a serious review? There’s also no point in leaving the CE and council staff to identify savings and new priorities – they will come up with whatever is least painful for them, not what is best for ratepayers. Councillors need to drill down into the budget themselves – if they don’t know how to do that there will certainly be experienced ratepayers willing to help them. A good starting point would be for the Council to address its bloated staff numbers and bloated salary levels – it needs to follow the example of commercial organisations in taking hard albeit unpalatable decisions. [Ten per cent pay cut for mayor, councillors and senior staff]

     
  14. Wellington Commuter, 13. April 2020, 15:57

    “[Ten per cent pay cut for mayor, councillors and senior staff]” … Wrong, it’s not a “ten per cent pay cut” – ratepayers are paying the same amount for the mayor, councillors and senior staff as before COVID-19. Yes, they have generously chosen to give 10% of their income to local support organisations, but they are giving away money that comes from ratepayers. As far as I can tell there is no reduction in ratepayer funding to pay the mayor, councillors and senior staff.

     
  15. Northland, 13. April 2020, 16:06

    Nelson councillors unanimously voted for a zero percent increase.

     
  16. Joe, 13. April 2020, 21:32

    Everyone paying the rates is taking a hammering. Pause your silly projects and go back to basics; no one wants to pay for your grand ideas.

     
  17. TrevorH, 14. April 2020, 8:19

    Let Councillors be under no illusion. This is not the time to try to divert funding to their own pet projects. That is totally unacceptable. Ratepayers are demanding real cuts in expenditure. We will be watching closely.

     
  18. michael, 14. April 2020, 10:53

    I note that repairs to the sewage pipe that failed in January are likely to cost ratepayers $16 million dollars and Councillor Fitzsimons says this is a result of “decades of underfunding” but “we” (ie: the ratepayers) have no choice but to fund these costs, and this is just the beginning. Unless councillors start implementing very hard decisions beginning now, ratepayers will be faced with further unsound governance, increasing rates and continued underfunding of critical infrastructure and services.

     
  19. CC, 14. April 2020, 11:35

    The cost of the repairs is about the same as two or three years of the subsidy that ratepayers are going to be paying for the Conference Centre. That was before it became irredeemably non-viable.

     
  20. Durden, 14. April 2020, 11:56

    This is a once in a multi-lifetime opportunity to re-examine everything. Time to undertake a “zero base budgeting” exercise and take a sharp clear eyed look at the operational expenses and vanity/white elephant expenses accumulated over the years. Dire situations call for dire action.

     
  21. TrevorH, 14. April 2020, 14:44

    Councillors need to rapidly acquaint themselves with the Treasury’s latest projections of the consequences of the COVID 19 lockdown, available here. Once they have digested this information, they will realize we are going to be living in a very different world from that in which they were elected.

     
  22. Andy, 16. April 2020, 22:08

    Cut costs, staff, salaries, budgets and non essential projects. Stop expecting that rates can increase every goddamn year! Let’s Do This!

     
  23. Cameron Bagrie, 19. April 2020, 13:39

    So for any councillor at the next election.
    Q. What did you do to support businesses and households struggling with the “great lockdown and facing ruin or losing their job”?
    A. We increased rates by a lesser amount.
    Good luck getting re-elected. [via twitter]

     
  24. John Locke, 20. April 2020, 10:08

    I’d be with Durden on this one – this is a once in a lifetime opportunity to bring council expenditures under control and focus on core council activities. But of course, council is advised by staffers, and one suspects these staffers may have incentives that are opposed to ratepayer interests.
    And to the councilors I ask: why are you even considering any rates increase that is above inflation?