Some sums don’t add up

Graham Crombie responds to Hilary Calvert about Dunedin City Council debt.

Chairman of Dunedin City Treasury Graham Crombie
Chairman of Dunedin City Treasury Graham Crombie


Dunedin City Treasury Ltd welcomes the opportunity to respond to Hilary Calvert’s claims about the provision of funding to the Dunedin City Council Group.

Ms Calvert argues that Dunedin City could have saved millions of dollars over the past five years by sourcing debt from the Local Government Funding Agency (LGFA). This argument is based on several mistaken assumptions, which mean her conclusions are incorrect. We address these errors below.

Dunedin City Treasury Ltd (DCTL) is a council-controlled trading organisation (CCTO), owned wholly by the Dunedin City Council (via Dunedin City Holdings Ltd). DCTL has been managing the financial holdings of the council and its stable of subsidiary companies for more than 25 years.  We refer to the council and all its subsidiaries collectively as the DCC Group.

DCTL manages the DCC Group’s cash and liquidity — ensuring the group has funds available to meet obligations, minimising our funding costs and maximising the return on surplus cash — within acceptable levels of risk prescribed by the council.  DCTL acts as a centralised treasury for the DCC Group. It also manages the council’s investments, including the Waipori fund.  The structure of DCTL funding is reviewed regularly. This includes an annual review at council level of the treasury risk management policy, which sets out the parameters DCTL works within. DCTL also continually benchmarks its own performance against comparable entities, including the LGFA.

While Dunedin City Council could join and borrow from the LGFA, DCTL and other council-owned subsidiary companies could not, under current LGFA rules. Furthermore, local government law imposes restrictions on councils seeking to lend to their subsidiary companies at the rates they have accessed using rates revenue as security. This is important because the $600 million debt that Ms Calvert refers to is DCC Group debt. Only $200 million of this is council debt. The remaining $400 million resides with subsidiary companies, such as Aurora Energy Ltd and Dunedin Stadium Property Ltd — owners of key city infrastructure. This debt could not be borrowed from the LGFA directly. This point alone reduces Ms Calvert’s estimates of potential savings by two-thirds.

The estimates reduce further when the analysis is reviewed more closely. The rates were derived by comparing transactions from different dates, which distorted the comparison. DCTL completed the same analysis using more closely aligned dates, which showed only a minimal difference between DCTL and LGFA borrowing costs. In addition, the graph Ms Calvert refers to illustrates the rates at which LGFA and DCTL debt is priced by the market. The LGFA, however, would add a lending margin above that rate when on-lending to the council.

Furthermore, Ms Calvert’s analysis makes no allowance for the risk involved in becoming a guarantor of the LGFA and its combined debt portfolio. We are not in a position to assess the risk involved, but simply note that all guarantees involve risk. This is supported by the fact that the LGFA applies an additional 0.10% margin to borrowers which are not guarantors.

Also, Ms Calvert’s $7 million figure has been reached by applying a single-point-in-time margin of difference to the full portfolio of DCC Group debt. In reality, the margin between DCTL and the LGFA changes daily, reflecting the dynamic portfolios of both organisations. Applying a single-point-of-time margin to the full portfolio is overly simplistic.

Because of the DCC Group structure, any surplus margin made by DCTL is able to be shared across the DCC Group by way of interest rate adjustment. DCTL has successfully managed the city’s financial holdings for more than 25 years, placing high priority on careful and appropriate financial risk management, and ensuring good value for money for ratepayers. We welcome the opportunity to provide the community with more information about our work.

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