Storm clouds over city finances as S&P notes ‘negative’ outlook

Thursday, 28 September 2023

In what’s described as a shot across Hamilton’s bow, the council’s long-term credit outlook has been downgraded from “stable” to “negative”.

City finances are under pressure, with the gap between income and expenses widening and a council finance leader saying rates have been “too low” and a reset could come as council plans its next decade.

But what international financial rating agency Standard and Poor’s change in position means practically is not certain - the current rating for Hamilton stays at a very strong AA- for now.

It’s suggested that a drop to the next peg of creditworthiness would add about $500 extra annual interest on every $1 million borrowed, and could have a significant effect on reputation.

Debt levels and deficits were among the agency’s concerns.

“Hamilton City Council’s fiscal metrics are under-performing our previous expectations,” the S&P report said.

“Operating surpluses are roughly half our previous forecasts because inflation, interest rates and other costs are outstripping revenue growth.”

Hamilton has long grappled with how to bring costs down without cutting services.

Council figures show a projected balancing the books deficit of $17 million this financial year - due to be funded by borrowing. Net debt at the end of June was $723 million, although the latter was down on budget due to cash flow timing.

Still, S&P said debt levels were among the highest in the world for the council’s AA- rated local sector peers, although the council said this wasn’t comparing apples with apples because of the way local government funding works in this country.

S&P said its assessment meant “we revised our long-term rating outlook on Hamilton to negative from stable”.

The AA- rating for Hamilton could be lowered if operating deficits “regularly exceeded 25% of total revenues”.

And, with a large infrastructure programme ahead, they’re set to average 27.7% over fiscal years 2022-26.

On the revenue front, it noted how average property rates had only gone up 4.9% this financial year, the lowest rate of increase in Waikato and among the lowest nationally.

But S&P also noted how this country’s “extremely strong and predictable” local government financial arrangements helped underpin Hamilton’s credit profile. “The system allows Hamilton to support higher debt than some of its international peers at the current rating level.”

Finance and monitoring committee chairperson Maxine van Oosten saw the S&P report as “a shot across the bow”.

Pressure to sort city finances was strong. “Comes the day of reckoning where you have to be able to pay for what you’re doing,” she said on Wednesday.

The current 2024-2034 long term plan (LTP) discussion needed to find a better balance between future costs and revenue, and look at what level of service the community wanted, van Oosten said.

“We can be masters of our own destiny I think.”

Economic development committee chairperson Ewan Wilson, who’s advocated strongly for the council to live within its means, said S&P was “rightly sending an indication that significant focus needs to come to bear on the LTP.

“A change of our status or our rating could have an impact on the cost of borrowing and that ultimately doesn’t help our ability to balance our books.

“This will be the most demanding LTP,” he said.

Workshops on the LTP have started and a draft is due out early next year for public input.

The council’s business services general manager, David Bryant, said he currently wasn’t concerned about Hamilton’s ability to maintain services and meet its financial commitments.

But “council needs to do something about the widening gap between the revenues we receive and the expenses we incur”.

“We’ve got a growing deficit simply because our rates have been too low and our expenses have grown,” he said. Inflation had been a key factor in driving that deficit up.

Hamilton had gone “above and beyond” in its efforts to keep rate increases down.

“That’s why we need some re-set, if you like, through the next LTP.”

On any potential ratings downgrade, Bryant said going down a level would add about 5 basis points (0.05%) to interest charges “which means the cost increase wouldn’t be material”. Debt “headroom” - the ability to borrow more - remained significant.

A bigger issue for Hamilton of a downgrade was the reputational impact, he believed.

And, he added: “If we continue to have growing deficits and not balance the books that’s what our community would be most concerned with.”

What S&P was saying was “if we don’t re-set in our new LTP to come back with certainty to a balancing the books position…they’re going to be concerned”.

He felt councillors were up for an LTP re-set which would “revise our capital expenditure programme and address our gap between revenue and expenses”.