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.