Auckland Council's $1.4 billion in balance sheet losses is the greatest public sector financial disaster since National's Bill English lost $1.2b in South Canterbury Finance, says former Labour Party leader David Cunliffe.
"Absolutely incompetent and absolutely staggering loss," Cunliffe wrote on social media.
He was responding to a Herald article about the council booking $1.4b in balance sheet losses on interest-rate derivatives in the past two years after its strategy of fixing interest cost long-term backfired when interest rates fell.
The paper losses come as the impact of the Covid-19 pandemic bites. Last week, the council forecast by 2024 there would be a $1b Covid-shaped hole in its budgets, and signalled years of emergency belt-tightening.
Council treasurer John Bishop has defended the hedging strategy, saying it ensures certainty in council expenses and insulates the council and ratepayers from the shock of rate rises, but conceded they mean ratepayers were unable to benefit from lower interest rates.
In the latest 2020 financial year, the council paid $434 million interest on total debt of $10.2b.
Mayor Phil Goff, who declined repeated requests by the Herald last week to discuss or justify the hedging losses and whether ratepayers were locked into now over-priced loans, did not want to lock horns with his former Labour colleague today.
Instead he issued a statement through a mayoral spokesman, saying: "Any claim that there will be 'real' costs to the council is factually incorrect.
"Like homeowners, Auckland Council locks in interest rates to ensure that it can plan for the future and be confident that it can provide the essential services and infrastructure investment the city needs regardless of possible future changes to interest rates."
The spokesman compared the situation to a homeowner taking out a fixed-rate mortgage to provide certainty.
"If, after fixing a mortgage rate, interest rates decrease, the homeowner will not suffer an actual loss but will continue to pay the agreed fixed rate. Likewise, they won't "gain" anything if interest rates increase but will continue to pay the fixed rate," the spokesman said.
Cunliffe - who Goff appointed finance spokesman when he was Labour leader from 2008 to 2011 - said: "Could there be a clearer case of a sackable offence?
"Who is resigning over it? 1400 million reasons to hang their heads in shame."
Cunliffe, the Labour MP for Titirangi and New Lynn from 1999 to 2017, was commenting on a Facebook post by a local and longstanding associate Greg Presland.
Presland, who chairs the Waitakere Ranges Local Board, said it had been said to him "the dealers must have been grinning from ear to ear when they saw the council decide to get involved. Lambs to the slaughter."
He said in June the Local Board passed a resolution for an urgent review of the council's approach to derivative dealings on the basis they open up the council to unacceptable risk. The board did not get a response, he said.
In response to Presland's Facebook post, deputy mayor Bill Cashmore said the loss is a balance sheet entry and the policy protects the council from interest rate increases.
"Book losses occur when interest rates drop as they have been for the past few years but when they rise again, which will happen, there will be book profits. These are theoretical losses and the gains will likewise be the same, book profits, not cash," said Cashmore.
Cunliffe said: "If a city Councillor is seriously trying to excuse this singular catastrophe because it is a "non cash" item then that might explain how strong the chain of accountability is that led to the debacle in the first place."
Writing on the subject, Presland said the good news is the derivative losses are non-cash book-keeping entries and writing cheques will depend on if and when the contract matures.
The bad news, he said, is forecasts for interest rates to decrease in the short to medium term.
"At that time I anticipate cheques may have to be written. Rather big ones," said Presland.
An audit note in the council's 2020 annual report provided by the Auditor General said of the $1.4b losses: "This is primarily the result of the Auckland Council and Group using derivatives to fix the interest rates paid on borrowings at rates higher than current marker interest rates."
Economist Rodney Jones, of Wigram Capital, said the scale of the council's position - which covered almost all its long-term debt, and with a large chunk locked in for a decade - could be described as "extremely aggressive".
"I can understand you have some hedging in place on a three-year view - but I don't see how it's prudent to go beyond three years. And for all of your debt as well?" he said.
"This disaster - and this a disaster - is symptomatic of a systemic problem in local government."
University of Auckland senior lecturer in accounting Lily Chen said the $1.4b in paper losses from hedging at Auckland Council "certainly appears to be poor practice of risk management, but hindsight is always 20/20".
Bishop and members of the treasury team are scheduled to appear before the finance and performance committee on Thursday, where the hedging strategy will be canvassed.