By Gareth Vaughan
The Auckland "Super City" Council wants to lift its net debt as a percentage of total revenue limit to 275% from 175%, to prevent a breach of the existing limit, with its debt forecast to almost treble to NZ$12.5 billion over the next decade.
The council's Draft Long-term Plan for 2012-2022 - released on Friday afternoon - notes that council debt, forecast to be NZ$4.6 billion at June 30 this year, is expected to increase steadily to reach a peak of NZ$12.5 billion in 2021-22. However, in calculating the council's prudential borrowing limits and credit rating, adjustments are made to gross borrowing including excluding the council's wholly owned water business Watercare Services Ltd, which reduces forecast net borrowing at June 30 this year to NZ$2.9 billion, with this rising to NZ$8.4 billion in 2021-22.
The draft plan outlines three key changes to the council's treasury policy including increasing the net debt as a percentage of total revenue limit to 275% from 175%.
"Given the new financial projections in this plan, it is necessary to reassess the appropriateness of this debt limit ratio," the draft plan says.
"While the other debt ratios require no amendment, it is necessary to increase this ratio to reflect the additional investment within the region funded by debt. The alternative to increasing the debt limit ratio at this time is to leave it unchanged but based upon plan projection, council will be in breach by 2014/15."
Pledges to have credit rating no lower than two notches below current one
The Auckland Council was established on November 1, 2010 through the amalgamation of eight councils in the Auckland region, - the Auckland Regional Council, Auckland City Council, Franklin District, Manukau City Council, North Shore City Council, Papakura District Council, Rodney District Council and Waitakere City Council.
Other key changes to the treasury policy include adding an objective of maintaining a minimum A+ credit rating - two notches below Auckland Council's current long-term credit rating of AA from Standard & Poor's (S&P) with a stable outlook - and introducing a bias within its investment policy towards New Zealand investments where possible. S&P recently reviewed Auckland Council's rating, which it ultimately reaffirmed, over concerns plans to increase capital expenditure to fund transport projects would see debt reach 200% of operating revenue by 2015.
Auckland Council chief financial officer Andrew McKenzie told interest.co.nz in December that by S&P's measure of gross debt as a percentage of operating revenue, Auckland Council was sitting at 140%. Net debt as a percentage of operating revenue was 122%, McKenzie said.
Aside from having net debt as a percentage of total revenue at less than 275%, the council's other prudential limits are net interest as a percentage of total revenue of less than 15%, net interest as a percentage of annual rates income -debt secured under debenture - of less than 25%, and liquidity - cash and liquid investments plus headroom under committed funding facilities to equal a minimum period of forecast net cash outflow including maturing debt on a rolling basis - of at least six months.
100,000 new dwellings required
Meanwhile, the draft plan forecasts Auckland's population will grow by 16% over the next 10 years to 1.74 million from 1.50 million implying additional housing needs of 20%, or 100,000 dwellings. The council also projects 14% growth in the floor area covered by industrial and commercial activity in the Auckland region.
The council forecasts capital expenditure of NZ$20.2 billion and operating expenditure of NZ$38.2 billion over the next 10 years. It will fund this primarily through rates, user charges and borrowings. The council says it's reviewing a range of potential alternative funding sources to help reduce the burden on ratepayers - who are facing an average general rate increase of 3.6% in the first year of the plan and an average as high as 4.9% in other years although some ratepayers face much steeper increases as the council mergers eight ratings systems into one - including regional fuel taxes, road pricing including network pricing, tolls and congestion charges, and local sales taxes including bed taxes.
Transport comprises the biggest slice, 33.2%, of forecast operating expenditure. The key new project is the proposed City Rail Link being pushed by mayor Len Brown, with an estimated cost of NZ$2.86 billion. The council is assuming a so far reluctant government will cover about half, or NZ$1.52 billion, of this cost.
General rates revenue is forecast to rise by just under NZ$1 billion to NZ$2.21 billion from NZ$1.27 billion with NZ$15.56 billion forecast to be collected through fees and user charges.
Council assets are forecast to rise in value by NZ$21 billion, or 58%, to NZ$57 billion.
NZ$487 mln leaky home liability
The draft annual report also reveals the council has budgeted its liability for "weathertightness claims", or leaky homes, at NZ$487 million over the 10 years. The settlements will be funded through borrowings with repayments spread over 30 years.
Although the council says it's committed to retaining its ownership of Ports of Auckland and 22.35% stake in Auckland International Airport, it expects to receive NZ$468 million from asset sales over the next decade. A council spokeswoman couldn't immediately say which assets may be sold.
Late last year the Auckland Council set up a US$2.5 billion Euro Medium Term NoteProgramme, arranged by HSBC, and applied to list debt issued under the programme on the Singapore Exchange. It's yet to borrow any money through the programme. The Auckland Council is also a shareholder in the new Local Government Funding Agency which this month issued its first NZ$300 million of debt.
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26 Comments
Please, list the 10 NZcities/ towns going bankrupt by date. The winner will be announced in 2014.
The first price : A family bungalo
Kaipara District Council has some pretty significant problems - http://www.radionz.co.nz/news/regional/99089/kaipara-council-given-dead…
Late last year the Auckland Council set up a US$2.5 billion Euro Medium Term NoteProgramme, arranged by HSBC, and applied to list debt issued under the programme on the Singapore Exchange. It's yet to borrow any money through the programme.
I very much doubt the council will ever be able to raise debt through this facility at a rate commensurate with the rate payer's ability to repay - it will be stuck with disguised comingled issuance through the LGFA and hope the costs don't reflect Greek style net debt increase projections.
They're open for submissions - http://www.aucklandcouncil.govt.nz/EN/News/NewsArticles/Pages/haveyours…
Probably not. The only thing that I can think of is to leave. If you do however be carefull where you go. Dunedin city has a rates income of $109 M. With it's holding company, it has a debt of $700-$800 M perhaps more, as they may be hiding some in other entities. A credit crunch and interest rates at 12% say, and an awful lot of their rates are required for debt servicing. They must be getting close to a Greek meltdown situation.
Auckland however should not be heading in this direction of increasing debt. They only have to look arround to see where this leads. Their estimated costs for some of the intended projects are rediculously high to the point of being suspicious.
Why would they look around to see where it leads?
You only have to look at the leaky building fiasco to know that looking outside New Zealand is not on the radar of Councils. If they had, for the leaky building fiasco, they might have chanced across Canada's debacle.
I would give it 10 to 20 years before the council realizes there was a debt crisis anywhere in the world. I mean, the GFC only started 4 years or so ago. I expect that the relationship between too much debt and the GFC hasn't penetrated too many politicians heads in NZ yet. Give it another 10 to 15 years.
hehe boatman, when i divide 4.6 billion into 1.5 million population, i get $3067 for every person in auckland, including unemployed, retired, children, and workers... not sure how you got $2k per worker, and definitely not sure if that debt is repayable at all, let alone with taking more on!
An "Intellectual Revolution" must start in Auckland – soon – otherwise it gets ugly.
Stop economic and financial megalomaniac behaviour by the government, before it is too late and rates rise to the extent of pricelessness.
Negative events worldwide are now accumulating and accelerating - in an unprecedented pace.
Auckland Council has now admitted the cost so far of dealing with the Occupy Auckland protesters totals $356,587. By far the biggest item is $194,626 in legal fees for the services of Crown solicitors Meredith Connell.
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=107…
But what proportion of the rental price charges relates to a 15% increase on rates - my guess is something between a 1-2% rent increase? - maybe $5 - $10 more per week? Whereas your initial gripe above seems to be that renters are not paying their fair share of the local government tax burden?
Where's your thought for those "hard working tenants" in terms of that? Are you saying it's okay if the Council charge them directly? Nonsense. You'll eventually put the rent up.
I doubt you have a true concern for your "hard working tenants". Landlords are not in the social services business ... no matter what they try to imply. If you're having to run your business at a loss - then dump the investment.
Well the rent includes a % of the rates.....so why not put up the rent? Olly, SK and Big daddy say its all OK just hike it....could they afford it? or maybe your tenants will leave?
Maggie Thatcher tried that and it cost her.....but I liked it because it made you see how much left your pocket....in Wandsworth I had to pay Sterling153 and next door (Lambeth?) it was sterling500 each....
regards
It's a sensational headline but lets break-down the numbers provided.
In 2022 Auckland will have
Assets $57 Billion
Capital Expenditure $20.2 Billion
Operating Expenditure $38 Billion
General Rates Revenue $15.56 billion
So our great Auckland leaders are looking at burdening us with $58.2 billion expenditure-less $15.56 billion income which equals $42.64 of new debt which will be serviced by annual income of $2.21 billion.
I guess if you look at like investing in a house and paying a 5% deposit on a property then you can say that it's a crappy investment full of downside risk because who can you sell non-performing assets to?
Another-way to look at it is the council is looking to spend $58.2 Billion to increase its asset base by $36 Billion to $57 Billion, this also seems stupid.
Now I'm not the expert on numbers that Gareth is, so perhaps someone can explain his maths statement "debt forecast to almost treble to NZ$ 12.5 billion over the next decade," when clear based on my limited understanding of the numbers provided debt will rise to $42.64 Billion, perhaps he means interest on debt?
Quick question... When we talk about Sovereign Debt as a percentage of GDP, does this statistic include debt taken onboard by Council's? If so, I can see a gaping disconnect between John Key's intended return to surplus in 2014/15 and the Super City's intentions to take on greater amounts of borrowed money. (Notwithstanding the fact that anyone capable of working out that 1+1=2 ever believed that a return to surplus was realistically achievable).
On the other hand, if the statistic does not include Council debt then it would be interesting to see what sort of effect it's inclusion would have... I would hazard to guess the debt to GDP ratio would increase (ever so slightly).
You gotta watch this , Black dude Felonius Munk on Government (over)spending
http://www.google.co.nz/url?sa=t&rct=j&q=black%20man's%20rant%20on%20ob…
I agree with Chris-M above, Dunedin is in an even worse state, with its alphabet soup of holding companies all added in, its debts are probably north of $800,000,000. No one really knows for sure what the figures even are! And remember their population is only around 125,000. That's a massive load.
Things are only getting worse with one of the major users of their white elephant stadium, the ORFU, going broke. A very scary time for Dunedinites. I'd say Dunedin is likely to beat Kaipara to bankruptcy. Can local authorites go bankrupt under our system? I'm not sure if there's any mechanism under the Local Government Act to deal with insolvencies.
Rates going up. Resource consent fees going up. Quoted $7265.00 for a new installation water meter (goes to maintaining and improving infrastructure) No wonder new building is not happening
Dog licence proposed fee $160 from present $70 per dog. Did some background info on this subject. Total of registered dogs 103000 in Auckland Council. At $70 per dog = $7.4 million. Not shown in Annual reports, Council either cant find out where the money went or will not tell. Going to prise it out of them under Official Information Act espcially as the new revenue will be $16 million.
We must remember that Politicians run the Council as in Government. In Councils you have an elected members to Council and to the Local boards, if you do not like what they are doing and I dont, VOTE THEM OUT. Find other like minded people in your Council area or Electorate, put up your own candidate for election.We are not Greece yet!!!!
T'would be interesting to run the Gawk through a standard 'corporate survival' calculator.
If Interest on the upper limit of debt (275% of revenue) is assumed, and at a WACC of say 6.5% (counts on fingers) why then interest expenses are 17.875% of earnings (by definition).
I smell smoke, and is that a mirror on the cover of the LTP doc?
For those with an eye for detail (but WaterCare is excluded...) Note 5, p37 of the PDF (oh, in Vol 3 of the LTP) is a nice summary which bears out my back of envelope calc above....also known as the money shot.
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