Local government finances reaching crisis point
An AI-generated image of a newspaper with the headline "Crisis" set against the backdrop of a decaying city.
It’s hard to open up a news website these days without seeing a story about the growing financial pressures facing local government. From escalating costs, growing political backlash to fast-rising rates increases, and cuts in funding from central government, councils could be forgiven for feeling that they’re under siege from all sides.
Just this week in my neck of the woods in Wellington there are multiple stories relating to the growing financial crisis. Wellington City Council, already facing a mountain of cuts in amending their long-term plan, have just been informed of another $68 million funding shortfall from Waka Kotahi New Zealand Transport Agency. Up the road, Upper Hutt City Council has just seen its credit rating slashed to be the worst amongst all councils in the country.
A quick survey around the country shows similar issues playing out from our largest to smallest councils. Auckland is facing a half billion dollar funding hole over three years, Gore District Council faces a $3.3m shortfall, and is having to defer the replacement of bridges, and Waikato councils are looking at a shortfall exceeding $100 million.
The shortfall in central government funding for transport in particular comes on the back of councils being hammered by huge costs incurred by severe weather events. As noted several months ago, Waka Kotahi NZTA’s emergency roading fund exceeded its funding allocation for eight out of the past 10 years. I remember speaking with a council chief executive in late 2022 where they mentioned that recent heavy rain events had already caused them to exceed their emergency works budget by 150 percent and that was before Cyclone Gabrielle ripped through the country.
It’s not just council’s transport portfolios that are causing financial pressures. The cost of implementing water reform is another big one, with councils on the hook for both developing their water services delivery plans and the setup costs for any water service entities that result as required by the Coalition’s Local Water Done Well reform. Of course, that reform is meant to address the cost pressures facing councils as illustrated by the situation in the Wellington Water area, though questions still remain over how effective the reform will actually be.
It’s also worth remembering that councils have been forced to respond to and implement a changing array of planning reforms in recent years. A report commissioned by Local Government New Zealand from the New Zealand Institute for Economy Research where they interviewed 10 councils put the combined cost of responding to these reforms at more than $40 million.
It’s not hard to see why. There’s been significant reforms proposed, enacted, modified, repealed and so forth. Just off the top of my head there’s been various national policy statements and reforms (including attempted) focused on freshwater, natural areas, three waters (both Labour and National), Medium Density Residential Standards, Urban Development, Future for Local Government, and we’re now into the second attempt to both simultaneously reform and replace the Resource Management Act!
Reviewing, assessing, and responding to these changes (proposed or realised) takes both time and specialist knowledge, which both incur significant costs for local government. While some of these changes may well save councils money in the longer term, in the short term they have to pay to deal with the changes, and often they’re caught in a bit of a small and hyper competitive market for the specialist expertise needed to respond and implement things - with both central and local government needing access to the same people!
All of this comes on the back of underlying cost pressures on local government increasing significantly in recent years. Local Government New Zealand commissioned Infometrics to investigate this and released a report back in February 2024 that detailed the impact, with civil construction costs up 27 percent over three years versus 19 percent for consumer price inflation. Councils are also facing massive increases in the cost of insuring their assets, pouring further fuel on an already fierce inferno of cost pressures. In many respects, the skyrocketing cost of insurance is one of the core reasons behind the political drama unfolding in Wellington around its long-term plan amendment.
The political tolerance of the necessity of high rate increases also appears to be running out. From that earlier Infometrics report, they calculated that the average rate rises of 9.8 percent per annum in 2023 were the highest since 2003. While I haven’t yet seen a final figure from this years series of long-term plans, Radio New Zealand was reporting back in March a figure from LGNZ that average rate rises of 15 percent were on the cards for the 2024/25 financial year. While we won’t see the extent of any voter revolt against this until the 2025 local government elections, the Coalition has made its displeasure about rate increases eating up their tax cuts clear.
There’s some possible small bits of relief on the horizon. Back in August, Labour committed to ending the devolution of unfunded mandates to local government by central government. Assuming this is honoured when Labour eventually returns to government, it should either result in any responsibilities being passed down coming with attached funding, or central government not continually unloading its responsibilities onto local authorities.
Likewise, the Coalition’s Regional Deals Framework hints that there will be assistance in the form of new funding and financing tools to assist with the revenue needed to deliver on the content of the deals, but until the sector sees what this looks like in practice there is significant scepticism, especially given the rhetoric from the Coalition over council’s rates increases.
But fundamentally, at some point we have to acknowledge that these measures are just rearranging deck chairs on the Titanic and we need a more fundamental overhaul of the sector. It’s been something that I’ve been advocating on for a number of years, having called for a Royal Commission back in 2020, and it’s good to see prominent mayors such as Hutt City’s Campbell Barry echoing similar sentiments.
The last major overhaul of local government was 35 years ago in 1989, and barring the Auckland super city amalgamation, the system that was created nearly four decades ago remains in place to this day. If it’s to survive another four decades, let alone another four years, there has to be an overhaul of local government to ensure it remains relevant to its communities, it can deliver the infrastructure and services those communities need to grow and thrive, and it can be financially sustainable while doing so.
If we don’t do anything, we face the worsening crisis that is currently unfolding in the United Kingdom where one-by-one councils are effectively going bankrupt. Unfortunately, I fear that it will require multiple councils reaching that point locally before central government will actually take genuine and meaningful action. Certainly, the Coalition’s outright rejection of the Future for Local Government Review’s recommendations likely means we’re back to square one on this all over again.
