Debt spike revealed in council plans

19:06, Feb 17 2013

The speed at which local councils expect to borrow has increased dramatically, a comparison of their plans reveals, but Local Government New Zealand says taking on debt is sensible and prudent.

However, moves to limit contributions councils charge to developers could leave a funding hole that will need to be filled by ratepayers, LGNZ chief executive Laurence Yule said.

Yule said the council debt spike is off low levels and the debt is being used to build infrastructure needed to keep the country operating, unlike central government debt which is mounting much faster and being used to fund spending.

The debt levels shown in the long-term plans (LTPs) for 2012-2022 show the combined debt of local councils to be around $10.77 billion in the current financial year, nearly $820 million higher than was projected in the 2009-2019 long-term plans.

The difference between the expected debt levels in the two sets of long-term plans continues to increase (see table) growing to $5.6b in 2019, though the 2012-22 figures do not include Christchurch City Council which has been temporarily relieved of the duty of producing the three-yearly LTP.

The costs of servicing the debt is now projected to increase far faster than previously thought, though lower interest rates have resulted in lower debt servicing costs this year. The newer LTPs show the interest cost of the debt to be just over $1b by 2019, $275m more than was projected in the last set of LTPs.


Yule said the debt growth is the story of Auckland readying itself for rapid growth. Outside of Auckland, debt has mostly flatlined, though he acknowledged that some councils had taken on levels of debt that had caused local concerns.

Under the "Golden Rule" local councils are not allowed to fund current spending with debt, which is reserved for funding longer-term investment in assets.

Regardless of the rationale behind the spending, council expenditure and debt levels are a controversial issue, and local authorities have been criticised by the Government for lacking spending restraint.

At the end of last year, LGNZ released a paper by the New Zealand Institute of Economic Research entitled "Is local government fiscally responsible?" including many financial ratios showing that spending, revenue rises and debts were not rising too fast.

Some of the conclusions, such as rates having fallen in real terms when compared to property values, may strike ratepayers as unhelpful as their rates must be paid for from income and not capital gain.

The paper concluded that as a whole local councils were behaving responsibly on debt and the income they generate.

Yule said the criticism of local government stung, particularly when Government was borrowing to fund national expenditure at a rate which meant it is borrowing, in just 40 weeks, the same amount that local councils planned to borrow in the next 10 years.

"I get a bit annoyed with people who criticise our debt projections when I consider the Government is borrowing on a weekly basis just to fund spending," he said.

Yule added that local councils had done a poor job at telling people about the value they were getting for their rates.

"Six dollars a day is the local government rates that the average household pays. For that they get roads, water, sewerage, libraries, parks."

The NZIER paper showed that at the end of 2011, the ratio of all operating revenue being spent on debt servicing was 6.4 per cent.

Internationally, the "responsible" benchmark is considered to be 10 per cent, and that it is imprudent to go above 20 per cent.

But the latest LTP tables of the Ministry of Internal Affairs, bringing together the long term plans, show that all the country's councils - again excluding Christchurch - have a combined ratio of interest expense to total operating income of 7.6 per cent in 2013, rising to just over 9 per cent in 2017 and 9.5 per cent in 2021.

That is skewed by Auckland. The council's interest costs expressed as a percentage of its total operating income rises from 10.9 per cent this year to 14.6 per cent in 2022.

Councils' abilities to raise their rates and the monopoly they have on providing some services, such as issuing building consents, gives them a degree of control over their income, enabling them to manage their ratios.

The wild card is interest rates, which can move rapidly.

Councils seek to manage their risk, though even this can bring risks. They can find themselves locked into higher interest rates by derivative contracts designed to smooth the cost of servicing debts as has happened to Dunedin City Council.

Yule said such debt levels fell well within the responsible rule of thumb. The justification for spreading the cost of infrastructure spending between generations was a fair thing for councils to do.

He warned, however, that if the Government limits the "development contributions" which councils charge when new homes are built in a bid to bring down the cost of building, that would leave a hole in the revenues of some councils which would need to be filled by raising money from ratepayers.

Yule said the Government was coming around to recognising that development contributions in New Zealand were similar to those in other countries.

"All that would happen is that ratepayers would be subsidising developers," he said.

The LTPs have the councils budgeting on "development and financial contributions" running into hundreds of millions a year.

While the headline LTP figures show a significant rise in council debts, there is a wide spread of approaches to debt. Some councils have little, or none, while others, such as Dunedin, Tauranga and Kaipara District Council, have amassed debts to a level causing deep local concern.

Sunday Star Times