Council's unrealised hedging losses hit $2.7b, years of pain forecast

Auckland mayor Phil Goff. Photo / File

Auckland Council interest rate hedging swaps have accumulated $2.74 billion in unrealised losses and fixed the cost of its $10b in borrowings at double current market rates, documents show.

Council's finance and performance committee this morning will meet to conduct its three-yearly review of a treasury and hedging policy described early this week as a "singular disaster" by former Labour Party leader David Cunliffe. Cunliffe declined to elaborate on his early commentary when contacted by the Herald.

The Herald last week broke the news of $1.4b in hedging losses accumulated over the past two years after interest rates moved sharply against the council's hedge positions, and the latest figures appear to show problems stretch back to the formation of the Super City in 2010.

A spokesperson for Auckland mayor Phil Goff, also a former Labour Party leader and who had Cunliffe as his finance spokesperson, told the Herald he continued to have confidence in his treasury officials.

"Auckland Council's Treasury Management Steering Group includes a PWC partner and other private sector experts in debt management and investment policy. Its policy reflects that of other large council and corporate entities and is regarded as good practice," the spokesperson said.

Briefings attached to the committee's agenda suggests the committee will leave hedging policy unchanged: "The current policy is still deemed appropriate, and only minor cosmetic changes are proposed."

Goff confirmed no change of direction was anticipated today.

Council treasurer John Bishop told the Herald it was not possible to unwind the hedging positions, as they would attract the equivalent of a break fee exceeding $2b. "Theoretically if we unwound it, it would cost that amount of money: But we'd be exposed to unacceptable interest rate risk," he said.

Bishop was unapologetic about the hedging policy, and while acknowledging it presently locked the council into higher costs of borrowing, it was undertaken to ensure certainty in financial planning.

"It's a trade off between how much risk you want to take, and how much certainty you want," he said.

Accounting losses under the policy - effectively measuring the hit to the council's financial position from locking ratepayers into higher-than-market interest rates - are revealed in briefing documents to have reached $2.74b by September, equivalent of nearly a third of the council's debt total.

These losses are unrealised and, while they reduce over the lifetime of the swap contracts or if interest rates rise, they require the council to pay fixed interest rates that are presently double market rates.

The long-term consequences of the council's extensive hedging in a low-interest-rate environment, with the average time to maturity of its swap position listed as 6.5 years, is laid out in the forecast cost of borrowing.

Despite interest rates cratering worldwide in recent years, with banks this week flagging interest rates as low as 2 per cent for even consumer mortgage borrowers, the council is anticipating paying over 4 per cent until at least 2025.

Interest costs for the council last year totalled $434m, or nearly a quarter of rates revenue.

The finance and performance committee is also expected to approve today a sweeping range of austerity measures - including cutting millions from cemeteries, mowing and rubbish-collection budgets - designed to trim millions from council operating expenditure to counteract decreased revenues caused by the widespread effects of the Covid-19 pandemic.

Cunliffe had early this week called for the Office of the Auditor-General (OAG) to investigate Auckland Council's use of hedging derivatives.

A spokesperson for the OAG said they were aware of developments - "We chose to highlight the losses within the key audit matters of our audit report for Auckland Council because of the council's extensive use of derivatives" - but said such decisions were largely a policy decision for the council.

The OAG spokesman said the wider issue of hedging in the local government sector - with Auckland the largest user, largely by function of its debt load of $10b being the country's largest - was being considered for inclusion in its report on local government due to be tabled next year.