The Auckland Council lost NZ$233 million after tax in its first full year of operation with the lion's share of the loss blamed on unrealised costs stemming from fixing future interest rates at current low levels. The council has now lost NZ$343 million after tax in its first 20 months of operation.
The council said costs hitting its bottom line, for the year from July 1, 2011 to June 30, 2012, include NZ$167 million from the unrealised cost of contracts to fix future interest rates at current historic lows, NZ$83 million for asset impairments, legacy costs and provisions including a NZ$62 million provision for leaky homes.
The Auckland Council was established on November 1, 2010 through the amalgamation of eight councils in the Auckland region, - the Auckland Regional Council, Auckland City Council, Franklin District, Manukau City Council, North Shore City Council, Papakura District Council, Rodney District Council and Waitakere City Council. The establishment of the "Super City" was an initiative led by the then Minister of Local Government, Rodney Hide. See an article from Hide here on the reasons behind the amalgamation.
The council lost NZ$110 million after tax in the first eight months of its existence covering the period to June 2011.
The results are for Auckland Council Group, including its seven council-controlled organisations (COOs) which are Auckland Council Investments Ltd, Auckland Council Property Ltd, Auckland Tourism, Events and Economic Development Ltd, Auckland Transport, Auckland Waterfront Development Agency Ltd, Regional Facilities Auckland, and Watercare Services Ltd.
A council spokeswoman told interest.co.nz the NZ$167 million hit to the bottom line from interest rate swaps on loans stemmed from a combination of new swaps and swaps inherited from legacy councils. She described the contracts as "forward starting fixed rate paid (borrowing) interest rate swaps."
"The contracts are spread across a number of banks as you would expect with a diversified portfolio. The physical debt portfolio is currently NZ$4 billion in size and projected to increase to NZ$8.5 billion in size. It is prudent to hedge a portion of this increase in projected debt to reduce council's risk to an increase in interest rates," the spokeswoman said.
Meanwhile, total annual comprehensive income, which comes after property, plant and equipment revaluations and tax, losses on cash flow hedges, share of associates reserves, and gains on revaluation of financial assets classified as held for sale, was NZ$278 million, down from NZ$1.295 billion in the eight months to June 2011.
Income up, but costs up more
The council's total income rose NZ$1.1 billion, or 59%, in the year to June 2012 versus the eight months to June 2011 to NZ$2.98 billion. However, total expenditure rose NZ$1.26 billion, or 64%, to NZ$3.26 billion.
"Continued slow economic growth across the Auckland region reduced non-rate revenue from property developer contributions and vested assets," the council said.
The Group’s assets increased in value by NZ$1.5 billion to NZ$35.7 billion as a result of buying and building new assets such as libraries, roads and playgrounds, and revaluating existing assets. Total liabilities rose NZ$1.1 billion to NZ$7.4 billion. See Auckland Council's full financial statements here.
In a statement Auckland Council chief executive Doug McKay said it had been a year of "consolidation and achievement" for Auckland Council.
"While there has been some tidying up of legacy council accounts, we have put in some excellent building blocks for success in the years ahead,” said McKay. “The total value of council’s assets has gone up and the value of our land and buildings have improved. We introduced one consistent accounting practice across the council group, including for our CCOs,” McKay added.
Net tangible assets per NZ$1,000 of listed bonds at June 30 stood at NZ$28,690 up from NZ$28,440 a year earlier. See Auckland Council's bond issuer page here.
The council said it has started implementing the Auckland Plan during the period, which involves ongoing dialogue with central government agencies, infrastructure network providers, other private sector organisations, and communities.
"We adopted the City Centre Masterplan, Waterfront Plan (prepared by Waterfront Auckland) and council’s Economic Development Strategy, which sets the roadmap for how Auckland does business over the next 10 years. We also signed off on our 2012-2022 Long-term Plan ('LTP'). This ten-year plan for NZ$59 billion of operational and capital expenditure outlines how Auckland Council intends to keep its books firmly in balance."
"Some NZ$1.7 billion in savings are identified within this plan," the council said.
Standard & Poor’s (S&P) looked at the council's budget assumptions within the LTP and retained its credit rating at AA, which is higher than the AA- ratings on the big local banks. However, S&P did initially consider a downgrade.
"This credit rating has now been supported by a similar view from Moody’s Investors Service."
The council said it had completed one of the largest transitions in New Zealand history, put in place a new governance model and planning regime, hosted the Rugby World Cup 2011, and revalued 510,000 homes and business premises.
(Update adds further detail).
57 Comments
include NZ$167 million stemming from the unrealised costs of contracts to fix future interest rates at current historic lows, NZ$83 million for asset impairments, legacy costs and provisions including for leaky homes.
Ha ha ha ha.
However, total expenditure rose NZ$1.26 billion, or 64%, to NZ$3.26 billion. (gotta be a typo)
Ha ha ha ha.
Why dont they increase rates to cover the increase in spending-- because the people either cannot afford it or are not prepared to pay for it.
Ha ha ha ha, you are stuffed. When has a council ever reduced its expenditure?
The Auckland Council lost NZ$233 million after tax in its first full year of operation with the lion's share of the loss blamed on unrealised costs stemming from fixing future interest rates at current low levels.
...include NZ$167 million stemming from the unrealised costs of contracts to fix future interest rates at current historic lows
They are stuffed alright Andrewj.- cannot see myself moving to AK in a hurry.
But Gareth we cannot be left to wildly surmise the emphasised unrealised losses stem from collateral maintenace calls on large losing interest rate swap positions. Presumably from paying fixed receiving floating contracts some years back.
This part is just meaningless rubbish: to fix future interest rates at current historic lows.
On that, I've added this in:
A council spokeswoman told interest.co.nz the NZ$167 million hit to the bottom line from interest rate swaps on loans stemmed from a combination of new swaps and swaps inherited from legacy councils. She described the contracts as "forward starting fixed rate paid (borrowing) interest rate swaps."
"The contracts are spread across a number of banks as you would expect with a diversified portfolio. The physical debt portfolio is currently NZ$4 billion in size and projected to increase to NZ$8.5 billion in size. It is prudent to hedge a portion of this increase in projected debt to reduce council's risk to an increase in interest rates," the spokeswoman said.
Thanks Gareth:
A council spokeswoman told interest.co.nz the NZ$167 million hit to the bottom line from interest rate swaps on loans stemmed from a combination of new swaps and swaps inherited from legacy councils. She described the contracts as "forward starting fixed rate paid (borrowing) interest rate swaps."
"The contracts are spread across a number of banks as you would expect with a diversified portfolio. The physical debt portfolio is currently NZ$4 billion in size and projected to increase to NZ$8.5 billion in size. It is prudent to hedge a portion of this increase in projected debt to reduce council's risk to an increase in interest rates," the spokeswoman said.
Forward-starting swaps lock in the rate today for an asset or liability to be created or sold in the future. A company that plans to issue fixed rate at a future date can use a forward-starting swap to hedge the future issuance rate. Forward-starting swaps allow companies to take advantage of favorable rates when the market offers them - not just when coming to market. Locking in the forward financing costs or investment yields allow the hedger to accurately budget cash flows and expenses related to future projects.
One has to wonder who offered the advice that there is a risk that rates might rise over the new issuance time horizon?
Domestic NZ risk advisors and their consultants always seem to be on the wrong end of the trade for their clients while the counterparty banks are on the other.
My cynical side finds it hard to ignore possible acts of collusion when global central banks continuously make verbal assetions to "do what ever it takes" followed by actions confirming ZIRP leading to firm market prognostications of NIRP. NZIER even managed to assert:
The Reserve Bank will look through the current food and fuel price shocks and keep the Official Cash Rate on hold into 2014, the New Zealand Institute of Economic Research (NZIER) says.
Or is it a desperate desire to assume a return to better economic growth and associate higher rates with such wishful thinking? Whatever, the ratepayers deserve a professional approach and unless one is forhcoming they should seek a mandate to exercise a cease and desist order against the council floundering around in the world of derivatives.
With absolutely no formal training in the field I have managed to work out equation (M.V)+i=P.Q, which permits certain assumptions to be made, one of which is interest rates must go down. Perhaps i should consult to the council, would 10% of their losses be an acceptable fee?
"Standard & Poor’s looked at the council's budget assumptions within the LTP and retained its credit rating at AA"
The credit ratings agencies always apply high ratings to bodies that are able to tax. If and when there is ever a rates strike by ratepayers LA credit ratings will crash just as quickly as Greece.
Like the banks there is also in implicit guarantee that DonKey will bail them out if they get into too much trouble..
Keep spending lads!! Need to feed the bureaucracy - Wonder how many jobs in Auckland are dependent of Local and Central Gov't spending/welfare....
Like the banks there is also in implicit guarantee that DonKey will bail them out if they get into too much trouble.
It is more the case that many of the LGAs are signing up to cross guarantee each other's obligations under the LGFA. Scary stuff and not well understood.
Having IT contracted to Rodney Council a couple of times in the past, and being a Rodney property owner, I looked upon the idea of being part of a 'SuperCity' council with all the disdain and cynicism that the idea truly deserved.
There are never going to be economies of scale with this council – they will hire just as many numpties as they did separately but with even less accountability. This is just the first of many years of embarrassing financial disclosures before someone comes up with the ‘revolutionary’ idea that decentralisation will improve customer service and provides services better focused to the unique wards of the great diverse city we live in blah blah blah...
*yawn*
Having also worked at a council in my time I also thought the SuperCity idea was the dumbest I had heard for a long time. There is no question that the bigger the council the less efficient it is and the more out of touch with residents it becomes. Eventually Auckland Council will have to hire lots of people to get in touch with their communities and any gains from amalgamation will be well and truly lost.
I look forward to Gareth's sleuthing. There is something very smelly about this. All those amalgamating councils got their assets revalued every three years. Not sure why they would suddenly find they are worth a lot less today.
To add to Stan's comment, this is a classic example of how "economies of scale" work the opposite way in government entities as they do in the private sector. When private companies merge they tend to adopt the most efficient aspects of both firms, whereas with council mergers everything gets increased to the level of the most expensive council.
This is just the first of many years of embarrassing financial disclosures before someone comes up with the ‘revolutionary’ idea that decentralisation will improve customer service and provides services better focused to the unique wards of the great diverse city we live in blah blah blah...
Well observed StanGV.....
But embarrassed ..? never....Admit to complete failure to a feasible fiscal plan beyond the one trick pony of levy.....never
Then as you put it , in a blinding flash, some genius will go Back to the Future.
The Super City is a Super Dud, the firework that fizzels without a bang, while Bureaucrats look on bewildered with thoughts of outsourcing a committee to discuss the firecrackers lack of explosive impetus....
Somebody stop me, I'm going to hurt someone.
Why am I not surprised , has anyone seen that stupid chimney stack cositng $120,000 at the Albany Bus station?
Commissioned with ratepayers money .....Auckland transport call in ART ?
What a waste... in the middle of the worst recession in living memory , these clueless public servants spend your and my hard earned money on rubbish
It looks like an Australian coal power station stack , bears no relationship to anything on the shore , and I would like to know whther the 7 metre high blight on the landscape has resource consent ?
We need to get rid of Len Brown and his merry gang of leftwing layabouts as soon as possible
No wonder I've left for Australia. The increase on our rates on our central Auckland property this year was 42.5% (around $850 from the $2000 we were paying) - although staggered in at a max increase of 10% pa for the next few years - how kind, har har.
The Auckland Council is inept and far too cumbersome for its own good. It couldn't manage a piss up in a brewery let along a "super" city - not that its that "super" anyway. How is it Paramatta City Council in Sydney only charge rates of around $1300 pa on a 4 bedroom house (400m2 land) - which is similar in size to our Auckland property ?
Me thinks that Kiwis are being screwed yet again by the organisations that are supposed to look after their best interests - namely the Council & the Govt !! But I blame the general populous for being too complacent and adopting the "she'll be right" attitude
Surely, sooner rather than later that has to be the kiss-of-death for the little 80 year-old widow hanging on in the family home, living close to family and friends and neighbours for the last 50 years in the house she raised her family in. Does her OAP cover council rates, water rates, electricity, phones, insurance, paying the lawn mowing contractor. Anything left for food and clothing? When is departure day? How much out of her OAP does that $850 increase represent?
3 years ago we had been paying over $2,000 in Palmerston North for a property on an 800m2 section! That same property now pays $2,481.12.
The old Auckland City had some of the lowest rates in the country - given it had assets that brought in revenue - offsetting the rates requirement. Now the income/revenue from those assets are spread across the whole of the new Super City .. and hence the significant rises in the 'old' Auckland City area.
I imagine commercial rates take is alot higher in Aus cities. The commercial property fraternity in NZ managed to keep their differential rates quite low in most main centres .. aside from Wellington, that is - where the bulk of commercial buildings were occupied by central government :-) .. who of course have the "ability to pay"!
Education land is non-rateable, the conservation estate and Parliament land is as well and then a number of other specified places (like Te Papa) - but in general all else is rateable;
Here's the full non-rateable schedule:
http://www.legislation.govt.nz/act/public/2002/0006/latest/DLM133512.html
I don't get it. The Local Government Act specifically requires that a LA adopt a Balanced Budget - it envisages only break-even or surplus. Therefore, surely any loss is simply an abject failure - and contravenes the Act;
http://www.legislation.govt.nz/act/public/2002/0084/latest/DLM172357.html
100 Balanced budget requirement
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(1) A local authority must ensure that each year's projected operating revenues are set at a level sufficient to meet that year's projected operating expenses.
(2) Despite subsection (1), a local authority may set projected operating revenues at a different level from that required by that subsection if the local authority resolves that it is financially prudent to do so, having regard to—
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(a) the estimated expenses of achieving and maintaining the predicted levels of service provision set out in the long-term plan, including the estimated expenses associated with maintaining the service capacity and integrity of assets throughout their useful life; and
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(b) the projected revenue available to fund the estimated expenses associated with maintaining the service capacity and integrity of assets throughout their useful life; and
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(c) the equitable allocation of responsibility for funding the provision and maintenance of assets and facilities throughout their useful life; and
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(d) the funding and financial policies adopted under section 102
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And don't forget Audit NZ approves drafts before they are released for public submissions. No doubt they specifically look at this requirement.
Oh and don't forget that vested assets are classed as revenue in LG accounts so para (i) is a bit weird. How is council supposed to ensure enough assets are vested by developers?
No the out here is events occurred after adoption of the Annual Plan that affected the final result. Stuff they couldn't predict like a slowdown in development - hold on, couldn't they have just checked their resource consent database for a forward projection?
Exactly - councils across the country are using this slowdown in development contributions as an excuse. Fact is they had their heads in the sand about the GFC since 2008. Once the finance companies went down in a big way - the forward development prospects were plain as the nose on your face.
They carried on with bubble assumptions to legitimate new spending. There really is no excuse - they plain and simple made BAD projections/assumptions. Many of them are still doing it - and none of them are sacking the council staff who fed them this budget garbage.
Elected members don't do the spreadsheet analyses. Elected members need to hold their CEOs accountable - and the CEOs will subsequently stop feeding them BAD numbers.
:-) .. but hey, according to our council, Palmy North is a thriving metropolis sheltered from the ills the world is suffering - what does TSY (or John Cleese know, for that matter) ... the GFC can't touch us here!
And by the way - how about that lowered dairy payout .. gee, you were right - they were wrong.
Kate
http://www.mongabay.com/images/commodities/charts/crude_oil.html
Every thing they do, needs the stuff in that graph. Nobody saw it coming. Well, almost nobody.....
Small losses are not abject failures, you are now trying to force onto a public organisation the guarantee it cant make a loss even for one year which is pretty un-realistic. Otherwise you have to over-charge by any amount you can foresee which means running significant (over time) surpluses....its nonsense. Now looking a the rolling debt I do agree its contravening the spirit of the act...
regards
As a grizzlled old ex-County treasurer, who has also worked in a second life on the financial models/cubes which sit underneath the LTP's and the like, I long ago intuited that there would be a toxic combination of:
- economically clueless budget-setting, such as expecting ever-rising DC's in the teeth of a housing bubble, to be paid for by Hopey-Changey first home owners desperate to Own their Own and mortgae the kids to do so.
- naive Council staffers who have been sold a whole bunch of financial pups, just as the world changed around them.
- The level of internal staff capability and financial nous in many of these Councils is no better than you'd find in an average dairy herd.
- long-term chickens a'comin' home to roost, for example, the MUL, land release strangulation, LBP and regulatory requirements, which have both caused and perpetuated the housing bubble, and now effectively prevent new building and subdivision unless the developer or builder can consistently fail an IQ test.
- the failure to realise that Councils are in a competetive market for the $ in their ratepayers' pockets: these cows now have wings, and cannot be tied down and milked till they're dry. Oz, neighbouring Councils, and plain under-the-radar business, all beckon...
So what we are seeing is quite simply the whole edifice running, in slow motion, natcherally (only speed Councils are capable of) into the proverbial wall. It won't be fun for quite some time, to be standing next to all this.
But as Candide was wont to exclaim at such momemts, 'This too shall pass'.
Especially the animal metaphors.
It would have to be done en mass on such a scale that the council couldnt cope with the PR disaster...ie 10s of thousands....
What will happen I think in time ppl will be unable to pay en mass.....
The Q is of course why to voters still vote in ppl who want to build stadiums and other white elephants.
regards
Does anyone really think it would have mattered who sat in the hot seats? This thing was wired to blow from the outset. Smearing those elected in the resultant mess was just icing on the cake. It was designed to fail in order to break open the piggy bank that is the Auckland Region and let private interests in the back door through CCO's and all the rest. Everyone knew before it started the costs would be out of control, it is just a matter now of seeing it play out in real time.
Notaneconomist-
I am not a legal expert, but does the councils spending behaviour with other peoples money well over the the rate of inflation not also have some ramifications? On the peoples pockets?
As there is hardly any chance that whatever party or personality is voted in will change the spending attitude and fee charging, how can "we the people" make "them" to listen?
Rising petrol and food prices, not forgetting insurance premiums, make it harder for more and more people to make ends meet, so unnecessary council largesse has to be stopped.
Gertraud - I'm certainly not against a rate revolt and fully agree that measures of some sort need to be taken. It is certainly a good threat to the Council.
Council will throw their weight around and add penalties to the unpaid rates which could end up costing more. At the end of the day Council still has to pay its bills and any extra debt loading from a rate revolt will be added to further rate accounts.
Mortgage agreements also have clauses on the paying of rates.
Does the Council have the right to file against an individuals mortgage for non-payment?
Notaneconomist -
what are "measures of some sort" that need to be taken and would be successful? Any idea?
Nobody in their right mind would deny that we have to pay for the services we need and use, the question is just how can we prevent spending of councils for "prestige projects" or general waste. For example last year I did read that the biggest expense of AucklandCouncil was (I don't remember exactly, but around 38%) for the broad heading of "Recreation/entertaining/events/multicultural wellbeing" or similar. Don't nail me down on this, is too long ago, but vividly remember discussing this nonsens with my son and neighbours, all upset. Also could observe absolute unnecessary roading work in my area, all neighbours did shake their heads in disbelieve about the waste...........etc.etc.etc.
Gertraud - Have there been any public meetings regarding the rates and Councils spending?
Have people been writing to their local representatives on the issues? Or phoning them?
Have people written to the Mayor and Council and requested that these issues be disgussed in a full Council meeting? You have to get the issues onto the Council meeting agenda.
How many submissions where put in to the Council in regards to District Plans and other plans?
What sort of ratepayer association/organisation exist in Auckland? If there isn't one in your area maybe one needs to be started but do keep meeting minutes.
As I'm not from Auckland, I don't really have any idea as to what is available, you may have existing organisations available that you can join for your purpose.
Become very familiar with the legislation of Local Government and also follow what Council is doing so that you can make submissions if and when necessary.
If enough people write letters and email them they will start to take notice. Full inboxes and mailbags of complaints can keep the Council busy. Address all mail directly to the Mayor and Councillors.
FYI, I've just posted another Auckland Council story that may be of interest. The new one's on the council's 24 point plan to become a more innovative, effective & focused council.
It's here - http://www.interest.co.nz/bonds/60922/auckland-super-citys-24-point-pla…
Gareth - thanks.
After stripping all blah-blah-blah from this great sounding abstract list, it should come down to more efficient service and no waste. Hopefully.
I just fear it might be the old saying:
"When the mountain was crying out in labour - it produced ....... a mouse."
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