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Feb112011

Ten Year Planning 2012/2022

Developing the Financial and Sustainability Strategy 


This paper evolved from a Closed Door Workshop held on 2 February, 2011 when planning staff sought direction from the new Council on these critical matters.

We can assume that all Councillors agreed with the content of the paper when it was presented to the Council meeting on 3 February, because it was adopted as presented, with one correction only proposed by Councillor McLean. That was to change the words “existing debt burden”, to “existing debt level: - “burden”, claimed Councillor McLean, carried “emotive connotations”. Perhaps he was referring the emotions that followed the Thames Council’s previous demise into administration through its unsustainable debt “burden”.

The paper projects income and expenditure of $170m. by 2018/19 – up from $110m. in 2011/12, and a $20m. rate increase during that same period. The projection incorporates static levels in Assets Vested, Subsidies, and Fees & Charges while again getting sucked into the Development Contributions dream (see my Development Contribution post of 19 December). It projects about $8m. for 2019/19 from that source against the abysmal $2.8m. projected for the current year, which based on current collections are unlikely to achieve much more than $1.5m.

When will they ever learn? Future growth in this district is not a given – it is the real growth situation we face, rather than the gung-ho “Business Day” report reproduced on page 24 of today’s HH.  The problem is that growth projections (generally un-met) lead to expenditure projections (generally met), leading to shortfalls having to be made up from rates, or additional borrowing.

When developers, and their surrogates get to be in charge of the hen house, this is the usual scenario, and one that we are able to observe in stark reality within our own Council. Our planners are accepting a 150 house a year growth to start, leading to 300 by the end of the period (2019) They are of course bound by the projections provided by the professional crystal ball gazers – in this case Berl Consultants. (see my post “Mayor on the Ball (Berl?)” dated 9 December for additional comment.

The paper certainly acknowledges, “projected income from future additional absentee properties won’t eventuate should the economy decline or stagnate”, but that this is a high likelihood is not reflected in the ambitious projections.  It then proceeds to outline concerns about increased rates in all sections of the community, and the need to “balance needs and expectations for improved services”. 

A warning follows in regard to the need for our Council in particular to maintain a financial “cushion” to enable it to deal with natural events such as occurred on the last weekend of January. What a timely warning – our vulnerability is greater than almost any other Council in that regard.

Our Disaster Fund that is reimbursed each year based on previous experience (just like the insurance industry generally) is already over expended for the current year, and the commitment from the weekend event will undoubtedly cause an additional funding demand that could be even more than the $2m. I estimated in my Storm Damage Funding post of 30 January.

The money has to come from somewhere, and such an amount is far more than can be met from normal budgetary “unders & overs”.  The reality will not hit until Service Delivery Manager - John Whittle presents his report to the next meeting of the Service Delivery Committee on 16 March.  

Councillors on 23 March, or 13 April will be faced with some very painful decisions – even the possibility of having to consider striking a “special rate” to cover the contingency - if they wish to proceed with their pet election promise projects in the coming year. Or raise more borrowing. 

The Paper then proceeds to develop the argument concerning the ability (or rather inability) of ratepayers to manage any increase in rates greater than the CPI, but then suggests that some communities (presumably, wealthy Eastern Seaboard communities) may be able to manage rates higher than the CPI in order to pay for additional projects and services.

It next draws attention to the Local Government rates enquiry, which suggested that rates should only comprise 50% of a council’s operating revenue. This figure is of course totally misleading when applied to our Council, which has no investment income, unlike many other councils that own air or seaport shares for instance, and has a rate level of 78%, together with a "relatively" conservative risk approach to borrowing. The Enquiry certainly never contemplated that any Council would seek to raise the other 50% through borrowing. And it is inconceivable that its members could have established a standard applicable to the circumstances of every council.

By this convoluted route, our Report now proceeds to describe our past approach to borrowing as “very conservative” (previously "relatively"), and that it now wishes to “continue taking a conservative approach, albeit to a lesser extent than in the past”. - crikey - talk about playing with words!

I will deal with the suggestion by way of comparison with other comparable councils towards the end of this post, but take no issue with the next claim that “our borrowing must be within our ability to service and repay that borrowing (like a mortgage) - there will be limits to what you can repay – even over a long time”. A whole lot of fudge follows about borrowing capacity not being fully utilised, stagnation risk, and allowing, “individual funding decisions to be assessed on a case by case basis, and on their merits”. Pure bollocks!

Then comes the crunch – “Whilst the local communities willingness to pay for additional expenditure may drive increased borrowing for locally funded projects, the Council is ultimately accountable for the cumulative effect of borrowing decisions”.

Councillor McLean may feel that Whitianga (and perhaps other communities) may wish for, and can afford to pay for desirable projects, but the rest of the District takes on the liability equally in this event.  He may also care to dwell on the fact that there are fixed income beneficiaries in these wealthy communities who will be saddled with the same additional rates needed to pay for projects for which he is suggesting that funds are borrowed.

Further, we already know through the waste-water debacle of the desire within the Eastern Seaboard communities (or at least their representatives) to localise Development Contributions, and spread infrastructure costs. The paper refers to the need for such a system in order to meet the cost of a new waste-water scheme for Thames. This is plainly dishonest, and designed to obfuscate – there is no need for a new waste-water scheme for Thames for at least ten years. The Planning staff should talk to the Utilities staff in order to verify this, and cease promulgating this deceitful old saw that originated with the previous Mayor whenever she endeavoured to justify "district" charging of waste-water. 

The paper proceeds to justify activity based rates to those who generate demand, but “only to the extent that it is considered affordable”. This is “planning-speak” for spreading the cost of waste-water and water plants over the whole district – a policy that in the past has only advantaged the Eastern Seaboard. It further proposes user fees for those who directly use an activity, but again “only to the extent that it is considered affordable”. This is an abrogation of “user pays”,and must be resisted.

The paper then pays obeisance to “intergenerational equity” as if this was somehow a brilliant new concept. It is not – it has been a firm part of our Council’s revenue and financing policy for a very long time – it is simply a matter of balance, and to date we have maintained a fair and balanced level in this regard.

The paper is silent on two critical issues:

1.    Treatment of interest and depreciation, and

2.    The inability of our Council to secure medium or long-term borrowing.

The first is of major importance because of the need to comply with IAS (International Accounting Standards). Even if modified, these still impose substantial additional district wide costs over those met through additional local rates where individual communities are willing and able to fund additional works or services.

The second is critical because in setting the new unspecified borrowing limits proposed in this paper (180% of revenue is suggested in Graph 1 within the paper), no mention is made of the interest rate risk incurred with the short term borrowing that is currently our only source. This risk is substantial, and it is common banking practice to impose higher and higher rates on roll-over, when additional borrowing is perceived to create greater risk. It is not like a fixed interest long-term mortgage, as is quite incorrectly alluded to in the paper.

Finally, here are some comparative tables obtained from TCDC that indicate where our Council stands relative to a range of other comparable councils for the year to 30/6/09.  Those councils that have significantly greater proportion of loan to revenue than our Council would normally be considered to carry a higher risk profile, and rated accordingly by lenders. 

Also, note that borrowing referred to in the tables refers only to external borrowing, as only this borrowing is recognised by lenders. But remember when considering these figures that TCDC is fully borrowed internally to the 50% of total borrowing allowed. Some councils below that are indicating higher external borrowing ratios may well have further internal borrowing capacity that is not available to our Council.

Councillors must scrutinise any attempt to raise the borrowing ratio if they are to retain any credibility as protectors of ratepayer interests, and question the claim that somehow or other we are out of step with other councils in the borrowing stakes.

 

       Prudent debt, liquidity and interest rates

 

Council              Net Debt as      Net Debt as     Net Interest as   Net Interest as

                       % of Equity      % of Income      % of Income   % of Annual Rates  

Palm. Nth CC      <20%                <150%           <15%                 <20%                  

Hastings DC       <20%                <150%           <15%                <20%

Whangarei DC     N/A                   <170%           <15%                   N/A

Gisborne DC       <10%                < 95%            <10%                 <15%

Kapiti Coast DC  <20%                    N/A             <25%                   N/A

TCDC           <20%               <150%         <15%                N/A

Western BoP DC  N/A                   <220%           <15%                 <22%

Whakatane DC    N/A                   <150%           <15%                   N/A

 

                            Sector Debt Comparatives

 

Council                   Debt($M)            Total Inc. ($M)           Ratio

 

Palm. Nth. CC         143,481              99,952                    144%

Hastings DC             50,574              91,379                      55%

Rotorua DC            100,751            104,185                      97%

Whangarei DC        122,972            118,108                    104%

Gisborne DC             19,407              86,168                      23%

Kapiti Coast DC        71,519              56,408                    127%

TCDC                49,234            76,323                  65%

Western BoP DC    122,514               67,928                    189%

Whakatane DC        17,922               45,610                      39%       

 

                        Funding Limits: spread maturities,

                    reduce concentration risks

 

Council                      0-3 Yr       3-5 Yr         5 Yr Plus      Liquid ratio

 

Palm. Nth. CC       15-60%        15-60%      10-60%         >110%

Hastings DC           10-60%     20-60%      10-60%         >110%

Whangarei DC       10-50%     20-60%      15-60%         >100%

Gisborne DC          10-50%     20-60%      10-60%         >100%

Kapiti Coast DC     20-60%     20-60%      10-60%         >110%

TCDC              20-60%    20-60%    10-60%        >110%

Western BoP DC      0-50%     20-60%      10-60%         >115%           

 

 

 

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Reader Comments (2)

I have made submissions to 10 year plans before and as it is the end of the process when submissions are heard I had a VERY strong feeling that the thing was very "Ho Hum" as the budget was already set . The Wellington Wallys require public input to pretend that democracy is happening but lets be real the councillors find public input tiresome.

February 15, 2011 | Unregistered CommenterPeter Feran

Peter, you are absolutely correct, BUT this different.
This is surreptitious attempt by Councilor McLean, ably assisted by the Mayor, to get other councilors to accept that a little increase in borrowing won't hurt anyone. The staff paper is just a reflection of what went on the Closed Door Workshop the night before. This is such a fundamental change in policy that everyone should be concerned, as I am sure you are. Don't hold back - get your views on the table, and encourage everyone else to do the same. Numbers do count when it comes to it, and they can be forced to take notice if there is a ground-swell.

February 15, 2011 | Registered CommenterBill Barclay

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