The long-signalled financial headwinds impacting New Zealand’s local government sector have seen Hamilton City Council’s credit rating downgraded by Standard and Poor’s (S and P). The international rating agency says Hamilton is one of a number of councils which have been downgraded, with more to follow as the sector deals with multiple financial challenges.
Council’s rating has moved from AA- negative watch to A+ negative watch, which is a one-notch downgrade. The shift was expected as high interest rates, inflation and depreciation costs began to be felt by councils around the country.
The tangible outcome of the lower credit rating is a relatively small effect on Council’s borrowing costs. S&P expects that a one-notch downgrade in credit rating would amount to an additional $500 interest cost for every new $1 million borrowed, per annum.
Finance and Monitoring Committee Chair Maxine van Oosten said S&P’s rating and commentary reflects the challenges all councils across New Zealand are facing.
“The report's findings are confrontational, but it's a stark acknowledgement that this Council made the tough decisions and did the right thing some months ago through our Long-Term Plan. It will be little comfort to our ratepayers that the report shows those decisions were the right ones, but as S&P notes, we can now start to rebuild.
“We are not the only council facing these monumental challenges or these impacts on our credit rating, but we are always going to be more exposed than many because of the unique challenges we face as New Zealand’s fastest growing city.”
In a report published by S&P in May, the global rating agency foreshadowed sector-wide downgrades, largely due to New Zealand’s local government operating context.
Councils in New Zealand, the report states, have “substantial obligations relative to their revenue sources [that] require them to rely on debt more heavily” than local government organisations internationally.
“Growth councils, for example, are facing pressing infrastructure needs that are resulting in large deficits, and rising borrowing and credit risk. These councils need significant investment in underground assets to allow growth to occur,” S&P said.
This was reconfirmed by S&P today, who said Hamilton City Council’s financial outcomes had weakened as it seeks to address growth pressures.
Hamilton City Council recently set its 2024-34 Long-Term Plan which puts Council on track to have the city’s everyday costs met by everyday revenue from 2026/27. This is echoed in S&P’s commentary which shows Council’s financial position strengthens over the next three years.
“This is why Council landed on the rates increases we did, to balance our books and create cash surpluses to both repay debt and continue to invest in growth,” said Councillor van Oosten.
S&P also acknowledged the Council’s budgets as credible and processes well-established.
“There is stability and credibility in how the city’s monitoring its spending and managing its debt.”