Local Government Finance Agency gives ‘fast-growing’ councils green light to increase borrowing

Hamilton Mayor Paula Southgate welcomed the change, saying it would give some councils more flexibility in structuring their debt to reduce the impact on taxpayers.

Similarly, Local Government Minister Simeon Brown said: “Using debt to spread the value of long-term assets means councils can invest in long-term growth and pay off their debts over the life of the new assets.”

“This will ensure that the cost of these assets is paid for by those who use them, rather than simply raising rates today.”

The way the LGFA works is that it issues bonds to investors in New Zealand and overseas. It then lends this money to councils, saving them the trouble of doing it themselves. The goal of the agreement is to improve efficiency and reduce the cost of debt.

While the average length of LGFA debt is 4.6 years, the average length that councils choose to borrow from the agency is 3.6 years.

Butcher believed that municipalities should take on debt over longer periods to better match the life of their assets.

While he named four councils most likely to benefit from the changes, 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 in New Zealand dollar bonds outstanding, as well as $3.45 billion in Australian dollar bonds.

Butcher was unable to say how much more debt LGFA plans to issue if the bank’s rules change, saying it would depend on councils’ willingness to borrow more.

“Of course, more debt needs to be serviced,” he warned.

Councils are currently not very close to their debt limits.

The average council with a credit rating has a net debt of 108% of their income, well below the 280% limit.

Auckland Council’s rate is 198%, Wellington City’s is 164%, Hamilton City’s is 187% and Tauranga City’s is 181%.

Councils with small rate bases in tourism hotspots – the Queenstown Lakes District and Rotorua – have the highest debt-to-income ratios, at 247% and 208% respectively.

Martin Fu of S&P Global Ratings warned that councils that borrowed more than previously planned could see their credit ratings downgraded.

Seven councils have already had their ratings downgraded this year.

Foo acknowledged New Zealand had an infrastructure deficit but said municipalities were highly indebted by international standards and there were other ways to finance investment other than issuing more debt.

Local Government New Zealand president Sam Broughton welcomed the LGFA’s decision to allow councils to apply for debt limit relief, but acknowledged that “not every funding tool works the same for all councils”.

“We also want the government to look at other tools, such as the distribution of GST on new housing developments, so that councils have a range of levers that can be pulled according to the local context,” he said.

Jeni Tibshreny Herald Wellington Business Editor, works in the Parliamentary Press Gallery. She specializes in government and Reserve Bank policy development, economics and banking.