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 Themes

• Council refinancing of existing

shorter dated debt rather than substantial new debt issuance

• Issuance of longer dated debt to

benefit from

• Low nominal interest rates
• Tight credit margins
• Provide certainty of borrowing

cost

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

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 without a credit rating (26)

Covenant Net Debt / Total Revenue <175% Net Interest / Total Revenue <20% Net Interest / Rates <25% Range of councils compliance

• 252% to 159%
• 13.8% to 8.5%
• 35.3% to 12.2%

LGFA Financial Covenants – member councils with a credit rating (17)

Covenant Net Debt / Total Revenue <250% Net Interest / Total Revenue <20% Net Interest / Rates <30% Range of councils compliance

• 125% to 212%
• 3.9% to 12.3%
• 5.6% to 17.1%
• LGFA councils operating within

financial covenants

• Ranges highlights the

differences between councils

• Sufficient financial headroom

for most councils

• Improvement from 2013
• Revenue increased
• Capex and debt held in

check

• Issues facing councils
• Deferrals
• Prioritisation
• Underinvestment or lack
• f renewals

Note: these are only the 43 council members of LGFA as at June 2014

Financial reporting and prudential benchmarks- 2014

Rates affordability benchmarks

1. Actual rates income = or < each limit on rates 2. Actual rates increases = or < each limit on rate increases Outcome:

• Less than 5 councils did not meet one of the

two benchmarks e.g. penalty rates not included

• r an additional growth charge not planned

Debt affordability benchmarks

1. Net debt as a % of total revenue 2. Net interest as a % of total revenue 3. Net interest as a % of rates income Outcome:

• Only 2 councils did not meet all the benchmarks –

forecast to be within in the future and one due to plan too low

Debt servicing benchmark

Borrowing cost as % or revenue 1. If population forecast to grow at or faster than national population growth then < 15% 2. If population forecast to grow less than national population growth rate then < 10% Outcome:

• Only two councils did not meet – were high

growth councils and now in low growth category

Debt control benchmark

• 1. Actual net debt is = or < planned net debt

Outcome:

• All councils met – generally due to lower actual

capex relative to planned capex.

Note: based on 43 LGFA member councils

Financial reporting and prudential benchmarks- 2014

Balanced budget benchmark

• 1. Revenue = or > operating expenditure

Outcome:

• 28 councils met benchmark
• Of those who didn’t – most were very close

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

Essential services benchmark

• 1. Capital expenditure on network services = or >

depreciation on network services Outcome:

• Large variance in outcomes
• Most councils (29) met benchmark
• A single year not a good indicator
• Discussion needed over

– quality of capex – need to have capex > depreciation – accounting life of assets

Operations control benchmark

• 1. Actual net cash flow from operations is = or

> planned net cash flow from operations Outcome:

• Large variance in outcomes
• Volatility due to timing of grants, insurance

and earthquake recoveries

• Most (30 councils) met benchmark

Note: based on 43 LGFA member councils

The next six months : Council Long Term Plans 2015-25

Long Term Plan requirements

Under the Local Government Act 2002 each local authority is required to: 1. A long-term plan must be adopted before the commencement of the first year to which it relates, and continues in force until the close of the third consecutive year to which it relates (30 June 2015). 2. A local authority must, within 1 month after the adoption of its long-term plan make its long-term plan publicly available (31 July 2015).

LGFA interest

• 30-year Infrastructure Strategy – that the council is
• providing infrastructure that meets the needs of the

community

• meeting or will meet legal requirements
• not under investing in infrastructure
• Disclosure of risk management arrangements
• adequate insurance cover
• The financial strategy of the council
• planed level of rate increases that are affordable to

the community.

• That the council’s financial projections are consistent

with LGFA financial covenants over the life of the LTP.

• 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