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Tuesday
Apr122011

Revenue & Finance Policy - Ten Year Plan - Borrowing 

The extract below comes from the Revenue and Finance Policy Phase Two paper being presented to the Special Council meeting on Friday 15 April. The proposals differ significantly from the Phase One paper presented on 3 February (see posts 'Ten Year Plan' dated 11 February, and Cr. McLean's Vision' dated 26 January).

http://web.tcdc.govt.nz/24DocServ/cache/807dd90fc3112afb54b47b5c3ad2299c.pdf

One can only speculate that these changes have resulted from the closed door workshops that followed the Phase One presentation, and that they will now be decided on this Friday. Experience tells us that once they are in place, they will be very hard to alter.

In Phase one, it was proposed that the long established borrowing limit of 150% of revenue, based on the combined internal (reserves) and external (banks etc.) borrowing would be extended to around 180%, or a net increase of around $24m. borrowed over the ten year period.

In Phase Two one can clearly detect the hand of Cr. Mclean. Phase Two proposes to increase the borrowing limit to 150% of revenue based on the external borrowing alone. This would have the net effect of increasing the borrowing limit by approximately $60m. Internal borrowing amounts to roughly 50% of the total anticipated total debt of $122m. as at 30 June 2011. By adopting the external borrowing benchmark alone, the effect is to double the external borrowing limit from $60m. to $120m.

I am not confident that our newly elected members are aware of the effect of this fundamental change to the Council's borrowing policy. Can they possibly have the acumen and knowledge needed to resist the siren call of Cr McLean?. This may well be promoted as contributing to to 'generational transfer'. I prefer to characterise it as 'generational larceny'.

Readers will be aware from previous posts that current TCDC borrowing is in accordance with other comparable prudent councils. It is unlikely that the new limit will enable TCDC to make the same claim in the future. 

The public will have the opportunity to make input into this proposed policy change in October when the LTCCP comes up for consultation, but experience tells us that once in place, it is very hard to change. Regardless of the rates blow-out contemplated in the following post, further increases to cover the cost of servicing the additional debt are inevitable. 

Be warned!    

Limits on Borrowing

Direction 2 above sets out that the Council wishes to continue taking a conservative approach tomanaging its finances, albiet to a lesser extent than in the past. This includes borrowing within itsliability to service and repay that borrowing while adopting less conservative borrowing limits to provide the flexibility to fund projects deemed to be of benefit (acknowledging that borrowing capacity does not have to be fully utilised). 

Borrowing is used to fund services and assets built or provided now before future new consumers usethose services.   It is used to ensure fairness or 'intergenerational equity' so that current ratepayers pay for the services they use now, and future ratepayers pay their share too. Currently, the Council'sborrowing limits are linked to total revenue, however its only guaranteed revenue is rates which makes up approximately 78% of total revenue. The Council considers that borrowing external funds of up to 150% of its total rates revenue would be more financially prudent. 

This approach would result in approximately $60,000   of additional expenditure required each year forevery $1 million of debt we have to pay for the interest costs resulting from that debt, plus the ongoing costs of servicing that debt year on year until the debt is repaid. 

This represents a significant change in the Council's borrowing policy and will come with increasedborrowing costs as indicated above. The Council's ability to use this increased borrowing facility will be constrained however, by the overall rates and the rates increase caps that it is proposing above. 

Details on how the Council's debt is managed is set in its Liability Management Policy which is publiclyavailable.

The Council also utilises internal borrowing which is not subject to the above limits.

 

 


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