Most councils 'in good financial health'

06:59, Jun 11 2014

Local government is defending its financial management, saying a new report shows the overwhelming majority of councils are in good financial health.

The report prepared for Local Government New Zealand by analysts Grant Thornton looked at several aspects of councils' financial management. Those included debt to asset ratios, debt per head of population, and ability to service debt.

The report found only four councils "narrowly" fell below a ratings score that indicated overall sound financial health. Those four were Western Bay of Plenty District Council, Taupo District Council, Kaipara District Council and Waitomo District Council.

Kaipara was dealing with the financial impact of debt from building the Mangawhai community wastewater scheme. Council management of the scheme had led to the appointment of commissioners in 2012, the report said.

Kaipara had adopted a long-term plan with a financial strategy that would reduce debt and lift its financial position above the sound rating line.

Waitomo was addressing historic debt levels and had carried out crucial infrastructure upgrades for water and wastewater services. It had implemented financial measures aimed at gradually reducing debt.


Western Bay of Plenty used financial contributions to meet the cost of infrastructure caused by growth, but the assessment in the report did not take into account income from financial or development contributions. When that income was included the council was in a sound financial position.

Taupo had a high level of debt to population, but that did not take into account the 42 per cent of ratepayers who lived outside the district. The council also had a large investment fund and combined a high level of debt with a high level of financial equity.

Despite the issue with Taupo, the report said a debt-to-population ratio provided a better comparison between councils than a debt-to-ratepayers ratio. Ratepayers was a problematic definition because it ignored the fact rates were not weighted evenly between different classes of ratepayers, and that a large part of the population effectively paid rates through rental accommodation.

The report classed as sound a debt per head of population of between $3001 and $4000. Councils with higher debt-to-population ratios included Christchurch City, Auckland and Dunedin City, the report said.

Christchurch was affected by its earthquake reinvestment programme and Auckland by infrastructure investment, while Dunedin had been investing in infrastructure renewal and amenity development.

LGNZ said the debt to population ratio of $3001 to $4000 was the level used by the Local Government Funding Agency when assessing the credit worthiness of councils. Based on international practice it was a "very modest" figure.

The debt to asset ratios covered in the report were more an indication of the way in which councils managed their balance sheets, than a sustainability measure, LGNZ said.

Despite that, more council assets than many people realised could be sold if that ever became necessary, although it was important to note government policy encouraged councils to invest in illiquid rather than liquid assets.

The report rated as excellent councils with debt to asset ratios of less than 7 per cent, and debt to saleable asset ratios of less than 20 per cent. Both those categories had maximum ratings of four in the report, giving a maximum rating of eight for an overall debt to asset category. A combined rating of four was considered sound.

Among councils dropping below that level were Kapiti Coast District and Rotorua District, the report said. Kapiti had high growth pressures and borrowing reflected the cost of putting in place infrastructure for future residents. Rotorua had been facing major infrastructure renewal demands with a relatively static population.

Wellington Regional Council also dropped below the sound level as it had significant investments in bulk water infrastructure and public transport, and was investing to meet the needs of growing populations and to build resilience for extreme climatic events.

The report also looked at the ratio of ebitda (earnings before interest, tax, depreciation and amortisation) coverage to principal and interest, and ebitda coverage to just interest.

Councils with more than three times coverage of principal and interest, and 3.5 times coverage of just interest were considered to be excellent. Both categories had a maximum four rating which were combined to give a measure of ability to service debt. A rating of four out of the maximum eight for the combined measure was considered sound.

Four councils fell below that level but only because of the way the assessment was carried out. If all income was included in the assessment, those councils would have been well above the line, the report said.

LGNZ president Lawrence Yule said the report set the record straight about the financial position of councils. It provided conclusive evidence the overwhelming majority of councils were in good financial health and using best practice financial management.

"Overall, New Zealand’s councils are in overwhelmingly sound financial health," he said.

The Taxpayers' Union and Fairfax Media today co-launched Ratepayers' Report - an online tool that compares council performance across the nation.