Auckland Council plans to increase its net debt as a percentage of total revenue limit to 275% from 175%

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 Note Programme, 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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