Every other day or so, another ‘letter to the editor’ decries Hastings ‘outrageous’ debt, comparing it to Napier’s reassuringly meager $4 or $5 million debt. The letters are usually written by Napier residents fearful of amalgamation.

All share a fundamental error, which no Napier official has bothered to correct in the media – Napier’s total public debt in 2011-12 is projected at $52 million! Still less than half Hastings’ debt, which is projected at $120 million for the same period.

With all the ‘debt-slinging’ going on, BayBuzz decided to take a closer look at the figures presented by both Councils, with the Regional Council’s debt rounding out the picture.

First, the basics

Coming out of fiscal 2010-11, Hastings carried a total public debt of $91.6 million – $58.2 million in external debt (owed to banks) and $33.4 million in internal debt (owed to itself, more on this in a moment).

Napier carried a total debt of $38.5 million – $4.0 million external and $34.5 million internal.

The Regional Council total debt was $15.8 million – $15.5 external and $250,000 internal.

The ‘internal’ debt component makes debt levels difficult to assess. This is money that councils borrow from themselves out of currently available cashflow to pay for immediate capital improvements they might be making. Two examples might clarify the practice, used by most councils.

Councils bill us prospectively for our rates, and the in-coming revenue outpaces the actual need to pay current operating expenses. So, some ‘surplus’ cash accumulates. The council might invest that cash for some relatively low rate of return, or it might ‘borrow’ it to finance some other activity – let’s say, building new public toilets – instead of borrowing those funds from an external bank at a higher interest rate.

When it comes time to pay for the operations that the rates revenue was originally raised to cover, those activities must of course still be funded. Either the council ‘repays’ the internal loan (by switching those toilets to an external bank loan) or other new revenues have arrived to cover the cost. Sort of a public finance ‘shell game’.

A different example involves ‘dedicated’ revenues. Napier, for example, has charged its ratepayers $48 per year since 1997 to fund eventual construction of a new sewage treatment plant, accumulating about $20 million for that purpose. But plant construction won’t commence next year. Where’s the $20 million?

It can be held in reserve and invested. Or, Napier can borrow internally against it. So the sewage plant money is used, hypothetically, to build a new stormwater pipeline, instead of externally borrowing for the pipeline. When it’s time to pay for the sewage plant, that funding must now somehow be covered. Councils can have any number of dedicated reserves that build up this way.

Council loans can be used only to fund capital projects – that is, building or purchasing new physical assets for the community. They cannot be used to pay operating costs or for the renewal of existing assets. Capital projects are presumed to have inter-generational value; hence appropriately loan-funded over time.

Internal borrowings are virtually the same for Hastings and Napier. The two councils take very similar approaches to maximising their use of ‘spare’ cash – ‘total liquidity management’ in finance lingo.

Both Napier’s accounting manager Fiona Green and Hastings’ finance chief, Tony Gray – both interviewed at length – assert that internal borrowing is not ‘jam jar’ financing – using funds dedicated to Project A to instead fund Project B. And then funding Project A with funds raised for Project C. To them, all available cash is fungible and available to be deployed where immediately needed. The ratepayer benefit, they say, is less need for highercost bank borrowing. Green notes that her Napier Council saves typically 1.5-2% on each dollar funded this way.

Ratepayers might differ in their ‘tolerance’ of the practice. It certainly blurs transparency and accountability to the typical ratepayer. What matters to the ratepayer is that all debt – internal and external – is an actual liability owed by the community.

Too much debt?

Financial managers use various measures to reassure ratepayers that borrowing is limited to some ‘prudent’ level. For example, councils enact policies regarding ratio of outstanding debt to assets, or to rates revenue. ‘Accepted practices’ in the public finance sector – and an Auditor General to whom we can all appeal – probably prevent any really egregious borrowing practices.

To the typical ratepayer, probably more important is knowing what the loans are actually being used to buy.

Our chart lists the projects for which the Hastings and Regional Councils have borrowed money, internally or externally, and the amounts outstanding as of 30 June 2011. NCC was disinclined to provide more than general activity figures.

To its credit, the Regional Council publishes this detail routinely in its Annual Plan. Other councils should be this transparent.

After looking at specific borrowing purposes, ratepayers should be better able to satisfy themselves (or not) about the appropriateness of borrowing levels.

If one believes Hastings’ debt is too high, which projects represent excessive borrowing – $5 million for the Opera House, or $1.4 million for housing for the elderly, or something else? For the Regional Council, is it $1.5 million for the regional sports park, or $2.9 million for loans to householders for clean heat improvements, or something else?

Apparently, Napier ratepayers don’t deserve this level of detail and accountability. How can one evaluate $3 million for ‘City Promotion’ against $3 million for ‘Social & Cultural’?

NCC staff provided some examples of specific project borrowing – for example, $6.6 million for the Taradale stormwater pipeline, $5 million for the new museum & art gallery, $2.9 million for Taradale town centre redevelopment, and $10 million for the proposed BTF sewage treatment plant. Such information should be routinely available to ratepayers.

Given the amalgamation ‘debtslinging’, it’s unfortunate that NCC does not provide the detail that might permit more informed comparisons between Napier and Hastings borrowings.

For example, is Hastings wantonly spending more for its new wastewater treatment plant than Napier? The answer is no … both are spending $32 million or so. But Napier’s borrowing won’t hit the books until next year. NCC insists that the Council has accumulated $18 million in unencumbered cash (remember that sewage levy mentioned above?) to pay against its plant, and having spent around $5 million already, will borrow $10 million to complete the project.

Or take roading. Napier has borrowed $5 million for its 363 kilometres of mainly urban streets. Hastings has borrowed $16 million to build and upgrade 1,627 kilometres of roads, many of which deliver the bulk of the region’s agricultural product to market. Does this reflect Hastings profligacy, or a core infrastructure investment that supports many Napier incomes?

Looking forward

Councils’ forward projections are even tougher to assess.

In Hastings, in the 2011-12 fiscal year, external debt is projected to rise $20 million, while internal debt will increase by $5 million, a net of $25 million in new debt. In Napier, internal debt is projected to increase $13 million, while external debt will remain the same.

There’s no question that Hastings has significantly more borrowings than Napier. Hastings’ external debt is projected to peak at around $93 million. Regarding which Napier CEO Neil Taylor recently wrote: “I am not suggesting that Hastings debt is unsustainable because that is not the case.” Napier’s external debt will peak at around $20 million.

Both of these figures can change significantly – reflecting new and discarded projects – when councils update their Ten Year Plans next year. For example, Napier, concerned that
many of its precincts are underwater after major rainfalls, has previewed new stormwater projects estimated at $10 million over 2012-2015.

Paying interest on debt costs Napier ratepayers more proportionately than Hastings ratepayers. In Napier, about 13-15% of rates goes to servicing debt, whereas this figure is about 9% for Hastings. Perhaps a surprise to Napier ratepayers.

All in all, there’s plenty for partisans in the amalgamation debate to explain. For its part, Hastings has a significantly larger debt load to defend. Napier, on the other hand, needs to be more forthright in acknowledging its current and future debt position, reflecting needed stormwater and wastewater infrastructure improvements.

And it should not require hours of ferreting around for the typical ratepayer to get an accurate understanding of the situation. BayBuzz’s research for this article underscores the need for an independent, professionally-conducted review of the financial positions of our local councils … a review then presented to the public in plain English.

Is that too much for our ratepayers to expect? With all the accounting and financial brainpower available in Hawke’s Bay, why doesn’t some public-spirited group of experts step forward and offer to provide this public service?

The amalgamation discussion cannot proceed objectively without it.

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