The Dunedin City Council and its Dunedin City Treasury subsidiary have retained their credit ratings from Standard & Poor's, although the retention comes with some concerns about rising debt.
Both have AA/stable and A-1plus ratings.
In reports released yesterday, S&P says the strengths of the council include strong institutional framework, good budgetary flexibility, especially revenue flexibility, and a track record of sound financial management.
The weakness is the high debt level of the council, which S&P expects will remain elevated.
S&P primary analyst Claire Curtin said the stable outlook reflected the view Dunedin would maintain its strong financial position and fiscal discipline.
"We expect that tax-supported debt will remain less than 160% of consolidated revenues.
"The most likely drivers for a negative reassessment of the rating would be an escalation in gross debt levels towards 180% of consolidated revenue.
"Dunedin's debt levels mean there is little upside to the rating."
An improvement in budgetary performance and debt levels would probably be the drivers for positive rating action, she said.
Dunedin's debt burden had risen significantly since 2008 and was forecast by the council to peak at 163% of consolidated revenue in the 2014 financial year.
However, Ms Curtin said the interest burden remained manageable at about 7% of revenue.
"We anticipate that debt levels will not reach the forecast peak, based on the council's history of underspending and reapportioning capital expenditure projects. But it will remain high by historical standards."
The council had undertaken several significant capital expenditure programmes which represented much of the increase in debt levels, she said.
These were the Forsyth Barr Stadium, costing the council about $130 million, and the Tahuna wastewater treatment plant. Other significant projects under way included the redevelopment of the Dunedin Centre and the Otago Settlers Museum.
About 40% of the estimated $568 million of debt outstanding at June 30, 2011, was held outside the core council, Ms Curtin said.
"This proportion will shift significantly during fiscal 2012, when about $130 million of debt relating to construction of the stadium is transferred from the core council to a council-controlled trading operation, Dunedin Venues Ltd."
Ms Curtin noted Dunedin City Holdings, which reports its financial results tomorrow, was undergoing changes to its governance structure after a corporate governance review commissioned by the council.
The changes primarily related to stopping cross-board membership and removing councillors and council staff from boards, as well as changes to the frequency and formality of reporting from city holdings and its subsidiaries to the council.
"We do not consider that such changes, which are yet to be implemented, will weaken the likelihood of extraordinary support to Dunedin City Treasury in a distress scenario," she said.
The Otago Daily Times has received hints from city holdings directors that the accounts this year will be a substantial improvement on past years'.
Profit from continuing operations should be improved once the loss-making Citibus has been removed.
The accounts will show a loss on the sale of Citibus, but it should be a one-off. Citibus inevitably made an operating loss each year, and selling the company will mean the end of losses.
Carbon credits are expected to play a role in the cash flows of city holdings, and the DCC will again get a substantial dividend from the holdings company.
Whether the substantial dividends can be sustained in the future may be revealed tomorrow.
Delta will again be the star of the council-controlled companies with its ability to work out of the region. It has established itself in Christchurch and Nelson.
