Government

Council debt cap rises to 300 percent

The Wellington-run authority that borrows on behalf of councils has officially voted to increase council debt limits

The Local Government Funding Agency has voted in a temporary increase of council debt caps to three times revenue. 

Shareholders of LGFA held a special meeting on Tuesday to vote through the change.

It will last for 2021 and 2022, but wind back at 5 percent a year to settle at a new debt cap of 280 percent net debt to revenue by 2026 for all councils that are part of LGFA. 

Raising the cap will free up hundreds of millions of dollars for councils to deal with infrastructure projects and heed calls from small businesses desperate for rates freezes and rates holidays. 

Ninety percent of council borrowing is done via the LGFA, where councils raise debt under a covenant that used to limit their borrowings to 250 percent of revenue. 

Borrowing through the LGFA keeps interest costs on debt low, but the debt covenants have been blamed for discouraging councils from investing in infrastructure for fear of breaching it.

Raising the cap will free up hundreds of millions of dollars for councils to deal with infrastructure projects and heed calls from small businesses desperate for rates freezes and rates holidays. 

However its effect will be limited because council revenues are shrinking as a consequence of Covid-19. This has caused some to question whether an increase to 300 percent of revenue will be enough.

High growth councils like Auckland, Hamilton, and Tauranga were already within spitting distance of debt limits before Covid-19 as runaway population growth required them to make major upfront investments in infrastructure. 

Five councils would have breached the 250 percent debt cap under one economic scenario generated by an analysis of the situation by Internal Affairs' Local Government Covid-19 Response Unit. 

The debt caps have also prevented high-growth councils from cutting rates because the size of a council's debt cap shrinks by $2 for every $1 they reduce the rates take by.

Sense Partners Economist Shamubeel Eaqub has labelled the debt caps as "idiotic" and also suggested a simple solution: central government cash.

Council revenues would rise if they were given more money via a Government grant. They could then borrow more off the back of that and never breach their debt ceilings. 

"I have no idea why that debt cap is where it is at anyway ...it makes no sense to me. I think it's idiotic," Eaqub told Newsroom in May.

"Essentially the current rules stop you from being able to invest in the future at a time when interest rates are very low [and] the private sector investment cycle is in a slump."

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