S&P Global Ratings says the credit risk for New Zealand’s local councils is rising after the coalition Government repealed Labour’s water reform legislation last week.
An assessment by the international credit rating agency said council incomes were not increasing fast enough to cover the costs of growing infrastructure responsibilities.
The gap between revenue and expenditure was widening and sector-wide deficits and debt levels were much higher than had been forecast last year.
Plus, previously “extremely predictable and supportive” institutional support from the central government was weakening.
“This is because of rising inflation and infrastructure budgets, and given the new National Party-led coalition government's promise to repeal existing water reform legislation”.
“The former government's water legislation was developed after many years of reviews and working groups, and the sudden reversal makes it difficult for councils to prepare their upcoming 10-year long-term plans,” the report said.
S&P Ratings said National’s alternative legislation was expected in mid-2025, but council finances could continue to deteriorate while implementation dragged on for years.
Plans pending
National has promised to legislate a new kind of council-controlled organizations that will achieve balance sheet separation, but hasn’t given much more detail than that.
Rating agencies have said council-controlled organizations would likely be viewed as being part of its parent or at least a contingent liability.
Simeon Brown, the Minister for Local Government, said the coalition had been “very clear” about how they were going to deliver its water policy.
“We're working at pace around implementing that. It's all about making sure that local councils have the financial sustainability and what's required to invest in infrastructure over the long term”.
Prime Minister Christopher Luxon said he was not concerned about S&P’s warning. The new proposal would establish “robust, proper” CCOs with balance sheet separation.
“That means that they can access long term debt and funding and financing in ways they haven't been able to do before. I think it’s gonna work fine”.
Indebted to ideology
S&P Ratings noted that most of the opposition to Labour’s Affordable Water Reform related to “ideological differences” and not the “significant debt relief” it could have provided.
“The New Zealand central and local government appears to be unwilling to address the growing imbalance between revenue growth and rising expenditure for the local government sector.”
Councils are able to raise property rates but even seemingly large increases in recent years have been “cannibalized by high inflation, and rising interest expenses and infrastructure spending”.
“We estimate the after-capital account deficit across the sector grew to be 16% of total revenues in 2023, and total debt rose to 184% of operating revenues”.
Part of the problem was that the central government had “steadily withdrawn financial assistance” while simultaneously increasing the sector's responsibilities.
Still rated
While the note warns about increasing credit risk, S&P didn’t downgrade any of the councils’ actual credit ratings.
“New Zealand's local councils remain highly rated. We have not lowered the ratings on any local council today. We have flagged a potential weakening in ratings and revised several outlooks to negative.”
S&P said the outlooks on 15 councils were revised from stable to negative, meaning they could get a credit rating downgrade if the trend continued.
“Even if we revised downward the institutional framework and lowered the ratings, New Zealand councils remain highly rated in a global context at between AA and A categories”.
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