New Zealand councils are improving their debt ratings faster than anywhere else, according to S&P, contrary to the perceptions of ratepayers and mayors who regularly argue they cannot borrow more for infrastructure.
The ratings agency issued credit ratings for 23 of our councils this week in a report entitled “New Zealand Councils Can Carry Growing Debt”. Collectively those 23 councils account for the bulk of local government debt.
S&P Global Ratings credit analyst Anthony Walker told Newsroom in an interview that high-debt councils that had borrowed heavily in previous years for infrastructure were paying off those debts.
… councils had that ability to carry large debts because they also had the ability to ramp up rates.
And councils with large debts in the pipeline would pay them off with expected population and economic growth, he said.
“We’ve had more positive rating actions in New Zealand than we would have had in any other country in the last six years because the financial positions of councils are getting much stronger,” Walker said.
“That’s kind of lost amongst investors and some New Zealand councils,” he said, pointing out that putting an AA rating on a council means it has a rating equivalent to New Zealand’s sovereign rating as well as to that of the United Kingdom.
New Zealand is the only country in the world where councils could sustain “AA” credit ratings for councils with debts at 200 percent of revenue, according to a webinar presentation on the credit ratings delivered on Wednesday afternoon.
Walker said councils had that ability to carry large debts because they also had the ability to ramp up rates.
For that reason debt levels were less of a factor in judging the creditworthiness of councils than the strength of a region’s economy, he said.
That’s not what ratepayers and many councils think. Local Government NZ President Dave Cull said this week councils were restricted from using debt to fund infrastructure. Mayors and councillors are often elected on pledges to reduce debt and stop rates increases, which often results in infrastructure funding freezes. For example, Waitomo’s new mayor, John Robertson, won election last year on a campaign to reduce the council’s debt of $40 million and stop rates increases.
But Wellington can be a problem
Government policy was one additional source of risk for councils that was more of a factor here than in other countries, Walker said.
Our councils are exposed to sudden shifts in government policy that could expose them to huge costs, he said.
South Taranaki District Council was hit overnight with one such government policy change on water quality.
Changes in drinking water standards between 2005 and 2008 saddled them with budget deficits of over 50 percent for two years trying to meet them.
Walker said those deficits were “some of the biggest we’ve ever seen”.
Debt soared from 50 percent of operating revenues to 250 percent. It was an example of how changing regulations, set by central government, could weaken the financial positions of local councils with little lead-time.
“We don’t rate anyone above the sovereign because of that issue: a legislative change from the Crown can actually change the rules,” Walker said.
“In Australia, with the constitution, it’s actually much harder,” he said.
South Taranaki District’s Mayor at the time, Ross Dunlop, told Newsroom in an interview that the local population were already onboard with the large infrastructure spend when he pushed it through after drinking water standards changed in 2008.
Their water supply was in a bad state when new legislation on drinking water standards came in and the community was well aware of it, he said.
The district’s water treatment plant used open-air sand filters, other pieces of water infrastructure in the region were 100 years old at the time, he said.
Dunlop remembered people shouting ‘when are you going to fix our water’ as he sat beside Santa on a float at the Christmas parade in Ōpunake.
“We didn’t have very much resistance [to the infrastructure spend] at all.”
Walker said South Taranaki’s debt position had improved since then. S&P had upgraded its rating once already and would look to do that again over the next 12 months, he said.
Good debt
New Zealand councils were largely spending the money they borrowed on infrastructure like roads and water. This was different to comparable councils in developed countries overseas, Walker said.
He said our councils were borrowing to spend on infrastructure because of forecast population growth.
Debts taken out to fund infrastructure were generally repaid quicker than when the funds went towards other types of spending.
“[New Zealand] councils tend to borrow more and repay it faster, whereas other governments around the world have small deficits and constant debt levels,” Walker said.
Small councils, big problems
Two types of councils were more exposed to risk according to S&P’s assessment.
Councils in regions with economies exposed to particular industries could see their revenue reduced if there was an economic downturn affecting the key industry.
For example, three Bay of Plenty councils could be heavily affected by a kiwifruit market downturn, and a downturn in domestic tourism would leave Taupo District Council similarly exposed.
The same applied to councils in Hastings and Marlborough, who are vulnerable to a downturn in horticulture. Councils in the Taranaki region are vulnerable to downturns in the oil, gas and dairy industries.
The second type of council more exposed to risk are smaller, rural councils with low population growth, an ageing population and lower income levels, Walker said.
He said Whanganui, some parts of the Taranaki, and the west coast of Wellington fitted that description.
Whanganui had 46,000 people living there during the 1996 census and 20 years later had a population of 45,750 during the 2018 census.
“The older people get the more fixed income they’re on which means if councils are going to start raising rates even further, will retirees afford that and will there be political pushback on the politicians from the residents saying we can’t deal with more rates?” Walker said.
“What does that mean to the council? How do they start to fund their infrastructure needs?” he said.
