Auckland Council backs away from hedge-trimming

Auckland Council has reaffirmed its controversial hedging policy with mayor Phil Goffsaying “we should not be knee-jerk reacting to sensational headlines”.

The council hedges most of its $10b debt portfolio with interest rate swaps, effectively fixing rates for up to 10 years, and recent interest rate falls have seen $2.74b in accounting losses booked after interest rate falls saw ratepayers locked into significantly higher interest rates than those now available on market.

The council’s finance and performance committee met on Thursday to conduct its three-yearly review of its treasury policy, following two weeks of Herald reporting of the swaps losses.

Goff dismissed coverage of the issue – “often those posing as investigative journalists are simply after a sensational headline” – and referred to David Cunliffe, his one-time finance spokesman when Goff was leader of the Opposition, as a “retired politician”.

“I have vague memories of the gentleman, but I won’t go there because that’s exactly what the media would want me to do,” Goff said of Cunliffe, who earlier this week described the swap losses as a the single biggest loss to public finance since the Government guarantee for finance company investors during the global financial crisis.

The mayor then derided Rodney Jones, an economist credited by Deputy Prime Minister Grant Robertson as being the first to focus his mind on Covid-19 and who last week described the council’s billions in hedging losses as a “disaster”, as his consulting firm Wigram Capital only employed four staff.

Council treasurer John Bishop said it was only accounting policy that required swaps – as opposed to traditional fixed-interest loans – to be revalued each year that led to the liability on their books and losses would not be realised if interest repayment terms were met.

“This is not a John Bishop opinion: It is a fact from a economic, mathematical and accounting view that any gains or losses must reverse if you hold them to maturity, as is our practice,” he said.

Bishop said the hedging policy provided certainty for financial planning, and insured the council against interest rate rises.

Goff praised PWC partner Alex Wondergem, invited to speak by council treasury staff, and drew sharp attention to the fact his consulting firm “employs a quarter of a million people”.

“This is not a disaster, this is not unorthodox, this is a third-party expert view and I’ve got great confidence in my treasury team,” Goff said.

Wondergem earlier told the committee Auckland Council’s position was that of a risk adverse borrower, and its use of financial derivatives was considered common practice by large corporates and other councils.

“The use of interest rate swaps is an extremely common practice, and it’s the most vanilla interest rate product you can use,” Wondergem said.

Wondergem is one of two independent members on the council’s treasury management steering group which set the hedging policy.

Councillor Chris Darby said recent Herald reports had helped focus minds around the council table on local government debt management, and he said it was important to address public concerns directly as the council as a whole was contemplating a post-Covid austerity budget.

“Criticism is a healthy thing if it’s constructive criticism. Sometimes it comes to us with barb attached as well,” Darby said.

Darby suggested the council pro-actively refer the matter to the Office of the Auditor General (OAG) in order to confirm to ratepayers that its hedging strategy was not imprudent.

Goff rejected this suggestion, instead recommending the matter be referred to the chair of the council’s audit committee. He said the OAG had already cast its eye over the council’s use of derivatives and not flagged any concerns.

“If there was a material risk I would imagine the office of the auditor general would have raised it with us,” he said.

The Office of the Auditor General earlier his week told the Herald they had raised the accounting of Auckland Council’s hedging positions in an audit note attached to the 2020 accounts “because of the council’s extensive use of derivatives”.

The committee unanimously – bar councillor Efeso Collins, who expressed concerns about being hamstrung by a debt cap – approved the treasury management policy with only cosmetic changes.

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