Covid-19 has disrupted the financial plans of councils and the Government is exploring ways of helping them shoulder an economic crisis without hiking rates during a downturn
The Government and councils are discussing ways local bodies can borrow more to avoid slashing services, but one mayor is questioning if it’ll be enough.
Tauranga is pushing up against its debt limits. Mayor Tenby Powell said the local government financing system was “broken” and debt ceilings for all councils should be lifted.
Local Government New Zealand President Dave Cull said council debt was being explored to bridge budget gaps in response to Covid-19. The Office of the Auditor-General told Cull on a conference call last week it was comfortable with councils taking on more debt in the current circumstances.
That included borrowing more to fund operational expenditure, Cull said.
“Normally local government would look at taking on debt to fund capex [Capital Expenditure] now we’re looking at taking on debt to fund opex [Operational expenditure].”
The Auditor-General required councils to maintain balanced budgets and was responsible for keeping an eye on council debt levels.
“The Auditor-General has signalled that he is comfortable with councils borrowing and leveraging strong balance sheets,” Cull said.
“There’s quite a lot of discussion going on now between central Government, local government, and various funding agencies to come up with mechanisms to allow councils to walk that line,” he said.
‘Councils can borrow more’
Local Government Financing Authority CEO Mark Butcher said each council should be looked at on a case-by-case basis, but broadly there was “headroom” to borrow more to combat a crisis like Covid-19.
Councils were also responsible for a broader range of “wellbeings” now, he said.
“This is a real game changing event,” Butcher said.
“It doesn’t matter if you’re an individual, if you’re a company, if you’re a local government, or central Government or a central bank. This is cutting across everyone,” Butcher said.
The Local Government (Community Well-being) Amendment Bill passed last year assigned councils responsibility for the social, environmental, cultural and economic health of the communities they govern.
Butcher said that gave councils a broader responsibility to address the Covid-19 crisis than they had during previous disasters.
“There is liquidity in the system.There is the ability to borrow. We’re not seeing a crisis here in the financial sector or the banking sector, unlike how it was in the GFC,” Butcher said.
Butcher said through LGFA the interest rates on three-year bonds were just over 1 percent. On 10-year bonds that would be a little over 2 percent. And for short-term borrowing the rate was 0.8 percent.
He said turmoil in financial markets had impacted the market demand for local government debt, but less so than other markets like equities.
Councils did face some constraints on their borrowing. Debt covenants meant councils could never allow net debt to exceed 250 percent of their revenues, with the exception of Auckland.
Auckland Council’s debt-to-revenue ratio could not exceed 270 percent and it had a self-imposed debt ceiling of 265 percent. Auckland councillors learned just before the lockdown that global ratings agency Standard & Poors had removed explicit reference to that debt ceiling, giving the council room to borrow more.
An earlier Productivity Commission report into local government financing found debt servicing costs for all councils would rise if Auckland breached that ceiling because it would result in a downgrade of LGFA’s credit rating.
Under LGFA rules, borrowings by council special purpose vehicles (SPVs) and council controlled organisations (CCOs) didn’t count towards the debt-to-revenue ratio used for debt covenants. That’s one reason why a paper from Treasury in 2018 concluded SPVs could free up more funding than loosening debt covenants.
Cull suggested the Government could also pump more money into councils by temporarily amending rules requiring councils to operate a balanced budget.
“The worst thing you can do to get out of an economic recession is to cut major spending,” Cull said.
Pandemic throws council rate rises into limbo
Local councils downgraded some of the proposals in their 10 year plans as cities and towns ground to a halt under lockdown.
Hamilton extended a $549 rates rebate to those who have lost their jobs as a result of the pandemic. Smaller councils in the Waikato have explored rates freezes and other mechanisms.
Porirua’s Mayor Anita Baker said she wanted to downgrade her council’s proposed rates increase and borrow the rest.
Tauranga City Council doesn’t have that option. They downgraded a proposed rates increase from 12.6 percent to 7.6 percent but Mayor Tenby Powell said the council couldn’t borrow more under the current rules.
Powell said his council was pushing right “up to the wire” of a 250 percent debt covenant imposed on local government financing.
“What I would love to think is that this will be a trigger for everybody to realise that the model is broken,” Powell said.
“High-growth councils working to a debt-to-revenue ratio of 250 percent just doesn’t work. We can’t do it,” he said.
He wanted councils and Government to use the crisis to change LGFA debt covenants and allow councils to borrow up to 450 percent of their revenues.
A Treasury paper in 2018 concluded raising the debt covenant to 400 percent would free up $379m for the city and $6.2b for Auckland.
Powell said if his council breached the current debt ceiling it would be forced to refinance within a month.
Cull said a lot of important work around the country would be deferred if cuts to rates weren’t supplemented with debt or some other form of funding.
“When the recovery gets underway, there will be a need to get people back to work,” Cull said.
“The last thing we want is a reduction on things that are absolutely necessary.
“It’s about finding ways to fund those that don’t involve increasing rates unduly.”