Councils in good financial health with debt costs dropping but future funding still a concern

A funding review of New Zealand local councils shows debt is less than forecast and all are operating within their financial covenants.

Analysis by the Local Government Funding Agency showed that during 2014, the sector’s total gross debt increased by 6.8 percent to $10.8 billion. But only 30 of the country’s 78 councils increased their debt during the year while 30 decreased debt levels. Excluding Auckland Council, which has the highest amount of debt and assets, total gross debt fell less than 1 per cent.

Total assets increased by 4.7 percent from the previous year to $117 billion while total revenue increased 4.4 percent to $8.4 billion. The movement in rates revenue by council ranged from 12.5 percent rise for Westland District Council  to a 5.4 percent decrease for the Chatham Islands.

The LGFA said its review confirms Local Government New Zealand’s findings that while the local government sector is currently in good financial health, a growing and aging population means there could be funding challenges in future. LGNZ released a funding review discussion paper last week which suggested a move away from relying on property-based rates to fund the majority of council revenue and beefing up user charges.

LGFA chairman Craig Stobo said councils are very conservatively geared, which means they're better able to contemplate major works.

“It indicates they’re prudent financial managers and the community should be grateful but then there’s the infrastructure renewal story where around $30 billion is needed for stormwater renewal alone and that’s challenging,” he said.

An issues paper providing a clearer picture on the nationwide state of water, wasterwater and stormwater assets and services, which accounts for a major chunk of council infrastructure spend, was released in October. There’s a large amount of aging pipes in the ground around the country – some up to 100 years old - and a final paper on a new water services model will be released in the next few months.

The review found a wide variance in the level of capital expenditure as a proportion of depreciation on network services but LGFA said a single year is not a good indicator and more discussion is needed over the quality of capex.

New debt issued by LGFA was $295 million during the December 2014 quarter compared to the average quarterly issuance of $379 million and the agency now has total debt on issue of $4.54 billion, making it the largest issue of NZ dollar debt securities after central government.

Long-term financial costs are continuing to decline and many local councils are taking advantage of the fall in global interest rates and tight credit margins to refinance, particularly replacing short-term debt with long-term debt that better matches infrastructure spend. Some 93 percent of LGFA borrowings are now on six to nine-year timeframes.  LGFA chief executive Mark Butcher said borrowing costs are a large part of the overall expenditure of councils and having long-term debt means many can go ahead with their long term plans with more certainty.

“There’s a myth out there that councils are borrowing and spending a lot but that is not actually the case,” Butcher said.

The 20 councils that have credit ratings from one of the ratings agencies are all rated between AA and A+. During the year no councils had a ratings downgrade and one – Western Bay of Plenty - had an upgrade.

Stobo said there had been growing interest in LGFA bonds from offshore investors at over 22 percent of issuance compared to only 2 percent a year earlier.

“This is a real vote of confidence from what we call real money funds internationally who hold money on account of institutions and wealthy people and they’re thinking the New Zealand dollar is well regarded and the macro story well managed,” he said.

The LGFA said since its inception three years ago has saved councils 20 basis points of interest on their borrowing – or some $30 million, although it had been targeting 30 basis points over the lifetime of the borrowing.

LGNZ chief executive Malcolm Alexander said the funding agency’s success in partnership with the Crown could set a precedent for what else could be done collectively for councils such as risk management and insurance. 

(BusinessDesk)