Work is carried out on the Forsyth Barr Stadium roof
truss,. Photo by Stephen Jaquiery.
Does the Dunedin City Council have a recipe for
increasing rates and debt, and are its elected officials either
devious or incompetent - as some of the council's critics
suggest? Richard Walls answers some specific criticisms.
Calvin Oaten avers (ODT 19.7.10) that after sifting through
the DCC accounts, the city has a recipe for both increasing
rates and increasing debt.
Unfortunately, his recipe, not for the first time, omits some
key ingredients.
"No wonder Dunedin's rates are so high."
Simply an opinion. And an unsupported opinion at that.
No facts, no comparisons.
The facts would, of course, get in the way of the case Mr
Oaten attempts to build.
Dunedin has one of the lowest average residential rates in
the country and mixes it competitively with its peers even
when the dividend income from council investments is excluded
- a dividend that, this financial year, will reduce the
average residential rate in Dunedin from around $2095 to
$1641 on a property valued at $291,000. (Note: the figure
given is approximate because of the varying impact of GST in
the period.)
Surely the question that Mr Oaten and others should be asking
is: do we get value for our rates dollar? That is certainly a
legitimate question and one for objective debate at any time,
especially when we consider our annual budgets (the draft
annual plan) and, of course, right now with council elections
imminent.
So while expenditure and the activities that council
undertakes should be (and is) constantly under scrutiny, and
bearing in mind that just maintaining services at current
levels accounts for something between 90% and 95% of rating
income, just what services would Mr Oaten cut?
What lesser standards would he accept?
What the council spends is set out in each draft annual plan.
An insert in the relevant City Talk carries a summary of
spending by activity in simplified diagrammatical form.
Last year, a rates funding working party recommendation that
a breakdown of the spending should show on each rates
assessment notice sent to ratepayers was adopted by the
council and appeared on the reverse of the notice.
This year, the detail in the breakdown has been taken
further.
It now shows both a gross and net breakdown for the general
rate, which covers all activities generally referred to as
discretionary: i.e. those we contribute to for community
purposes as distinct from targeted rates such as water, which
are for services directly delivered to individual properties.
It also shows the beneficial contribution of investment
income.
Unfortunately, the detailed legal requirement relating to
rating information that the assessment notice must carry does
not leave sufficient space for the new breakdown and the
changes in GST.
In its place, the notice for this financial year, currently
being sent out, therefore explains how ratepayers may obtain
rating information relating to a property: the first is by
going to the DCC website at
http://www.dunedin.govt.nz/services/rates-information/rates,
entering your property address from the drop-down window and
clicking through from there; the second is by telephoning the
DCC customer service centre on 477-4000 and requesting that
it be posted to you.
Now, let's turn to council debt and the "deceptions" alleged
by Mr Oaten.
In a recent letter to the editor, he wrote: "This year [debt]
is to peak at $337.151 million.
In 2011-12 it is to reduce to $233.061 million."
No problem there.
Straight from the "recipe book" - the now confirmed Annual
Plan.
Then, says Mr Oaten: "This is achieved by transferring the
DCC's costs of the stadium to Dunedin Venues Ltd, which is to
be part of the DCHL group. In doing so, DVL will raise some
$104 million and pay the DCC, thus removing that debt from
its books. Of course it does not go away, it simply becomes
DCHL's burden."
Yes, the recipe does say that Dunedin Venues Ltd will take
over the debt that the DCC has incurred in building the
stadium.
As it should.
Nor is there anything new in that.
It is well documented.
Mr Oaten departs from the script, however, when he says
Dunedin Venues Ltd "is to be part of the DCHL (Dunedin City
Holdings Ltd) group".
Indeed, he does so deliberately knowing full well from a
direct discussion with Mr Athol Stephens, general manager,
finance and corporate, as well as exchanges with me on the
What If Stadium website, that DVL, like its sister company
DVML (Dunedin Venues Management Ltd), is not part of the DCHL
Group.
That is because the two companies are CCOs
(council-controlled organisations), quite different entities
to CCTOs (council-controlled trading organisations), the
companies that comprise the DCHL Group.
The essential difference between the two is that CCOs remain
the direct responsibility of the council and the council
ultimately stands behind them.
I won't repeat the raft of reasons why the ownership and
operational costs of the stadium and other similar bricks and
mortar properties proposed to be included have been
structured within DVL as a CCO. They have been well canvassed
and result in considerable benefit to the ratepayer, directly
and indirectly.
Mr Oaten writes of "an additional amount of interest
amounting to $44.35 million", describing it as a "deception".
And that if it was to fall where it belongs, would "result in
a rate increase this year of some 18%".
He is referring to interest that has been or will be
capitalised into the final cost of assets under construction,
or to be constructed.
When borrowings are needed to fund construction of an asset,
accounting standards require that, like any other cost of
construction, interest on the borrowings is capitalised into
its cost.
Page 96 of the DCC's 2010-11 annual plan gives the total
capitalised, and estimated to be capitalised, over the 11
years from 2009-10 to 2019-20 and pages 110-122 give the
detail.
Of the $44.35 million, payment of $6.7 million (15%) will be
deferred by adding it into the associated debt during
construction.
Once construction has been completed, repayment of the debt
will start.
The remaining $37.65 million of interest is paid as it is
incurred out of a mixture of rates and non-rates income.
There is not a "debt bomb of maybe $60 to $80 million".
These interest payments are already reflected in the three
prudential ratios the council uses.
The interest payments have not been deferred for the purpose
Mr Oaten claims.
There is no deception.
When false assertions are published, the council has no
option but to publish the truth.
Mr Oaten then omits to say that at the time ownership of the
stadium passes to DVL, the commitment to the repayment of the
loan, the ratepayer share, remains unchanged - although the
way of doing so does change.
The current levy of $66 on the average residential property
with a rating valuation of $291,000 will cease in the 2011-12
year when it will instead be deducted from the investment
dividend received by each ratepayer.
Such investment dividend is distributed on the same pro-rata
basis as the general rate is calculated, i.e. if the value of
a property is more, you receive more and vice-versa. Mr
Oaten's position goes completely awry when he mischievously
stirs in "intergenerational equity", suggesting it is a
euphemism related to the deferment of interest.
I say mischievously because he well knows that
intergenerational equity is a term (not a euphemism) applied
to the funding of long-term assets that will serve successive
generations of users: that is, spreading the costs over
long-life assets such as a sewer or water reservoir at Mt
Grand that may last for, say, 80-100 years.
Is it being suggested that the current generation should pay
the lot upfront and bear the full cost of depreciation as
well? That, along with the annual (and seemingly always
increased) asset revaluations, would be nasty medicine for
current ratepayers indeed.
Mr Oaten has been a vociferous critic of the Town
Hall/Dunedin Centre redevelopment and the stadium.
The continued hit-and-run campaign he and others are running
on council debt is simply rooted in that.
Dunedin is carrying a level of debt that is historically
high.
Whether one agrees with that or not, it is tied to the major
capital projects the council has committed to in its
community plan (the LTCCP).
While the stadium is part, the major drivers of council
borrowing remain core infrastructure, in particular water and
wastewater.
And our borrowing pales in comparison with that of our peers
to the north - Auckland recently seeking to raise a mere $350
million to fund part of their requirements in one hit.
As with the spending of rates, it is entirely legitimate for
proposed capital projects - which are the only items of
expenditure that can be funded by loan - and their priority
to be fully debated.
But Mr Oaten consistently ignores that loans must be repaid
and that the DCC plans this precisely before committing
itself to taking them out.
Indeed, it has a respected record of doing so which perhaps
explains why it has been able to secure funding through the
turbulent period of world recession and at very competitive
rates.
The debate on council spending, on its projects - on anything
- does, I suggest need more rigour, objectivity and, dare I
say it, more respect for the opinion of others than Mr Oaten
brings to it.
Richard Walls is chairman of the DCC's finance and
strategy committee.
He has yet to confirm whether he will stand for re-election
this year.
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