Earlier this week, S&P Global Ratings lowered its credit ratings of 18 councils and three council-controlled organisations.
The rating of Dunedin City Council and its financing arm, Dunedin City Treasury Ltd, dropped from AA to AA- and the outlook for both organisations remained negative, while many others stabilised.
In its report, S&P Global said the negative outlook reflected its view the council’s budgetary outcomes could underperform expectations in the next two years, "resulting in higher debt and weaker liquidity".
The rating could lower further if the council’s deficits did not narrow as expected, but might rise if the council’s fiscal outlook improved "broadly in line" with S&P’s forecasts.
Cr Sophie Barker said the downgrade was no surprise, especially as councils across the country struggled with infrastructure needs and associated funding.
"We’re always going to be concerned — any downgrade in credit ratings leads to an increase in interest costs, which impacts directly on ratepayers."
The council needed to make some "tough decisions" about borrowing for core infrastructure and other projects, she said.
"We need to face facts about creating a burden for future generations when we make capital project decisions.
"Most of council’s borrowing is related to core infrastructure, like roads, water and waste facilities — which we absolutely have to invest in.
"We do need to look at other borrowing very seriously."
Mayor Jules Radich said "unfunded mandates" such as Three Waters had forced councils across New Zealand to raise rates and debt — the downgrade should not be a surprise.
"Infrastructure upgrades are essential and form the great bulk of council expenditure.
"However, I believe that we can get down to a single-digit rate rise and a flattened debt graph by taking some of the excellent suggestions we have received from residents on board."
Cr Steve Walker said ratepayers should be concerned the council, like others around the country, was being asked to do more "with far less, in terms of financial help from central government".
"New legislative requirements set by the water regulator demand, for good reason, that we manage and invest in the more than $4 billion worth of water services infrastructure that we as a city own, much of which needs upgrading or replacement — that comes with rate and debt implications that can’t be avoided," he said.
Cr Lee Vandervis said he had anticipated the downgrade, which highlighted how vulnerable Dunedin was to interest costs while carrying high debt.
"Council and our council companies are borrowing way too much and often getting poor value for spending, small examples being the $600,000+ cost of the George St seesaw ‘playground’ or the $750,000 toilets," he said.
Council chief financial officer Carolyn Allan said the downgrade had been signalled well in advance and reflected rising debt levels across the sector — which were in part due to increasing investment in infrastructure renewals, she said.
"Past under-investment, population growth and more demanding national standards are also contributing."
She expected the impact on the council’s borrowing costs to be small.
"If Dunedin City Treasury were to borrow an additional $150 million, the additional interest costs arising from the downgrade would amount to $75,000 per annum based on long-term borrowing from the Local Government Funding Agency.
"For funds borrowed via debt capital markets via banks, the additional margin could be a little wider but is unknown at this stage."
Last month, S&P Global lowered its institutional framework assessment for local councils
to "very predictable and well balanced", the second-highest assessment on its six-point scale.
"In our view, the local council sector’s revenue is insufficient to fund its growing expenditure responsibilities.
It had "larger cash deficits and structurally higher debt levels than we have previously seen".
