NZ local govt assets to grow faster than debt, revenue in next decade

Thursday 10th December 2015

Local government sector debt is forecast to surge 42 percent to about $20 billion in the next 10 years, mainly reflecting infrastructure investment in Auckland and Christchurch, but the increase is matched by projected increases in revenue and asset values and councils are expected to remain financially sound.

The projections are in a report from the Local Government Funding Agency, commissioned by Local Government New Zealand, which concludes the nation's various regional and local authorities are in good shape, with modest debt and strong credit ratings. The decade ahead would not be without its challenges, the report concludes, including the longer-term question of rates affordability.

Local government gross debt has more than tripled over the past six years to about $13 billion and "it is perhaps not a surprise that some ratepayers and elected members are questioning whether their council's level of debt is prudent," the report says. But with revenue also forecast to rise, "the sector's ability to service its aggregate debt will be largely unchanged."

Revenue is projected to arise to almost $14 billion in 2025 from $9.8 billion in 2015, while the value of assets is forecast to rise to $174.6 billion from $126 billion. Capital spending over the 10 year period is actually projected to decline to$4.4 billion in 2025 from $5.09 billion in 2015.

Much of the increase in debt reflects Auckland Council investment in infrastructure to cope with its growing population and Christchurch's continuing rebuild effort following the earthquakes. By 2025, Auckland is forecast to account for 58 percent of total sector debt, with Christchurch making up about 10 percent. The share held by the remaining 76 councils would make up 32 percent.

For rural and provincial councils, total debt is forecast to rise by less than 9 percent over the 10-year period and 24 councils will have no net debt (gross debt minus liquid financial assets) in 10 years, up from 20 councils as at June this year.

The LGFA began issuing bonds to raise funds for local authorities in February 2012, having been established to reduce council borrowing costs by at least 30 basis points. It is the second-cheapest borrower after the central government and currently has about $5.54 billion of bonds on issue at maturities ranging from December 2017 to April 2027. Its AA+ credit rating at Standard & Poor's matches the sovereign rating.

All the growth in total sector debt in the past three years is as a result of increased borrowing in Auckland and Christchurch, and excluding the two cities, debt was little changed at $4.5 billion.

LGNZ president Lawrence Yule said sound local government finances were important because of the future challenges faced by the sector, including asset renewal and infrastructure demands, earthquake strengthening and demographic changes, and longer-term issues such as extreme weather events and sea level rise.

BusinessDesk.co.nz

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