Credit Highlights

The New Zealand local government sector's ability and capacity to raise revenue isn't keeping pace with its growing operating and capital expenditure needs.  This imbalance has led to the sector becoming highly indebted. We believe the sector has a bigger imbalance between revenue and expenditure than in the past. We also think upcoming water reforms ("Local Water Done Well") will have mixed credit implications and aren't likely to result in substantial debt relief. In some cases, options available to councils could exacerbate widening revenue and expenditure imbalances and sectorwide debt. Therefore, we have lowered our institutional framework assessment to very predictable and well balanced from extremely predictable and supportive. We project sectorwide debt to be structurally higher than in other jurisdictions with the highest institutional assessment.

The central government's Local Water Done Well reforms and associated laws give councils various options to implement over the next three years.  Some options (e.g., formation of regional water utilities) could help alleviate financial pressure on individual councils but are likely to weigh on councils' contingent liabilities, particularly if the utilities are highly indebted. Other options (e.g., councils maintaining the status quo or creating wholly controlled subsidiaries to house their water services) are unlikely to alleviate financial pressure and in some cases could exacerbate it.

We forecast elevated deficits after capital accounts, averaging about 20% of revenue, over the next three years.  Updated budgetary forecasts suggest deficits after capital accounts will be much greater than we previously forecast. Over recent years, councils have increased their capital budgets to deliver infrastructure for growth, improve quality, and cover rising costs. The sectorwide deficit in fiscal 2024 (ended June 30, 2024) was exceptionally large at about 21% of total revenue. This was much higher than previous budget documents indicated.

Lifting self-imposed debt ceilings will generally be negative for credit quality.  Local government debt has increased significantly in recent years, with the sector's total tax-supported debt rising to 197% of operating revenue in fiscal 2024. To cater for rising indebtedness in the system, the New Zealand Local Government Funding Agency Ltd. (LGFA) in August 2024 changed its borrowing protocols. LGFA can provide debt financing to new council-controlled water entities (that parent councils financially backstop) at potentially much higher leverage ratios than apply to councils. Additionally, LGFA's board will allow "high growth" councils a covenant of net debt to total revenue of up to 350%, up from 280%.

Trend: Stable

The mismatch between the capacity to raise revenue and the need to fund growing expenditure will remain wide. As a result, sectorwide debt levels will be much higher than in many other developed country jurisdictions. Further, policy settings will continue to evolve in ways that have less predictable effects on council credit quality than in the past. Counterbalancing this are the sector's enduring strengths, including high levels of transparency and accountability and strong revenue collection powers.

Downside

Further increases in expenditure responsibilities without an accompanying increase in revenue-raising capacity, or limits on the ability to raise revenue, could accelerate growth in local government debt and further weaken our assessment of the system's revenue and expenditure balance.

Upside

For New Zealand to improve its institutional framework, the local government sector needs to sustainably address the gap in its revenue and expenditure, which would allow councils to reduce sectorwide debt. This could occur if the relationship between central and local government changes, particularly regarding funding mechanisms and spending rules, leading to a sustainable improvement in budgetary results for local councils. We view this as unlikely in the current policy environment.

Predictability Of The Framework

Laws governing New Zealand's local government system are generally predictable and supportive

The system reflects the New Zealand sovereign's historically stable policy environment. Reforms and policy changes usually evolve over long time frames and undergo rigorous consultation and development to ensure their suitability.

However, we see a more volatile policy environment than previously.  This reflects the quick passage and accelerated repeal of the former government's water-related and resource management legislation, cancellation of various Crown grant programs coupled with a rise in unfunded mandates, and recent announcements surrounding infrastructure financing solutions. These changes can materially impact council financial outcomes, making it difficult for S&P Global Ratings and individual councils to produce accurate financial forecasts.

Financial and credit effects of major water reforms are uncertain.  The Crown introduced its "Local Water Done Well" reforms in February 2024 after repealing the former government's policies. The legislation gives councils several options to implement by July 1, 2028. These measures are likely to have mixed effects on finances. Several may elevate some financial pressure on councils; others may not significantly affect their financial positions. Additionally, when combined with changes in the LGFA's borrowing protocols, we see the measures offering little advantage for the sector's indebtedness. Changes to major policies have also created difficulties for local government budgeting and reporting, with statutory deadlines and requirements easing in recent years (see Transparency and Accountability for details).

Uncertainty isn't restricted to water policy.  The Resource Management Act (RMA), which governs a national strategy for how land and natural resources are used, has also undergone changes aimed at improving the system. The Crown has a three-phase approach to reforming the RMA. Phase 1, in December 2023, was to repeal the former government's RMA reforms, which were only enacted in August 2023. The Crown is consulting on the second phase, which introduces a raft of "quick fixes," before implementing major updates in 2026 as part of the third phase.

The policy environment was previously relatively stable.  The last major reforms occurred in the late 1980s and early 1990s when the Crown amalgamated 850 public entities into 86 local governments. Other reforms of note include the forced amalgamation of Auckland's eight individual councils in 2010. The Auckland amalgamation appears to have improved the region's historically fragmented administration and planning. It was flagged well in advance with a Royal Commission established in 2007 that reported its findings in 2009. After several public discussions and consultations, parliament passed the amalgamation legislation in late 2009. There are now 78 local governments in New Zealand.

New Zealand local governments are established under the Crown's Local Government Act, rather than the Constitution as in some international peers.  This gives the sector less ability to withstand unwanted changes than its peers. Local governments have some ability to soften negative consequences of reform, individually and through Local Government New Zealand, the local government association of New Zealand. The Crown can consult with the association or individual local governments, but local governments have no legislative power to reject reforms or demand additional funding to cover new mandates.

The water reform process demonstrated local councils' ability to influence but not prevent Crown policy.  Local councils' suggestions appear to drive key principles of Local Water Done Well, including criticisms raised by many around the former government's legislation. These include issues such as water quality and regulation, ownership and control of water assets, and co-governance of water services. Local Water Done Well has ceded more control to local governments, allowing councils and ratepayers to adopt their own option to manage water assets. The sector was also able to influence some aspects of the former government's "Affordable Waters" ("Three Waters") reform program to increase local influence and stagger the implementation timeline. Ultimately, though, councils must implement Crown policies because they are not protected by a constitution.

Revenue And Expenditure Balance

Cash deficits and debt are much higher than previously expected

This indicates local councils don't have the capacity to raise enough revenue to fund growing expenditure, despite having strong revenue and expenditure autonomy. Affordability concerns have resulted in increases in property rates in line with, or below, inflation in recent years (prior to large increases in fiscal 2024), during a period of record capital spending and rising interest costs, weighing on budgetary deficits across the sector. We forecast deficits after capital accounts across the sector to be about 21% of total revenue in 2024 and debt at 197% of operating revenue. These outcomes are much worse than we anticipated in our last review. They are also much worse than in other comparable systems.

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General property rates are New Zealand local governments' key source of income, but increasing them significantly can be difficult.  While individual local governments set rates and Crown policies do not limit them, there can be affordability concerns for ratepayers. This was evident in fiscal 2024, when many councils imposed double-digit rate increases for the first time in years. Local governments have extraordinarily strong abilities to collect rates because they can recover unpaid rates ahead of residents' mortgages (i.e., local governments outrank banks and finance companies) and can seek court approval to sell properties to claim unpaid rates. These key strengths underpin New Zealand local councils' creditworthiness.

Rates are a stable revenue source and allow councils to post solid cash operating surpluses, even in major economic downturns.  Operating margins in New Zealand have been a historic strength and have allowed councils to reduce debt quickly during consolidation phases. Unlike many peer systems, in New Zealand the Crown, not councils, is responsible for major operating expenditure for health, education, and social welfare. However, in fiscal 2024, several councils plunged into operating deficit for the first time in decades despite large rate increases, with expenses rising much more than anticipated. Interest expenses, for example, can be materially higher in New Zealand than in other jurisdictions. Higher interest expenses are weighing on operating margins as debt rises.

New Zealand local governments have large infrastructure responsibilities.  Moreover, they consider using debt to share the cost of constructing infrastructure over generations that make use of or benefit from them. This is commonly referred to as "intergenerational equity." In other words, for a piece of infrastructure that will last 30-50 years, local governments borrow to fund the upfront cost of construction and charge ratepayers over the next few decades to repay the debt. This approach means New Zealand's local government sector debt is higher than that of all peers.

We estimate the sector's debt was about NZ$33 billion in 2024, up significantly from NZ$20 billion in 2020).  We expect sectorwide debt to increase as councils' operating expenses rise rapidly and councils continue to expand infrastructure plans. Capital expenditure on water assets represents around half of total infrastructure spending, which shows the significance of water reforms.

There is no legislative limit on debt.  All local governments have internal limits published in their long-term plans, annual plans, and annual reports that Audit New Zealand audits to ensure financial sustainability. Debt limits, however, are not binding and have eased in the face of rising debt. Debt limits and liquidity covenants exist for local governments borrowing from the LGFA, which as of December 2024 total 77 of the sector's 78 local governments and 90% of sectorwide debt. These limits are relatively relaxed, in our view. Furthermore, the LGFA recently announced it will entertain increasing its net debt covenant for "high growth" councils to take on more debt for growth infrastructure. This is the second such change since the pandemic: in 2020, the LGFA raised its net debt covenant to 280%-300% of total revenue, from a previous limit of 250%.

New Zealand's fiscal policy framework focuses on accruals, not cash deficits.  Local governments are generally required to balance their budgets on an accrual basis and to ensure that debt is not used to fund operating expenditure or financial investment (termed the "golden rule" of fiscal policy). The framework limits debt to capital investment and requires depreciation of capital to be expensed in accrual financial statements. The Crown requires a local government provide a sound rationale if it chooses to run an accrual operating deficit. In 2024, a few local governments ran small accrual operating deficits. This framework, however, doesn't limit the size of the overall cash deficit when including capital expenditure.

There are only two tiers of government in New Zealand, with the Crown reluctant to fund local infrastructure.  Local governments are responsible for a substantial proportion of infrastructure, such as road development and transportation, and three waters (drinking water, wastewater, and storm water). The Crown sometimes provides capital grants for large infrastructure projects, and it provides ongoing subsidies for road renewal and maintenance. In total, these grants amount to about 15% of local councils' total revenue. There is no system of fiscal equalization.

New Zealand has had no known local government default.  There is no explicit guarantee from the Crown for New Zealand's local governments. However, we would expect local councils to receive support long before a default scenario materializes. This is due to the Crown's close oversight of local governments, the system's transparency, and mechanisms available to the Crown to intervene in a local council's operations. The Crown has the power to dismiss a local government and call an election based on its inability to properly govern, poor financial management, or corruption. Other possible measures include requesting information from a local government, or appointing a Crown review team, a Crown Observer, a Crown Manager, or a Commission.

The Crown has shown it is willing to use these powers when needed. It has intervened in several local councils in recent years, such as:

• Appointing a Crown Observer to Wellington City Council in October 2024 to assist the council with financial challenges and rewrite its 2024-2034 long-term plan.
• Appointing a Crown Manager to Hawke's Bay Regional and Wairoa District councils in August 2024 to deliver flood protection works after severe floods.
• Appointing a Commission to act in place of elected representatives at Tauranga City Council in February 2021. This followed an independent review identifying significant governance problems and infrastructure and funding challenges. Local government elections occurred in July 2024, replacing the Commission.
• Appointing a Crown Observer to Christchurch City Council in January 2012 to assist the council after several major earthquakes. It also appointed a Crown Manager in July 2013 to ensure the council regained its building consent accreditation, which was withdrawn by International Accreditation New Zealand (the council regained accreditation in 2015).
• Appointing a Commission to Kaipara District Council in August 2012 that replaced elected councillors and appointing a Crown Manager in 2016 and 2017 after various legal issues.
• Replacing councillors from Environment Canterbury, a regional council, with a Commission in May 2010.

The Crown has also demonstrated some willingness to support councils in selected circumstances.  The Crown has offered ad hoc contestable grants or concessional loans through the Housing Infrastructure Fund and Crown Infrastructure Partners. To further alleviate pressure on borrowing needs, the Crown passed the Infrastructure Funding and Financing (IFF) Act, which allows special purpose vehicles to raise private debt for large infrastructure projects in a way that is ringfenced from council balance sheets. As of December 2024, Tauranga City Council and Wellington City Council have used the IFF to fund large infrastructure projects.

The Crown has cost-sharing arrangements for natural disasters.  The Crown pledged 60% of the repair and replacement of Christchurch City Council's essential infrastructure after several severe earthquakes in 2010-2011. The Crown offered a NZ$275 million emergency financial support package to councils affected by Cyclone Gabrielle in May 2023, covering a considerable proportion of emergency costs for affected councils. In addition, Marlborough District Council secured Crown funding to cover 95% of the cost of repairing storm-damaged roads after two heavy floods in July 2021 and August 2022. The Crown and individual councils each fund 25% of the repair cost of properties that suffer from leaks or moisture damage. We also see an extremely high likelihood of the Crown providing extraordinary support to the LGFA, which raises debt on behalf of local councils, in a distress scenario.

New Zealand's revenue framework could undergo further changes.  In late February 2025, the Crown announced a plan for councils to charge infrastructure levies, which would be regulated and replace their existing system of "development contributions." The Crown also committed to make the IFF more effective and increase the flexibility of targeted rates. It is unclear how, or if, these changes would improve structural imbalances inherent within New Zealand's local council system. In December 2024, the Crown also revealed a plan to start benchmarking councils' financial performance and investigate the possibility of capping rates. We await further details of these plans.

Transparency And Accountability

New Zealand's local government system is highly transparent compared with international peers'

Minimum disclosure standards are high by international comparison. Governing laws set out in the Local Government Act 2002 impose comprehensive requirements for public consultation and financial planning and reporting. There is also a clear separation between responsibilities and roles of elected officials and their administrations.

Financial and nonfinancial reporting requirements enhance New Zealand local governments' transparency and accountability.  Requirements include public reporting of audited consolidated accounts, in accrual and cash terms, within specified time limits. These reports cover all council-controlled entities, including majority and minority holdings. Additionally, monthly or quarterly reports are also available via local government websites, as are agendas and minutes of most local government meetings. Crown reforms over time have increased disclosure and transparency by introducing funding impact statements and disclosure of risk-management strategies.

The Local Government Act requires that local governments develop long-term 10-year plans updated every three years.  However, these have become less reliable in recent years, with major reforms potentially affecting council financial forecasts and annual revisions of infrastructure budgets. Long-term plans supplement the annual planning process with which they are integrated and reflect longer-term asset-management intentions. The system also requires local governments consult the public on these documents. All local governments also must develop and publish 30-year infrastructure strategies to identify future infrastructure needs and identify options, including asset management plans, to address them. These extensive plans, even for the smallest local governments, are an indication of the sector's long-term capital planning and budgeting capabilities. The Crown granted an extension to the June 30, 2024, statutory deadline for the adoption of upcoming 2024-2034 long-term plans. This followed changes in Crown policies regarding water reform.

A shortage of auditors has affected councils' abilities to prepare audited financial statements in recent years.  The central government passed legislation in 2020 extending statutory reporting timeframes by two months for Crown entities, local authorities, and council-controlled organizations with June 30 balance dates. In recent years, auditor shortages, challenging immigration settings, staff turnover, and higher sick leave (in audit firms and in public organizations related to COVID-19) have caused several councils to adopt their annual reports more than four months after the fiscal year ended, breaching the statutory deadline. However, we expect this situation will improve over the next one to two years.

The Local Government Act requires local governments to prepare pre-election reports.  The reports, which provide information about the issues a local government faces, promote public discussion and help voters make more informed choices. The reports provide details on a local government's financial performance for the three years before the election; financial plans and projects for the next three years; and statements comparing rates, rate increases, borrowing, and returns on investments, with the limits and targets set in the financial strategy.

Local governments also publish financial prudence benchmarking in their annual reports.  This shows a local government's financial performance in relation to various benchmarks to assess whether it is prudently managing its revenue, expenses, assets, liabilities, and general financial dealings.

Related Criteria

• Criteria | Governments | International Public Finance: Methodology For Rating Local And Regional Governments Outside Of The U.S., July 15, 2019

Related Research

• New Zealand Councils' Institutional Framework Lowered On Rising Debt, Feb. 25, 2025
• Institutional Framework Assessments For Local And Regional Governments Outside Of The U.S., Feb. 24, 2025
• New Zealand, Oct. 16, 2024