Sector financial position - Craig Stobo, Chairman Mark Butcher , Chief Executive New Zealand Local Government Funding Agency - Local Government ...
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Sector financial position
Craig Stobo, Chairman
Mark Butcher , Chief Executive
New Zealand Local Government Funding AgencyLGFA - December 2014 quarter developments
> New debt issued by LGFA of $295 million vs. average quarterly issuance of $379 million
> $15 million of 2017s, $30 million of 2019s, $50 million of 2020s, $35 million of 2021s and $165
million of 2023s
> Total debt on issue now $4.545 billion
> largest issuer of NZD debt securities after the New Zealand Government
> Long term financing costs continuing to decline (and further falls in January 2015)
> LGFA 2021s yield in December 2014 tender of 4.31% compared to 5.50% in December 2013 tender
> Growing interest in LGFA bonds by offshore investors – over 22% of outstandings
compared to only 2% a year earlier
> Fitch affirm LGFA credit ratings at AA+ and place on positive outlook – linked to the NZ
Government credit ratingLGFA – 2014 year borrowing themes
2014 calendar year issuance by LGFA
Apr-15 Dec-17 Mar-19 Apr-20 May-21 Apr-23 Total
$10 million $45 million $70 million $265 million $280 million $825 million $1495 million
2014 Themes LGFA 2019 yield
• Council refinancing of existing
shorter dated debt rather than
substantial new debt issuance
• Issuance of longer dated debt to
benefit from
o Low nominal interest rates
o Tight credit margins
o Provide certainty of borrowing
costLocal Government Sector – stable to improving credit quality
> Credit Ratings
> Currently 20 councils have credit ratings from either S&P, Fitch or Moody’s
> Ratings range over three notches between AA and A+
> Stable ratings – no downgrades and one upgrade (Western Bay of Plenty
District Council) in 2014
> LGFA ratings affirmed by S&P and Fitch at AA+ and the same as the NZ
Government
> Debt levels below forecast while revenue in line with forecast over 2014
> Councils who are LGFA members - financial covenants improved over 2014Local Government Sector – 2014 financial metrics
Revenue from 2014 Council Annual Financial Statements
> Total revenue increased 4.42% from 2013
> $8.08 billion from $8.437 billion
> Total rates revenue (including metered water charges) increased 4.38%
> $4.925 billion from $4.718 billion
> Range of increases from -5.4% to 12.5%
> NZ population forecast to have increased by 1.53% over the June 2013-14 year (Statistics NZ)
> CPI increase in June 2012-14 year of 1.6% but the inflation increase on council basket of
goods and services was x.xx%
> Total revenue in line with forecasts but rates revenue collected less than in Annual PlanLocal Government Sector – 2014 financial metrics
Assets and Debt Levels from 2014 Council Annual Financial Statements
> Total assets increased by 4.72% from 2013
> $117.407 billion from $112.114 billion
> 14 councils have zero gross debt or gross debt less than $500k
> 30 councils (38% of sector by number) increased their debt in the June 2013-14 year
> Total gross debt (at parent level) of the sector increased 6.81%
> $10.880 billion from $10.186 billion
> Total gross debt (at parent level) of the sector excluding Auckland Council decreased 0.79%
> $5.441 billion from $5.484 billion
> Gross debt levels below forecast
> Gross debt reduced across the total sector (excluding Auckland)
> Lower debt improves financial situation and covenants but does not tell the entire storyCompliance with LGFA Financial Covenants
LGFA member councils as at June 2014
LGFA Financial Covenants – member councils with a credit rating (17) • LGFA councils operating within
Covenant Net Debt / Total Revenue Net Interest / Total Revenue Net Interest / Rates financial covenantsFinancial reporting and prudential benchmarks- 2014
Rates affordability benchmarks Debt servicing benchmark
1. Actual rates income = or < each limit on rates Borrowing cost as % or revenue
2. Actual rates increases = or < each limit on 1. If population forecast to grow at or faster
rate increases than national population growth then < 15%
Outcome: 2. If population forecast to grow less than
national population growth rate then < 10%
• Less than 5 councils did not meet one of the
two benchmarks e.g. penalty rates not included Outcome:
or an additional growth charge not planned • Only two councils did not meet – were high
growth councils and now in low growth
category
Debt affordability benchmarks Debt control benchmark
1. Net debt as a % of total revenue
1. Actual net debt is = or < planned net debt
2. Net interest as a % of total revenue
3. Net interest as a % of rates income Outcome:
Outcome: • All councils met – generally due to lower actual
• Only 2 councils did not meet all the benchmarks – capex relative to planned capex.
forecast to be within in the future and one due to
plan too low
Note: based on 43 LGFA member councilsFinancial reporting and prudential benchmarks- 2014
Operations control benchmark Essential services benchmark
1. Actual net cash flow from operations is = or 1. Capital expenditure on network services = or >
> planned net cash flow from operations depreciation on network services
Outcome: Outcome:
• Large variance in outcomes • Large variance in outcomes
• Volatility due to timing of grants, insurance • Most councils (29) met benchmark
and earthquake recoveries • A single year not a good indicator
• Most (30 councils) met benchmark • Discussion needed over
– quality of capex
– need to have capex > depreciation
Balanced budget benchmark – accounting life of assets
1. Revenue = or > operating expenditure
Outcome:
• 28 councils met benchmark
• Of those who didn’t – most were very close
Note: based on 43 LGFA member councils
to meeting the benchmark so analyse over a
number of years
• Some impact from non cash items e.g. asset
write-downs and higher depreciation chargesThe next six months : Council Long Term Plans 2015-25
Long Term Plan requirements LGFA interest
Under the Local Government Act 2002 • 30-year Infrastructure Strategy – that the council is
each local authority is required to: o providing infrastructure that meets the needs of the
1. A long-term plan must be adopted community
before the commencement of the o meeting or will meet legal requirements
first year to which it relates, and o not under investing in infrastructure
continues in force until the close of • Disclosure of risk management arrangements
the third consecutive year to which o adequate insurance cover
it relates (30 June 2015). • The financial strategy of the council
2. A local authority must, within 1 o planed level of rate increases that are affordable to
month after the adoption of its the community.
long-term plan make its long-term • That the council’s financial projections are consistent
plan publicly available (31 July with LGFA financial covenants over the life of the LTP.
2015). • Consistency with the previous LTP – if there are major
changes what are these?
• Council specific issues.
• Population trends.Summary
• LGFA councils taking advantage of low interest rate environment to prudentially lengthen the term of their debt
• Council borrowings less than planned and sector debt (excluding Auckland) declined in the June 2014 year.
• Credit quality of local government sector is improving
• Debt reduction
• Revenue up
• Interest expense will be lower going forward
• All councils operating within financial covenants and financial headroom for most councils
• All councils are not the same - incorrect to lump all together and to make detailed comparisons or to create
league tables
• Use of financial prudence and benchmarking a positive step for the sector
• Council Long Term Plans and 30 Year Infrastructure Strategy issues
• Demographic issues
• Long term cost of deferrals, underinvestment or lack of renewals
• Prioritisation of projects
• Affordability of rate increases vs. the need to provide infrastructure and maintain service levelsYou can also read
