Infometrics shows that council debt levels have been rising over the last decade and are scheduled to rise further in the next decade as revenues are insufficient for replacement projects, let alone growth projects

Infometrics shows that council debt levels have been rising over the last decade and are scheduled to rise further in the next decade as revenues are insufficient for replacement projects, let alone growth projects

With local elections in full swing, there’s a greater focus on the direction that our councils are moving towards and how much is it going to cost.

Wrapped up in these discussions is the the fact that right across New Zealand we need to address our infrastructure deficit after decades of neglect.

Planning to address this deficit will not be easy, or cheap, but is critical to aiding growth and fixing our housing issues.

Our latest analysis shows that debt levels are increasing over the next decade, with a focus on replacement of existing infrastructure rather than investing to accommodate growth. With increasingly thorny issues around housing and productivity remaining, councils will need new funding streams to allow New Zealand to grow and remain prosperous.

Local government debt heads above 200% of income

Debt levels in councils continues to increase as population pressures, tourism growth, and ageing infrastructure come together to form a perfect storm.

Comparing total liabilities to operating income is a common way of comparing debt levels among councils and is a similar concept as house-price-to-income ratios. Total local council liabilities (“debt”) in New Zealand is expected to rise to 205% of operating income (“income”) on average over the next decade, up from 176% on average over the previous decade. Debt ratios across New Zealand councils have been increasing over recent years (see Graph 1) and are expected to remain broadly around their current levels.

Graph 1

Looking at historical and future debt tracks, Christchurch City Council is expected to rise from being the 10th most indebted council over the last decade (2009-18), to the most indebted over the next decade (2019-28). Substantial investment to ensure that Christchurch’s infrastructure assets are back to pre-earthquake levels drives this higher debt profile, with significant spending occurring to upgrade water assets.

Auckland is shuffled into second place over the next decade, down from the most indebted council over the 2009-18 period, while Kapiti Coast District Council remains the third most indebted council. A full list of debt ratios can be found at the end of this article.

Of all 77 local council areas examined (including regional, district and city councils, as well as all unitary authorities), 51 are expecting to see an increase in their debt levels relative to income, leaving just 26 with a declining debt profile. Yet even this increase in debt is conservative, with a larger increase needed in reality to deal with both replacement of assets and coping with current and future growth.

Funding is the major constraint, not debt

Higher debt ratios don’t necessarily show that councils are borrowing too much. Instead, high debt ratios can sometimes more accurately highlight a lack of income needed to grow, even as the population has grown.

Increased infrastructure across the country will be used by not just today’s population, but for generations to come. Given the useful life of an asset, funding infrastructure through debt actually allows for intergenerational equity, as the debt repayments allow for the cost of infrastructure to be spread across the various generations that use the asset. It’s often said that councils, like households and others, shouldn’t live outside their means. However, with households highly likely to purchase a home using a mortgage (that is, taking on debt), it’s clear to see that investing for the future is a wise move, as long as the investment is on the right assets.

The need to fund increasing capital investments in infrastructure means that different funding options are important going forward.

Recent research from Local Government New Zealand and the New Zealand Initiative have found that local government in New Zealand receives the smallest comparative share of total government funding in the developed world. The small share of funding shows the need for more funding from central government to local government, either as pure cash payments, or as project-based subsidies, to increase council funding.

The recent Productivity Commission report into local government funding also outlined other alternative funding options, including:

  • Payments from central to local government based on building work put in place
  • Use of special purpose vehicles to fund infrastructure
  • More funding from tourism levies (national or local)

A focus on replacement at the expense of growth

Councils face a tough choice in the future, with many competing issues and a small pool of money. Over the next decade, councils are currently expected to replace rundown assets, ahead of projects which would improve service levels or add more capacity to cope with growth.

Of the $91 bln in capital spending on the four network infrastructure areas (roading, water supply, stormwater, and wastewater) over the next decade, councils across New Zealand are intending to allocate 46% to replacing existing assets (see Graph 2). Around a third (31%) will be spent on improving levels of service, while only 23% will be spent to meet additional demand.

Graph 2

Most council capital spending is currently geared towards keeping the status quo and fixing rundown assets. But this gearing comes at the expense of investment for the future, with increased tourism and population levels.

Integrated infrastructure critical to current and future success

With at least $129 bln in infrastructure funding expected to be built over the next decade, and a housing undersupply still existing, a coordinated attempt to integrate infrastructure spending is critical to success in addressing high housing costs. Increasing local council debt ratios, and a focus on replacements before additions, highlight a need for more infrastructure funding to local government. But with household costs increasing, yet again many in the 2019 local elections will be calling for no to low rates rises. In the absence of increased local government income, central government should support local communities by setting aside funding for infrastructure. Failure to do so will continue to exacerbate New Zealand’s infrastructure deficit and see housing issues increase even further.

Note: Due to the 2016 Kaikoura Earthquake, Kaikoura District Council was exempt from producing a Long Term Plan, and so has been excluded from all analysis.

Table 1

Council debt ratios increase over next decade
Debt ratio, total liabilities to operating income, 10-year average
Local councils 2009-18 2019-28
Christchurch City Council 193.0% 291.7%
Auckland Council 272.7% 285.0%
Kapiti Coast District Council 258.9% 268.0%
Tauranga City Council 267.6% 229.6%
Horowhenua District Council 169.3% 220.4%
Hamilton City Council 248.4% 220.0%
South Taranaki District Council 228.3% 215.6%
Rotorua District Council 180.9% 190.3%
Opotiki District Council 69.6% 185.4%
Waimakariri District Council 131.9% 184.2%
Taupo District Council 249.5% 177.8%
Wellington City Council 144.0% 174.4%
Queenstown Lakes District Council 138.5% 173.7%
Palmerston North City Council 145.7% 173.0%
Marlborough District Council 54.1% 171.2%
Masterton District Council 156.7% 168.7%
Timaru District Council 138.9% 166.8%
Upper Hutt City Council 91.1% 166.2%
Buller District Council 141.6% 159.7%
Hutt City Council 109.5% 158.3%
Tasman District Council 172.8% 157.6%
Waipa District Council 55.4% 144.6%
Porirua City Council 119.4% 143.9%
Whangarei District Council 167.3% 143.7%
Nelson City Council 104.1% 140.3%
New Plymouth District Council 115.4% 136.7%
Whanganui District Council 156.3% 134.3%
Manawatu District Council 110.1% 134.3%
Gore District Council 89.7% 132.8%
Invercargill City Council 87.4% 131.2%
Hauraki District Council 118.1% 130.2%
Stratford District Council 52.6% 128.4%
Waitomo District Council 209.4% 127.0%
Hastings District Council 88.5% 120.4%
Western Bay of Plenty District Council 251.1% 119.8%
Matamata-Piako District Council 86.7% 119.3%
Westland District Council 109.8% 118.0%
Ruapehu District Council 113.5% 116.2%
Far North District Council 108.3% 114.6%
Selwyn District Council 108.7% 114.2%
Dunedin City Council 140.3% 113.9%
Ashburton District Council 103.9% 113.6%
Waikato District Council 88.5% 112.2%
Rangitikei District Council 21.2% 109.6%
Grey District Council 138.5% 104.5%
Carterton District Council 66.0% 102.7%
Gisborne District Council 71.7% 98.6%
Tararua District Council 55.5% 96.3%
South Wairarapa District Council 101.1% 95.3%
Hurunui District Council 55.4% 93.9%
Whakatane District Council 108.4% 92.3%
Kaipara District Council 207.8% 90.2%
Thames-Coromandel District Council 97.1% 85.3%
Wairoa District Council 37.3% 75.9%
South Waikato District Council 57.2% 73.7%
Waimate District Council 37.7% 70.2%
Central Hawkes Bay District Council 57.3% 59.3%
Clutha District Council 21.4% 51.1%
Chatham Islands Council 54.0% 46.3%
Mackenzie District Council 21.6% 42.3%
Otorohanga District Council 96.1% 34.5%
Southland District Council 20.0% 28.6%
Napier City Council 25.0% 27.3%
Kawerau District Council 23.9% 22.2%
Waitaki District Council 18.9% 13.5%
Central Otago District Council 15.8% 13.1%
New Zealand, local councils 188.1% 215.9%
 
Regional councils 2009-18 2019-28
Greater Wellington Regional Council 118.6% 156.2%
Bay of Plenty Regional Council 73.9% 147.3%
Hawkes Bay Regional Council 96.9% 95.0%
Northland Regional Council 35.6% 76.6%
Manawatu-Wanganui Regional Council 58.4% 54.5%
Waikato Regional Council 20.7% 48.9%
West Coast Regional Council 72.5% 46.6%
Canterbury Regional Council 22.1% 33.6%
Taranaki Regional Council 21.1% 14.4%
Otago Regional Council 23.0% 13.7%
Southland Regional Council 19.3% 11.7%
New Zealand, regional councils 61.8% 95.3%
New Zealand 175.9% 205.0%
Source: Infometrics, StatsNZ, DIA
Note: Excludes Kaikoura District Council

This article was first published by Infometrics here and is reposted with permission.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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Councils like Nelson have been wasting huge amounts of money on non-essentials while neglecting infrastructure. Special interests and lobby groups have ensured they receive huge amounts from council funding.
My Nelson rates have increased over 300% since the current mayor became a councillor 12 years ago, but I have the same sub-standard footpath I had 30 years ago, and when I go for a swim at Tahuna beach sometimes the beach is covered with raw sewage due to storm water infiltration into the sewage system. The Minister of Local Government does not even answer letters bringing up such concerns, instead focusing on legislation allowing councils to spend yet more money on non-essentials.

And, oh happy daze, LG has now gotten back the Four Wellbeings (social, cultural, environmental, economic) as it's prime purpose, as of mid-May 2019. And because any and every human activity can be neatly slotted under Social or Cultural wellbeing, that's carte blanche for Yet Mo' Festivals at the direct expense of boring stuff like roads, footpaths, three waters and other inessentials.

Ho hum....

Challenges to keeping rates down are many, and include:
1. Inept leadership and management. The yes culture is hardly conductive to attracting and keeping quality staff.
2. Pampering to larger scale developers.
3. Ongoing central government regulation passing down the cost of administration to local government.
4. Lack of competition to deliver large scale infrastructure projects. I wonder whether smaller scale projects are the answer; as the very least they would spread the risk.
5. Growth doesn't necessarily represent progress. Its often a means to hide management inefficiency. Fonterras farmers will tell you that.
6. Media misinformation, driven by vested interests who do not necessarily live in this country or have long time interests.

Look no further than Christchurch. It’s a circus! council debt per ratepayer equates to $25,000.00. Way way above any other region. Rates, on average are 65% higher than Auckland. In some equivalent suburbs over a 100%. And yes, yes and yes again there were the EQ’s. And what is scary about that is the basic service above and below ground are only being barely maintained let alone properly restored and preserved. I do believe most NZ’s would prefer their home street to not be full of patches and potholes, and be able to park outside their house, rather than have a beaut smooth cycleway there instead.

The manager/executive who were looking after Dave Bridges is the main culprit here. Under insured assets.

At least those remaining had the sense to hold onto strategic assets, which are returning and will continue to return more than the cost of capital.

The manager/executive who were looking after Dave Bridges is the main culprit here. Under insured assets.

At least those remaining had the sense to hold onto strategic assets, which are returning and will continue to return more than the cost of capital.

Increase property rates and levy them against land values only. Stop loading the running of our cities on the shoulders of future generations just so we can jack up property prices in the short term.

Realistically the local and regional government model ought to be replaced by professional central government functions. I have just voted for relatively unqualified people to administer critical local and regional functions, is that sensible? Local and regional bodies only ever came into existance because it was difficult to communicate and travel and therefore administer, anything. There was also a macro economic aspect that enabled the regions to be developed, somewhat. But time and technology have changed, we should change too!

Very well stated!

You're not wrong, i have little faith in our current Central govt politicians, but scanning the list of Auckland Mayoral candidates is not something for the faint of heart.. I wouldn't trust most of them to run a cake stall, let alone a city.

I agree.. Local government is no longer representative of local communities and should be scrapped.

Elephant? Not enough tax revenue.
Tax base too narrow.
Because asset appreciation not taxed, nor Inheritance.
Cannot improve state of NZ infrastructure unless:

a. Tax wealthy more
b. Borrow more (NOT 21% of GDP!!)

Neither is in public debating arena of course, so hair shirt and deluded debate re what to do will continue.

...because only the wealthy get inheritances? I have news for you about the chances of middle NZ paying down $500K mortgages without inheritances. But you are free to try and load even more tax burden onto an even smaller part of the population, just don't be surprised if they up sticks.

Not enough tax revenue??!! That's a good one. We are drowning due to being over taxed and over regulated. Who exactly are these "wealthy" people you want to tax more? Earning over $100k a year, $150k a year? This sounds like more of the Elizabeth Warren/Thomas Piketty/Marxist playbook which is coming back into vogue and which will be the final nail in the coffin of western civilisation. Elizabeth despises the "wealthy", and those people that control the stock market. The over 65yr olds own 60%+ of US equities. In her twisted mind they should be penalised for working and saving during their lifetimes, as they are one of the key reasons for today's income "inequality" and their assets should be redistributed to the 20-55yr olds who have far less. That makes a lot of sense to someone who is brain dead. That'll solve your inheritance tax problem though, because within 20-30yrs there will be no inheritances to tax. I guess if everyone is poor then there'll be nothing to complain about. The next step is banishing individual property rights and giving control over to the state.
If you squander your lifetime earnings and save nothing over your lifetime, the govt will pay $1000+ per week to put you in a rest home for 20yrs+, no problem. If you're prudent and work hard and save to provide for yourself and your family in retirement, then you will be a major target of this govt and future govts. Welcome to "Atlas Shrugged"...the non-fiction version.

Tax the unearned income that's not currently being taxed, not the earned income that currently bears the brunt. That was the idea...didn't make it past the speculators and Winston, though. Tax the income that is delivered to the owner through the betterment of the city around the land.

Rates & local body spending. Not something that attracts a great deal of attention. And that is why council debt has completely blown out over the last decade. In 2007, the kcdc(Kapiti coast) was more than $5 million in the black, having saved for the creation of a link road, a local solution to traffic congestion. Last look, kcdc was $245 million in debt!
No surprise that it is now 3rd on the most indebted list.
In 2008, the central govt. decided that local councils had "lazy" balance sheets, in other words, they all needed to borrow more. Nationally, the total debt for councils quickly rose to make up 20% of national debt, and not a soul seemed to notice, or care.
This was the source of NZ's "rock star" economy, a miracle of financial magic that people still reminisce about.
All local council funding was bundled together, and debt was/is still dished out through one organisation, an American institution.
I lived on the Kapiti coast most of my life, I owned a house there for over 20 years, yet the people there would not be drawn into conversation on such important local issues.
New Zealanders need to wake up, and educate themselves about how the world actually works. Now there is a movement to give local bodies even more powers, not less, and it's not too hard to guess what forces might be behind that.
Councils now spend time dreaming up new revenue streams, and acting like law enforcement than service providers.
I still think of myself as a Kiwi, yet I refused to be robbed blind continually while being told everything was great.
Articles like this smooth over actual events by not saying anything concrete, even the tables are in %'s, when the actual dollars in debt might hit home more.
This about how areas that recieve little or no interest are ripe for those organisations with massive self interest, hijack the individual's wallet.
Serious topic, needs national discussion. The amount of debt local bodies carry is one of the reasons housing development is so very expensive, yet when so many people are reliant on their house value going up, who truly wants to solve the problems?
The Lark Cynic

Big problems. Good post. A lot of sense here. Pity councils won't read it.

I blame earlier councils for not getting around to building that Link Road, as I think the community of Kapiti would have been so much more pleasant had the old SH1 been upgraded. The new expressway, where the Link Road should have been, has such an impact on the landscape.

Kapiti has had a massive influx of oldies over the past 20 years. Infrastructure to support growth costs big bikkies. How many of those oldies are getting rates rebates?

''council debt continues to rise''
Especially when you have a council that wants/doesn't want the V8s and then reduces the rent on a rugby stadium because the income doesn't match the predicted income made by council.

Too much "city of the future" thinking instead of maintenance which historically was what councils were all about.

They tend to have forgotten their mandate and need to spend within their means.

Auckland City Council is so bloated, they could easily operate with 30% of the staff and 10% of the vehicle fleet.

They need to get Lean!

An additional aspect is that, contrary to the fond hopes of many seeking election, Councillors don't have much if any influence on the myriad of day-to-day implementations of 'policy' by staff. Councils have one, count 'em, One employee: the CEO. That CEO then is the employer of everyone else. So the CEO sets the corporate culture, even if by laissez-faire acceptance of whatever goes down inside the tent.

Councillors are, typically, regarded by staff as a set of buffoons around a distant table, and can be ignored, circumvented, blocked, and stalled - all with zero effect on their own well-remunerated and serene existence - unless the CEO is apprised.

Unsurprisingly, staff are prone to fads, tend towards empire-building, and of course enjoy general feather-bedding. They have agendas of their own which occasionally coincide just enough with some vague central direction to slide under the radar, and if crossed, can raise 'Code of Conduct' allegations sufficiently serious to derail Councillors' further enquiry.

Public 'servants' they are not.....they are essentially free agents, with little fiefdoms, and all on our dime.

So the issue is actually structural.......as is so often the case with Gordian Knots.....I seem to recall blogging this years ago - ah, here it is.

Absurd.

The major problem is the quality of expenditure.

Councils should be forced by legislation to undertake benefit / cost assessment on all their expenditure and rank the projects based on the relative b/c's. Anything with a b/c < 1 doesnt get funded and if there is a funding shortfall then b/c > X is used to ration.

Commercial companies do the same, but on a financial return basis. Nothing gives politicians the right to do anything but the same on a benefit/cost basis.

The days of vanity Council spending has to be over.

That was the case for just a few years, under the LG Act 2002 2012 amendment brought in by National to try to knock some sense into LG objectives. The objective, IIRC, was efficient, effective service delivery. Labour re-set that in a 2019 amendment, back to the 2002 Four Wellbeings. So, sorry, that ship has sailed and we are back to the anything-goes soft spend to infinity and beyond territory....Enjoy them Festivals.....

Well...and councils seemed to be going so incredibly efficiently from 2012-2018!

Even under Nationals legislation there was no requirement to do benefit/cost assessments.
Treasury now has a framework for it for central government.
It needs to be enforced on local government.

A festival could have positive benefit/cost. Social cost benefit analysis does take into account all the monetised net benefits

Always on the button re council Waymad, and with your other comments here in.

There are two main issues as I see it, 1) any property owner could bring many of the services councils now provide back under their own wing, but to do so would reduce council revenue so they resist it, or in their ideal world they agree that you can do it so as long is that still get the same revenue.

We have set up a beast that needs to be feed, regardless to whether or not they are needed as much.

For example, everything from stormwater, to waste water and even electrical generation can be handled on site (even up to 100%) with modern technology in most new builds and many retrofitted existing properties. In doing so, your rates should be lower based on the reasoning on why you get charged rates, but of course its smoke and mirrors and council still need the money regardless.

2) We have allowed rentier land banker behaviour to asset strip purchasers of capital. Capital that could have gone to council if there was a genuine need. Ironically councils have promoted this behaviour with their restrictive zoning policies, in that by allowing super profits to land bankers due to council zoning restrictions, there is very little extra left for councils to take, either legitimately or illegitimately.

What you find in jurisdictions that have no or low zoning restrictions, is the ingoing capital expense by the homeowner is far less, the homeowners take care, either individual or as a community group, of as much of their own needs as possible including fully paid up capital and operational items, and councils are only concerned primarily with the basics thereafter. The rates as a % of ingoing capital are higher than in NZ but since the ingoing is half the price, the total dollars spent are no more, or even if they are more, over the life cycle of the property, the homeowner spends far less on the capital and rates total.

Most of the cost of a property in NZ is the extra cost to landbankers and the extra finance costs we pay over the life of the mortgage. All this money goes off site to other people, when if it is going to be spent it should first go back to the homeowner as in not needing to have spent it in the first place, or at least onto local amenities (via council?) that the homeowner uses or will get the benefit of.

But as you said, now they have allowed the four well beings back in (read the four horsemen of the apocalypse), the system is even more stuffed that what it was.

Of course the elephant in the room is the fact most councils have been steadily asset stripped so have either lost the ability to use those assets (fully paid) to raise debt against or also lost revenue streams from those assets. Bright idea neo libs...never thinking of tomorrow!