By Paul McBeth
Nov. 22 (BusinessDesk) - Dunedin City Council, whose investment unit posted a $5.1 million loss in the 2012 financial year, has been put on notice of a rating downgrade over its finances, which may not bounce back as quickly as expected.
Standard & Poor's affirmed Dunedin's AA credit rating and put it on a negative outlook, giving it a one-in-three chance of a downgrade over the next two years. The council forecasts small surpluses over the next three years as it slows down the pace of annual rate hikes, while at the same time facing more capital expenditure and rising interest costs.
"This is based on our view that Dunedin may not achieve its financial targets outlined in its long-term plan, with its after-capital account deficits not improving as quickly as forecast," credit analyst Anthony Walker said.
"If this scenario were to materialise, we consider that Dunedin would have limited budgetary flexibility to improve its financial position without deferring asset renewals, which may lead to future infrastructure backlogs," he said.
The council needs to meet forecast and achieve after-capital account deficits of about 2 percent of its operating revenue from 2014 to get back to a stable outlook.
Dunedin City has faced a handful of setbacks in recent years, having to stump up funds to rescue a cash-strapped Otago Rugby Union from the brink of liquidation while at the same time facing a bigger deficit than expected for its new Forsyth Barr Stadium.
Subsidiary Delta Utility Services is also under investigation by the Auditor-General over decisions to invest in residential property in Queenstown and Wanaka, which have fed into weaker earnings from the investment unit, Dunedin City Holdings.
S&P's Murray said the outcome of that investigation could stress the council's rating further if it raises questions about the management of council-controlled trading organisations.
The rating could also come under pressure if a hard rates cap was introduced or if capital expenditure was increased without an offsetting lift in revenue.
New Zealand's local bodies face a major overhaul with looming central government legislation aimed at focusing councils' role to providing "good quality local infrastructure, public services and regulatory functions at the least possible cost to households and business."