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Financial Strategy - Long Term Plan

Ross Ashby's analysis of the key financial issues confronting the council as it commences the work towards development of the next Long Term Plan - 2015/25 Plan is interesting from a couple of perspectives.

Firstly, the mention (for the first time to my knowledge) of a shadowy group called Mayor PLUS. It appears that is a group of like-minded individuals (you can put a ring around that!) who have been brought together by Leach to provide legitimacy for the views that he wont to express forcefully and often. I have no idea who is on the Group - I have never seen mention of it in any paper presented to Council, and reference to it through the Website search engine is as fruitless as any other enquiry through that extraordinary device. But I bet I could name most of them if given the challenge. 

Ross indicates that the "draft high level financial Strategy is the culmination to date from staff input, guidance from the Mayor PLUS group as well as a Council workshop held on the 15th April."

I have no argument with the majority of the content of the Paper - it is fairly innocuous at this stage and he is content to set out new LGA Guidelines that pay particular attention to quantified limits on rates, rate increases and borrowing in order to maintain existing, and any additional levels of service.

Ah yes - borrowing!

That is the biggie as far as this Council is concerned, and despite further discussions with the AG representatives, and the content of the guidelines, there remains a distinct reticence to mention the words "Internal Borrowing."

Borrowing where it is mentioned is always "External" - never "Internal", and why? Because there are councils around the country that to one degree or another have used this device to provide capital for works and services, and where no one appears anxious to "show and tell." This form of borrowing, and make no mistake, it is borrowing no matter what slant you choose to put on it, is pervasive, corrosive and without doubt contributes to distortion of balance sheets.

TCDC used to have a 100% of total income limit on all borrowing. Within weeks of arriving on Council, Cr McLean moved to change this limit to 150% of rate income for all external borrowing - effectively providing an opportunity for Council to incur another $50m debt without anxiety over its month to month ability to stay within the limit. This was borrowing sleight of hand at its worst - McLean had long advocated such a solution - it was resisted by the previous Council. 

What is indefensible is that the change has enabled Council to completely disregard internal debt - it is always at the limit, and represents what Council owes to its so-called 'reserves.' The availability of these funds therefore varies as reserves are called upon for the replacement of assets etc. The fluctuation is limited, and will remain so until massive replacement of infrastructure is called for.

In the meantime, it provides Council with the ability to access between $30-40m of additional funding, and  remarkably, it it not acknowledged in any of the debt reporting documents presented to Council. Nor does the AG appear to take the slightest interest in the matter despite it having been drawn to his attention on several occasions. No amount of agitation appears likely to change this state of affairs - I wonder why?

In the meantime, Ross acknowledges that "Whilst we have addressed the one-off change in the 2014/15 Annual Plan, interest repayments on Additional Capacity loans are not (I presume he means "will not) being met by future development," and that while "we are 29% under our self-imposed debt level, (Note - the word should be 'limit', not 'level' - incredibly different!) however (we) have a debt balloon with interest repayments (surely payments) for additional capacity loans. (that is 4 apparent mistakes in one sentence - not bad!)

What is being suggested at all stages is adjustment downward of Development Contributions to encourage development even although this change will be at substantial cost to existing rate-payers - something with which elements within Council (including the Mayor) and probably Mayor PLUS,  appear to have never had a problem. It is the elephant in the kitchen about which every rate-payer should be concerned.

Further, within the section of the Paper on Affordability, Ross appears to be suggesting the need to adjust rates throughout the District to reflect "ability to pay" as a counter to 'user pay' policies of the past which have meant that rate-payers in certain areas are paying more for infrastructure (ie wastewater-plants) that those in other areas. Actually it only the increasing interest on borrowing for these plants that they paying for, but it suits the current Council to blame previous councils for over-providing, and are thus seek to re-apportion the rating. Thames rate-payers are in for a surprise I suggest as this gets into gear.

This is another of the long term ambitions of the present crop of councillors that needs very close watching. It is very convenient for these people who were not around at the time to forget the absolute pressure that came on from those rate-payers at the time for 'Rolls-Royce' plants, and maximum capacity for what they fondly imagined to be the future growth of their towns. All this was backed up by Waikato University and BERL of course, but it has not stopped Leach from using the poor suckers from that era as the 'whipping boys' for the new reality.

Ross makes some prescient comments about the effects of the current Council over-provisioning for future growth when most of it is likely to be in the additional absentee land-owner category, with greater risk resulting from any downturn in the economy.

He finishes with a sage warning to our enthusiastic 'economic developers' - "We need to ensure that the right balance is struck between growing our economy and ensuring this is affordable and ensuring we are maintaining what we have got." English expression aside, that is a strong and unsubtle warning to Leach and his cohort that their current policies may be dangerous, particularly if they fail to deliver, and are simply a drain on our otherwise scarce resources. 

I will report on the reaction tomorrow, but expect that as usual, this important Paper will simply be received, rather than bring about a display of ignorance through discussion.




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Reader Comments (1)

Hi Bill,

With regard to your comments about a reluctance to use the words 'internal debt':

" What is indefensible is that the change has enabled Council to completely disregard internal debt - it
is always at the limit, and represents what Council owes to its so-called 'reserves.'

If you go back in the 21 May 2014 agenda to the minutes of the Councils 9 April 2014 meeting, there is record of the Councils 'key discussion points' arising from the financial results presented then. The second of these discussion points is given verbatim below:

"Council discussed that the terminology of 'internal debt' is misunderstood as a negative connotation and
suggested staff use a different terminology going forward. such as 'internal reserves'."

So there it is - "going forward", they merely wanted to remove a "negative connotation"! That is your explanation

Of course their logic is fatally flawed in that internal reserves may or may not be borrowed against (most Council do not in fact undertake the practice) and that if they are borrowed against, then logically it can only really be called 'internal borrowing" because that is exactly what it is.

I do wish to be too critical. Councillors are obviously trying their best to avoid controversy, which is of course dangerous given that it is usually un-intelligently reported by local media.

However, you are right, in this instance it is a bridge too far and underlines a serious lack of financial comprehension by the current Council.

Dal Minogue

May 21, 2014 | Unregistered CommenterDal Minogue

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