The New Zealand Local Government Funding Agency has hiked the debt ceiling for local council borrowers to 300 per cent of revenue until 2022, freeing up capital for councils to manage out of the Covid-19 crisis.

The council controlled organisation, which provides debt funding to NZ local authorities and council-controlled organisations, yesterday approved changes to its financial covenants allowing 30 councils with a credit rating of 'A' or higher to take on more debt, limited to no more than 300 per cent across the June 2021 and 2022 financial periods.

That will ratchet down by 5 per cent per year over the next four years, with a debt cap of 280 per cent applying from 2026, allowing councils to borrow an additional $2.35 billion, it said.

The prior covenant limited council borrowings to 250 per cent, or 2.5 times, revenue streams.

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The LGFA is expected to issue $6.78b in bonds over the next three years, and is mandated to provide at least 85 per cent of its long term debt funding to the local government sector.

Little headroom

While borrowing through the agency keeps a lid on debt costs, the tight covenant restrictions provided little headroom for additional spending required because councils were unable to raise rates and as their fee income from infrastructure such as swimming pool declines, the LGFA said last month.

Auckland Council alone is facing a $525 million budget deficit this year, and has been at risk of breaching the LGFA covenants.

Shamubeel Eaqub, an economist with Sense Partners, said raising the debt cap was small change for faster growing councils who had already been facing covenant breaches even pre-Covid. "What this does, though, is that it allows them to take on additional debt for practical reasons, which makes sense given low interest rates on local government bonds, which at the last auction were at less than 1 per cent."

In Auckland's case, debt wasn't a major issue but the city still needed to make up for "decades of insufficient infrastructural investment," he said.

Eaqub said limited borrowing cap levels for councils including Christchurch, had also had the consequence of not allowing reductions in rates.

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