Council's borrowing tests limit

Dunedin city councillors will spend three days from Wednesday scouring the budgets as they begin this year's annual plan process.

With some major multimillion-dollar projects in the offing, the meeting will be part one of a passionate debate held every year in the city to decide where and how our money should be spent.

Dunedin City Council reporters David Loughrey and Chris Morris explore the issues.

The Dunedin City Council is eyeing a decade of debt, but the city's financial bosses say that while it will be tight, it can be managed.

Councillors will next week be asked to decide whether to commit to an extra $232 million in capital expenditure over the three years to 2011-12, for projects including the planned Otago Stadium.

The spending, contained in the council's pre-draft community plan, will be financed largely by borrowing, raising the council's overall debt from its current level of about $130 million to $189.7 million by June 1.

However, assuming all the planned new projects go ahead, the debt figure will tip the scales at $354.1 million at its peak in 2010-11 before beginning a gradual decline, the figures show.

That means interest and principal payments to service the debt would more than double over the next few years, climbing to $44.8 million in the 2016-17 year, after a steep rise from $22 million in 2008-09 to $39 million in 2012-13.

The council's own pre-draft plan warned the spending commitments meant the council either "exceeds or is near the limits of its debt-carrying capacity", and DCC finance and corporate support general manager Athol Stephens agreed.

"If we do this capital, financially, it ties us to a set of cash flows for the remainder of the decade," he told the Otago Daily Times.

"We are going to be OK. We are not going to go belly-up or anything like that . . . but there's not much space left in our balance sheets for new projects."

Under the plan, new borrowings - for projects including the city's secondary wastewater treatment plant, Dunedin Centre redevelopment, Otago Settlers Museum development and Otago Stadium - totalled $104 million in 2009-10, $82 million in 2010-11 and $46 million in 2011-12.

Capital expenditure would reach $186.1 million in 2009-10, before a "steep" decline, along with borrowing, over in the years to 2018-19.

Debt would also decline steadily in the years after 2010-11, reducing to $151.9 million by 2018-19, with about $92 million in council debt for the stadium to be repaid once ownership was transferred to a proposed new council-controlled organisation (CCO), expected on July 1, 2011.

However, Mr Stephens said interest repayments on the council's remaining debt - about $284 million in 2011-12 - would, for several years, still breach the council's own liability management policy, which set guidelines on interest payments as a percentage of overall council revenue (8%) and rates (20%), before beginning to trend down from 2015-16, he said.

"That tells us we are pushing it, that we are right at our outer edges," he said.

The council faced other risks, too, including possible future difficulties raising debt, or being charged a "much higher" margin than before, the draft plan warned.

Increased project costs might also fuel the demand for additional borrowing, placing more pressure on funding sources and the cost of funds.

However, Mr Stephens remained confident the finances could be managed until the financial squeeze eased, towards the end of the 10-year period, and suggested there would still be room for smaller capital projects, of several million dollars, if required.

"It will need some good people around this organisation," he said.

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