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Saturday
Dec142013

Development Contribution Interest

The serious financial situation that Council now finds itself in was the subject of a ‘Public Excluded’ item at the Audit Committee Meeting on Friday 13 December. All the circumstances surrounding this situation would no doubt have been examined at that time, and members therefore fully informed as to how this had developed.

 

A Paper is now to be presented to Council on Wednesday by Steve Baker under the bland heading - Potential Funding Options for Development Contributions Interest. It should be made quite clear at the outset that this Paper is a masterful piece of obfuscation that pointedly avoids any judgment on the gross errors that have led to the Council's current crisis - even the title carefully avoids drawing attention to the real situation. But nothing should detract from the momentous decision that this Council will have to make before setting its Annual Plan in concrete - a decision that has substantial political implications as far as our lame-duck Mayor is concerned. His very legacy is at stake. 

 

One can even assume that regardless of the Global Financial Crisis that is again the crutch referred to in this Paper, this crisis is ultimately the effect of reducing rates during the last term. This fact has been deliberately glossed over out of deference to the Mayor whose faulty logic lies at the very heart of the current dilemma in which Council finds itself. 

 

The situation as outlined in the Paper reveals that $73m (62%) of the current total debt of $116.6m relates to Wastewater. It is extremely important to note reference to “total” debt – denial that ‘internal’ ($34.3m) debt was debt has been par for the course for this entire Council term. One has to presume that the penny has finally dropped - well there is nowhere to hide really.

 

One way to deal with the matter is to dwell on the alternative funding options for Development Contribution Interest that is currently compounding, unpaid due the paucity of contributions. Current Council finance policy correctly ensures that this interest is added yearly to the development contribution liability of developers as they come along. If development is scarce, then the interest simply accumulates on the books. Steve acknowledges $2.4m in the current year, but fails to report the sum accumulated - probably around $7m based on other reports. 

 

Leach has often indicated that he considers this an unfair imposition on developers, but more important, it is now financially unsustainable to be carried as debt when borrowing has reached the state it has in our Council.  Councils cannot borrow to pay interest – a no-no under the LGA. 

 

The Paper explores a number of options to get the interest off debt - ranging from full Area of Benefit liability (rating impact from $14 for Thames to $233 for Whitianga), through to District ($124 per rating unit). It can be assumed that there will much hand wringing over either, or any solution – the net effect on rates being about 6% for the latter - a much more likely, if unfair outcome, simply because the former would result in a 13% increase for Whitianga - rates revolt territory!.

 

The following is the manner in which the “issue” is explained by Steve Baker:

 

It is understood that there is a general consensus amongst Councillors that, even though the

levels of resource and building consents are on the rise, that rating unit growth on the

Peninsula will, for the foreseeable future continue at levels similar to those currently.

 

If this eventuates then revenue received by way of development contributions to repay

the interest and principal on the Additional Capacity loans will not be sufficient to

cover the interest component. Consequently under the above model development

contributions will increase in future years by the difference between development

contributions received and interest payable on the outstanding loans, regardless of whether

there are any future AC projects or not.

 

Development Contributions are already significant in some catchments (see Attachment A)

and further increases may in fact be a disincentive to future growth in some parts of the

region.

 

The anticipation of this issue has been flagged in a number of Council's public documents

and plans, such as the Pre-Election Report and the 2013/2014 Annual Plan.

 

Total AC loans at 30 June 2013 were $82.3million. Total loans both AC and ILOS were

$116.6million. AC loans therefore account for 71% of total debt. Note total debt includes both

internal and external debt. This provides an extremely valuable insight to the cost of

Council's position to provide infrastructure to facilitate growth along with the risk of providing

that infrastructure and then the timing of growth being delayed through external factors such

as the Global Financial Crisis.

 

To do nothing would likely only exacerbate the issue further therefore this paper outlines

options for addressing a partial or full payment of the AC loan interest for 2014/2015.

 

The anticipated cost of the interest in the 2014/2015 year is approximately $2.8m.

 

The following is the suggested resolution:

That the Thames-Coromandel District Council:

 

1. Receives the report.

 

2. Advises its preference to fund the full amount of development contributions interest,

with costs being apportioned by the current activity funding (as set out in the Revenue

and Financing Policy), as the basis on which to build the draft 2014/2015 Annual Plan,

and that staff make clear alternative options in the draft Annual Plan for consideration

by the communities, including examples of rating impacts.

 

3. Instructs staff to bring back information and options for reducing expenditure in the

2014/2015 year.

 

4. Instructs staff to bring back further options for addressing the on-going AC interest

issue as part of the 2015 Long Term Plan.

 

I may be accused of over-simplifying the issues, but the Paper over-complicates it - I believe to protect the current Council from criticism. It is really important that readers are in a position to understand both the cause of the problem, and the solution being proposed – it will have direct effect on rates in the Annual Plan and the years to follow, likely to wipe out all of our Mayor’s prized reductions that he has bragged about incessantly.

 

On the other hand - para 3. above suggests that savings may be made by simply cutting maintenance and capital works (and staff must follow like night follows day!) as this Council did at the outset - probably equally as unpalatable as rate increases. 

 

Finally, the question that has to be asked is why it has taken this long to raise this issue, and seek radical answers? Is it because the reality shock arising from attempting to roll-over existing loans, and seek further borrowing in the face of projected increased interest rates? All this at the same time our Council's financial situation comes under ever closer scrutiny as a consequence of the Kaipara debacle?

 

We have not been fully informed, and I do not expect this situation to change.

 

 

 

 

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