Downgraded: ‘Weak’ financial management sees city credit rating take a big hit

Monday, 9 September 2024

It’s just become much tougher for Hamilton City Council to borrow money, with a damning financial assessment leading to a devastating credit rating downgrade.

International credit ratings agency Standard and Poors’ just-released assessment of the council’s financial health paints a dramatically grim picture of the organisation’s “weak” position.

S&P has lowered its long-term issuer credit rating on Hamilton to “A+” from “AA-”, and the short-term issuer credit rating to “A-1” from “A-1+”.

The city’s outlook remains “negative” - a status the ratings agency consigned it to a year ago.

But this year’s assessment was even darker.

“Hamilton City Council's financial outcomes are very weak,” the agency declared. “Its large capital expenditure (capex) pipeline means after capital account deficits will be much weaker than that of 'AA-' rated peers, at more than 25% of total revenue. This will push up debt to more than 300% of operating revenue.

“We believe Hamilton's financial management has weakened, as seen in the fiscal outlook and recent outcomes. Its 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.”

And while some in the council are taking an “It’s not our fault - it’s grim for everyone” stance, others are saying the time to press the “red alert” button is now.

No such buttons were being pushed by chief executive Lance Vervoort, however.

“We saw it coming. It’s not a surprise to us. A number of councils have been on negative watch for a while now, and the thing I want to emphasise is that we still have a very high credit rating.”

The downgrade effectively amounted to an additional $500 in interest costs for every new $1 million borrowed, per annum, he said.

So, what was the easiest ray to restore the rating to what it was?

“The problem is that councils are very limited in the ways they can collect revenue. We have to work with central government to find new tools that will lead to greater financial stability in future.”

Mayor Paula Southgate described the downgrade as the effect of “decades of under-rating, decades of under-funding of infrastructure coming back to bite us”.

But with the city’s population still increasing, there was little choice other than to keep investing in key infrastructure such as the recently-opened Te Ara Pekapeka Bridge.

“We have had record high inflation. It’s 33% more expensive to build a bridge than it was just five years ago.”

But she had no regrets about the $166.6m overpass, which was paid for with an interest-free loan.

“It doesn’t get much better than interest-free. And it’s opened up the Peacocke’s subdivision that will be a big help to us.”

Hamilton’s was not the only council getting a downgrade. Wellington City Council had been taken down a notch in their latest assessment and there were at least four to five other councils in similar situations.

Central government could be doing a lot more to help such councils, she said.

“It’s a New Zealand-wide situation, and that points to how broken the financial situation is.”

Southgate said the process to push the council’s rating back up had already started with numerous cuts to council budgets in this year’s Long-Term Plan.

“Their assessment is based on last year’s finances - not this year’s. We have had to make some tough decisions. There’s $94m in savings out of staff and consultants. We have taken $282m out of the capex for years one to five of the LTP.

“The problem is that we are New Zealand’s fastest-growing city. We can’t just turn that off. People are having families and those families need somewhere to live. Migrants want to locate here.”

Ewan Wilson, who chairs the council’s powerful Economic Development Committee, is in the “red alert“ category.

“It’s quite alarming. They are using language [in the report] that is pretty darn strong.

“The thing is, if any of our debt expires it will have to be renewed - and we are going to have to pay extra for that now.”

Wilson reckoned the credit downgrade was an event the council had been dreading.

“It could not have come at a worse time, because we have a lot of spending planned.

“The problem is that this council is currently $1 billion in debt. We are projected to add an additional billion over the next 10 years. We are currently paying $150,000 in interest per day … which will double to $300,000 per day.

“This drop in credit status just adds additional pressure that we don’t need. We are sailing so close to the wind we don’t have room for a black swan event.

“We are just going to have to mitigate our appetite for borrowing - at least until we can balance the books.”

Finance and Monitoring Committee chairwoman Maxine van Oosten said S&P’s rating and commentary reflected challenges all councils across New Zealand were facing.

“The report's findings are confrontational, but it's a stark acknowledgement that this council made the tough decisions and did the right thing some months ago through our Long-Term Plan.”

The plan’s budgets had placed the council on track to have the city’s everyday costs met by everyday revenue from 2026/27 - which the S&P report acknowledged.

“It will be little comfort to our ratepayers that the report shows those decisions were the right ones, but as S&P notes, we can now start to rebuild.

“We are always going to be more exposed than many [other councils] because of the unique challenges we face as New Zealand’s fastest growing city.”