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Local Government New Zealand is crying foul over potential rates capping, saying such a policy will only drive them up.
Ratings agency Standard & Poors (S&P) on Thursday downgraded 18 councils and three council-controlled organisations, with negative outlooks for three councils.
The ratings agency in a release said debt levels had risen to 197 percent of councils' operating revenue, and cited central government policy changes leading to a "more volatile" policy environment.
"This reflects factors including the quick passage and repeal of several key laws governing local councils, the cancellation of various Crown grant programs, an increase in unfunded mandates, and recent announcements about infrastructure financing options," S&P said in a release.
Unfunded mandates are where central government gives policy direction to local government without bearing any of the costs.
Wellington City and Hamilton City councils - already downgraded in September - were again affected.
LGNZ President Sam Broughton said the government's proposal for a cap on rates increases would only make things worse, with Australian examples showing it would do the opposite to what the government wants.
"A rates cap will have unintended consequences on communities, it will restrict the ability of councils to invest in infrastructure and risks their financial instability, and we need to avoid this," he said.
"In the past, councils have had their own voluntary rates caps in many respects with elected members deciding that they'll keep their rates increases at 2, 3 or 4 percent or whatever is palatable to the community.
"Over generations of that decision making we have a massive ... multi-billion dollar infrastructure deficit as a country, and so we don't want to exacerbate the situation that we're in."
He said South Australia for example had used transparency and accountability rather than the rates capping approach taken in Victoria and New South Wales, and was seeing lower rates rises as a result.
"Sometimes, if you have rates caps, then you're making artificial decisions about the investment required. And if investment in infrastructure isn't kept up to date, then the catch up is very expensive later on.
"We would rather have tools and availability to show our community the value of council investment and infrastructure as required and over the medium term."
He called for a commitment from the government to put aside rates capping, and to "send a strong signal to credit agencies that New Zealand is a safe place to invest by working with us on a better way forward".
"We're happy to work with the minister on tools that are going to help rates stay affordable for communities, we've already raised a number of other funding tools that would make a difference to councils to afford and pay for infrastructure for communities other than rates."
RNZ has sought comment from Local Government Minister Simon Watts.
The ratings news on Thursday followed an Auditor-General's report in February which also raised concern about "significant uncertainty" due to government policies affecting councils.
It said councils were dealing with an infrastructure deficit, and warned that with the level of investment in new capital projects, demand for local contractors could put push out deadlines and budgets.
LGNZ represents 71 of the 78 councils around the country after Western Bay of Plenty this week voted - six to five - to quit, calling the organisation "extremely political" and "far left".
The councillor who brought the motion, Tracey Coxhead, said LGNZ's job was to represent local government, and in her view presentations at its 2024 conference were "largely, although not entirely, pushing a certain agenda, for example, only one narrative on climate change".
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