Tauranga City Council’s credit rating downgraded

Tauranga City Council expects to pay an extra $100,000 to $150,000 in annual interest after its credit rating was downgraded amid political turmoil and tightening budgets.

The downgrade is unusual, but the council says the move reflects its challenging financial situation.

Earlier this month, independent credit rating agency Standard and Poor’s lowered its long-term issuer credit rating for the council to A+ from AA-, and short-term from A-1+ to A-1.

In its report, the agency said: “Tauranga City Council’s financial management has weakened, in our view.

“Political and governance issues have beset the council recently and have resulted in the central government … deciding to appoint commissioners in February 2021.

“Tauranga’s large capital programme and lower-than-previously budgeted rate increases will lead to very large deficits and rising debt levels. This partially reflects the council’s response to the Covid-19 pandemic.”

The agency also pointed to costs relating to building defects in projects such as the Bella Vista development, Cayman Apartments, and the Harington St Transport Hub – each of which has cost the council tens of millions of dollars.

The report said the agency believed the council was “unable to implement unpopular, but necessary, policies and reforms in a timely manner to adequately address the city’s infrastructure needs”.

“We expect financial outcomes will stabilise, if not improve somewhat, under the direction of the commissioners.”

The agency gave the council a stable outlook but it also predicted its budgetary performance would stay “weak” for at least the next few years due to “large infrastructure requirements”.

The agency gave the council a negative outlook in October during its annual review but kept the rating stable.

An extra review in January followed Local Government Minister Nanaia Mahuta’s December confirmation a commission would be appointed to replace the council’s elected members.

Names of the commissioners are expected to be announced next week with their term likely to start soon after.

The credit rating downgrade reversed an upgrade the council received in 2018 on the back of an “improving debt trajectory”.

The council’s credit rating is an assessment of its creditworthiness and ability to meet its financial commitments. The rating impacts the interest rates the council can attract from lenders.

Council corporate services general manager Paul Davidson said the change from AA- to A+ still left the council with a strong rating, relative to the public and private sector.

“But it is likely to have a small impact on debt servicing costs.

“The slightly higher interest rate costs resulting are likely to add between $100,000 and $150,000 to each year’s borrowings.”

For the 2021 year, the council had budgeted operating expenses of $227 million and interest expenses of $20.8m with forecast debt of $685m.

He said the Long-Term Plan 2021-31 being drafted had already incorporated an allowance for the expected increased interest costs.

“TCC is committed to working closely with the Government-appointed commission to deliver the strong and stable financial management required to manage growth and protect the interests of the city and its residents.”

Regarding the assessment the council’s financial management had “weakened”, he said each agency used its own particular language, but the assessment ultimately reflected growing pressures on the council’s budget that had been a long time coming.

“When they say that they are reflecting our forecasted debt level is high for our revenue base. That’s ultimately what that comes down to. We have a very large forward-looking capital programme and the challenge is having sufficient revenue to actually service that programme.”

Council staff previously warned this Long-Term Plan will be the city’s most challenging. An early draft forecasted a total rates rise approaching 50 per cent over three years.

Davidson said other growth councils in New Zealand also faced similar “significant pressure” and challenges under the local government funding model.

He did not know of any that had seen their rating downgraded but said all rating agencies would be watching Long-Term Plans closely ahead of the next assessment.

Both upgrades and downgrades were “relatively uncommon” in local government, which was generally viewed by agencies as having a strong financial system.

Davidson said Tauranga’s 2018 rating upgrade followed the divestment of Route K off its balance sheet, which helped improve projections over the next few years.

Projections looked less “comfortable” now.

Bruce Robertson, appointed independent chairman of the council’s Finance, Audit and Risk Committee last year, said the review was forward-looking and reflected the council’s revenue and debt situation.

Councillor John Robson, who chaired the finance committee under the previous council, said while the interest impact might seem significant to the average family, it would be “well within the margin of error of treasury management” for the council.

“In the great scheme of things it is noise rather than anything significant,” he said.

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