How big city credit risks can be avoided
Latest figures show big rates increases proposed for Hamilton will help avoid major creditworthiness risks amid soaring debt for capital works.
But some councillors still have big concerns over the projections for crucial debt to revenue ratios to be outlined in the 2024-34 draft long term plan.
Also, net debt is now picked to top $2 billion by 2028-29 compared to a new high of $1 billion this financial year.
The updated figures have been accessed by the Waikato Times after it reported the $1 billion-plus net debt projection last week, as well as new forecasts of potential debt to revenue ratio breaches in coming years.
Exceeding those ratios can severely effect the council’s creditworthiness and risk a need to pay back loans from the Local Government Funding Agency, which lends at favourable interest.
The council is currently on a negative credit watch.
But under new rates rise proposals including 19.9% next year and 15.5% in each of the four years after - the council is now set to stay under the agency’s debt to revenue caps.
That’s even though net debt is set to climb further - as Hamilton grows - and soar above $2 billion for the six years from 2028-29. Despite the new ratio projections if the rates rises are approved, finance committee members remain concerned about any higher debt levels.
Finance director Tracey Musty told last week’s committee meeting she preferred to maintain “headroom” in keeping borrowing below debt to revenue ratio limits.
But she also noted several years of the ratio being as high as 274%, not too far under the 280% limit. The council would need to reassess plans if it was hit by any financial shocks, Musty said.
Economic development committee chairperson Ewan Wilson believed that despite the new ratio forecasts “we’re in trouble” with the risk that “we are going to sail so close to the sun that we’re going to burn”. He predicted ratios would eventually be breached, particularly given a history of the council not meeting financial forecasts.
“I am terrified we’re going to have low headroom...we think we have a draft plan that is going to help us, we need to go further.”
Councillor Geoff Taylor warned ratio breaches could have “dire” consequences.
“There’s no going back when that happens.”
Councillor Tim Macindoe said the council couldn’t rely on changes to local government funding mechanisms to help avoid risks - tough fiscal choices were needed.
“We are so close to being in deep, deep trouble that failure to do so by looking for much greater efficiencies, reining in costs across the board, would be the height of irresponsibility.”
However, councillor Sarah Thomson said Wilson was being “intentionally catastrophic in his rhetoric”.
“It’s a little bit like Chicken Little calling ‘the sky is going to fall’.”
But she too was concerned about low headroom and wanted a contingency plan to manage ratio breach risks before the long term plan was signed off.
The updated figures take into account the fact that Three Waters is back on the council’s books from year three of the long term plan.
But Musty confirmed in a statement that this didn’t necessarily account for all of the debt rises from year three.
“The main driver for the increased debt is the overall capital programme, which is investment across all areas of the business.”