The use of debt by local government in New Zealand has historically followed a cyclical pattern. This pattern is the result of a number of factors. These include:
- the debt policy of the council and funding tools (including any historical precedent or reaction and development contributions)
- availability of debt, terms and interest rate movements
- the level of cash reserves and their (potential) use for internal funding
- investments and commercial assets
- population growth rate and development
- council infrastructure upgrade cycles and asset management plans
- project planning, completions and forecasting capability
- government policy, regulations and legislation
- community and societal trends and expectations.
As a result, not all councils have the same approach to debt. This report identifies some overall trends for groups of councils. However it needs to be remembered that while many of the observations are made at sector or sector group level, some councils will be outside the observed averages. This report identified the following points with respect to the use of debt by councils:
- the total amount of debt raised by local councils in New Zealand has been increasing steadily since 2005, it is projected to peak in 2016 and reduce after that time
- the largest increases are in Auckland councils and in some high-growth, periurban councils
- by 2019, the highest forecast debt per capita will be in the group of medium sized provincial councils, the lowest ratios will be in rural councils
- when grouped by population growth, the largest percentage increases in average forecast debt will be in those councils with the highest population growth
- although the figures for the groups remain high, some large metropolitan and large provincial councils are looking to reduce debt over the next ten years
- some councils continue to have no debt (although the actual councils involved may change over time)
- while some debt forecasts are higher than previous, they are still operating within prudential limits (although some councils may be close to exceeding their limit), this trend may not be unusual for a cyclical peak in capital expenditure
- the amount of forecast debt in the 2012 long-term plans (LTP) will be an important indicator as to whether future debt levels will be an ongoing issue for the sector.
Analysis of council interest payments indicates that prior to 2000 (when debt is first recorded in the Local Authority Census) a number of councils had relatively high levels of debt. Over time this reduced, so that by 2000-2002 the sector as a whole had relatively low debt. From 2005 debt started to increase, with this trend continuing into the future. Forecast debt predicted to peak at $11.7 billion in 2016 before dropping off by 2019 to reach $10.7 billion.
A similar trend was seen in the 2006 long-term council community plans (LTCCP), with debt peaking in 2014 then tailing off. If the trend in the 2006 and 2009 LTCCPs continues for the 2012 LTP, local government debt may continue to increase past 2020. If this occurs, questions may need to be asked as to whether this is sustainable or affordable for some communities. Advances in asset management planning, community input, the overall economic climate and other one-off factors could see more conservative debt forecasts in 2012.
Smaller rural councils appear to take a more conservative approach to debt funding. As a result, some councils in this group continue to have no, or very low external debt. Many of these councils also have low or negative population growth.
Regional councils are typically not significant users of debt. They tend to hold around 5% of the total for the sector. Most debt is concentrated in the two regional councils with large capital requirements for public transport and bulk water supply.
Council treasury policies show a range of measures and limits for debt. While there are some commonly used types of measures (e.g., interest/income) there is no firm consensus as to the types of measures used, or the subsequent levels set.
Overseas, there appears to be a general trend toward devolving more decision making powers to borrow at the local level, as long as local authorities comply with prudential limits and accounting standards. There are no standard prudential ratios common across the jurisdictions reviewed. Prudential ratios and regulatory frameworks also commonly differ within jurisdictions, particularly in three tier government structures. Increasing debt in local government is causing concerns in a number of countries.
Use of debt is a prudent way to finance capital expenditure. The Rates Inquiry indicated councils could look to make more use of debt. Trends emerging from this analysis indicate that as a whole, the sector may be moving toward a point where the level of debt councils are operating with is approaching prudent limits. Greater monitoring and coordination of debt and debt-raising may benefit to the sector.
Excessive levels of debt could be seen to place an undue burden on future generations and to potentially restrict future choices. It may also limit the ability of a council to borrow to meet (natural) emergencies or unforeseen circumstances. The follow-on impact of unforeseen events (such as the Canterbury earthquakes in 2010 and 2011) may also change future needs for capital and debt in local government.
This means that while some individual councils may be in a prudent position, others are likely to be taking on (or looking to take on) levels of debt that are unsustainable. This has implications for funding growth and asset development in the future. It may be timely for the sector to review how debt is used and what types of limits might be useful guides for future fiscal management. Specific issues facing these councils can then be considered in more detail, this includes the relationship (and risks) between high growth, and high levels of debt.
The analysis in this report serves to highlight potential issues for the local government sector. Further analysis and discussion of the implications of the trends identified will help to build a more complete picture of the ways local government uses, or plans to use debt in the future.