S&P Global says local councils’ credit risk is rising

Wellington Water workers respond to a burst water main in the central city last year. S&P says the credit outlook for several councils has turned negative, based on their increased infrastructure needs. Photo / Mark Mitchell

Ratings agency S&P Global says the credit risk for New Zealand’s local councils is rising, based on their increased infrastructure needs.

The agency revised the outlooks for the long-term ratings of 15 councils and two council-controlled organisations to negative, from stable, to reflect their weakening credit outlook.

The former Labour government passed its final water reform legislation before last year’s election.

“Labour’s reforms, if implemented, could have alleviated a significant portion of sector debt,” the agency said.

Auckland Council and Christchurch City Council, which both have AA ratings, retained their “stable” outlooks, while Dunedin City Council (AA) saw its outlook go from stable to “negative”.

The outlook for Greater Wellington Regional Council (AA-plus) also turned negative from stable.

A string of smaller councils faced negative outlooks, among them Nelson City, Porirua, Tasman District, Taupo District and Upper Hutt City.

S&P said the final design of the new Government’s policy on water would be vital for addressing the rising revenue and spending mismatches in the sector.

“Sector debt has risen rapidly since the start of the pandemic as councils grapple with large infrastructure needs and persistent inflation in operating and capital budgets,” S&P said.

“Rising infrastructure budgets and responsibilities are exerting pressure on the finances of New Zealand’s local governments,” the report said.

“Revenues and central government grants are not rising enough to cover this additional spending,” S&P credit analyst Anthony Walker said in the report.

“This is leading to widening revenue and expenditure mismatches, as seen in large deficits and rising debt compared with similar systems.”

If the trend continued, S&P could assess that the institutional framework for local councils in New Zealand had weakened.

“We now forecast much higher sector deficits and debt than we previously expected.

“This weighs on our assessment of New Zealand’s revenue and expenditure balance,” S&P said.

The final timing and structure of the National-led Government’s water reforms and the impact on local government finances remained uncertain.

The Government has promised to repeal existing legislation and plans to legislate its version of reforms - “Local Water Done Well” - by mid-2025.

“The final design of Local Water Done Well will be vital for addressing the rising revenue and expenditure mismatches in the sector,” S&P said.

“Reforms may also be important for curtailing sector debt as a proportion of operating revenues,” it said.

Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.