Bernard Orsman is Super City reporter for the NZ Herald.

Auckland Council looking at 'rainy day' reserve fund

Credit rating agencies have warned of a rating downgrade if its debt-to-revenue ratio approaches 270 per cent. Mayor Len Brown's latest budget forecasts a ratio of 265 per cent. Photo / Dean Purcell
Credit rating agencies have warned of a rating downgrade if its debt-to-revenue ratio approaches 270 per cent. Mayor Len Brown's latest budget forecasts a ratio of 265 per cent. Photo / Dean Purcell

The Auckland Council is looking at using a "rainy day" fund to reduce the risk of a credit-rating downgrade and higher rates.

The council is set increase rates by 2.4 per cent this year, but its $7.5 billion debt is placing pressure on further rates rises.

Credit rating agencies have warned the council of a rating downgrade if its debt-to-revenue ratio approaches 270 per cent.

Mayor Len Brown's latest budget forecasts a debt-to-revenue ratio of 265 per cent.

A one-notch downgrade, he said, would lead to an $11 million rise in interest costs.

Interest costs are funded by rates. A $14 million increase in running costs equates to about a 1 per cent rates rise.

To create headroom, council officers have suggested drawing down $100 million over each of the next two years from a diversified investment portfolio, currently valued at $335 million, to manage the debt ratios.

The "rainy day" reserve fund is part of the liquidity policy of council, a budget report says.

Last December, ratings agency Standard & Poor's acknowledged Auckland Council's strong financial performance and financial management but noted a "very high debt burden", which has risen steadily from 196 per cent of operating revenues in 2012 and is expected to peak below 260 per cent.

"Downward rating pressure might arise within the next two years if Auckland's debt increase to more than 270 per cent of operating revenues as the council borrows to invest in more infrastructure without offsetting revenue growth," it said.

Councillor Mike Lee was appalled the council would consider liquidating one of its few long-term income streams, which was built up in the 1990s by the former Auckland Regional Council from asset sales, including the Yellow Bus Company.

He said the fund mostly comprised stocks and bonds and provided $23 million a year.

The fund, he said, had previously been managed by a non-political council body, Auckland Council Investments Ltd, before being moved to the council in 2014 where it was now being "looted" by council officers.

Councillor Cameron Brewer said councillors had been given the impression the council would never hit the 270 per cent debt-to-revenue ratio.

"The chickens have come home to roost, but no one thought it would happen so soon," he said.

The governing body is due to approve this year's budget tomorrow.

The 'rainy day' fund

• Diversified investment portfolio worth $335m. Made up of shares/bonds/cash
• Inherited from former Auckland Regional Council
• Plan to draw down $200m to reduce risk of credit rating downgrade and higher rates

- NZ Herald

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