Napier City Council has long held the enviable reputation of not having a dollar of external debt.
That is about to change. Rapidly.
The council plans to borrow almost $300 million over the next five years to replace ageing water infrastructure and to meet years of "under-investment in assets".
It means - according to projections - Napier Council will overtake neighbouring Hastings District Council, which has more than $200m of debt.
Napier City Council CEO Steph Rotarangi, who took over the top job at the start of this year, said a lot of work needed to be done.
"At council we have been challenged by previous under-investment in assets and have needed to play catch-up at a time when inflation and supply chain constraints are pushing costs up," Dr Rotarangi said.
"Entering into debt is something that needs to be carefully considered.
"We can't under-invest and let future generations worry about the catch-up; likewise we can't over-invest as we are constrained by markets and affordability.
"We've identified major intergenerational assets that are required to keep Napier safe and vibrant and we've used debt to spread the costs of those assets over time."
The council currently has zero external debt but will reach an estimated $298m external debt by 2026.
The council confirmed about half of that money ($150m) will be spent on improved drinking water, waste water and storm water infrastructure and projects.
The council's water projects in the next five years include a new drinking water reservoir on Napier Hill to replace the Enfield Rd reservoir, flood alleviation projects, a new water treatment plant, and replacing ageing waste water infrastructure among other projects.
The council did not clarify an exact breakdown of where the remainder of the debt would go.
However, other major projects set out in the long-term plan include the rebuild of Napier Library (estimated $26m), the Civic Buildings upgrade (estimated $28m), roading and transport projects, and the Te Pihinga Community Centre project in Maraenui.
The council's gross debt will reach $333.8m by 2026 (which includes $36m internal debt), according to projections.
WHERE THE MONEY COMES FROM
While Napier City Council currently boasts zero external debt it does have internal debt.
That means rather than borrowing money from a bank or lending agency (and paying high interest rates), the council has been able to reshuffle existing funds put aside for future projects or in reserve and borrow millions of dollars from itself.
That process is known as internal borrowing and is included in a council's gross debt.
The council's gross debt currently sits at $68.8m, which is all internal debt.
However, the council is now at a point where it has exhausted internal borrowing options and must borrow externally.
It officially joined the Local Government Funding Agency (LGFA) in March, from which it plans to borrow hundreds of millions of dollars.
The LGFA is owned by the Government and local councils and allows councils to borrow money at low interest rates. It is based on a similar model from Norway, Sweden and Finland.
Hastings District Council, for example, has already borrowed $205m from the LGFA.
The LGFA issues bonds onto the NZX Debt Market, which goes toward loans for councils.
The LGFA sets caps on how much a council can borrow according to a council's annual revenue, which effectively restricts councils from borrowing more than they can afford.
"Overall, our loan funding is well within our limits," Dr Rotarangi said.
"So while this increase in debt is significant, it is well within our limits and allows for future decisions and challenges to be addressed."
Rates are set to increase steadily for the next 10 years, by between 7 and 9 per cent every year.
"We have kept our rates low in the past," Dr Rotarangi said.
"We now have to deal with ageing infrastructure, outdated systems and increasingly tough Government standards, and at the same time make sure we are putting enough money aside to replace and renew our assets in the future.
"We can't pass all these increasing costs onto ratepayers in one hit, so we've prioritised our spending and projects."
Taking on debt will help the council spread the cost over a longer period, with future generations helping pay off the projects and debt.
THREE WATERS REFORM
If the Three Waters reform goes ahead as proposed in July 2024, with a new entity taking over drinking water, storm water and waste water infrastructure and services, then it will dramatically impact Napier City Council's debt levels.
Any debt associated with the council's Three Waters infrastructure will be transferred to the new entity.
That would see well over $100m in debt wiped from council debt levels.
That debt would ultimately be passed onto property owners who will be charged for water services in the region by the new entity, rather than through council rates.