Council set to crest debt summit

Sue Bidrose
Sue Bidrose
The Dunedin City Council looks set to reach the summit of its debt mountain and start paying it down over the other side.

However, Dunedin Mayor Dave Cull and council chief executive Dr Sue Bidrose have cautioned now was not the time for profligate council spending, and discipline would be needed for years to come.

Councillors considering the council's 2014-15 budget later this week would face a possible 2.5% rates rise, and a host of competing options vying for the $633,000 in unallocated funds created in the budget.

They would also face a situation unique in the council's recent history, as the organisation was forecast to begin repaying more debt than it borrowed for the first time in a decade, Dr Bidrose said.

The council's consolidated debt - spread across the council and its companies - stood at about $612 million.

However, the council's share of that, excluding companies, was forecast to drop from about $264 million in 2013-14 to $258 million in the coming financial year, Dr Bidrose said.

That reflected a push during the last council term to cut costs and accelerate debt repayments where possible, even while still borrowing to complete projects - such as the town hall upgrade - begun in previous council terms.

The results were beginning to flow through into the council's budgets, with forecasts showing a steady decline in core council debt - to $187 million in the 2021-22 year - was to begin.

That would see the council meeting its self-imposed goal of reducing core council debt below $200 million, but only if spending discipline was maintained.

Dr Bidrose said the forecasts showed the council was heading into ''clear water'' financially, but only just.

''The tide is flowing in our direction ... We've only just turned the ship around, but we're no longer [just] promising that we're going to turn the ship around.''

Mr Cull agreed, cautioning a ''spending spree'' that consumed the debt to be repaid would be ''basically throwing away'' the possibility of reaching the council's $200 million debt goal in 2021.

It could also have a negative influence on international credit agency Standard and Poor's view of the council's financial recovery, having only just lifted its negative watch on the council, he said.

While this council would have their own views on some of the previous council's commitments, Mr Cull hoped the $200 million target would stay.

''I would hope that the rationale that underpins that ... would continue to be respected. I don't think [changing the target] would go down very well with our community.''

However, councillors would have to juggle the pressure of continued financial discipline with the need to invest in the city's development, Mr Cull believed.

''We can't stand still ... but we have to be doing it in a very constrained spending environment.''

The council had previously expected to begin repaying more than it borrowed in the 2013-14 year, which ends on June 30.

Dr Bidrose said that remained a possibility, but the result was now going to be ''close'' after some earlier planned capital expenditure was delayed, pushing the associated borrowing into the 2013-14 year.

The figures
DCC core debt forecast*

• 2013-14 $264.7 million
• 2014-15 $258.4 million
• 2015-16 $249.1 million
• 2016-17 $238.5 million
• 2017-18 $233.8 million
• 2018-19 $226.6 million
• 2019-20 $217.5 million
• 2020-21 $202.6 million
• 2021-22 $187.9 million

* Gross debt, excluding DCC companies.

DCC and DCTL financials

Thanks Rob Hamlin, for bringing this information to the fore - and signifying the role of the "three big banks" in this city council gamble performed on the ratepayers' backs.

I accept that s62 of the Local Government Act (LGA) specifically forbids the granting of debt guarantees to council owned trading companies.

However, late last year at the public Finance meeting hosted by Crs Richard Thomson and Hilary Calvert with senior staff from Finance, we heard in group discussion that the ‘secured multi-option note facility' arrangement was entered into to circumvent this section of the LGA. Now, in this knowledge - and in the knowledge of that which is contained in confirmed minutes - surely the Dunedin City Council and Dunedin City Treasury Ltd (DCTL) have an investigation headed their way, of official and powerful kind, and a case to answer, no?

'Core debt' meaningless

The notion of DCC ‘core debt' is meaningless for two reasons:

Firstly: the debt and interest payments that the DCC is liable for cannot be quantified as the DCC has entered into an arrangement with BNZ, Westpac and ANZ called a ‘secured multi-option note facility' via its CCTO, ‘Dunedin City Treasury Ltd. Exactly what this arrangement is not known, but it seems to involve considerable exposure to interest rate swap derivative debt instruments whose future behaviour and fiscal outcomes are unpredictable. The DCC ‘lost' more than 20 million on this arrangement in 2011/12 and ‘made' just over 10 million in the last financial year. It may be this ‘windfall' that is supporting this low rates rise - in which case it is not a sustainable or predictable outcome.

Secondly: DCHL group and DCC debt cannot now be separated because the DCC has committed to 850 million in ‘on call capital' to DCTL to support this ‘secured multi-option note facility'. What this means is that the three banks named above can demand that the DCC pays this sum into DCTL at any time that they feel like it within the terms of this ‘secured multi-option note facility - whatever those terms are. A quick look at its books clearly shows that the DCC cannot meet this sum via liquid assets - so responsibility/liability would fall upon the ratepayer. If you are a ratepayer, then your individual share of this liability is approximately $17,000.

This is clearly undesirable, and has been identified as such by a specific section of the Local Government Act (Section 62) which seeks to stop councils from entering into this kind of business guarantee arrangement. The minutes of the relevant Finance and Strategy Committee meeting make it perfectly clear that this ‘secured multi-option note facility' arrangement was entered in to specifically to circumvent Section 62 of the Local Government Act which specifically forbids the granting of debt guarantees to council owned trading companies. Unfortunately parliament did not identify ‘on call capital' as a mechanism that has precisely the same outcome when they drafted this legislation.

I don't like this, and neither did Dave Cull at the time. The minutes make it clear that the purpose of this arrangement was made explicit to those were present and voted on it. The minutes record that he voted against it - In a motion that was carried by a single vote.

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