Council credit downgrades cost ratepayers millions

Announcing this week that the new $68-million Te Ngaengae Pool will soon open to the community, Hutt City’s Campbell Barry said it would be “one of the proudest moments of my time as mayor”.
So too, last week’s opening of the new $167m Te Ara Pekapeka Bridge, for Hamilton mayor Paula Southgate. “This is a fantastic moment,” she said.
They should enjoy their moments in the sun; there may not be many more such ribbon-cuttings. Indeed, Wellington Mayor Tory Whanau has already suffered the discomfit of standing by the stage at the capital’s new $180m Tākina convention centre, as the Prime Minister scorned its ‘wasteful cost’.
As the Government throws more responsibility for infrastructure back to councils – everything from water to speed humps – the country’s heavily-indebted councils now face paying more to service their debt.
Unlike central Government which has relatively low debt by world standards, New Zealand’s councils carry some of the highest debt burdens in the world – so their credit ratings are critically important.
In the past year, global rating agency S&P has downgraded six councils’ credit ratings: Wellington City Council was lowered to AA last week; that came hard on the heels of Hutt City, Porirua City Council and Bay of Plenty Regional Council all being dropped to AA-.
Horowhenua was downgraded even further to A+, as was – worst of all – the big Hamilton City Council.
Wellington and Hamilton are both high-growth councils; Wellington has $1.75b of debt but is somewhat insulated from harm as moving from AA+ to AA does not change its borrowing margin.
Hamilton is not so lucky: last week’s downgrade to its $1.04b of debt will begin impacting quickly.
The council is forecasting more than $300,000 in the first instance; the Local Government Funding Agency says that will rise to $520,000 a year in additional interest costs as more debt moves up five basis points to the higher rates.
Almost all councils borrow through the Local Government Funding Agency; in November its directors will vote on a government proposal to increase the debt cap for the country’s high-growth councils from 280 to 350 percent, allowing them to borrow more.
Hamilton City Council is nearly at the 280 percent mark, and its chief financial officer David Bryant confirms he’ll urge councillors to be cautious before borrowing more. The added debt should be taken out only for “black swan events” like rebuilding from major storms and earthquakes.
“It does speak to the challenges of the sector and the limited revenue tools that councils have to fund growth,” he tells Newsroom. “We are bound to invest in infrastructure, to meet the Government’s desire to improve and increase housing. Every dollar borrowed is a dollar that needs to be repaid with interest.”
Over the course of councils’ 10-year long-term plans, the impact on ratepayers – of high debt and lower credit ratings – is serious. Nationwide, when interest rates are dropping for most institutions, they will increase on more than $2.5b of council debt, and the debt-servicing costs will rise further as more councils are downgraded.
S&P has placed another 19 councils on a negative outlook, which essentially means they’re facing a downgrade in the next 12 months if they don’t do something special.
For those other councils downgraded in the past year, they’ll pay 5 basis points (0.05 percent) more as they take out new borrowings, and when existing borrowings mature and are refinanced.
That may not sound much – but it quickly adds up across billions of dollars of debt.
Local Government Funding Agency chief executive Mark Butcher tells Newsroom that Hutt City Council will pay an additional $314,000 a year on its $627m of debt, and Porirua will pay $151,000 more on its $302m borrowings.
Horowhenua ratepayers face another $116,000 a year, and Bay of Plenty Regional Council will pay $128,000 a year more on its $256m debt.
S&P Global Ratings director Martin Foo says central government’s debt levels are moderate – a lot lower than some highly-rated peers like the UK, US, Canada and a lot of European countries.
By contrast, gross debt to operating revenue for New Zealand’s local government sector stands at about 180 percent, which is already double or triple municipalities in comparable jurisdictions like Canada and northern Europe.
New Zealand councils are already among the most highly leveraged in the world, and if their debt-to-revenue ratios increase further to 300 percent or more, “then New Zealand increasingly looks like an outlier”.
The most recent round of long-term plans shows councils preparing for a significant further escalation in debt and deficits, says Foo, who’s based in Melbourne.
“A lot of that is probably for good public policy reasons. They are catching up on a backlog of infrastructure. They are complying with new water standards and new earthquake standards and all sorts of other standards.
“And arguably, a lot of this is overdue and it needs to be done. But at the end of the day, as a credit rating agency, we focus on debt and credit risk, and there is a lot of debt being incurred. So they’re going to face higher debt stocks, and they’re going to face higher borrowing costs as a result.”
Council budgets are going to become increasingly constrained because so much more of their revenue wil go to servicing debt.
The question of whether it’s better for central government or for heavily indebted councils to borrow to finance infrastructure is, he says, one for New Zealanders and their elected politicians.
From a pure mathematical standpoint, he says, it would be more cost-effective for the Government to finance infrastructure than for councils. The sovereign credit rating is much higher, so taxpayers will spend less than ratepayers, servicing the same debate.
And in the end, of course, taxpayers and ratepayers are the same people.
But New Zealanders may value the autonomy of local decision-making – of having local infrastructure decided and financed by local government. That will come at a cost.
“There are, of course, advantages to localism. You can argue that local councils or local cities know their areas better, and can decide on infrastructure better than someone in government in Wellington can.
“What we really stress is that it’s the same group of people, the same Kiwis, who ultimately pay for this infrastructure in the end. We’ve seen lots of innovative policy that tries to get debt off council balance sheets, but ultimately, the group of people who pays those levies and taxes and rates is overlapping. It’s the same Kiwis.”