Sector financial position Craig Stobo, Chairman Mark Butcher , - PowerPoint PPT Presentation

Sector financial position Craig Stobo, Chairman Mark Butcher , Chief Executive New Zealand Local Government Funding Agency

LGFA - 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 rating

LGFA – 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 LGFA 2019 yield 2014 Themes • 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 cos t

Local 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 2014

Local 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 Plan

Local 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 story >

Compliance 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 financial covenants Covenant Net Debt / Total Revenue Net Interest / Total Revenue Net Interest / Rates • Ranges highlights the <250% <20% <30% differences between councils Range of councils compliance -125% to 212% -3.9% to 12.3% -5.6% to 17.1% • Sufficient financial headroom for most councils • Improvement from 2013 • Revenue increased LGFA Financial Covenants – member councils without a credit rating (26) • Capex and debt held in check Covenant Net Debt / Total Revenue Net Interest / Total Revenue Net Interest / Rates • Issues facing councils <175% <20% <25% • Deferrals Range of councils compliance -252% to 159% -13.8% to 8.5% -35.3% to 12.2% • Prioritisation • Underinvestment or lack of renewals Note: these are only the 43 council members of LGFA as at June 2014

Financial 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 than national population growth then < 15% rate increases 2. If population forecast to grow less than Outcome: national population growth rate then < 10% • Less than 5 councils did not meet one of the Outcome: two benchmarks e.g. penalty rates not included • Only two councils did not meet – were high or an additional growth charge not planned 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 Outcome: 3. Net interest as a % of rates income • All councils met – generally due to lower actual Outcome: • 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 councils

Financial 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 charges

The next six months : Council Long Term Plans 2015-25 LGFA interest Long Term Plan requirements • 30-year Infrastructure Strategy – that the council is Under the Local Government Act 2002 o providing infrastructure that meets the needs of the each local authority is required to: community 1. A long-term plan must be adopted o meeting or will meet legal requirements before the commencement of the o not under investing in infrastructure first year to which it relates, and • Disclosure of risk management arrangements continues in force until the close of o adequate insurance cover the third consecutive year to which • The financial strategy of the council it relates (30 June 2015). o planed level of rate increases that are affordable to 2. A local authority must, within 1 the community . month after the adoption of its • That the council’s financial projections are consistent long-term plan make its long-term 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 levels