Auckland Council trying to avoid rating downgrade

The Herald reports:

Auckland Council is heading towards a financial crisis over its debt position, says mayoral candidate and businesswoman Victoria Crone.

She says a decision by councillors today to use a “rainy day” fund to reduce the risk of a credit-rating downgrade and higher rates is a big concern.

“This is a massive decision,” she said of a plan to draw down $200 million over two years to manage the council’s debt ratios.

At today’s finance and performance committee, councillors are expected to increase rates by 2.4 per cent this year and take steps to manage its $7.5 billion debt.

Credit rating agencies have warned the council of a rating downgrade if its debt-to-revenue ratio approaches 270 per cent.

Mayor Len Brown’s latest budget forecasts a debt-to-revenue ratio of 265 per cent.

A one-notch downgrade, he said, would lead to an $11 million rise in interest costs.

Interest costs are funded by rates. A $14 million increase in running costs equates to about a 1 per cent rates rise.

To create headroom, council officers have suggested drawing down $100 million over each of the next two years from a diversified investment portfolio, currently valued at $335 million, to manage the debt ratios.

So basically the Council is borrowing so much that they are on the verge of a credit downgrade which would increase interest rates and result in ratepayers paying an extra 1% (on top of the 9.9% average increase).

To avoid that, they don’t decide to borrow less, but instead to start liquidating assets.

This won’t end well for ratepayers.