Local bodies' healthy asset to debt ratio would be the envy of other commercial sectors, writes Local Government New Zealand president Lawrence Yule
Debt is not a bad thing when used responsibly as a tool for growth. While most councils have debt like most businesses, the levels of local government debt are sustainable.
Everyone has an opinion on council finances, because everyone has a stake in them as ratepayers either directly through their rates or indirectly through rent.
Local Government New Zealand (LGNZ) welcomes the transparency of council finances and encourages the public to be aware of their council's financial position, using appropriate context.
It might surprise a lot of people to know that local government is actually in a very sound financial position. LGNZ commissioned analysts Grant Thornton to review key financial factors for councils across the country to produce an accurate overall picture of local government financial health.
The report, Local Government: A Financial Snapshot, shows that the vast majority of councils scored well in metrics relating to their balance sheets, such as debt levels relative to their asset base, debt levels relative to their population, ability to repay debt and ability to cover interest (finance cost) obligations.
Debt is not a bad thing when used responsibly as a tool for growth. While most councils have debt like most businesses, the levels of local government debt are sustainable. In fact, the local government sector continues to have by far the lowest debt of any sector in New Zealand -- household, business and central government.
The local government sector has an asset base of around $121 billion and debt of approximately $11 billion -- a ratio of debt to assets of around 9 per cent. This is the equivalent of a modest $36,000 mortgage on a $400,000 home.
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. By any measure, local government debt sits at very prudent levels.
The Office of the Auditor General keeps an eye on council financial operations, auditing the full balance sheets of every single local authority in the country each year to produce an annual summary showing the overall financial health of the local government sector. Its 2011/12 report, Local Government: Results of the 2011/12 Audit, shows indicators of long-term financial sustainability are all within a reasonable range.
The report stated, "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."
This is significant when we consider 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.
Councils also take care of the bulk of the country's water and wastewater networks, libraries, recreation and a range of other services and facilities that enable communities and businesses to operate.
While financial performance in the sector is sound, LGNZ is working to strengthen it further. Earlier this year we launched EquiP, our Centre of Excellence that will deliver practical tools and services for councils on financial performance and other relevant topics including good governance, audit and risk, and executive performance.
I encourage Kiwis to be involved in local government finances by taking an active role in their council's financial position as they would in any other business that they are a shareholder in.
You can do that by reviewing the contents of long term plans which are presented to the public for consultation. When council balance sheets are viewed with the appropriate context, it is clear the overwhelming majority of councils in New Zealand are in a strong financial position.