Auckland should borrow first

Finance Minister Grant Robertson says Auckland Council should borrow more before it comes cap in hand to central government

The Government is asking Auckland Council to look to its own balance sheet to plug any fiscal holes from a Level 3 lockdown in the city.

Despite a plea from Mayor Phil Goff last week Finance Minister Grant Robertson has signalled the council should look to borrow more itself before coming to him.

"Mayor Goff's been public about the fact that that he's got concerns about where they find themselves. They've already made significant cuts within their budget and so he's made that clear," Robertson said at a press conference on Monday afternoon.

"We're happy to have those conversations with them, but the LGFA [Local Government Funding Agency] should be the first port of call."

LGFA CEO Mark Butcher backed Robertson, saying there was enough headroom there for councils to borrow - even within existing debt covenants - if they needed to.

"It's not a cost reason for councils not to borrow at the moment. Their interest costs have never been as low."

Not just that, but it had never been cheaper for them - 1.5 percent per annum on some bonds. LGFA borrows on behalf of most councils in the country. By pooling risks across all councils it is able to get lower interest rates on its debt. 

"[Auckland has] breathing space for the next couple of years...they can increase their borrowing without jeopardising the covenants," Butcher said.

"It's the cheapest time for anyone to borrow. Interest rates are at historic lows and credit margins are really tight.

"It's not a cost reason for councils not to borrow at the moment. Their interest costs have never been as low."

Sense Partners economist Shamubeel Eaqub noted these were the kinds of interest rates the Government had once been able to borrow at (Crown borrowing costs are even lower now).

Government bonds are often seen as the most risk-free form of debt. Those low rates for council debt have come courtesy of the Reserve Bank, which had kept them that way by buying up.

"To somehow say that local government is going to be broke if they borrow this money is not right," Eaqub said.

A new report due this week could add extra impetus to the debate on whether councils should be borrowing more to fund a long-talked-about infrastructure deficit while interest rates are at so low.

Newsroom understands the Covid-19 response unit in the Department of Internal Affairs (that earlier produced an analysis showing territorial authorities were in danger of breaching their debt caps) will release another this week looking at the impact lockdown has had and what future "second wave" infections could do to council books.

Goff asks Government to consider sending more funding Auckland's way

When the Government made its announcement about Auckland's move to Level 3 last week, Goff had to address not just the impact on his city's economy, but the health of his own council's balance sheet. 

Auckland is more reliant than any other council on services and facilities to balance its budget. 

During the last lockdown those services were hit hard because they couldn't operate.

To balance its budget, the council had to raise rates, lay-off 600 temporary and contract workers and is likely to cut 500 full-time permanent positions.

The decline in revenues also hurt the council's ability to borrow to make up the shortfall because reduced revenues meant it had less room to seek more debt.

All councils faced these pressures, and earlier this year LGFA voted to temporarily raise debt covenants that limited net debt to 250 percent of revenue to 300 percent.

Goff told reporters: "From council’s point of view it is a much shorter period of [lockdown] time this time. We’ve already built in the loss of things like the dividends from Auckland International Airport and Ports of Auckland, but there will definitely be a cost." 

"And I’ll be having discussions again with the Minister of Finance once we’ve calculated what that cost may be to see if there are ways in which the Government can work with us.

"What I’ve suggested to him already, and publicly, [is] additional government support for some of our infrastructure projects so that we can keep those projects going notwithstanding our loss of income."

Council position better than expected

Auckland Deputy Mayor Bill Cashmore said councillors were briefed on Monday morning about the impact Level 3 restrictions might have on the council's fiscal position.

All staff who could were now working from home and the council had shut playgrounds, libraries, halls and council facilities.

"The impact from a Level 3 lockdown is not too bad [on council's books] at this point in time. It just depends how long it goes on for.

"If it gets stretched out into a month or we go into Level 4, that's when the impacts do hit."

Goff says a Level 3 lockdown will hit council's books. Photo: Lynn Grieveson

While he backed more funding tools and more revenue sharing from central government, he was dismissive of any call for councils to borrow more themselves.

Auckland Council has its own self-imposed debt limit of 270 percent of gross debt to revenue. It has often maintained credit agencies would downgrade the council if it went past this level of borrowing.

Cashmore believed moving above this in the long-term would cause a credit downgrade that would be very costly according to his council's own calculations.

"If you do get downgraded, it's not by one point. It's usually two or three points. In our case a three-point downgrade would cost us $35-45m a year for 10 years.

"And to get graded back up again is really challenging."

More room to borrow?

The ratings agencies have often taken a different view on Auckland Council's self-imposed debt ceiling and even the LGFA's debt covenants.

S&P Global Ratings credit analyst Anthony Walker told Newsroom in May that it was a bit of a misconception among councils that credit agencies had a hard debt to revenue number attached to their credit ratings.

"We've removed a hard number at least for something like Auckland because we don't believe it's around a debt number. We believe it's around how the council is actually managing that number."

His colleague, associate director of public finance ratings at S&P, Martin Foo, told Newsroom Auckland Council's credit rating wasn't related to its debt cap policies.

"It might be the case that they consider a downgrade a fair trade-off to get more infrastructure for their citizens"

Neither was it directly related to an LGFA debt covenant which then limited borrowings to 250 percent net debt to revenue.

He acknowledged S&P rated the chance of default on LGFA bonds as low because there were serious consequences attached to breaching those covenants.

"Some council mayors will say 'oh we'd like to talk to the credit agencies about changing this 250 percent cap' and we just really want to clarify that. That cap is entirely set by the LGFA.

"It is a very separate thing to the debt ratios we look at in our own credit ratings."

And while debt levels between 300 and 400 percent of revenue would start to raise questions around a potential downgrade, that didn't necessarily mean councils shouldn't or couldn't borrow even if they did.

"That's a decision for councils to make. It might be the case that they consider a downgrade a fair trade-off to get more infrastructure for their citizens," Foo said.

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