Audit New Zealand has warned Wellington City Council (WCC) is risking more burst pipes, reduced levels of service, and greater infrastructure costs than forecast.
The council has received a qualified opinion raising concerns about how it has determined its investment for three waters infrastructure.
It relates to WCC's draft Long Term Plan, which is about to go out for public consultation.
It's the second qualified opinion the council has received from Audit New Zealand relating to water in less than a year.
They are the first the council has ever received to the best of council officers' knowledge.
In the opinion, audit director Karen Young said the council did not use information about the condition of water assets to direct investment.
Instead, renewal of assets are forecast on age, capped by what the council considers affordable, she said.
"Given the age of the three waters networks and recent asset failures, we consider it is unreasonable for the Council to use age alone as the basis to support and direct the renewal of its three waters infrastructure.
"This could result in more asset failures during the 10-year period of the long-term plan, reduced levels of service, and greater costs than forecast."
Mayor Andy Foster said the Long Term Plan was challenging and complicated because the city is facing an unprecedented number of issues all at once.
He noted they were already funding a ramped up condition assessment of Wellington's pipes that Wellington Water is currently undertaking.
Foster said they would have much better information on the condition of the city's pipes later this year.
But the council has statutory deadlines to meet for the delivery of its LTP, so it can't wait for that information.
Audit NZ also wanted to draw attention to other uncertainties, which were not part of the basis for the qualified opinion.
The council has budgeted about $678 million over the next 10 years to deliver a three waters capital programme.
But Young said the delivery is at risk due to other large infrastructure projects within the region and nationally, which are competing for limited resources.
"This, coupled with the uncertainty of Covid-19, could result in the Council failing to deliver its capital programme in future years which could impact on service levels."
Young also noted the council was relying on external funding contributions for sludge treatment through the use of the Infrastructure Funding and Financing Act 2020.
"The external funding contributions are currently uncertain because funding agreements are not yet in place", she said.
High-level estimates have put the cost of dealing with the city's sludge as high as $185 million.
Young also noted the uncertainty created by the Government's incoming three waters reforms.
But the qualified opinion is not just about water.
Concerns have also been raised that the council has not budgeted for a $400 million funding gap in its city housing stock.
Wellington City Council has already spent the $220m it got from the Government in 2008 as part of a 20-year deal to upgrade its social housing stock.
But that was only enough to upgrade half the portfolio.
It was initially thought the council would invest additional money from its rental income.
But rising costs through the likes of insurance and a volatile construction industry has left the upgrade project short.
Foster has previously said the council was talking to the Government about how to come up with the remaining $400 million and what funding levers could be pulled.
But Young said given the council's obligation under its deal with the Government, it was unreasonable to omit these costs.
Foster pushed back and said he thought the council was managing the situation the right way.
"We have spelled out quite clearly what the risks are and the process we're going through."