Local government in strong financial position

Local Government New Zealand (LGNZ) advised at its April Quarterly Media Briefing today that the local government sector has the strongest balance sheet in New Zealand, outperforming central government and the private sector.

As at 30 June 2012 local government collectively owned $121 billion of infrastructure, investments and other assets against $11 billion debt with a 9 percent debt to assets ratio. Central government has $241 billion of assets under management with $181 billion debt, while the business sector has assets of about $1,233 billion with liabilities in excess of $800 billion, based on a Government report ‘Building Capital Markets’.

The local government sector is responsible for managing infrastructure and delivering a range of services that are vital to communities including almost 90 per cent of New Zealand’s total road network length, the bulk of the country’s water and waste water networks, libraries, recreation and a range of other services and facilities.

LGNZ President Lawrence Yule says that consistent with best practice for financing in the public and private sector, council debt is used as a tool to fund infrastructure to support long-term growth that will have intergenerational benefits servicing a community for years to come. He gave the example of waste water plants with an operational lifespan of at least 50 years.

Except in very rare occasions, debt is not used to fund operations and must be spent in accordance with a council’s revenue and financing policy which is set in consultation with citizens. These policies are subject to review by Office of the Auditor General.

“When assessing any council’s financial health or whole balance sheet, both assets and liabilities need to be taken into account. Viewed in this way, local government is in sound financial health with assets far exceeding debt. Debt is the appropriate funding tool for intergenerational assets and against standard measures it is being prudently used and managed throughout local government in New Zealand,” Mr Yule says.

Indicators show that local government’s financial position continues to be sound. Local Government Funding Agency (LGFA) Chairman Craig Stobo, who also spoke at the LGNZ April Quarterly Media Briefing, said its credit margins over government bonds have been improving since its establishment in February 2012. LGFA borrowers represent more than 90 percent of total local government sector debt. LGFA has a stable long term outlook as a lender, classed as AA+ by international rating agency Standard & Poors. Many councils have similarly strong ratings. Mr Stobo provided comparisons with the private sector where companies with heavy infrastructure investment rated by Standard & Poors include Transpower at AA-, Meridian Energy at BBB+, Contact Energy’s recent proposed $250 million fixed-rate bonds were rated BBB, while banks Westpac, Rabobank and ANZ are all rated AA-.

“Since the LGFA was launched in 2012, it has reduced the cost of debt to its council borrowers by at least 30 basis points. Continued strong support from local authorities has contributed greatly to our success, giving councils a reliable source of funding,” LGFA Chairman Craig Stobo says.

As the Office of the Auditor General (OAG) stated in its most recent result of local government audits, the indicators of long term sustainability are all within a reasonable range.

“Operationally, the local government sector remains strong in this aspect. Debt levels have remained within a reasonable range. Local authorities’ ability to service that debt is also strong and consistent throughout the sector,” the OAG report stated.

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