Hamilton Mayor Paula Southgate welcomed the change, saying it would give some councils greater flexibility in how they structured their debt to reduce the impact on ratepayers.
Similarly, Local Government Minister Simeon Brown said, “Using debt to spread the costs of long-term assets means that councils can invest for long-term growth and pay back their debts across the lifetime of new assets.”
“This ensures the costs of those assets are paid for by those who use them, rather than simply pushing up rates today.”
The way the LGFA works is that it issues bonds to investors in New Zealand and abroad. It then lends this money to councils, removing the need for them to do so themselves. The arrangement is aimed at creating efficiencies and lowering the cost of debt.
While the average term of LGFA debt is 4.6 years, the average term councils choose to borrow from the agency at is 3.6 years.
Butcher believed councils should take out debt at longer terms to better align with the lifespans of their assets.
While he identified four councils as the most likely to benefit from the change, the following councils are also considered “high-growth”: Auckland, Waikato District, Western Bay of Plenty District, Christchurch City, Selwyn District, Waimakariri District, Whangarei District, New Plymouth District, Hastings District, and Tasman District.
The LGFA currently has $20.95 billion of New Zealand dollar bonds on issue, as well as $3.45b of Australian dollar bonds.
Butcher couldn’t say how much more debt the LGFA expected to issue on the bank of its rule change, saying this would depend on councils’ appetites to borrow more.
“Of course, more debt needs to be serviced,” he cautioned.
As it stands, councils aren’t too near their debt limits.
The average council with a credit rating has net debt worth 108% of their revenue – well below the 280% cap.
Auckland Council’s ratio is at 198%, Wellington City’s 164%, Hamilton City’s 187%, and Tauranga City’s 181%.
Councils with small rate bases in tourist hotspots – Queenstown Lakes District and Rotorua District – have the highest debt-to-revenue ratios at 247% and 208% respectively.
Martin Foo of S&P Global Ratings warned councils that borrowed more than previously planned could see their credit ratings downgraded.
Seven councils have already had their ratings downgraded this year.
Foo recognised New Zealand had an infrastructure deficit, but said councils were highly indebted by international standards and there were other ways of funding investment beyond issuing more debt.
Local Government New Zealand president Sam Broughton welcomed the LGFA’s decision to enable councils to apply to have their debt caps lifted, but acknowledged “not every funding tool works for all councils equally”.
“We are also wanting the Government to look at other tools, such as GST sharing on residential new builds, so councils have a range of levers to pull that suit their local context,” he said.
Jenée Tibshraeny is the Herald’s Wellington business editor, based in the Parliamentary press gallery. She specialises in Government and Reserve Bank policymaking, economics and banking.
