Wellington City Council sticking to its guns despite calls to borrow more

Friday, 12 March 2021

Calls are growing for Wellington City Council to increase its borrowing cap to fix mounting infrastructure costs, but the council says it has already increased forecast spending and needs to leave some headroom. (File photo)

Wellington City Council is sticking to its guns over its proposed borrowing cap despite growing calls for it to spend more in the face of mounting infrastructure costs.

The council is proposing to lift its self-imposed debt cap by 50 per cent from July, as it looks to fund major infrastructure costs, including a $2.7 billion water infrastructure bill, a one-third share in the $6.4b Let’s Get Wellington Moving (LGWM) transport programme, and a $179 million central library rebuild.

Chief financial officer Sara Hay said the council would increase borrowing by 84 per cent within five years, from $708m to $1.3b.

But several commentators want the council to go even further in a period of historically low interest rates and cheap money for local bodies.

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Infometrics senior economist Brad Olsen says the council is taking the right approach to borrowing but could probably afford to borrow a bit more.

Councils borrow almost all of their money through the Local Government Funding Agency, which temporarily increased its debt limits for councils from 250 per cent of revenue to 300 per cent for the next two years, dropping to 280 per cent by 2026.

Wellington City Council has subsequently proposed to increase its cap from 175 per cent to between 223 and 234 per cent over the next six years.

Brad Olsen, senior economist at Wellington-based consultancy firm Infometrics, said there was scope to borrow even more given interest rates were currently as low as about 1 per cent.

“We know that borrowing costs at present are likely to be the lowest they will ever be. There is certainly reason to be more permissive of higher debt for a period,” he said.

Wellington mayor Andy Foster says taking on more debt is no stroll in the park.

Olsen believed the council would likely be comfortable borrowing up to 250 per cent, while still leaving room for unexpected events like an earthquake or worsening infrastructure deficit, as well as non-budgeted costs.

“It’s still raining. Sometimes in Wellington, it’s raining poo.”

Wellington City Council chief financial officer Sara Hay says the council needs to be careful about taking on too much debt.

His comments echo those of economic commentator Bernard Hickey, who said “out-of-date and arbitrary rules” were stopping councils from addressing their massive housing affordability and climate change crises.

Infrastructure Commission chairman Alan Bollard also said recently local councils were largely to blame for the country’s infrastructure deficit, with the average debt-to-revenue ratio among the 30 councils with the highest credit ratings just 80 per cent as of June.

Wellington was eighth on the list, with a ratio of 127 per cent.

But Mayor Andy Foster said people who thought the council was being too conservative were “completely barking up the wrong tree”.

“A higher level [of debt] would be appropriate if we didn’t have lots of other things that we were expecting to have to pay for.”

Those things included new roads and pipes, the $400m housing deficit, and the remainder of LGWM funding. Just $220m has been budgeted for that project in the next 10 years, but the council’s share will ultimately be about $1.3b.

The council’s capital programme had increased from $2.3b in its 2018-2028 long-term plan, to $3.4b in its current one, Foster said.

Hay said if a council came too close to the debt ceiling it was placed on a watch-list, monitored monthly, and had financial statements and long-term plans reviewed.

Calls to raise the borrowing cap also failed to acknowledge critical factors, including the council’s current position and plans, and what the debt would be used for, she said.