Council finances in sound health but potential challenges in future decades

Following the Local Government New Zealand (LGNZ) funding review discussion paper released last week, the New Zealand Local Government Funding Agency (LGFA) has now completed its analysis of the most recent council financial reports.

The LGFA confirms LGNZ’s findings that while the local government sector is currently in sound financial health, demographic changes mean there could be challenges in future so financial sustainability needs to be considered.

LGFA Chief Executive Mark Butcher, who was also on the Working Group for the LGNZ Local Government Funding Review, says strong financial management is critical for the local government sector and most councils are performing well.

“While the funding review shows some current and future challenges and the need to strengthen council financing, LGFA’s most recent analysis shows the current financial health of the sector is strong and has improved from the last review. These improvements are supported by a sector-wide focus on financial prudence and fiscal responsibility,” Mr Butcher says.

“However, communities in New Zealand face different economic and demographic pressures which calls into question how to fund and maintain infrastructure and delivery of services in future. Funding solutions need to take account of these differences, and, in considering solutions, an investment approach that ensures that funding contributes to the long-term sustainability of communities is warranted.”

LGFA analysis found that during 2014, the sector’s combined total assets rose 4.7 per cent to $117.407 billion. The sector’s total gross debt level was below forecast, while gross debt reduced across many councils. Of all councils across New Zealand, 38 per cent increased their debt in the June 2013-14 year.

“Debt is a useful tool for growth when used correctly. Consistent with best practice for financing in the public and private sector, council debt is used as a tool to fund infrastructure to support long-term growth that will have intergenerational benefits,” Mr Butcher says.

It was pleasing to see the Prime Minister comment that that there does not appear to be excessive levels of debt in local government and that councils have a range of assets they own.

“Each council is different, but analysis shows all LGFA member councils are operating within the LGFA financial covenants so ratepayers can feel secure that the local government sector is managing its money prudently,” Mr Butcher says.

During 2014, there was a theme of councils refinancing existing shorter dated debt rather than seeking substantial amounts of new debt. Longer dated debt was issued so that councils could benefit from the low nominal interest rates and tight credit margins available in the market, and to provide certainty on borrowing costs as long term financing costs continue to decline.

The 20 councils that have credit ratings from either Standard & Poor’s, Fitch or Moody’s are all rated between AA and A+. During 2014, no council ratings were downgraded but one was upgraded. LGFA’s own ratings have been affirmed by both Standard & Poor’s and Fitch at AA+, the same rating as the New Zealand Government.

More than 22 per cent of LGFA bonds are now held by offshore investors, compared with only 2 per cent a year earlier. This shows international investors see New Zealand councils as a good investment and there is growing confidence in the quality of the debt.

LGNZ President Lawrence Yule says the financial health of the local government sector is important for New Zealand communities and while it is pleasing to see improvements in the current state it is important to keep an eye on future trends that are impacting on financial sustainability.

“The LGNZ Local Government Funding Review final report will be released in June, seeking to determine a sustainable future model for funding to ensure local infrastructure and services continue to be delivered to a high standard.”

“The local government sector continues to have a strong focus on financial and governance performance excellence to deliver value and quality infrastructure services to communities across New Zealand,” Mr Yule says.

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