Bernard Orsman is Super City reporter for the NZ Herald.

Auckland Council on road to financial crisis: Auckland mayoral candidate Victoria Crone

A storm is brewing over Auckland Council's debt position. Photo / Dean Purcell
A storm is brewing over Auckland Council's debt position. Photo / Dean Purcell

Auckland Council is heading towards a financial crisis over its debt position, says mayoral candidate and businesswoman Victoria Crone.

She says a decision by councillors today to use a "rainy day" fund to reduce the risk of a credit-rating downgrade and higher rates is a big concern.

"This is a massive decision," she said of a plan to draw down $200 million over two years to manage the council's debt ratios.

At today's finance and performance committee, councillors are expected to increase rates by 2.4 per cent this year and take steps to manage its $7.5 billion debt.

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.

Ms Crone said the decision to draw down the fund was all very last minute, lacking in information and haphazard.

"We have no idea of how much room we have before we max out. Is it $20 million, $100 million or $200 million.

"Councillors should be given more information about how much headroom there is to make a prudent decision," she said.

Ms Crone said before liquidating $200 million in assets the council should look at its revenue and spending lines.

"Len Brown is recommending to spend more more than what is in the (long-term) budget and sell assets to pay down debt. But if you spend less you don't have to sell assets," Ms Crone said.

She was critical of the council's lack of an asset sales strategy. Ms Crone said the debt issue was "another step towards a financial crisis" in Auckland.

A review last year of council assets by two advisory firms, Cameron Partners and EY, recommend a range of asset sales.

"Why go for a rainy day fund? They are going for the easiest and quickest way," Ms Crone said.

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 increases to more than 270 per cent of operating revenues as the council borrows to invest in more infrastructure without offsetting revenue growth," it said.

- NZ Herald

Get the news delivered straight to your inbox

Receive the day’s news, sport and entertainment in our daily email newsletter

SIGN UP NOW

© Copyright 2016, NZME. Publishing Limited

Assembled by: (static) on production bpcf03 at 08 Dec 2016 07:45:16 Processing Time: 312ms