Councils must balance market risk with liquidity, inflation and concentration risk, writes Brett Moffat, Senior Consultant, Russell Investments. Brett is giving a talk at the SuperLocal conference in October.
New Zealand councils are under growing pressure to deliver more with limited revenue.
According to the Taxpayers’ Union’s 2026 Rates Dashboard, councils are proposing average rates increases of approximately 6.9 percent for 2026/27, easily outpacing inflation. Several councils face double-digit increases as infrastructure, borrowing, insurance and operating costs continue to climb.
There is no silver bullet for these pressures. But before asking ratepayers for more, councils should also ask: Are the assets we already own working hard enough?
At SuperLocal, my session on building financial resilience will explore how investment funds can help councils create sustainable income streams, ease reliance on rates and build greater flexibility to respond to future challenges.
Our latest review identified diversified investment funds across 14 councils, collectively managing an estimated $3 billion on behalf of their communities.
Managed well, these funds can become a strategic financial asset; supporting council services today while preserving and growing capital for future generations.
But having an investment fund is not the same as having an effective investment strategy.
Looking across the balance sheet
The opportunity is larger than existing investment funds alone.
Many councils hold substantial capital in land, forestry, commercial property, ports and airports. These assets may have strategic or community value, but some generate relatively low or inconsistent returns compared with the capital tied up in them.
They can also create concentration risk. A council’s revenue, borrowings, infrastructure and other physical assets are already closely connected to its region. A local downturn or natural disaster could simultaneously reduce asset values and income while increasing the council’s funding requirements.
This does not mean councils should automatically sell strategically important assets. It does mean they should periodically ask whether each asset still earns its place on the balance sheet – and whether recycling some capital into a diversified investment fund could improve income, liquidity and resilience.
Starting with purpose
Every investment fund needs a clearly defined job.
Is the capital intended to support future generations? Provide regular income or rates relief? Fund infrastructure? Meet insurance claims following a natural disaster? Or support another long-term liability?
The answer should drive the investment strategy – not the other way around.
A long-term intergenerational fund may be able to tolerate short-term market volatility in pursuit of stronger returns. A self-insurance reserve needs sufficient defensive and readily accessible assets to meet potential claims. A fund with multiple objectives may be better separated into distinct pools.
Without this clarity, a portfolio can appear successful in investment terms but still fail the council when the money is needed.
Balancing risk, return and liquidity
Keeping everything in cash may feel safe, but over time it increases the risk that returns fail to keep pace with inflation and rising council costs.
Councils must balance market risk with liquidity, inflation and concentration risk. They must also consider governance and reputation: can elected members explain the strategy – and remain committed to it – when markets become volatile?
The objective is not to avoid all risk, nor to simply pursue the highest possible return. It is to take the right risks, for the right reasons, over the right time frame.
Protecting the fund for the long term
A sound Statement of Investment Policy and Objectives – or SIPO – should connect the fund’s purpose with its return objective, risk tolerance, liquidity needs, asset allocation and governance arrangements.
Structure matters too. Ring-fencing can help protect capital intended for long-term or intergenerational objectives from gradually being redirected towards relieving short-term budget pressures.
For larger funds, a council-controlled organisation, trust or separately governed investment vehicle may provide clearer accountability, specialist expertise and continuity across political cycles. These structures add cost and complexity, so the model must reflect the fund’s scale, purpose and circumstances.
Three questions every council should ask
Purpose – If we did not already own this asset, would we choose to buy it today, given the alternatives available?
Performance – Is it delivering an appropriate return for the capital committed, costs incurred and risks taken?
Resilience – Would a more diversified and liquid mix of assets leave the council better prepared for future funding pressures or unexpected events?
These questions do not presume that assets should be sold. They provide a disciplined framework for deciding whether public capital is being used as effectively as possible.
With rates rising and close to $3 billion already invested, council investment funds deserve to be viewed as more than passive reserves. Used strategically, they can strengthen financial stewardship, diversify income and give councils more options when the next challenge arrives.
The goal is not to make council investment more complicated. It is to make public capital more deliberate, transparent and effective – supporting today’s ratepayers while building greater financial resilience for generations to come.
Disclaimer: This article was prepared by Russell Investment Group Limited. It has been compiled from sources considered to be reliable, but is not guaranteed. It provides general information only and should not be relied upon in making an investment decision. Before making an investment decision, you need to consider whether this information is appropriate to your objectives, financial situation and needs. All investments are subject to risks.