11 Jun 2014, 1:05 PM
A newly released independent report from Grant Thornton shows councils are in a sound overall financial position.
Local Government New Zealand (LGNZ) commissioned analysts Grant Thornton to review key financial factors for councils across the country to produce an accurate overall picture of local government financial health.
The report, Local Government: A Financial Snapshot, shows that the vast majority of councils scored well in metrics relating to their balance sheets, such as debt levels relative to their asset base, debt levels relative to their population, ability to repay debt and ability to cover interest (finance cost) obligations.
The report’s “Ability to Service Debt” measure looks at the soundness of a council’s ability to service both its debt principal and interest costs, using an equivalence of operating cash. It shows that, in relation to their ability to service debt costs, all metropolitan and regional councils are sound; and the large majority of rural and provincial councils are all sound or very sound.
LGNZ President Lawrence Yule says the report provides conclusive evidence that the overwhelming majority of councils are in good financial health and are using best-practice financial management.
“The local government ratio of debt to assets is at a prudent 9 per cent. This is the equivalent of a $36,000 mortgage on a $400,000 home,” Mr Yule says.
“Accordingly, the local government sector continues to have the lowest debt of any sector in New Zealand.”
As at 30 June 2012 local government collectively owned $121 billion of infrastructure, investments and other assets against $11 billion debt. In comparison central government owns $241 billion of assets $181 billion debt, while the business sector has assets of about $1,233 billion with liabilities in excess of $800 billion. (See attached infographic from the February 2013 Government report Building Capital Markets.)
Mr Yule stated that it is vital to understand the appropriate context when analysing the financial situation of any local authority. The analysis needs to account for for the different pressures faced by individual councils, for example, whether they are planning for an increasing or decreasing population base.
“Debt per se is not bad. On the contrary it is an appropriate funding tool for intergenerational assets such as roading and water infrastructure,” Mr Yule says.
Any council debt needs to be considered alongside the council’s asset base and it is necessary to look at what specific intergenerational projects the debt is being used to fund, the services councils provide and population change. Local Government: A Financial Snapshot applies appropriate metrics for sector analysis.
“This report sets the record straight about the current council financial position,” Mr Yule says.
“Overall, New Zealand’s councils are in overwhelmingly sound financial health.”