Opinion: The big challenge councils face with debt

Photo / Andrew Warner

Rotorua Lakes Council’s increase in debt by $96 million on the previous year to a total of $447 million, largely to support inherited high-cost projects, highlights, in my view, a critical tension between the financial prudence of debt-financed investments and the unaffordability of further rates rises for ratepayers.

This underscores the complexities local governments face when balancing the need for infrastructure development with the financial pressures on households.

It reflects the financial commitments required for councils to sustain or complete high-cost projects inherited from previous administrations.

These projects, which may include upgrades to essential infrastructure such as water supply systems, transport networks, or community facilities, often aim to address longstanding deficiencies or support future growth.

While here these investments are vital for maintaining and enhancing Rotorua’s appeal as a tourist destination and liveable city, they come with significant financial burdens.

It is essential to assess whether these projects align with the region’s strategic goals.

Debt financing is often justified through the principle of intergenerational equity.

This concept ensures that the costs of infrastructure improvements are distributed across the generations that will benefit from them. For example, a new wastewater treatment plant or upgraded roads serve both current and future residents, making it reasonable for future ratepayers to contribute to their costs.

Spreading repayment over decades allows the financial impact to be more manageable while promoting fairness across generations.

Examples from other regions, such as Auckland’s investment in its transport network, demonstrate how this principle can be effectively applied to support long-term development.

When managed responsibly, borrowing can unlock significant benefits for local governments. It allows councils to undertake transformative projects that would otherwise be unaffordable within annual budgets.

Debt financing can also attract additional funding sources, such as central Government grants or private-sector partnerships. For instance, co-funding arrangements may reduce the burden on ratepayers while enabling large-scale investments in public infrastructure.

Moreover, well-planned projects often stimulate economic growth, create jobs, and enhance public welfare. In Rotorua’s case, these investments may strengthen the local economy by attracting businesses and increasing tourism revenue.

Predictable repayment schedules and the preservation of cash reserves for emergencies further underscore the potential advantages of this approach. By maintaining a balance between debt servicing and liquidity, councils can ensure they remain financially resilient in the face of unexpected challenges.

However, the risks associated with high levels of debt are considerable. Rising interest costs, particularly in the current global economic climate, can significantly increase the financial burden on councils.

Excessive reliance on debt may also constrain future budgets, limiting the council’s ability to fund new initiatives or respond to emergencies. This phenomenon, often referred to as “debt overhang,” reduces fiscal flexibility and may erode public trust.

For Rotorua ratepayers, the financial implications of increased debt are, in my view, particularly concerning. Repayment obligations often necessitate higher rates or taxes, which can disproportionately affect households already struggling with rising living costs and economic uncertainty.

Reynold Macpherson. Photo / Andrew Warner

This reality calls into question the sustainability of relying on debt-financed investments, particularly when the community’s capacity to absorb further rate increases is limited.

Vulnerable populations, including low-income families and retirees, are especially at risk of being adversely impacted by rising rates.

Rotorua Lakes Council must ensure that ratepayers have a clear understanding of how borrowed funds are being utilised and the long-term benefits these investments will deliver.

Robust stakeholder consultation and regular updates on project progress can help foster trust and demonstrate accountability.

Prioritising high-impact projects that deliver measurable benefits to the community is another essential strategy. By focusing resources on initiatives that address critical needs or generate significant economic returns, the council can maximise the value of its investments while mitigating financial risks.

Achieving a balance between ambitious investments and economic constraints requires sustainable financial planning. Alternative funding models, such as public-private partnerships (PPPs), can help reduce the reliance on debt. These arrangements enable private sector involvement in financing, constructing, and managing public infrastructure, often delivering cost efficiencies and innovation.

Community-driven funding initiatives, such as crowdfunding or targeted levies, may also provide supplementary resources for specific projects.

The council must also consider rigorous cost-benefit analyses for future projects, ensuring that proposed investments align with strategic priorities and deliver tangible outcomes for the community. Scenario planning and stress-testing financial models can further enhance resilience and preparedness for economic fluctuations.

Lessons from other local governments provide valuable insights into managing similar challenges. For instance, Wellington City Council has adopted a cautious approach to borrowing, emphasising the importance of maintaining a strong credit rating and clear debt limits.

The Rotorua Lakes Council’s situation highlights broader issues in local governance across New Zealand. Balancing the demand for modern infrastructure with fiscal prudence and community affordability is a challenge many councils face. As local governments grapple with increasing responsibilities and constrained funding, adopting innovative and collaborative approaches to financial management becomes increasingly important.

Advocacy for greater central Government support or reforms to funding mechanisms, such as revisiting the rates-based revenue model, could also help address these systemic challenges.

Ultimately, the tension between debt financing and ratepayer affordability underscores the importance of balancing long-term investments with immediate economic constraints.

In my view, Rotorua Lakes Council must navigate this fiscal challenge with transparency, accountability, and a commitment to sustainable financial practices. By reassessing priorities, exploring alternative funding models, and maintaining open communication with stakeholders, the council can work towards achieving its development goals without compromising the wellbeing of its community.

Reynold Macpherson is a former Rotorua district councillor and has led the Rotorua District Residents and Ratepayers for a decade. He has a PhD in large system leadership, led Waiariki Polytechnic and the startup of Abu Dhabi University, held four professorial chairs internationally and has published 17 books and 77 research papers.