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Sunday
Feb232014

Borrowing - Same Old, Same Old!

For those who remain confused as to the level of borrowing of our Council that our Mayor claims to be "comparable with other councils", I reprint the following extract from my 12 April 2011 post on the subject - "Revenue & Finance Policy - Ten Year Plan - Borrowing."

This is relevant because of the claim again repeated in the Draft Annual Pan Paper going to Council on Wednesday that Council will "improve" its position viv-a-vis borrowing in the new Annual Plan by by some $5m." Note also the following "the draft 2014/2015 Annual Plan proposes total capital spend of $22.9 million which is $5.8 million less than last (2013/14) year." Could there be a connection? 

[The actual document should be available, but our Council's document system has again proved defective, and it appears to have 'disappeared.' It is amazing how often this phenomena occurs! But there is no shortage of high priced 'experts' around the Castle, or for that matter 'state of the art' hardware and 'locally developed' software. It may well be time for Chief Executive Hammond to apply his analytical skills to determining just why we are unable to access a three year old document. The doument reference is http://web.tcdc.govt.nz/24DocServ/cache/807dd90fc3112afb54b47b5c3ad2299c.pdf  - perhaps someone else can locate it - I have given up!]

I commented at the time that once in place, the new Finance and Revenue Policy would be very hard to alter – a view that has proven prescient.

From my 12 April post:

"Phase Two proposed 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 amounted to roughly 50% of the total anticipated total debt of $122m. at 30 June 2011. By adopting the external borrowing benchmark, the effect is to double the external borrowing limit from $60m. to $120m" 

That is the limit against which the writer of the Draft Annual Plan Paper now claims an “improvement."

The following is the extract referred to above from the actual 15 April 2011 Proposal:

"Direction 2 above sets out that the Council wishes to continue taking a conservative (my bold!) approach to managing its finances, albiet to a lesser extent than in the past. This includes borrowing within its liability 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 use those 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's borrowing 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. (My bold!)

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 increased borrowing 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 publicly available.

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

They could have added that the internal borrowing is not even reported, and this is the utterly ridiculous benchmark against which our current Council now claims 'prudence'. 

It is all 'smoke and mirrors' of course, and both staff and councillors appear to continue to hold to the view that 'internal' borrowing is irrelevant. As our developer friend stated with tongue-in-cheek hyperbole (see my 11 February post) - "A psuedo ponzi scheme with rate payers the duped investors."  

 

 

 

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