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Look around you - Dunedin is humming with economic activity, creativity, aspiration and promise.
Despite that, a few people have expressed concern the Dunedin City Council is in too much debt, so let's talk about that.
The use of debt is very common for local governments and the DCC is no different. Having "well-managed debt" does not expose us to unreasonable risk, and some readers might appreciate having a better understanding of that.
The DCC currently has just under $200 million in debt. This debt level is likely to increase to $350 million as the elected council decided to use debt finance instead of "asset sales" to pay for future planned development.
A debt level of $350 million which is backed by annual income of around $335 million (2027-28) is not, in a local government environment, generally considered high or a cause for concern.
Local authority statistics show that each quarter, New Zealand councils generate a total of about $2.4 billion of income and pay around $190 million in interest.
That's around 8%. In 2028, when our debt is expected to reach its maximum during the term of the new 10-year plan, our projected income will be $335 million and our forecast interest expense is $18 million. So, when our debt is forecast to be at its highest over the next decade, our interest expense will be around 5.4% of income - significantly lower than the existing average for NZ councils.
Why are we planning to go into longer term debt? Because we are about to invest in this wonderful city of ours.
To keep moving ahead we need to build on our strengths and think about the sort of city we want to be living in for the next 10 years and longer. We want to keep attracting people to live, work and study here by keeping the city looking good, so we are investing in revamping the central city, the tertiary precinct area and building a waterfront bridge.
At the same time, we must prepare for the increasing risks from climate change. We need to plan carefully and spend money to make sure our roads and stormwater pipes can cope better with events like the two serious floods we have had in recent years. On top of that, it's costing more to do the work that keeps the city safe, well maintained and ticking over.
During the 10-year plan consultation, the elected councillors first considered funding some of the planned development by selling non-essential property, such as investments outside the city. However, during the hearings process, the council shifted its preference to retaining property and increasing borrowings instead.
The Local Government Funding Authority has three measures of debt to assess a council's credit worthiness. First, a "debt to total revenue ratio" has a benchmark of less than 175%. When our debt is forecast to reach $350 million our total revenue is forecast to be $335 million so our ratio will be around 104% - significantly less than the benchmark.
Second, the benchmark for "net interest cost to total revenue" is capped at 20%. As shown above, ours is forecast to be 5.4%.
Third, the benchmark for "net interest cost to rates income" is capped at 30%. When our debt reaches its highest level, our ratio for this benchmark is expected to be around just 8%.
When reviewing this new level of debt, Audit New Zealand said "the council's forecast debt limits are well within industry best practice standards and should be viewed as such".
The auditors also concluded that:
The council's financial strategy, and the associated financial policies, support prudent financial management by the council.
The council's infrastructure strategy identifies the significant infrastructure issues that the council is likely to face during the next 30-50 years.
On top of that, at the end of the 10-year plan, the DCC will own just under $4 billion in assets and have around $350 million of liabilities. The difference between assets and liabilities is often referred to as "net assets".
The DCC's latest 10-year plan shows that our net assets are scheduled to increase every year during the 10-year plan. Finally, to further reassure you about DCC debt, unlike most councils where their assets are mostly in roads, pipes etc, we own assets which could be easily sold to cover the planned debt if we were ever required to do so.
Our vision is to be one of the world's great small cities. To make this happen, we've worked with the community to set goals which make it clear where we need to put our efforts and our spending. We've listened, and we've acted while keeping a close eye on any risks around debt. Over the next 10 years I look forward to building on our strengths and developing a prosperous and vibrant city.
Mike Lord is a Dunedin City councillor and chairman of the finance committee.