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Guest Post: Larry Mitchell on Auckland Council’s “Elephant in the Room”Guest Post: Larry Mitchell on Auckland Council’s “Elephant in the Room”

In the last year there has been a lot of discussion regarding efforts by Auckland Council to fund its yawning funding gap, a gap that mostly relates to its transportation (roading) budgets. New tolls for existing motorways are a possibility, as well as distorying the Auckland Energy Consumer Trust so that Auckland Council (instead of the intendand benificiares) get the annual payout.

Feedback included one commentator who “shouted” (in bold caps) … “Hang On! lets not try to fill any funding gap before we first address Auckland Council’s wasteful and unaffordable expenditures which are so clearly out of control!” … the Elephant!

Fair point … so here, to start this particular ball rolling, are some simple financial facts concerned with Auckland’s expenditures.

The 2012- 2022 long term plan forecast Council group expenditures to increase by 24% over the next five years, although this year’s 2014 actual result is slightly less (by 3%) than that forecast.

Recent publicity surrounds the funding deficit issues referred to already, that is, the search for increased income and other sources to meet budgeted funding totals. But there is something important missing from this picture. Nowhere in the debate surrounding the financial management of Auckland Council is there to be found any call for or actions to address the funding shortfall by making budget savings derived from expenditure reductions.

How different this is from individual budget holders of our family’s expenditures or of firms in the private sector. Any private sector firm faced with a similar funding dilemma to that of the Council would not hesitate in wielding the axe to its expenditures. They would act promptly to lower their overheads, then most likely to reduce payroll, while all the while seeking more efficient and economical ways to produce their goods and services. So why is our Council somehow exempt from employing these sensible strategies?

It appears that the Council’s coercive powers give them an assured (taxation) basis for their revenues and that effectively removes any incentive or compulsion for their making cost savings.   

This is the reason Councils usually just run “cost plus” budgets year after year. A small number, usually those reacting to pressures of their ratepayers, from time to time trim their costs. Currently though New Zealand Councils by and large show little interest in making cost savings as tables of recent year’s inexorable rates increases attest.

An analysis of alternative solutions, designed to modify Auckland Council budget strategies fall into two broad areas.

The first is to look at the Auckland Council culture and practices that have allowed this situation to develop.

The second addresses a range of specific tactics that can make inroads (savings) to meet balanced budget objectives..

So how did this expensive, unaffordable approach to Auckland Council financial management arise? There is no need to itemise these reasons as recent publicity has already done so. One glaring example of a lack of cost control however is the Council payroll. With over 1,100 (roughly 15% by number) of all Council employees drawing over $100,000 salary per annum this of itself is sufficient evidence of poor cost management for most ratepayers when their average incomes are in the mid-sixties.

In the interests of brevity we now merely list some of the missteps that have lead to the creation of our under-performing, expensive monster of a Super Council: 

  • The election of a Mayor and Council (majority) who have shown little interest in the creation of a high performing cost-effective unit of local government. Recent events may have forced them to address some funding alternatives but any cost savings ideas remain missing in action
  • Failure to do (as the Royal Commission recommended) and put in place a governance and management structure where performance and cost control would have the highest priority. The appointment of the suggested performance audit function was quietly shelved – some might say to be replaced it seems by an army of Mayoral feel good PR spin merchants?
  • Appointments in key financial positions of persons with no interest or track records in seeking to achieve affordable, high performance service delivery
  • Layered staffing structures with high payroll and head counts consequently building up large departmental overhead structures.
  • The absence of useful benchmarked expenditure-setting controls or performance improvement processes.
  • A failure to determine (including the use of independent public opinion surveys) the level of service ratepayers are prepared to trade off against cost savings.
  • A disinterested hands off external audit role. This is obvious from recent annual audit management clearance letters to the Council. These reflect an ineffectual extremal audit presence out of its depth, often beholden to Council management and totally disinterested in improved Council performance.

The result of these circumstances are well understood by Auckland ratepayers - just look at their rates bills and see the nearly daily headlines of the latest examples of Council waste and extravagance. Lack of control of Council expenditures has lead to unaffordable rates and their projected high percentage annual increases.

Only a total turnaround of leadership and of Council culture plus effective cost savings tactics can address these issues. Electors, as ratepayers seeking better value for their money have their opportunity next year to (albeit somewhat indirectly) set affordable cost-effective budgets by electing a Council with these as their principal agenda.   

Larry Mitchell is a local government financial analysist.  The views are his own and do not necessary reflect those of the Taxpayers’ Union. Larry can be contacted vai larry@kauriglen.co.nz.  

Daniel Hannan MEP on David Cunliffe & Trickle Down Myth

Daniel Hannan, a Conservative Member of the European Parliament, has written an article for CapX on the myth of “trickle down economics”. He quotes former Labour Party leader David Cunliffe and seeks to dispel the myth surrounding free market economics.

In the run-up to the recent New Zealand election, for example, the Labour leader, David Cunliffe, asserted: “The rich are getting much richer, the middle is struggling and the poor are going backwards. It’s the human face of ‘trickle-down economics’, the idea that if we give more to those at the top, eventually things will get better for the rest of us.”

Cunliffe (who went on to lose badly, Kiwi voters evidently not sharing his analysis) was in distinguished company. When he was standing for the presidency in 2008, Barack Obama had similarly excoriated “the economic philosophy [which] says we should give more and more to those with the most and hope that prosperity trickles down to everyone else.”

It’s a wide-spread meme.

The case against trickle-down, then, is pretty clear. But who exactly is making the casefor it? Where are the economists, the politicians, the commentators, arguing that we should give more to the rich? Who avers that the best way to stimulate the economy is for plutocrats to have more to spend on their Lamborghinis and swimming pools?

Well, here’s an odd thing: I can’t find anyone. Which is, when you think about it, pretty astonishing. One of the consequences of the Internet has been to ensure that even the most eccentric points of view generally turn out to have some advocates. But my online searches, while turning up hundreds of people debunking trickle-down, have not discovered a single person defending it. Could it be that the whole thing is a socialist fantasy, a false creation proceeding from the heat-oppressed brain of Left-wing polemicists? 

If nobody can be found to promote this theory, why is it that there are so many politicians who are quick to rally against it? And what does it actually mean?

Hannan explains:

Coolidge, surely the most underrated of all American presidents, had applied the logic of the Laffer Curve avant la lettre. He could see that the punitive tax-rates levied under the Wilson administration were pushing wealthy people into removing their assets from the productive economy, and believed that, by cutting tax rates, he would boost tax revenues – as well as stimulating the economy in general. 

He was absolutely right. In 1921, when Americans earning over $100,000 were expected to pay an eye-watering 73 per cent in federal income tax, they accounted for 30 per cent of a total tax yield of $700 million. By 1929, when the top rate had been cut to 24 percent, the federal government collected more than a billion dollars in income taxes, of which 65 percent came from those earning over $100,000.

So “trickle-down economics” as characterised by Mr Cunliffe and others appears to be the rallying cry of certain politicians that want to tax people higher amounts and in doing so reduce the amount of tax raised by the government.

Mr Hannan’s full article is well worth a read. It can be found here.

SkyCity convention centre bailout? NBR readers say no

Just before the Christmas break we were aghast to learn that SkyCity was looking to a government bailout after cost overruns with the National Convention Centre project.

It looks as though NBR readers agree with us.

An overwhelming number of NBR poll participants say the government should not pitch in $130 million for Sky City’s new convention centre.

The Auckland-based company increased building estimates for the centre, putting the cost between $470 million and $530 million.

The casino operator had previously estimated the centre would cost $402 million, which it had agreed to cover in return for extensions to its Auckland gaming licence.

The entire purpose of the SkyCity deal was that Auckland and New Zealand would gain a world class convention centre, paid for by SkyCity, in return for various regulatory concessions for the casino.

It was never suggested at the time that taxpayers or ratepayers would have to shoulder any of the burden. If SkyCity underestimated the cost of the centre when they signed the deal, that’s their financial problem and should not be borne by taxpayers.

Economic Development Minister Steven Joyce says he expects the cost difference to be bridged through cost-cutting and in the procurement process, though would consider other funding options if needed.

"Any such options would not involve granting SkyCity more or different gambling concessions, or making further changes to any legislation that affects casinos or gambling," Joyce said.

It looks to us as though Minister Joyce is trying to warm up the public to the idea of gambling taxpayers’ money on the venture.

If that’s the case, we think he will be facing an up-hill battle!

NBR poll participants are strongly against the government forking out money to help SkyCity, with 86% of participants voicing their opposition to the idea. 

Sky City corporate welfare

Fairfax has picked up our comments on SkyCity's recent comments to prompt taxpayer funding of the controversial convention centre.

Auckland Councillors blast Sky City 'corporate welfare' Stuff 22/12/2014

Auckland ratepayers should not have to pay for a blow-out in the cost of the Sky City National Convention Centre, councillors say.

Economic Development Minister Steven Joyce raised the prospect of the Auckland Council chipping in to help fund the project, after new estimates revealed the cost could blow out by as much as $128 million.

The increase in cost could leave taxpayers on the hook for any shortfall, but Joyce said the council could provide some assistance.

[...]

The Taxpayers' Union has derided the deal as "corporate welfare" and called on the Government not to bail Sky City out.

"The whole idea of the SkyCity deal was that Auckland and New Zealand would get an international class convention centre, paid for by SkyCity, in return for various concessions to the casino," Taxpayers' Union executive director Jordan Williams said.

"It was never suggested or intended that the taxpayer or ratepayer would have to shoulder any of the burden. If SkyCity underestimated the cost of the centre when they signed the deal, that's their problem."

Read more.

Cruisin' on the taxpayer

New Zealand taxpayers have forked out $9 million to pay for a  four-day UN conference in Samoa that included hiring the luxury P&O Pacific Jewel cruise liner. New Zealand covered the accommodation and operating costs, of September’s Small Island Developing States.

We not aware of New Zealand taxpayers having ever chartered such a luxury cruise-liner. The ship is marketed as 'the world's largestPacific-Jewel.jpg adventure park at sea’ and includes a zip-line across the top deck, an outdoor circus performance arena and numerous movie theatres. Conference attendees had nine bars, pubs and nightclubs to choose from and seven restaurants and cafes to dine in.

It seems inconceivable that the Ministry of Foreign Affairs and Trade would think it a good use of taxpayers’ money to fund the chartering of a luxury cruise-liner for a conference in another country.  It appears that MFAT brought in the liner so conference attendees could avoid the mainland.

Pacific_Jewel_-_1.jpg

$9 million is nearly half New Zealand’s annual aid budget to Samoa and amounts to $4,500 per attendee. The amount does not include the cost of attendees’ flights or travel (and presumably cocktails) which makes the $9 million amount all the more remarkable.

If the $9 million had been used for genuine economic development or investment, no one would complain. Instead taxpayers forked out for a conference which ‘achieved’ a document that ‘reaffirmed’, ‘acknowledged’, ‘recognised' and ‘recommitted’ to various bureaucratic platitudes.

Little of the money is likely to have gone into the local Samoan economy. The British-American owned company, P&O Cruises, appears to have been the main beneficiary.

We should be funding measures that actually develop economies, not chartering liners to talk about it

pacific-jewel-circus.jpg

Earlier in the year press releases were issued by Foreign Affairs Minister, Murray McCully and the Ministry which pumped the value of the talk-fest. They failed to mention the fact that taxpayers were footing the bill at a cost of more than $2 million per day. It it a shameful misuse of public money and officials are no doubt praying that the Christmas rush allows them to avoid public vilification.

 

State Services Commission staff the highest paid

The average salary for staff at the State Services Commission is higher than at any other government department, according to figures released by the Taxpayers’ Union. This morning’s Dominion Post reported the Commission staff earn an average of more than $113,000 a year - $45,000 more than the public sector average.

Frontline orientated groups such as the NZ Customs Service ($60,209) and the Department of Corrections ($60,630) have significantly lower salaries when compared to the management-heavy Ministry of Women’s Affairs ($104,586) and Ministry of Pacific Island Affairs ($90, 887).

Instead of rewarding those on the front line, the Government appears to be making those in Wellington most comfortable. How can, for example, the Ministry of Women's Affairs and the SSC justify higher average salaries than both Foreign Affairs and the Serious Fraud Office?

In light of the recent blunders by the State Services Commission, Paula Bennett should be asking some serious questions as to whether taxpayers are receiving value for money from those who are supposed to be promoting an efficient public service.

Over the flip is the list of government departments and average salaries (access by clicking 'read more').

Annual Review

The Taxpayers’ Union has today released its annual review, covering the first 12 months of operations.

We’re proud of the document, and what we’ve achieved to date, but there is still plenty to be done.

There are hundreds of organisations that campaign for more government spending and a higher tax burden. The Taxpayers’ Union helps balance that debate by exposing government waste, arguing for more efficient government spending, and promoting the benefits of lower taxes.

Thanks to all our members, donors and supporters who make our work possible.

If you're not already a member click here to click here to join the Taxpayers' Union, or click here to make a confidential donation.

'Trickle down economics' doesn't exist

This morning's Radio NZ's Morning Report interviewed Labour's Finance Spokesperson Grant Robertson on the OECD report on inequality released today. In the interview, Mr Roberson referred a number of times to 'trickle-down economics' and reiterated the point Green Party co-leader Russel Norman made in an earlier interview that the theory is invalid. But what does the term mean and have fiscally conservative groups (such as the Taxpayers' Union) or centre-right politicians ever argued for lower taxes on the basis a 'trickle-down' theory?

Audio on demand: Labour's take on inequality's effects

What is 'trickle-down economic' theory? Does it exist?

Back in February, Jenesa Jeram at the New Zealand Initiative, a Wellington based think-tank, considered the same question.

Defeating the trickle-down straw man

Jenesa Jeram | Research Assistant | New Zealand Initiative

In debating, speakers are not rewarded for having a superior argument per se. They are rewarded for convincing the audience that they do. The easiest – but ultimately dishonest – way to do this is to caricature the opponent, portraying their argument as ridiculous beyond belief.

Trickle-down economics is an example of a “ridiculous beyond belief” idea; that giving money to the rich will eventually trickle down to the rest of the economy to benefit all. Indeed, the refutation of this theory of trickle-down economics dominates the discourse.

Recently, opposition leader David Cunliffe cited the theory’s failure in his State of the Nation speech, arguing that “The rich are getting much richer, the middle is struggling and the poor are going backwards. It’s the human face of “trickle-down economics”, the idea that if we give more to those at the top, eventually things will get better for the rest of us.”

The problem is, there is no such thing as trickle-down economics. In fact, it is an oxymoron: it has no “economics” in it whatsoever. Thomas Sowell, senior fellow at the Hoover Institution argues convincingly that the theory is a straw man argument – a flimsy invention of those arguing against it so they can easily knock it down. Sowell writes that the idea cannot be found in “even the most voluminous scholarly studies of economic theories”.

Trickle-down economics is a complete caricature of the original arguments supporting economic growth. No economist has ever argued that in order to make a poor person richer you should make a rich person richer first. Economists have, however, argued that economic growth can make us all better off, whether we are rich or poor.

So why has this trickle-down nonsense persisted for so long? Perhaps because it sets the parameters of debate around redistribution, focussing solely on inequalities in wealth, rather than inequalities in capabilities. If wealth is not trickling down naturally through voluntary processes, then it is up to the government to intervene to ensure it does.

However, there is a much better way to deal with inequalities. Instead of trying to correct inequalities through redistribution, we should ensure that everybody has a chance to participate in our growing economy. First and foremost, this means making sure people acquire the right capabilities and education.

Rather than waiting for wealth to trickle-down from the top, the focus should be on ensuring everyone has the ability to swim with the economic tide.

Ms Jeram's final two paragraphs hit the nail on the head. In fact they are a better summary of the main message of the OECD report: the importance of investing in education and ensuing equality of opportunity.

Unfortunately Messrs Robertson and Norman couldn't help but take the opportunity to use the report to mischaracterise the economic arguments for a low tax economy. Our press release responding to the comments is over the flip.

 

Time for recall elections for local government?

On Sunday we suggested that New Zealanders should be given the ability to recall their representatives after the latest of a series of scandals involving Auckland Mayor Len Brown was revealed. The NZ Herald picked up our suggestion:

'Secret room' spending shows need for recall elections

A lobby group says revelations Auckland Council spent $30,000 on "secret rooms" for Len Brown show New Zealand needs recall elections to dismiss politicians before their terms expire.

The Council spent the money building a private bathroom and dressing room hidden behind a bookcase in the Auckland mayor's new office, the Herald on Sunday reported.

The Taxpayers' Union today said the Government should give local communities the ability to petition for recall elections.

"Councillors have already censured Len Brown for misusing funds but clearly the line in the sand is being ignored," said Jordan Williams, Taxpayers' Union executive director.

"A recall option would enable ratepayers to petition for a vote to fire a shameless [politician] who lacks any respect for those who pay the bills." Read more.

Voter recall options are gaining popularity overseas and it's time New Zealand had the conversation. Though often associated with the United States, where they have a long history and are used at both the state and local leve, recall mechanisms also exist in British Columbia, several Swiss cantons, the Philippines and Venezuela.

Recently the UK Government introduced the Recall of MPs Bill to the House of Commons on 11 September 2014, after pledging to the public to go so upon election in 2010. Many UK MPs, led by backbencher Zac Goldsmith, think the Government’s proposed threshold of recall only after a committee of MPs has found the representative to have been engaged in “serious wrongdoing” is too high.

Based on the swamp of emails we've been getting, many Auckland's think the threshold to censure a Mayor seems to be pretty high too!

We think that it's time the Government gave ratepayers a voice between elections. A recall option would enable ratepayers to petition for a vote to fire a shameless politicians who lacks any respect for those who pay the bills. New Zealanders need a mechanism to replace elected representatives if they fail to perform or bring their office into serious disrepute.

As Zac Goldsmith recently said:

“What is at stake is a matter of principle – do we trust out voters to hold us to account or not?”

It’s time to have the recall conversation.

Is bigger better for local councils?

That's the question facing the Wellington region with the Local Government Commission releasing it's proposal for a "Super City" stretching from the Wairarapa to the Cook Strait.

TDB Advisory report, commissioned last year by the Hutt City Council, reviewed the international literature on the relationship between size and cost-effectiveness of local government. It examined the expenditure data from New Zealand territorial authorities to assess the relationship between size and cost-effectiveness. The report found that efficiencies are generally gained up until a local council area covers 50,000 inhabitants. Once councils reach around 200,000 in population it appears that diseconomies of scale kick-in and that larger councils tend to cost more on a per ratepayer basis.*

There are other problems with the model chosen by the Commission:

  • It doesn't offer value for ratepayers - that's not just our view, the Commission's own analysis ranks the chosen model fifth in terms of net benefits of the eight options presented. Projected efficiency gains of $30 million per year at 3% of operating expenditure are derisory given the risks of adverse efficiency changes described from other local government agglomerations.
  • A move to capital valuations for rates will hurt the CBD the most - as Aucklanders well know, capital valuations shift the rates burden onto inner suburbs. The Commission does not hide its intention to cross-subsidise. Wairarapa, for example is warned that it will lose $11m of subsidy if it goes it alone. We see Wairarapa’s determination to be self-reliant as creditworthy. Judging from the relative performance of Christchurch and its neighbouring small councils, Wairarapa will have every prospect of showing the Commission to be dead wrong.
  • The goal of 'regional coordination' is fudged - the proposal is obscure about the relationship between local boards and regional coordination matters such as economic development and transport.
  • It won't make the boat go faster or promote 'a single voice' - despite the recent efforts to address economic development at a regional level, the proposal gives economic development to local boards. Even if the scheme resulted in a 'single-voice' democracy we've not been able to track down evidence of advantages stemming from such a system. If anything, ‘single voice’ democracies in seem better positioned to squeeze central government for pork barrel politics courtesy of the taxpayer.

The Commission's draft proposal is available on this page. Submissions close on 2 March 2015.


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