By Geoff Kreegher (Hamilton Ratepayer)
The government is allowing debt to rise to 500% of waters revenue for new “Local Water Done Well” Council Controlled Organisations (CCOs). There are also plans to increase the borrowing limit for high growth councils to 350% of council revenue.
Hamilton City Council’s current debt to revenue ratio (borrowing) limit is currently 285% of revenue. The total revenue forecast for 2024/2025 is $506 million (page 153 of the HCC 2024-2034 Long Term Plan)
The Local Government Funding Agency (LGFA) is considering an increase in debt limits for high growth councils (Hamilton is a high growth city) beyond the current ceiling of 285 percent of operating revenues to 350%.
“Currently debt is limited to 285% of revenue and this figure will come down to 280% this year, said finance and monitoring committee chairperson Maxine van Oosten.
But it’s possible the Local Government Funding Agency may in November allow Hamilton’s ratio to rise to 350%.
“That would give us adequate headroom to respond to any disasters,” whether financial or natural, van Oosten said on Monday.”
Stephen Ward, Waikato Times, Even deeper debt warning in Hamilton waters report, 10 September 2024
I have never known of any individual or organisation that borrowed to get out of debt.
This poses a serious issue for ratepayers as our council cannot control their spending and borrowing to fund their (ever increasing) ‘nice to have’ projects. For example, Claudelands Event Centre is one of these projects at $68 million to build with every cent borrowed and has now incurred over $24 million in interest and total losses of over $90 million – More than it cost to build in just over a decade.
With Council’s 285% debt to revenue borrowing limit Hamilton ratepayers have incurred a 16.5% rates rise this year with further increases forecast over the next 4 years more than doubling the rates for everyone.
Imagine the result for ratepayers if Council’s ‘spending’ is increased to 350% debt to revenue (borrowing limit) and the impact this will have on the ratepayer.
Further LGFA is allowing the new water organisations (CCOs) to borrow to levels equivalent to 500 percent debt to revenue ratio. If the new CCOs have trouble with these huge debts then the council is expected to be financially liable.
“LGFA will extend its existing lending to council-controlled organisations (CCOs) to new water organisations that are CCOs and are financially supported by their parent council or councils. The ability of councils to establish water organisations will be provided for by the Local Government Water Services Bill.
LGFA will support leverage for water organisations up to a level equivalent to 500 percent of operating revenues [2](around twice that of existing councils), subject to water organisations meeting prudent credit criteria. LGFA will treat borrowing by water organisations as separate from borrowing by parent council or councils.”
LGFA, Update on Local Water Done Well and Additional Financing for High Growth Councils, 8 August 2024
Hamiltonians are struggling under the weight of the current overspending; this is at levels unimagined!
Our Council decided on 12 September 2024 to design a new Council Controlled Organisation (CCO) for water to begin trading in July 2026. Hamilton City Council will guarantee the loans taken out by the new CCO water provider leaving ratepayers on the hook for even more debt.
Hamilton City Council’s current debt is $843 million, which is projected to increase to $2493 million in 2034. This enormous level of debt is at a 264% debt to revenue ratio (with the borrowing limit set at 280%).
Page 121 of the HCC 2024-2034 Long Term Plan
Imagine the debt figure once they are given approval to go to 350% and the ramifications for you the ratepayer.
S&P, a global credit rating agency, also has concerns about how the Government’s new water plan could weaken the LGFA. The new water providers will be relying on LGFA for debt.
“S&P said it expected a raise in debt ceilings would be “be negative for credit quality across the sector, which is already highly indebted by international standards”.
Worsening credit scores for councils could translate into higher bills for ratepayers.”
Thomas Manch, The Post, Global ratings agency warns Government’s water regime could raise debt costs, 12 August 2024
This could further impact you the ratepayer as Hamilton City Council could be paying even more in interest rates should they receive yet another downgrade – a year ago they were taken from “AA- stable outlook” (which had been maintained for many years) to a negative outlook at AA- and this was designed to encourage the Council to improve their financial situation. Council did not and have now received an S&P downgrade to A+ (with a negative outlook) thus impacting the cost of borrowing. Hamilton ratepayers cannot afford another downgrade.
The S&P report states:
“We believe Hamilton’s financial management has weakened, as seen in the fiscal outlook and recent outcomes. It’s after capital account deficit for fiscal 2024 was one of the largest in the world, and the council’s debt and interest costs are rising rapidly.”
[Correction/clarification 02 October 2024: The original article read “S&P downgrade to A-“ This has been changed to “S&P downgrade to A+(with a negative outlook)”. Hamilton City Council received long-term issuer credit rating downgrate to A+ , and a short-term issuer credit rating downgrade to A-)]
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Further reading on this issue
OPINION: Analysis of Hamilton City Council’s financial position
OPINION: Why is Hamilton City Council unable to prepare and promise a financial budget that works?
Petition to stop rates increases and growing debt at Hamilton City Council
