By Steve Mooney
When the UK’s second largest city, Birmingham, effectively declared itself bankrupt last year the news reverberated around the world, but the city is not the only local government authority in dire financial straits.
The Birmingham City Council provides services for more than one million people and found itself GBP2.9 billion in debt.
It was a situation which triggered an effective takeover by the UK Government and an austerity program announced this year to sell GBP750 million pounds of assets and cut back on services.
Birmingham is the seventh local authority in the UK to declare itself bankrupt since 2020, and some other cities, such as Leeds with a debt of GBP2.2 billion, have debts of a similar magnitude.
This has also been an issue in the US, with the infamous 2013 bankruptcy of the city of Detroit under more than $20 billion of debt.
Closer to home, debt levels are also an issue for local government authorities in New Zealand and Australia.
In New Zealand, the financial constraints of councils have been a significant factor in the ongoing water crisis which saw the previous Government propose the Three Waters scheme, since scrapped by the Luxon Government.
Those debt issues, however, are not going away and they have been highlighted in a recent report called Is Local Government Debt Constrained by the New Zealand Infrastructure Commission Te Waihanga.
The report points out that local government owns and operates over one-quarter of New Zealand’s infrastructure assets and that this comes at a significant cost.
At the same time, the councils are constrained in how much debt they can raise and take on.
Currently, the debt is limited to 285% of annual revenues, dropping to 280% by 2026. The cities of Auckland, Hamilton, Tauranga and Wellington are all pushing up against that limit, as is Queenstown Lakes District Council.
The Infrastructure Commission report says that since 2002, for every NZ$100 invested in infrastructure, around NZ$24 comes from local government, a combined average of NZ$3.8 billion per year.
While revenues grew in line with debt during sustained periods of infrastructure investment in the 20th century, the current investment cycle – beginning in the 1990s – has seen New Zealand councils significantly increase their debt to finance investment without increasing revenues at a similar rate.
From 2009 to 2022, the report says that inflation-adjusted local government debt grew 226%, but inflation-adjusted rate revenues increased only 42%.
“The difference in how councils invest may be due to a change in our mix of investment over time,” the report says in one of its key findings.
“Between the 1920s and 1970s, local government was building new infrastructure networks from scratch to serve rapidly growing urban populations.
Today, a much larger share of investment is directed towards renewal of existing infrastructure than to growth infrastructure.”
Today’s challenge is that Investment to incrementally improve existing infrastructure networks is unlikely to drive the same level of economic uplift as building those networks in the first place.
Hamilton’s mayor, Paula Southgate, is the chair of the metro councils and as she told Newsroom in April, “not all debt is bad” but current ratepayers “can only afford so much.”
“We think there could be some movement in the debt ceiling,” she said.
“But even if we lifted it up to 300%, it really wouldn’t solve all our issues. We’re talking about a much bigger challenge.”
Christopher Luxon has declared infrastructure a priority since his election last October, and has indicated that New Zealand needs more private investment in infrastructure.
Councils are also exploring financing tools like public-private partnerships and the creation of special purpose vehicles for particular projects.
The pilot project to create a special purpose vehicle, which raised NZ$49 million to pay for five projects at the Milldale development, north of Auckland, has been help up as a successful model to pursue.
The Government has announced plans to provide NZ$1b of incentive payments for councils to deliver more new housing, and reform the Infrastructure Funding and Financing Act to reduce red tape and enable developers to more easily fund infrastructure.
Councils in Wellington and Hamilton are reportedly now pondering special purpose vehicles for specific projects, while Tauranga has raised a 30-year levy to finance new roads.
In Australia, meanwhile, the local government sector is lobbying the Federal Government for a A$3 billion one-off payment, accusing it of not honouring its commitment to “fair increases’ in financial assistance to the nation’s 537 councils.
The Australian Local Government Association has asked the government to restore financial assistance grants to at least 1% of Commonwealth taxation revenue as “an urgent priority”, in addition to a one-off payment of $3bn.
ALGA president Linda Scott – a Labor councillor on the City of Sydney Council and a former deputy lord mayor – told The Australian newspaper in February that financial assistance grants had declined from 1%of Commonwealth taxation revenue in 1996 to just 0.5% in 2024.
“Local governments’ share of Gross Domestic Product is among the lowest of comparable nations, and expenditure per capita by councils has flatlined over the past decade, while state, territory and commonwealth spending has continued to rise,” she said.
Scott said that these untied federal grants were vital to supporting local government to deliver more affordable housing, and cost-of-living relief through access to free and low-cost services.
“Councils will welcome a $155 million increase in Financial Assistance Grants this year. However, this increase is the result of the legislated indexation formula, and far below the fair increases promised by the government,” she said.
“This year’s Budget will be incredibly disappointing to many councils and communities that have been waiting for the Government to deliver on its fair funding promise over the past two years.”
