Debt-strapped councils feel chill Wellington wind

Analysis: It’s worth remembering that National was elected to government on a promise to reduce government debt by 2027/28, to $3.4 billion less than had been forecast under the Labour administration.
It seems we’re now discovering one of the tools by which it intends to do this: by shifting debt from taxpayers and public service users, to ratepayers.
In announcing on Tuesday that he intends to appoint a Crown observer to Wellington City Council, Local Government Minister Simeon Brown expressed concern the council doesn’t plan to borrow enough. It should be financing $1.17b of water services infrastructure through debt, as well as borrowing to cover some of its $2.8b insurance shortfall, he said.
In cancelling the previous government’s Three Waters reforms, of course, the coalition Government had shifted those costs back onto council balance sheets. And in pulling transport subsidies, it’s moved cost from the taxpayer to the ratepayer.
This is interesting because, contrary to the election rhetoric, NZ central government’s debt is at the low end compared to global peers. But local government debt is among the highest in the developed world – so it’s little wonder councils look askance at attempts to load them up with even more.
Few would disagree with Brown when he says capital expenditure on infrastructure should not be front-loaded on current ratepayers; that debt should be used to spread the cost over current and future users of the assets.
Council leaders at Wellington and around the country would agree on that. But what has been more problematic for councils is that there has been a rapid realisation of the urgent need to upgrade and replace water and transport infrastructure, since Covid – but their borrowing is almost maxxed out already.
Councils borrow through the well-rated government-backed Local Government Funding Agency, which imposes (by mandate of its government and council shareholders) a cap of 280 percent debt-to-revenue ratio. That’s high, according to ratings agency S&P Global. Local authorities in comparable Pacific Rim borrow around 150 percent on average; councils in the UK and Europe are under 100 percent.
NZ is different from some other jurisdictions in that councils own the water supplies, which are essential services that can be more heavily leveraged. But the big picture is that NZ local authorities are heavily indebted by most measures, and have suffered construction inflation, interest rates rises and credit ratings downgrades that mean they’re paying more to service more borrowing – far more than the Govt would, if it drew down the debt.
It’s in this context that Brown agreed with the Local Government Funding Agency that the high-growth councils should be allowed to increase their debt caps from 280% to 350%, as well as putting their water assets in council-controlled companies that could borrow up to 500%.
Many of these councils don’t want to borrow more, but they feel they have little choice. Politically, they can’t raise rates any further. The trouble is, the increase to the debt cap hasn’t yet been signed off by Local Government Funding Agency shareholders (that should happen on November 19) and the Govt hasn’t yet passed the law enabling water infrastructure to be moved to the multi-council water companies.
That’s why Wellington’s long-term plan doesn’t use increased debt headroom to fund its water services and insurance shortfall. It’s already up against its self-imposed debt-to-revenue limit of 225%. And S&P is forecasting that Wellington will breach the mandated 280% debt cap in 2026/27; the city doesn’t yet have the increased headroom to borrow more.
Local Government Think Tank consultant Peter McKinlay tells me the council would have been very aware, when preparing its long-term plan, that water services would be transferring away from the council to an entity that would be making its own decisions about how to fund capital investment.
“Operating under a borrowing constraint and with a number of demands for capital investment, it would be entirely logical to allocate the additional borrowing capacity to non-water activity, knowing the responsibility for investing in water infrastructure would not remain with the council.”
The important thing to reiterate here is that this is not just Wellington. There are other councils like Queenstown, Hamilton and Tauranga that are even more indebted. Like Wellington, they’ve been exploring alternative financing tools like development levies under the Infrastructure Funding and Finance Act, or regional deals with the coalition Government. But it’s not enough.
Where Wellington differs is that its leaders have fought to keep some debt headroom to give them borrowing capacity in the event of a natural disaster. They aren’t able to get full insurance coverage for all their infrastructure assets – this is different from many other councils due to the seismic issue and insurers’ unwillingness to take on all this risk.
So they really have few options, now that they’ve reversed the previous plan to sell their 34% stake in Wellington Airport to establish a new perpetual investment fund to help address investment and insurance risk.
They can’t reduce or slow-pedal their planned water capex, their earthquake-strengthening projects are already well underway, and mayor Tory Whanau doesn’t want to remove the Golden Mile upgrade and social housing. (“The Golden Mile is my priority,” she says, “but I also understand that I’m just one vote around the table.”)
Some observers say the council’s best remaining option is a balancing act: shift its water assets into a council-controlled company that’s jointly owned with neighbouring councils; reduce its capital expenditure on roading; and increase its self-imposed debt cap. That means that in the event of a natural disaster, the council would have to go cap-in-hand to the Local Government Funding Agency for a bespoke covenant allowing it to borrow more.
The council’s financiers are watching nervously. They don’t believe there’s a danger of Wellington City Council breaching its financial covenants in the short term, but as S&P has warned, it needs to be cautious in the long term.