What happens if a City Council goes bankrupt?

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Forums › Finance and wealth management › What happens if a City Council goes bankrupt?

Batman

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#195969 13-May-2016 22:22

http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=11638732

Apparently Auckland City COuncil is $7.5 billion in debt ...

Why is that body unable to make money, only knows how to spend? Surely!

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meow
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#1552437 13-May-2016 22:26

Don't worry, the government will bail them out if that happens and find a way to tax us on it.

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MikeB4

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#1552438 13-May-2016 22:29

Your toilet will explode

ockel

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#1552440 13-May-2016 22:38

What is the council's income? Debt to Income ratio?

What is the councils asset base? What proportion of assets cover the debts?

Whats the councils credit rating? Is it under creditwatch? Where is its debt trading, on a yield basis?

Key point is that a headline debt number is meaningless without putting in context.

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Technofreak

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#1552452 13-May-2016 23:09

ockel:

What is the council's income? Debt to Income ratio?

What is the councils asset base? What proportion of assets cover the debts?

Whats the councils credit rating? Is it under creditwatch? Where is its debt trading, on a yield basis?

Key point is that a headline debt number is meaningless without putting in context.

Does $5000 per head for every man woman and child put it in context?

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#1552458 13-May-2016 23:48

The government will bail them out.

It's a bit like when they came up with the genius idea that NHS hospitals had to run themselves like businesses. So, Minister, if the Bristol General Hospital spends their 50 million and there are still six months of the year to go, will you instruct them to lock the doors and send everyone home. No, you won't since to do so would be political suicide - ergo the budgets are merely a pipe dream.

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#1552483 14-May-2016 00:46

It's election time. Everyone is looking for an angle.

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#1552493 14-May-2016 01:35

The council could go into receivership (s40a-s42, Receiverships Act 1993). The net effect of this is that a receiver could take ownership of and sell off any council property (with the exception of reserves, which can only be leased for nine years), or take control of rates collection (including the power to set the rate amount).

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gzt

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#1552499 14-May-2016 05:28

joker97:
http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=11638732

Apparently Auckland City COuncil is $7.5 billion in debt ...

Why is that body unable to make money, only knows how to spend? Surely!

Depends on how the debt is structured and all those things.

The article does not raise any threat of council bankruptcy.

The reality is that the council is in many many many tmes better position than your average Auckland mortgage holder.

jmh

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#1552506 14-May-2016 07:50

Vicki Crone is running for Mayor, so this is just political sniping. She's presented as a high-flying business woman (which apparently means by definition she knows how to run a council better than anyone with actual experience) but imo she's all mouth and no trousers.

Batman

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#1552509 14-May-2016 07:55

I don't understand why a city council needs to be in debt whether it's $1 or 10 billion?

You can tell I am not a businessman ...

MikeB4

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#1552510 14-May-2016 08:08

joker97:
I don't understand why a city council needs to be in debt whether it's $1 or 10 billion?

You can tell I am not a businessman ...

So the Mayor can keep up with the rest of Mayors

ockel

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#1552512 14-May-2016 08:25

joker97:

I don't understand why a city council needs to be in debt whether it's $1 or 10 billion?

You can tell I am not a businessman ...

The debt for a council is generally used for capital works. Rather than paying for key projects out of rates (and never raising enough money to undertake the projects) councils generally borrow and then use the rates to pay the interest.

Laughably if there is a one-notch downgrade in the council debt (because its debt-to-income exceeds 2.7x) it'd result in an $11m increase in interest - on $7.5bn in debt. Thats a huge 0.14% increase in interest rates.

The council is rated AA and Aa2 which is well above investment grade. Its higher than any of NZ's trading banks (all AA-).

The council has about $40bn in assets - so its debt makes up less than 20% of its total assets. Plenty of headroom to borrow more and achieve an efficient capital structure. Its better to use someone elses money to grow your assets than your own - hence the use of borrowed money to increase property wealth in the NZ market.

Personally I'd like to see the council borrow more money, buy land, build houses and lease them to first-home buyers or for social housing. Its got plenty of scope to be a landlord in its own region.

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Fred99

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#1552519 14-May-2016 08:52

ockel:

What is the council's income? Debt to Income ratio?

What is the councils asset base? What proportion of assets cover the debts?

Whats the councils credit rating? Is it under creditwatch? Where is its debt trading, on a yield basis?

Key point is that a headline debt number is meaningless without putting in context.

$3.5 billion income.
$1.5 billion from rates, the rest from user charges, fees, ROI.

So debt is > 2x income.

However when debt is used to finance investment, perhaps income from that investment should be the debt:income ratio they look at. (ie put income from rates and services and costs to provide those services aside) Then many of those assets will probably never generate an income - IIRC cost to operate the trains was something like $1 per user km - so unless they were charging more than that, then it's clearly not going to be servicing the debt. Same for parks, stadiums, cycle tracks etc. There's a lot of obfuscation IMO in the way information is presented.

I believe that they may be under "negative watch" for credit rating.

One way they argue that the debt is reasonable is that "it's like a mortgage for a house - where debt to income ratios are often much higher". They then talk about these investments being for long-term, with benefit for future generations. This would be a very nice analogy - only if there was evidence that they were paying down / reducing debt, which is what everybody with a mortgage should be doing.

Bail out from central government doesn't seem likely to me.

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#1552522 14-May-2016 09:04

Blimey! Just found out that Dunedin CC debt is $600 million ... %$#@ me!

Fred99

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#1552527 14-May-2016 09:14

ockel:

The council has about $40bn in assets - so its debt makes up less than 20% of its total assets.

Heavily obfuscated valuations IMO. Some might be easily liquidated - ie those generating income, shares in ports and airports etc. Their value is only what someone else would pay for them, some can never be sold, others if they could be sold, well we've seen how governments dispose of loss making "assets" when they are under stress and want them off their books - they give them away.

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