Is the DCC paying too much interest?

Richard LaHood raises some unanswered questions about Dunedin City Council debt.

I read with interest Hilary Calvert’s opinion piece (ODT, 10.9.10) alleging  the Dunedin City Council has paid about $7 million in excess interest over the past five years, along with Dunedin City Treasury chairman Graham Crombie’s response and Mayor Dave Cull’s letter to the editor (11.9.18).

I respect all three parties and have an open mind, but my initial view is that Ms Calvert has a point that has not been adequately answered. Mr Crombie fairly states  Ms Calvert’s approach is over simplistic and her figure of $7 million can be challenged. However, his arguments do not convince me  there would have been no material saving had the DCC borrowed via the Local Government Funding Agency (LGFA).

Ms Calvert’s conclusion is based on a statement in an LGFA paper stating that if the DCC had debt of $500 million, it could save $1 million a year by joining LGFA.

Analysis to support that statement appears to have been prepared by international accounting firm PwC along with LGFA. Mr Crombie argues the suggested saving of $1 million  is inaccurate because of timing issues. Nevertheless, he does appear to concede  LGFA can access more favourable borrowing costs than the DCC, but describes the difference as ‘‘minimal’’. Of course,  even minimal rate savings across debt in the order of $600 million can result in material benefit to ratepayers running into millions of dollars over time.

Mr Crombie also makes the point  any saving would accrue only to the part of the debt owing by the council and not to the debt owing by the council’s subsidiaries, as subsidiaries cannot borrow from LGFA directly. Unless we have a DCC Group structure that is flawed and unreasonably prejudices our city’s ability to borrow at the lowest possible rates, surely the council can borrow and on-lend to its subsidiaries or reorganise its debt to capture all available savings. Even if the council charges a margin to its subsidiaries, the benefit of the cheaper rate will still accrue to the DCC Group as a whole.

To understand whether or not Ms Calvert has raised a valid concern, I believe that Mr Crombie needs to provide the following additional information:

a) What would the actual interest saving have been if the DCC Group had borrowed all Group debt (including subsidiary debt) via LGFA over the past five years? I believe that this would be a very important exercise as analysing the past can provide insight into what should be done in future. It appears to me that the saving can be readily calculated by anyone with knowledge of the DCC’s debt profile and is, or should be, already known to Mr Crombie as a result of the annual review process  conducted by DCC Treasury. There is no need to include any guarantee risk allowance as we are dealing with an historical period during which there was no guarantee call.

b) We are told the DCC did not join LGFA because of perceived risks around the guarantee it would have to give. Why is DCC not in a position to assess the risk of the LGFA guarantee? I understand  all councils that have a credit rating other than Dunedin and Invercargill have joined the LGFA and, with audit approval, have assessed the contingent liability at nil. If that is the case, does Mr Crombie believe  those councils have negligently made an inaccurate assessment or does the DCC simply not have the ability and resources possessed by other councils to form a view?

I raise these matters not to take sides in a political debate, but to make sure that DCC makes the best decision in future about minimising its interest charges.

- Richard LaHood is a Dunedin resident.

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