In February the Otago Daily Times reported that the credit rating agency Standard and Poor Global (S&PG) had issued a change to their credit rating outlook for Dunedin City Council (DCC) from "stable" to "negative".
S&PG is the largest of the world’s big three credit rating agencies. These three agencies provide 95%+ of all the credit ratings around the globe. A credit rating is simply an indication of the likelihood that an organisation will be able to meet its future debt obligations.
The DCC is rated "AA". However S&PG’s "negative" outlook notice is a specific and deliberate indication by S&PG that the DCC’s credit rating may fall.
This is a far more serious development than it might first appear to be. It is not just an indication that the DCC might simply end up paying more for its debt (although it probably will). Rather, it is an indication by S&PG that the Dunedin community might be heading towards economic calamity.
To understand this dramatic prediction, it is necessary to appreciate the fundamental difference between corporate and government debt and how they are rated.
S&PG rate most of the world’s larger corporations. The process is both formal and exhaustive. Thus, while the credit ratings agencies have got it wrong on occasion, the overall statistics of corporate credit ratings and subsequent debt default show a strong and clear linkage. This is why these agencies continue to be paid handsomely for their services by lenders.
S&PG also rate the world’s government entities using the same system, but there is an important difference. Within the corporate world, fiscal prudence, risk of default and thus credit rating are very closely related. This is not the case with government debt, for the very simple reason that governments that are in risk of default can go to a third party (the taxpayer/ratepayer) and forcibly extract the necessary money to avoid that default from them.
The debt gets paid, the credit rating agency does not care how. A high credit rating for a government entity does not indicate fiscal prudence.
It is this capacity to extract money from its citizens that underlies the high credit rating of local government debt.
There is a common misconception that national government backs local government debt.
But central government has no obligation to "bail out" defaulting councils. It does not, for example, guarantee the Local Government Funding Agency. It is therefore the domestic ratepayer that stands as sole guarantor for the DCC’s debts.
But the domestic ratepayer can only stand guarantor to the degree that they are able to, and there are limits to what they can pay. There are signs that the DCC’s demands are already exceeding these limits; and that they will do so even more in the future. My own rates have nearly quadrupled in the last 20 years. Many householders are now facing rates bills of over $4000.
The projected increase in rates this year is 17.5%, but if the DCC’s increased debt is also factored in, then this figure is in the region of 30%+. This is an increase in a single year that is more than the entire rates bill for the average household of some 20 years ago. Projected DCC/ORC rates and debt increases indicate an average household rates bill of $8000+ within a decade.
These demands fall hardest on poorer households, those on fixed income, and those who pay rent — while landlords may choose not to pass on their recent income tax break to their tenants, you may be sure that any increase in rates will be passed on.
Further massive fiscal bombs lurk in the DCC’s holding company’s accounts. In the notes to the accounts of DCHL (The DCC’s holding company) for 2023 lies this innocuous looking statement: "Note 34. On 8 September 2023, Dunedin City Treasury Ltd increased the amount which it can borrow under its Multi-Option Instrument Issuance Agreement from $1.2 billion to $1.6b. On 8 September 2023, Dunedin City Holdings Ltd increased its Uncalled Capital with Dunedin City Council from $1.2b to $1.6 b."
By these arrangements the DCC have circumvented Section 62 of the Local Government Act that prohibits public guarantees for trading companies.
They have thereby put the ratepayer "on the hook" for the unknown fiscal liabilities of Dunedin City Treasury Ltd and their mysterious "Multi-Option Issuance Agreement".
DCHL can call this capital at any time and the DCC has to pay, except of course that they don’t have $1.6b cash on hand ... but the ratepayers do ... maybe. The individual Dunedin household’s share of this "instant liability" will be a bill for some $30,000 — and they will have to pay it — or lose their home.
These two events occurring within the Dunedin community may well finally be the precursors to a DCC debt default. The mayor and his councillors may then go forth and demand payment from the raging mob ... but personally I wouldn’t recommend it.
Such an analysis might be dismissed by the DCC and DCHL as the ravings of an out of touch academic. Except it’s not me that’s saying it — it is S&PG, the world’s largest credit rating agency that’s saying it.
That is what their issuance of a "negative" credit rating outlook for the DCC really means.
— Robert Hamlin is a senior lecturer at the Department of Marketing, University of Otago. He is commenting in a personal capacity.
