Debt accounting deception

Calvin Oaten has been sifting through the DCC's accounts and finds nothing but dismay.

"No wonder Dunedin's rates are so high."

The avalanche of demands on the local public purse is staggering.

Combine that with the seemingly inevitable growing weight of council bureaucracy and the internal pressures that brings, and the city has a recipe for both increasing rates and increasing debt.

Meanwhile, net debt is due to soar by more than $30 million in the coming financial year to approach $100 million.

Further increases are predicted, with the total in 2011-12 due to reach more than $150 million.

Sound familiar? Well that was some of the Otago Daily Times editorial (23/05/03).

"Spiralling rates."

Estimated term liabilities (core debt) have leapt from $45 million for the year to June 2010 to $162 million.

Debt is soaring, and the cost of interest and principal repayment is now about $16 million a year - 10% to 11% of total spending.

Today? No, it is the ODT editorial (17/05/05).

"Annual Plan a sham," says the ODT editorial (20/01/10).

After 50 hours of annual plan meetings last year, the Dunedin City Council managed to achieve a reduced rate increase for the following financial year of a mere 0.9% down from an anticipated 7.8%.

To demonstrate the proof of its opinion.

Chief executive officer Jim Harland took exception to this, and we were then witness to the spectacle of a paid servant using our city council chambers as a forum to fulminate politically against the Otago Daily Times, defending the process of the annual plan.

That he did this is even more remarkable in that the mayor and full council were present.

After his tirade, Mayor Peter Chin concurred with Mr Harland's sentiments, which he said expressed the view of many councillors.

This subservience raises the question: who serves whom?

We might argue as to whether the new plan is a sham or not, but it is most certainly an exercise in the gentle art of deception.

Why? Well, we now know that the rate increase is struck at 5.5%, with a projected 9.1% next year, 8.2% the following and so on.

So what is deceptive about that? Let's look at the projected net debt.

This year it is to peak at $337.151 million.

 

 In 2011-12 it is to reduce to $233.061 million.

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.

Shifting the deck chairs in effect.

But we see that in just two years the DCC's debt is back up to $292.853 million.

If it was still carrying the stadium debt its total would then be $396.853 million.

In the expenditure column we see that from 2009-10 through 2019-20 provision is made for interest payments against the debt amounting to $185.595 million.

But here is where the real deception comes.

There is an additional amount of interest amounting to $44.35 million ($39.04 million of which falls due between 2009-10 and 2012-13) which, if it was to fall where it belongs, would result in a rate increase this year of some 18%.

So what have Mr Harland's men done?

They have progressively provided to capitalise $44.35 million of interest to defer it way into the future until it is more propitious to handle (what Cr Richard Walls would euphemistically call intergenerational debt).

This means that the ratepayers will be charged interest on the interest for as long as it takes.

Away in the future we could be looking at a debt bomb of maybe $60 to $80 million.

This had to be done as the cash-flow burden has already breached the prudential ratio of interest to total revenue past the set limit of 8% to 9.7% or so for the next seven years.

A rate increase this year of 18%? Not a good move in an election year.

Besides, that increase would have raised the whole foundation on which ensuing years' rates increases would be based.

Deceptive? If existing councillors were unaware of this situation then they are incompetent.

If they were aware, then they could be described as devious.

That the bureaucracy facilitates these financial instruments in order to disguise from the public the true situation, suggests that, like "Elvis", integrity has left the building.

Calvin Oaten is a Dunedin ratepayer.

 

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