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Auckland Council's ability to boost operating surpluses

Wednesday 18th April 2012

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Auckland Council’s ability to lift operating surpluses as planned, by hiking rates and cutting costs over the next five years, will be critical to super city as it prepares for a decade of ramp up debt to fund transport and water projects, Moody’s Investors Service says.

The ratings company has assigned an Aa2 credit rating to the council, its third-highest, with a stable outlook. That reflects the local authority’s “policy flexibility” to raise rates and lack of restraints to slashing costs including downsizing its workforce, Moody’s said in a report.

“Given the $22 billion, 10-year capital improvement plan, it will be critical for the council to achieve higher operating surpluses, both to constrain debt accumulation and to support the costs of the increased borrowing,” Moody’s said. “The council projects that its cash deficits will remain high and average about 24 percent of revenues annual over the next five years.”

The council is projecting improved operating performance, with its gross operating balance averaging about 16 percent of revenue over the next five years, according to the Moody’s report. The improvements are predicated on a 4.9 percent average increase in property rates and efficiency gains from the amalgamation.

The council came into being in November 2010, from the merger of seven smaller councils and Auckland Regional Council.

In its first eight months it generated a “modest” gross operating balance of $100 million on an annualised basis including council-controlled organisations. On a cash basis, however, it recorded a deficit equivalent to 27 percent of revenue on higher-than-expected amalgamation costs and increased capital spending.

In February, Standard & Poor’s removed Auckland Council from CreditWatch negative and affirmed its AA rating with a stable outlook. That’s equivalent to the Moody’s rating.

Auckland accounts for 33 percent of New Zealand’s gross domestic product and GDP per capita at $44,906 last year about matches the national level.

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