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Friday
Sep142012

Larry Mitchell's Annual Rant 

This is the text of an Stuff article dated 7 September that outlines a further Larry Mitchell story on council borrowing.

This has become an annual event, and LGNZ President Lawrence Yule's response is beginning to sound like a cracked record. Talk about talking past one another. Mitchell is guilty of generalising where he should be particular, and exaggeration where he should be accurate. It is dammed unfortunate because he is about the only commentator who hones in on council accounts and provides a worthwhile commentary of the direction in which council finances are heading. He provides an excellent service to rate-payers in that regard - it is just unfortunate that he cannot put his finger more accurately on the problem.

Yule, and councils generally (including our own) respond to Mitchell's comments with disdain, pointing to obvious discrepancies in his analysis, and avoid dealing with his overall contention that a great number of councils are borrowing beyond their means - not all, just many.  If you read the following, you will see why Yule's response is ill-considered, and defensive in the extreme:

"Statements carried on Radio New Zealand this morning about councils supposedly hiding the extent of their debt by internal borrowing are wrong and misleading, says Local Government New Zealand Local government analyst (sic), Larry Mitchell, who was in Whangarei speaking to a ratepayers group, said councils used to have “sinking funds that they could not touch which were to be used to replace infrastructure.”

(Note - Mr Mitchell is not the LGNZ analyst - rather an independent commentator, thus making the story a nonsense, and typical of prevalent media inaccuracy!)

Mr Mitchell also claimed that since the rules had been changed to allow councils to use these reserves to finance their other needs, they had done so with “a vengeance.”

In addition to questioning the emotive language Mr Mitchell had used about “raiding reserves with a vengeance,” LGNZ President, Lawrence Yule, explained that councils had accrued money in accounts from asset depreciation and temporarily used this money to fund other projects to avoid borrowing externally. This was common practice and saved ratepayers money".

The devil lies in the use of the word "temporary" it is common practice for councils to firstly borrow against their reserves to the full extent that they appear on their balance Sheets, and then proceed to borrow externally. That is what our Council has done, and this is common practice. The "internal" borrowing thereafter remains far from "temporary" - rather "permanent", as external borrowing is inevitably the first to be reduced, if any reduction takes place, as it seldom does.

There is nothing intrinsically wrong with "internal" borrowing, and it must be revealed in all its glory on the balance sheet for all to see, but naturally, many rate-payers are confused as to how reserves such as depreciation are maintained so as to be available when assets need replacing (as in a 'sinking fund') if is "permanently" borrowed against.

It is of course an accounting nonsense, but it has become acceptable practice, and is in accord with International Accounting Standards with which all councils are expected to comply. The only deviation allowed by the NZ Audit Office is that standard depreciation schedules may be adjusted downwards as in the case of our waste-water plants where capacity is far greater than would be required in the foreseeable future, thus postponing normal replacement. Of course, if the money is not going into the fund, it cannot be borrowed against, thus increasing the need for external borrowing. 

Larry Mitchell has indeed nailed the extent to which councils are extending their borrowing limits to the maximum allowed by legislation. But as far as I can see, he has not drawn attention to examples of councils that have increased borrowing while reducing rates as has happened here -  a particularly pernicious practice promoted by Mayor Leach and followed by his band of acolytes in this year's TYP with the simple purpose of promoting electoral advantage. Cant about needing to reduce the burden on poor rate-payers is nothing more than PR hype. 

I repeat the extract from the late paper that went to the Thames Community Board last week that draws attention to the "prudence " rule and infers that there are concerns that boards (and by inference, the Council itself) may be operating outside of those rules.

Borrowing is only used when all available funding sources are exhausted. However when electing to fund either operating or capital out of retained earnings council must be cognisant of its obligations in terms of stewardship, prudence and fiduciary duty.

For example does the consumption of a community boards local retained earnings to artificially lower the local rate in one year to the exclusion of future years meet councils obligations above?

Would the consumption of local retained earnings to fund capital expenditure projects be prudent use of Councils financial reserves?

The answer to these questions will depend upon careful analysis of the unique circumstances of each request considered".

I think far greater account should be taken of Larry Mitchell's analysis - he may be regarded as a flake by many, but there are truths in his findings that should be respected, instead of rejected out of hand simply because they do not comply with the current thinking about boundary's on borrowing.

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