Katherine Edmond: Council Debt … Should We Worry?

Debt is a burden, however you look at it. If you borrow money, you have to pay it back and when it’s local authorities doing the borrowing, the responsibility for payback ultimately falls on ratepayers.

Like most local authorities in New Zealand, Hawke’s Bay councils have a history of taking out loans to pay for big projects. But they don’t score too badly when compared to what some other cities and districts owe. In 2009, for every rateable property, Napier had debt of $1,628 and Hastings $2,011, much lower than New Plymouth, for example, on $6,896 and Invercargill on $4,517.

But having lower debt levels than some others is not, in itself, a reason to sigh with relief. A community’s ability to service loan repayments is more important than the size of its debt register.

One thing that complicates the debt debate is differing views on whether figures should include both “internal” and “external” loans. Most of us have external debt which is money borrowed from financial institutions at market rates. Internal debt is what local authorities borrow from their own accumulated cash. For example, say the Napier City Council set aside $5million towards the cost of upgrading the Art Gallery and Museum some years back and, with interest earned, the money has grown to $6 million. In the meantime the Council has borrowed that money from itself to pay for something else. Now that the Art Gallery and Museum upgrade is going ahead, the $6 million has to be paid back.

A key advantage of internal borrowing is that local authorities can raise money at more favourable interest rates. The risk is that the money won’t be there when it’s needed for its original purpose. Some, like the Hawke’s Bay Chamber of Commerce, say debt is debt whomever it’s owed to and it’s gross figures (including both internal and external debt) that count. Others say internal debt is different because, for a variety of reasons, it doesn’t always have to be paid back.

So, how much do the three major local bodies in Hawke’s Bay owe?

The Hastings District Council has the heftiest load with gross debt of around $85 million. The figure’s growing and could reach more than $100 million in the next few years, depending on which big projects go ahead.

Hawke’s Bay Chamber figures show Hastings gross debt rose 88 per cent between 2002 and 2009. There was a cumulative rate rise of 45 per cent in the same period, while household inflation increased by 22 per cent.

Hastings Mayor Lawrence Yule prefers to talk about external debt only, and to look further back. He says at the time of local government amalgamation in 1989, Hastings owed $40 million to external lenders, not hugely different from the $50.5 million it owed externally at the end of June 2010. Loans dropped to a low of less than $20 million in 2006, but have risen steadily since then as the Council has borrowed to pay for wastewater treatment, the Hawke’s Bay Opera House, Heretaunga House, and the new sports park.

Whichever figures you use, it adds up to Hastings ratepayers having to fork out more as a result of the Council’s borrowing in recent years. Wayne Bradshaw, who chairs the Council’s Finance and Monitoring Committee, estimates around $150 of an $1800 rate bill is currently going on debt servicing.

Napier’s debt is lower, but not by much, says Hawke’s Bay Chamber Chief Executive Murray Douglas.

The Napier City Council regularly quotes a debt figure of less than $8 million, but that’s only what it owes to external lenders. Napier’s gross debt is forecast to total $58.5 million by the end of the 2010/11 year. And Napier’s rates have also been going up with a cumulative rate rise of 36 per cent between 2002 and 2009, well above the rate of household inflation.

“When you look at the ratio of ratepayers to debt, both Hastings and Napier are in roughly the same position,” says Douglas.

A portfolio of assets and investments allows the Hawke’s Bay Regional Council to earn more and borrow less than other councils. Its chief asset, the Port of Napier, paid the Council $6.5 million in dividends in 2009, subsidising expenditure that could otherwise fall on ratepayers. The Regional Council also has a range of money-earning investments, and reserves of well over $45 million. Despite that, the Council is taking out loans this year worth $6.7 million, which will push its total debt to $19 million by the end of the 2010/11 financial year. In the seven years from 2002 to 2009, there was a cumulative rise of 83 per cent in Regional Council rates, but the figure is high because it came off a low base.

Should Ratepayers Worry?
Whether we should be worried about the Hastings and Napier City Councils’ debt levels depends on your political perspective.

Napier Mayor Barbara Arnott says the city is in a better position than at any time in the past 50 years and she attributes at least some of that to good financial management.

When Arnott became Mayor in 2001, 57 per cent of Napier’s expenditure came from rates, while today rates account for 43 per cent of what the city spends.

“Our position is incredibly manageable and councillors have been trained to be disciplined and careful. We have a very good asset maintenance plan, we don’t have ad hoc spending and we have planned for major expenses like sewerage treatment and upgrading the Art Gallery and Museum.”

But it’s not all the result of being frugal – income from assets owned by the Napier City Council has undoubtedly helped to keep rates down. This includes a portfolio of commercial leasehold properties and the Parklands Residential Development on land that was given to the Napier City Council as a result of the 1989 local government reorganisation.

Hastings has no such family silver, which is a key reason its debt levels have risen faster and higher.

“Napier has an almost guaranteed source of income so they can better afford debt repayments. Hastings has no such cash cow,” says Hastings mayoralty contender Simon Nixon.

Nixon believes bad decision making and poor financial management have also contributed to Hastings’ situation.

“Too many things the Hastings District Council has done, like Splash Planet and the Opera House, were said to be income generating and they’re not. On top of that, borrowings are often not disclosed. Expenses get buried in the system and come out at the other end in increased borrowings.”

Mayor Yule, on the other hand, says he is not worried about Hastings debt. “The reason Hastings has more debt than Napier or the Regional Council is that they both have vast assets that deliver additional income whereas we have to rely on rates or borrow. Of course we know the debt has to be paid back, but I actually think the amount we owe in Hastings is fine and, spread across our rating base, it’s not a huge burden.”

Murray Douglas says there’s nothing wrong, in principle, with borrowing money for long-term, intergenerational projects, but he is concerned about loans being used to ‘pay for the groceries’.

“There are examples where things like footpath maintenance has been funded by short term debt in Hastings. At the moment interest rates are low, but if they go back up councils with a lot of debt are going to be in a pickle.”

Councillor Wayne Bradshaw says Hastings debt levels are partly the result of trying to do too much. “We should be sticking to the basics, like roads, sewage and infrastructure, the core services our community expects us to provide.”

Bradshaw is concerned that too little research is being done into the ability of Hastings ratepayers to service the district’s debt burden in the future.

“With the exception of a couple of pockets, Hastings is a low income area with falling property values. In addition we have a population that is both aging and will include greater numbers of Maori and Pacific Islanders, both groups that historically have low, fixed incomes and high health needs.

“My question is, who’s going to pay? There will be a pinch point where people won’t be able to afford to live here. None of those things have been properly looked at.”

Cash Envy?
Amalgamation is firmly on the table as an election issue and the level of Hastings debt has been cited as one of the reasons Napier is reluctant to get into bed with its twin city. Few, however, seem to agree.

Nixon says there is an ‘irrational hatred of Hastings by Napier’ and the debt issue is a smokescreen. Barbara Arnott refutes that either hatred or debt are behind Napier’s opposition to amalgamation.

“People in Napier like what they have and that local decisions are made locally.”

Murray Douglas also believes the debt issue is a red herring in respect to amalgamation. He says there are proven systems for making sure regions keep their own debt repayments after amalgamation and the real question is whether joining councils would bring strategic benefits for Hawke’s Bay.

Last time amalgamation was put to the vote in Hawke’s Bay, the Regional Council sat on the sidelines and one thing most agree on is that mustn’t happen this time. “They’ve got the cash and we’ve got the assets,” says Barbara Arnott. Napier City Councillor Bill Dalton puts it like this: “It is a stupid situation to have the Napier and Hastings Councils struggling from one pay day to the next, while the Regional Council spends much of its time debating what to do with its money.

Mayor Yule, however, is adamant that amalgamation is not a ‘cash grabbing’ exercise.

“The regional council’s resources need to be used to add strategic assets to the region, not to pay off territorial authorities’ debt.”

Regional Council Chair Alan Dick is cautious.  “It’s not that we won’t share wealth. We’ve recently allocated funds for the Art Gallery and Museum in Napier, the velodrome in Hastings and the Waipawa town hall refurbishment and Wairoa knows we will partner with them on a suitable project.

“But I would need to be absolutely assured that the Regional Council’s priorities and its economic and environmental focus would not be downgraded and subsumed by projects like swimming pools and sports parks.”

There are two other issues with financial implications certain to be debated by Regional Council candidates in the election campaign – the Council’s plan to form a holding company and the merits of the water storage plan for Central Hawke’s Bay.

The proposed holding company would oversee many of the Council’s business interests, including the Port of Napier, with the rationale being that it would make sharper investments and boost returns from the council’s ‘lazy’ portfolio. Critics have questioned whether setting up a holding company would give the Council less control over its assets and the advisability of making riskier investments with Council funds.

What happens with water storage in Central Hawke’s Bay depends on the outcome of a feasibility study but, if the plan gets the green light, it could cost around $200 million. Regional Council chair Alan Dick says there are a variety of options for footing the bill including partnering with iwi and/or irrigators who will benefit from the scheme. He says the Regional Council could come up with a share of the funds relatively easily and he doesn’t see finance for the project as being a stumbling block.

One initiative that could go a small way towards reducing the cost of local government debt repayments is a bank that is to be owned by a consortium of local councils. It’s likely to be up and running next year and Mayor Yule predicts it could shave 0.8 per cent off the interest rate for local body loans by being able to borrow money more cheaply than individual councils.

If you’re worried about debt, what might you be seeking from council candidates?

• Clarity about their own level of concern … does it match yours?
• Commitment to restraint in future borrowing … what limit, if any, would they endorse?
• Purposes for which they regard borrowing as appropriate, or not
• Better information about the cost of debt repayments in the future
• More transparency in council book keeping and budgeting
• Specific reductions in council spending they would endorse (and what savings they have achieved if they are sitting councillors)