Outlook improving

The announcement the Dunedin City Council's credit rating outlook has been raised is welcome, but the reality is there is still much work to be done before its actual credit rating improves and benefits are passed on to ratepayers.

International credit agency Standard and Poor's this week lifted its ''outlook'' for the council and its subsidiary company Dunedin City Treasury Ltd from the November 2012 ''negative'' outlook to ''stable'', and maintained the ''AA'' long-term and ''A-1+'' short-term credit ratings of both agencies.

Dunedin Mayor Dave Cull was quick to say the news ''vindicated the last council's resolution and determination and the effectiveness of what we set out to do'' and Cr Richard Thomson, the council's finance committee chairman, praised staff for the ''extraordinary turnaround''.

But amid the back-slapping, it is important to consider what the ratings actually mean and what their implications are.

Credit ratings are opinions about credit risk and ''express opinions about the ability and willingness of an issuer, such as a corporation, state or city government, to meet its financial obligations in accordance with the terms of those obligations'', according to Standard and Poor's.

The information is used by investors and market participants and can help corporations and governments raise money.

An improved credit rating means the council would be considered less risk and might not pay as much interest on borrowing, important when it comes to rolling over its existing debt, which of course matters for ratepayers carrying that debt and footing payments through rates.

But it is also important to note the council's credit ratings have not actually improved. The change is in the outlook for its long-term credit rate.

According to Standard and Poor's, outlooks can be ''positive'', ''negative'', ''stable'' or ''developing''.

The council's previous ''negative'' rating indicated its long-term credit rate could be lowered.

(Indeed, the agency said when it reduced the rating last year that there was a one-in-three chance of a credit downgrade in the next two years).

Its new ''stable'' rating is an indication by the agency only that any change in its long-term credit rating over the next two years is unlikely and is not a comment on the ''stability'' of the council's financial performance.

Standard and Poor's credit analyst Anthony Walker did acknowledge in the agency's statement the decision reflected the council's ''significantly'' improved budget performance and liquidity over the past year.

However, the council must maintain its improvements to be on track for any increase in credit rating, and thereby bring actual benefits to ratepayers by reducing debt.

Mr Walker warned the ratings could be lowered if there was a change in policy direction, operating or capital expenditure or debt levels and said the council's strengths were still partially offset by its high debt ''relative to international peers'', moderate budget flexibility and the agency's ''neutral view'' of the city's economy.

It is worth noting the report found the likelihood of ''significant adverse findings'' from the Auditor-general's inquiry into land purchases by Delta was also considered low.

While the improved outlook is certainly a move in the right direction, the newly-elected council, staff and new chief executive Dr Sue Bidrose have much to do.

Credit must be given where it is due, however, and it is understandable Mr Cull is pleased with the work of the previous council and staff under former chief executive Paul Orders, who all worked to restructure senior management and company boards, find efficiencies, reduce non-essential capital expenditure and rates rises and contain debt and accelerate payments.

But there are still many critics, the global financial environment is still difficult and there is much debt yet to pay. Only more hard work over time will tell whether there is real - and lasting - cause for celebration.


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