Friday, October 4, 2013

Standard & Poor's Likes Council Debt

In the NZ Herald today there is a report of a mayoral campaign debate last night. Part of the debate related to the Auckland Council debt - which apparently has increased from $3.9 billion at the start of Auckland council's first term in operation - to $6.7 billion now.

If the NZ Herald's report of what Mayor Len Brown said about Council debt is accurate, and that it reflects Mayor Brown's view of the world of bank loans, then Auckland has a serious problem....

"He maintained it was within a low debt-to-equity ratio of about 12-13 per cent, a high AA credit rating from Standard & Poor's and a case of using a strong balance sheet to build appropriate infrastructure...."

This sort of language may be useful when talking about a commercial business, but it's not appropriate when talking about a local council, which is reliant upon property rates (property taxes) for revenue. Sure there's a lot of rhetoric along the lines that "council services should be run like a business" - Watercare has proudly retained in its Statement of Corporate Intent a performance target that reads something like: "To be a successful business" - and we can all agree that Council should be run efficiently.

But is going into debt on a huge scale businesslike behaviour - let alone being in the best interests of Auckland ratepayers?

As individuals we are all advised that our top financial priority should be to pay off debt. Especially the mortgage on the house. And if push comes to shove we can sell the house - and pay back any mortgage.

But could Auckland Council sell its Mangere Waste Water Treatment Plant to pay off a billion in debt? Could it flog off Queens Wharf? Or some of its arterial roads. Or a couple of Regional Parks?

Not unless it wanted a riot. That is why talking of a "low debt-to-equity" ratio is meaningless. Council's equity is public equity - assets that have been built up over generations. Talk of "low debt-to-equity" ratios is the same as saying: "my policy is to sell off Council assets". Really? Don't think so.  

Then there are the words: "case of using a strong balance sheet to build appropriate infrastructure...". This is another way of saying: "low debt-to-equity".  Auckland Council's "strong" balance sheet is strong because of the fair value of public assets: parks, road networks, stormwater networks, sewer networks, water networks and supply and treatment infrastructure, buildings, land, wharves, the Port, and so on.

But would we sell them? Would we sell any of them? To pay off the odd billion dollar bank loan? Don't think so. Well - I don't think we would plan to sell them off.

And this brings me to the heart of my concern with Mayor Brown's statement and point of view. These are the words: "a high AA credit rating from Standard & Poor's..."

And here I quote selectively from Jason Hackworth, The Neoliberal City:

"bond-rating firms, such as Moody's Investors Services and Standard & Poor's (S&P), are perhaps the single most influential institutional forces in determining the quality, quantity, and geography of local investment in the developed world..... Cities... depend on the bond market for the provision of basic infrastructure, services and economic development. Their ability to enter this market is determined almost entirely by bond-rating agencies that draft credit reports for investors..."

In plain language: for Auckland Council to stand a decent chance of getting a loan at a reasonable interest rate, potential investors need to get a good report from Standard & Poors.

So how does S&P go about preparing their report? Back to Jason Hackworth, The Neoliberal City:

"Bond-rating agencies evaluate the creditworthiness of municipalities and other public authorities trying to issue long-term debt. The bond-issuing authority (in this case Auckland Council) hires an agency (eg S&P) as soon as a decision to issue debt is made.... the agency will request an internal financial statement from the issuing city and combine this information with its own databases to arrive at a rating. The ratings are based on the municipality's financial history (past and present debt), its economic outlook (whether growth is going to occur), and its administrative structure and history (whether there is a history of mismanagement). The final rating is meant to be a reflection of how likely as given municipality is to repay its debt in a timely manner...."

Two or three decades ago, Council loans came from local banks which tended to benefit from positive political and economic conditions in the local council and within the geographical area it serviced. But after some of those municipalities defaulted on their loans (eg in the USA), the Council loans business has shifted to other institutional creditors, keen to invest, Keen to benefit from the "safe as houses" interest revenues from "businesslike Councils",  but reliant upon the reports from the likes of Moody's and S&P.

Another change in the last two decades is the pressure on Councils to become entrepreneurial, and generate growth related revenues to supplement rates revenues. This pressure is partly due to increasing costs of Council services, inability of ratepayers to pay ahead of inflation increases, and desire of investors to put their money where the return is greatest. Hence the rating reports.

The Mangawhai fiasco is a case in point. Kaipara District Council required a loan to develop sewage infrastructure. It took an entrepreneurial risk, assumed a high rate of development growth in Mangawhai with associated revenue streams, went to market, got a good rating report(the rating agency "liked" the plan), found an institutional investor, and took out the loan.

In that case, both the rating agency and the bank assumed that the rating revenue base for Kaipara District Council was in effect the collateral or security on the loan. Hence the "safe as houses" assessment.

The reason Auckland Council has got an AA credit rating from S&P is because Auckland Council has adopted a high growth strategy (like Kaipara District Council did), and is spending money (bank loans) like there is no tomorrow. And of course the investors love it, as does Standard & Poors. They "like" Auckland Council. They "like" that investors can make a good return out of Auckland.

Is it fair to commit Auckland Council and ratepayers to a high risk entrepreneurial growth path and the debt that goes with that?  By all means borrow money for essential infrastructure projects that are demonstrably supported by ratepayers - and maintain a good credit rating by keeping the level of borrowing low. But don't turn Auckland into someone else's business opportunity, their profit centre, so they can milk ratepayers.

3 comments:

Paul Simmonds said...

Joel,
In the early 1990's NZ led the western world in the concept of 'user pays' - in as much as this meant that public expenditure ought to be at least in-part recoverable, and where practicable, from those who are the (beneficial) users of the end product/service. I was living in Canada at the time and the issue of /national debt was so pressing that a 'debt clock' displayed the accelerating indebtedness of central government, by the minute.
N.Z. was recognised by fiscally responsible provinces such as Alberta, as having exactly the fiscal management approach that would sustain necessary routine expenditures financed by local taxes (rates). Where longer-term, deeper infrastructure investment was required, then borrowing should be against a measurable repayment plan - in the current case of Auckland, this would imply a toll on the Waterview Connector.

In conclusion, where have we gone so wrong, and how has this happened so suddenly? Accelerated Auckland Council borrowing programme against what is a long-term shrinking commercial rates tax base is a fiscal time-bomb, the fuse only being delayed for as long as rate-payers can stomach the outgoings; with a demographic bulge pushing those ageing ratepayers into downsizing/lower rates contributions just as the borrowings require repayment, who is going to cough up the cash when len Brown is long gone?

Anonymous said...

Joel
You are completely correct,

1. Councils are "desperate" to find new ways to extract income from ratepayers other than rates.

2. They fail to look at the costs to operate a Council and ensure it is efficient, as now required by the LG2012 amendment Act.

3. Perhaps 20-25% of Councils in NZ have this: borrowing, rates costs, infrastructure spending mindset entrenched. All that is going to come from it is huge rate increases and sooner or later there will be more Kaipara's

4. No Councillor, Mayor of LG staff member is liable for the debt, bad decisions, harm done to all personally as is the case possibly in the private sector, yet they claim "pay parity" for example.

5. The checks and balances are gone in way to many councils where the borrow/spend cycle is out fo control.

6. The AKL 2012-2022 10 yr plan shows that the current $6.8bn debt will be $12bn by 2022 @ 6% interest that is $1.1m a day in interest now and $2m a day then, cant see how rates will remain at or less that CPI, can you?

7. The debt cycle now in progress in AKL (and elsewhere to) can only end badly for ratepayers, rates and ratepayer property is the security and sooner or later the penny will drop

8. In the LG Act it says that there is a banker exemption, whatever a bank does w=right/wrong indifferent the paperwork and security will never fail, that means even if the lending is completely irresponsible then the bank still has its security and can not loose money on it EVER!

9. The Auditors in Kaipara (Audit NZ) have been evicted off the job, the reporting was a significant part of the issue, i.e. a failure to report the future debt committed to and the huge cost overruns at all in the annual report.

If only Joe-public realised what some of these Coucnil's are really doing to the future well-being of our future, children, grandchildren ... by the time the masses realise, by the time the politicians "see it" it will be to late. The lesson from Kaipara is there for all to see and learn something from but to do otherwise means a disaster will be fall all ratepayers. That process will start with commissioners and the eviction of elected members, large rates hike, perhaps a law change to make everything legal as is happening in Kaipara.

TERMITE - Tauranga

cordelia said...

Joel,
Great article; thanks.
This shows that the super-city council is just another obedient player in the global Ponzi-scheme economy. And that all the talk of 'sustainable city' and social equity is for the gullible.
--Dushko

Friday, October 4, 2013

Standard & Poor's Likes Council Debt

In the NZ Herald today there is a report of a mayoral campaign debate last night. Part of the debate related to the Auckland Council debt - which apparently has increased from $3.9 billion at the start of Auckland council's first term in operation - to $6.7 billion now.

If the NZ Herald's report of what Mayor Len Brown said about Council debt is accurate, and that it reflects Mayor Brown's view of the world of bank loans, then Auckland has a serious problem....

"He maintained it was within a low debt-to-equity ratio of about 12-13 per cent, a high AA credit rating from Standard & Poor's and a case of using a strong balance sheet to build appropriate infrastructure...."

This sort of language may be useful when talking about a commercial business, but it's not appropriate when talking about a local council, which is reliant upon property rates (property taxes) for revenue. Sure there's a lot of rhetoric along the lines that "council services should be run like a business" - Watercare has proudly retained in its Statement of Corporate Intent a performance target that reads something like: "To be a successful business" - and we can all agree that Council should be run efficiently.

But is going into debt on a huge scale businesslike behaviour - let alone being in the best interests of Auckland ratepayers?

As individuals we are all advised that our top financial priority should be to pay off debt. Especially the mortgage on the house. And if push comes to shove we can sell the house - and pay back any mortgage.

But could Auckland Council sell its Mangere Waste Water Treatment Plant to pay off a billion in debt? Could it flog off Queens Wharf? Or some of its arterial roads. Or a couple of Regional Parks?

Not unless it wanted a riot. That is why talking of a "low debt-to-equity" ratio is meaningless. Council's equity is public equity - assets that have been built up over generations. Talk of "low debt-to-equity" ratios is the same as saying: "my policy is to sell off Council assets". Really? Don't think so.  

Then there are the words: "case of using a strong balance sheet to build appropriate infrastructure...". This is another way of saying: "low debt-to-equity".  Auckland Council's "strong" balance sheet is strong because of the fair value of public assets: parks, road networks, stormwater networks, sewer networks, water networks and supply and treatment infrastructure, buildings, land, wharves, the Port, and so on.

But would we sell them? Would we sell any of them? To pay off the odd billion dollar bank loan? Don't think so. Well - I don't think we would plan to sell them off.

And this brings me to the heart of my concern with Mayor Brown's statement and point of view. These are the words: "a high AA credit rating from Standard & Poor's..."

And here I quote selectively from Jason Hackworth, The Neoliberal City:

"bond-rating firms, such as Moody's Investors Services and Standard & Poor's (S&P), are perhaps the single most influential institutional forces in determining the quality, quantity, and geography of local investment in the developed world..... Cities... depend on the bond market for the provision of basic infrastructure, services and economic development. Their ability to enter this market is determined almost entirely by bond-rating agencies that draft credit reports for investors..."

In plain language: for Auckland Council to stand a decent chance of getting a loan at a reasonable interest rate, potential investors need to get a good report from Standard & Poors.

So how does S&P go about preparing their report? Back to Jason Hackworth, The Neoliberal City:

"Bond-rating agencies evaluate the creditworthiness of municipalities and other public authorities trying to issue long-term debt. The bond-issuing authority (in this case Auckland Council) hires an agency (eg S&P) as soon as a decision to issue debt is made.... the agency will request an internal financial statement from the issuing city and combine this information with its own databases to arrive at a rating. The ratings are based on the municipality's financial history (past and present debt), its economic outlook (whether growth is going to occur), and its administrative structure and history (whether there is a history of mismanagement). The final rating is meant to be a reflection of how likely as given municipality is to repay its debt in a timely manner...."

Two or three decades ago, Council loans came from local banks which tended to benefit from positive political and economic conditions in the local council and within the geographical area it serviced. But after some of those municipalities defaulted on their loans (eg in the USA), the Council loans business has shifted to other institutional creditors, keen to invest, Keen to benefit from the "safe as houses" interest revenues from "businesslike Councils",  but reliant upon the reports from the likes of Moody's and S&P.

Another change in the last two decades is the pressure on Councils to become entrepreneurial, and generate growth related revenues to supplement rates revenues. This pressure is partly due to increasing costs of Council services, inability of ratepayers to pay ahead of inflation increases, and desire of investors to put their money where the return is greatest. Hence the rating reports.

The Mangawhai fiasco is a case in point. Kaipara District Council required a loan to develop sewage infrastructure. It took an entrepreneurial risk, assumed a high rate of development growth in Mangawhai with associated revenue streams, went to market, got a good rating report(the rating agency "liked" the plan), found an institutional investor, and took out the loan.

In that case, both the rating agency and the bank assumed that the rating revenue base for Kaipara District Council was in effect the collateral or security on the loan. Hence the "safe as houses" assessment.

The reason Auckland Council has got an AA credit rating from S&P is because Auckland Council has adopted a high growth strategy (like Kaipara District Council did), and is spending money (bank loans) like there is no tomorrow. And of course the investors love it, as does Standard & Poors. They "like" Auckland Council. They "like" that investors can make a good return out of Auckland.

Is it fair to commit Auckland Council and ratepayers to a high risk entrepreneurial growth path and the debt that goes with that?  By all means borrow money for essential infrastructure projects that are demonstrably supported by ratepayers - and maintain a good credit rating by keeping the level of borrowing low. But don't turn Auckland into someone else's business opportunity, their profit centre, so they can milk ratepayers.

3 comments:

Paul Simmonds said...

Joel,
In the early 1990's NZ led the western world in the concept of 'user pays' - in as much as this meant that public expenditure ought to be at least in-part recoverable, and where practicable, from those who are the (beneficial) users of the end product/service. I was living in Canada at the time and the issue of /national debt was so pressing that a 'debt clock' displayed the accelerating indebtedness of central government, by the minute.
N.Z. was recognised by fiscally responsible provinces such as Alberta, as having exactly the fiscal management approach that would sustain necessary routine expenditures financed by local taxes (rates). Where longer-term, deeper infrastructure investment was required, then borrowing should be against a measurable repayment plan - in the current case of Auckland, this would imply a toll on the Waterview Connector.

In conclusion, where have we gone so wrong, and how has this happened so suddenly? Accelerated Auckland Council borrowing programme against what is a long-term shrinking commercial rates tax base is a fiscal time-bomb, the fuse only being delayed for as long as rate-payers can stomach the outgoings; with a demographic bulge pushing those ageing ratepayers into downsizing/lower rates contributions just as the borrowings require repayment, who is going to cough up the cash when len Brown is long gone?

Anonymous said...

Joel
You are completely correct,

1. Councils are "desperate" to find new ways to extract income from ratepayers other than rates.

2. They fail to look at the costs to operate a Council and ensure it is efficient, as now required by the LG2012 amendment Act.

3. Perhaps 20-25% of Councils in NZ have this: borrowing, rates costs, infrastructure spending mindset entrenched. All that is going to come from it is huge rate increases and sooner or later there will be more Kaipara's

4. No Councillor, Mayor of LG staff member is liable for the debt, bad decisions, harm done to all personally as is the case possibly in the private sector, yet they claim "pay parity" for example.

5. The checks and balances are gone in way to many councils where the borrow/spend cycle is out fo control.

6. The AKL 2012-2022 10 yr plan shows that the current $6.8bn debt will be $12bn by 2022 @ 6% interest that is $1.1m a day in interest now and $2m a day then, cant see how rates will remain at or less that CPI, can you?

7. The debt cycle now in progress in AKL (and elsewhere to) can only end badly for ratepayers, rates and ratepayer property is the security and sooner or later the penny will drop

8. In the LG Act it says that there is a banker exemption, whatever a bank does w=right/wrong indifferent the paperwork and security will never fail, that means even if the lending is completely irresponsible then the bank still has its security and can not loose money on it EVER!

9. The Auditors in Kaipara (Audit NZ) have been evicted off the job, the reporting was a significant part of the issue, i.e. a failure to report the future debt committed to and the huge cost overruns at all in the annual report.

If only Joe-public realised what some of these Coucnil's are really doing to the future well-being of our future, children, grandchildren ... by the time the masses realise, by the time the politicians "see it" it will be to late. The lesson from Kaipara is there for all to see and learn something from but to do otherwise means a disaster will be fall all ratepayers. That process will start with commissioners and the eviction of elected members, large rates hike, perhaps a law change to make everything legal as is happening in Kaipara.

TERMITE - Tauranga

cordelia said...

Joel,
Great article; thanks.
This shows that the super-city council is just another obedient player in the global Ponzi-scheme economy. And that all the talk of 'sustainable city' and social equity is for the gullible.
--Dushko