Tauranga City Council's debt could increase by more than $38 million over the next three years, a report says.
The council has retained its A+/Stable/A-1 credit rating in the latest Standard & Poor's report but the agency has predicted the council's debt will grow by more than 10 per cent over the next three years. The council's debt is officially recorded as $380 million.
And there is a chance its credit rating could drop because of its tight debt-servicing ratio, the report says.
The credit rating agency also found the council had overestimated population increases, was grappling with high interest repayments and pressing infrastructure projects were contributing to the high debt levels.
Standard & Poor's primary credit analyst Anthony Walker said the council did have high budget flexibility and limited contingent liabilities but the region's sluggish economy, the council's budgetary performance and "very high" debt affected the final rating.
The agency predicted Tauranga's total tax-supported debt would reduce to about 240 per cent of operating revenues by 2016 - down from its peak of 270 per cent in 2012.
But the report also acknowledges the council's debt was "very high compared to peers".
"In our assessment, Tauranga's debt burden significantly underperforms our benchmarks." The report blames some of council's debt level on high interest expense - around 16 per cent of operating revenue between 2013 and 2015.
Ratings could improve if Tauranga's debt burden reduced and its debt-servicing ratio improved, the report says.
Mr Walker said the council could reduce its deficit further by reducing or postponing its capital works programme.
It's a move the council will investigate, mayor Stuart Crosby told the Bay of Plenty Times.
"The new council would determine the 2014-2015 capital works programme, which has a debt cap, late this year as part of the budget process," Mr Crosby said. "The first draft will be available this year and we will have community consultation happening in March, with the final plan out early June."
Mr Crosby said he could not comment on projects that could be pushed back as council was still in caretaker mode after the election. He said council would be looking at a transfer of interest rates going forward.
"We have a mixture of fixed and floating interest and then we have a repayment of debt programme," he said. "We will be looking at a transfer of interest rates as we move forward, we are budgeting for interest but it is a complex issue. We try to take a precautionary approach as much as possible."
Mr Crosby acknowledged the council had overestimated the number of new ratepayers moving to the area. This had occurred because the global financial crisis had reduced the number of people moving to the region. The former council had developed a strategy to sell off assets to reduce debt, he said.
"So far we have sold $8 million in surplus land and we hope to bring that total up to $20 million over three years to reduce our debt, depending on market values. What is being predicted (in terms of debt levels) and what will actually happen will depend on the new council."