Behind the smoke and mirrors of ‘balancing the books’

Monday, 22 January 2024

House of numbers - the city council is to consult on a whopping 25.5%

A whopping 25.5% average rate rise proposed for Hamiltonians next financial year sticks out like the proverbial sore thumb, and is a hot topic for ratepayers and candidates in the upcoming east ward by-election. Senior reporter Stephen Ward looks at technical issues for public submitters on the plan to consider.

The idea of a 25.5% averages rates rise for Hamiltonians next year scares the bejeezus out of a lot more people than the still stiff 18.6% rise mooted by council staff.

The proposal will no doubt feature prominently in the formal public consultation process over the city’s 2024-34 long term plan in coming months.

That 25.5% - the highest proposed percentage for at least 30 years - would add $723 in annual rates to a median value residential property, while 18.6% would add $528.

Mayor Paula Southgate supported an 18.6% rise next year, as recommended by staff.

However, the vast majority of councillors settled on putting 25.5% out for consultation, based on an alternative model from staff. At a time of big cost of living pressures, it sparked a collective “ouch” from many.

Proposals for higher rate hikes next year are aimed at helping avoid more debt quicker by better balancing revenue and costs.

On one level, floating the 25.5% proposal sends a strong political signal to the public about this and, if implemented, creates quicker interest savings. But staff say it’s not absolutely essential for the city’s financial survival.

Economic development committee chairperson Ewan Wilson countered with a proposed 25.5% rise, based on an alternative scenario modelled by staff.

So, as a explanatory pamphlet on the long term plan says, “the main choice council has is how quickly to balance the books”.

What balancing the books definition is used and what ratepayer pain is considered tolerable are core issues for consideration ahead of the plan’s formal adoption later this year.

A 25.5% hike in the first year of the plan period would allow balancing of the books according to a government measure that incorporates a wide definition of what can be counted as revenue, including some one-off capital items that aren’t part of standard operations.

This approach would generate a $2 million surplus by this measure next year for debt reduction and, over time, mean $3 million in interest savings.

But 18.6% would impose less immediate pain on ratepayers next year. And following this suggested path would still allow the generation of a $2 million surplus by the third year of the long term plan, all according to a stricter Hamilton council measure of balancing the books which excludes a lot of non-standard capital project revenue.

Untangling the financial issues facing Hamilton City Council in its long term plan will likely involve strong debate about how best to manage things, including the pain imposed on ratepayers to “balance the books”.

It’s a case of whether councillors and the public want to drive things hard on the debt reduction front from the start or ease into things a little more slowly.

So what are some of the less apparent issues politicians and ratepayers can take into account as they debate the way ahead?

Firstly, the council’s measure of balancing the annual operating books is seen as “purer” because it excludes various capital sources of funds used for the likes of specific big ticket projects, such as some subsidies from transport agency Waka Kotahi.

Whether longer-term targeting of balance using this measure is preferable to a shorter-term focus on the Government’s easier to achieve and legally mandated measure is a matter for consideration. This Government measure includes capital revenue actually marked for the likes of debt repayment rather than meeting operational costs.

There’s actually no legal sanction for not hitting the Government’s measure. Councils are required by law to balance the books this way unless it’s prudent not to do so - a plan to bring them into balance shortly will help alleviate external concerns.

But failure to achieve this Government target can affect creditworthiness - just last year rating agency Standard & Poors downgraded the council’s credit outlook given the financial stresses it faced.

Another important financial issue generally is the council’s maximum debt to total revenue from all sources ratio. It is restricted to 285% by the Local Government Funding Agency. The agency’s owned by councils nationally and central Government - it sources funds from financial markets to on-lend to local government.

None of the scenarios modelled in the council’s long term plan pamphlet see this ratio breached. But if it was, Hamilton would be asked to remedy things as soon as possible and, if it didn’t, the agency could require all debt to it to be repaid - the city currently owes around $750 million.

So, clearly, there’s a lot of financial balls for councillors and ratepayers to consider over the 25.5% proposal.

Some councillors want operational savings to chop that. Others could fiercely resist any attempts to cut services. Watch this space between now and mid-year.

See by-election candidates - page 4.