Photo: Tim Gouw, pexels.com
Waipa District Council’s debt level on June 30, 2022, was $149.5 million. A year later it was $226 million, a rise of 51 per cent.
By June it is projected to be $296.8 million, a rise of 31 per cent. The Council’s plan for 2024-25 has the debt level rising to $397.3 million at up another 34 per cent.
Susan O’Regan
Mayor Susan O’Regan said in a statement recently that it was ‘inching towards its debt ceiling’. I wouldn’t describe a rise in the level of debt of 166 per cent over three years as ‘inching’. It would be better described as sprinting.
This got me thinking about debt ceilings in general. The debt ceiling that gets the most publicity is the one applied to federal debt in the United State. It seems to get neat this ceiling every six months or so. Alarmist stories fill the media of the dire consequences if the US breaches this ceiling.
A political drama unfolds and with days, or sometimes hours left before the deadline, the ceiling is increased. This has now happened 74 times in the US in the last 40 years. The political drama has become a political farce and the US debt ceiling isn’t taken seriously by financial markets.
The debt ceiling that the Waipa District Council faces isn’t a farce. It is a serious limit with real consequences. The maximum level of the limit is not set by council. It is set by the New Zealand Local Government Funding Agency. The level is currently 290 per cent of the council’s revenue. Waipa gets almost all the money it borrows from this agency.
Peter Nicholl
Waipa has prudently imposed a tighter borrowing limit on itself, at 250 per cent of revenue. The council can change this limit, and they did two years ago when they raised it from 150 per cent. It is unlikely to do this as they need some borrowing space in case a disaster or emergency.
Is the rapid rise in Waipa’s debt a problem? Clearly, their debt levels can’t continue to rise by 30 per cent a year beyond 2024-25 or they will breach the agency limit. Waipa says the debt build-up is temporary and caused by the rapid growth. Councils in other growing areas, like Hamilton and Tauranga, are facing the same rapid build-up in debt. The costs of putting in place the infrastructure that growth requires – roads, storm-water etc – fall on councils at the beginning of a development cycle.
The council will receive revenue from developers and builders in the form of development contributions and building resource fees later in the cycle.
In these circumstances, it is appropriate for a council in a growth-area like Waipa to use borrowing rather than rate increases to finance this development infrastructure. But when the development revenue streams begin to come in over the next few years, the council’s debt level should fall, both as a ratio of revenue and in absolute terms. The debt strategy looks sensible. But we will only know for sure in three of four years.
It is the latter part of this cycle that governments and councils often get wrong. As the extra revenue finally comes in, they are tempted to spend.
Sprinting. Photo: Tim Gouw, pexels.com
