A Surprising Solution for Unsustainable Property Buyouts

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In this blogpost I will argue that extreme climate events like floods, fires and storms are causing both central and local government financial challenges. This will only increase with global warming. For councils the problem is worse. As we found out during Covid-19, the Reserve Bank can create new money but councils can’t.

Cyclone Cook (2018): The government offered to buy out around 100 properties in the Coromandel Peninsula that were severely damaged by the cyclone. The total cost of the buyouts was around $10 million, with the government paying around $8 million and the councils around $2 million.

Cyclone Gita (2018): The government offered to buy out around 50 properties in the Wellington region that were severely damaged by the cyclone. The total cost of the buyouts was around $5 million, with the government paying around $4 million and the councils around $1 million.

Lake Ohau Village fire (2020). Fanned by strong gales and actually caused by electrical short circuit, it took nine days to put it out. 54 homes and buildings were destroyed costing insurance companies $35 million.

Cyclone Fehi (2021): The government offered to buy out around 20 properties in the West Coast region that were severely damaged by the cyclone. The total cost of the buyouts was around $2 million, with the government paying around $1.5 million and the councils around $0.5 million.

Nelson floods (2022) Government offered to pay $12.3 million with Councils paying $12.3 million.

Cyclone Gabrielle (2023): The government has offered to buy out around 700 properties in Hawke’s Bay that are at risk of flooding. Government offered $92.5 million, with council matching it. It was a take-it-or-leave-it option for high risk homes too unsafe to return to. Government pays an additional $556 million (some was for flood protection and some for infrastructure).

Gisborne Council had to pay $102 million to match central government. It also got a $30 million loan at 0% from Government.

Auckland floods (Feb 2023) Government offers $1 billion and Auckland Council are expected to pay $1 billion over ten years. (700 homes). Consultation happening.

And this is all before the Dunedin City Council offers to buyout vulnerable South Dunedin properties for $131 million.

 Government expect councils to pay more and more

Insurance payouts on top of buyouts

In addition, the Insurance Council said private insurers paid out about $1.3 billion for Auckland and $147 million for Cyclone Gabrielle.

It is important to note that not all of the properties that have been offered a buyout have been accepted. Some homeowners have chosen to stay in their homes, even if they are at risk of flooding or other damage.

Of course in the future, it is the insurance industry that will lead the way. When they decide they will no longer insure a property or the premium keeps on rising, homeowners may just stay there until a freak weather event drives them out. They will lose all the equity in their home.

Extreme Climate Events will be bigger and more frequent

Climate scientists have told us time and time again, that extreme floods, fires and storms will increase in severity and become more common. This means that the cost to the government to bail out after floods, fires or storms, will just go on increasing.

You will notice that the councils now have to pay half, even if the cost is spread over some years. For instance, Auckland Council is going to have to find $1 billion over the next ten years.

But councils are already strapped for funding. The Local Government Association has been saying this for years.

Councils search for new funding sources for buyouts

Local Government provides essential services, including:

  1. Transport services
  2. Water services
  3. Flood protection services
  4. Social and community infrastructure services
  5. Refuse collection services
  6. Local planning services
  7. Regulatory services that assist with: a. Public safety b. Health c. Environmental protection d. Biosecurity e. Economic development
  8. A range of other essential services

However, Councils have always noted that their income is not large enough for all the work they want to do. In addition, central government keeps passing new laws for councils to implement but without any funding to do it. Councils have complained about unfunded mandates for years.

In 2015 Local Government NZ produced a report on council funding. It found that

Council’s Source of incomePercentage from this source
Rates49%
User fees and charges15%
Grants11%
Capital grants8%
Assets7%
Petrol taxes and regulatory income5%
Dividends and interest4%
Development contributions2%
 

However, the percentage of income from rates can vary substantially between councils.

They listed and discussed the various options – a local income tax, sharing revenue with central government, local expenditure tax, pollution taxes, road pricing e.g. motorway charge, regional fuel tax and transaction tax.

The Productivity Commission in November 2019 produced a 360 page report suggesting new ways to fund local authorities. These include an ability to levy land value capture, or congestion charges. The third option was a rule that if national benefits accrue from a local function, then central government should pay.

The Water Services Entity Bill was passed into law in August 2023, meaning that the water infrastructure assets and maintenance will be taken away from councils. The new water authority will charge the water bills.

So councils will have less income. Whereas councils once received about 10% of all taxes and rates income in New Zealand, they will soon have a mere 5%.

Councils could spend a new currency into existence

Goodness, I hear you say. Are you mad, Deirdre? No I am serious. It has been done before –in an Austrian town in the Great Depression, in Guernsey Island after the Napoleonic wars. Both of these currencies were hugely successful.

Trade that involved imports would naturally be transacted using national dollars e.g. petrol whereas local labour could be paid for using a council currency. The currency could be spent into existence to pay part of council workers’ wages.

Local businesses could accept it for goods produced locally. What gives the local currency value is that Council will accept it as pay for rates. Thus it is called a rates voucher.

Former Social Credit Leader Bruce Beetham when he was Mayor of Hamilton had the public behind him in 1976, but was prevented from doing this by three laws. If these laws were amended it would be legal.

There is more on this proposal and the success of Worgl and Guernsey currencies here and here.

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