Effects of council debt on rates exaggerated

November 7th, 2013
[by David Armstrong]

An increase in Council debt of $1 million would mean a rates increase of 2%, according to the story being put around Motueka at present. But is this true? Not even close, say those who have done the sums.

At the swearing-in ceremony for the Motueka Community Board last week, Cr Jack Inglis made that statement based on what he believed he heard at a Council briefing for new Councillors earlier that week. The statement has since been repeated around town by those strongly opposed to Council's borrowing.

However, Jack mis-heard what had been said and appears to have combined two largely unrelated numbers, says Mike Drummond, Council's Corporate Services Manager, and "the result is not correct".

"Jack is referring to a number I used to illustrate the impact of expenditure increases on rates. It assumes that the expenditure is 100% rates funded. The base calculation is an additional $1m expenditure and total rates of $50M which equals to 2% rates increase," Mike says.

"The caveats are of course that in practice it's a lot more complex to calculate the impact. The impact depends on what is the activity that the money is spent on. The activity could be funded by Targeted rates, General rates, or fees and charges, or indeed a combination of all three.

"The second ball park number I used was that a 1% increase in finance costs [interest rates rising for all New Zealanders] would require a 3.2% increase in rates to fund it (assuming it entirely rates funded); the basis for that is $160m in debt and $50m in rates.

"The purpose was to illustrate how sensitive rates are to increases in expenditure and interest rates. It's incorrect to say every extra $1m borrowed by council means a 2% rise in all our rates."

Community Board member David Ogilvie, along with Motueka Online, adds to this debate another simple way of calculating the maximum effect of any extra borrowing on our rates, assuming at the extreme that all borrowing is rates-funded.

A conservative reckoning is that if council borrows another $1m at 6% interest, the interest to be paid each year on that alone is $60,000, which spread over the about 21,000 rating units is just under $3 per ratepayer per year on the interest. On an annual rate bill of $3000, this is 0.1% rates increase ($3 added to $3000), not 2%.

And even if the repayment of the principal ($1m) over, say, 10 years, is included, and also assuming that it is funded by rates alone, then that's $100,000 p.a. to be paid by 21,000 rating units, or just over $5 per ratepayer per year.

The total maximum cost is less than $8 per average ratepayer per year to completely pay off the principal and the interest (which would of course decrease each year as the principal reduced, so this is an overestimate).

If ratepayers are to fear debt, at least we need to ensure we have our facts right - it has to be a rational fear, not heavily exaggerated numbers.

Comment by Chris Salt:
[Posted 10 November 2013]

The debate here is misdirected. You would think the debt burden across the world would have awakened us to the fact that increasing debt is a very bad idea. Apart from loading a burden of debt on future rate payers it remains an easy way to avoid living within means and sating an endless desire for new community spending.

Future spends for community projects, outside of core council functions, should come from community fund raising, not by appeals to council for funding. Council, in its turn has to get tough on requests for funding. For example, I'm keen to see the historic wharf refurbished but I don't think the TDC should pay for it. The local community should raise the money and contribute labour and other resources to the work to keep costs down. The TDC should help by waiving compliance costs and supporting the lowest possible reconstruction option.

We also have to get away from a rating system altogether. It is anachronistic and unfair. Local body funding should come from GST-type consumption tax so everyone contributes, including the thousands of visitors and tourists using the region's infrastructure.

If it were legislatively possible to institute this in Tasman, Nelson would also have to go along to prevent people hopping 'the border' to escape the tax. Even if people are not paying rates they would still try and save a buck even if they burnt petrol to do it. A consumption tax in lieu of rates would also likely boost the economy of the Nelson-Tasman by making it a more attractive place to do business and live.

Comment by Jim Butler:
[Posted 10 November 2013]

I cannot agree with you more David, we need to ensure we have our facts right.

So quoting from the Motueka Community Board's agenda for their meeting on 12th November under (TDC's) Corporate Services Committee (meeting) of 22 August 2012, (TDC's) debt at 30 June 2013 was $158.01 million, which has a present average interest rate of 5.04%. By use of a calculator, the interest on this debt this year is $7,963,704. Round it up to $8 million to make it easy and divide it by 21,000, about the number of ratepayers in TDC and we get $380.95. This is the present cost of interest included in each rate demand to every TDC ratepayer.

This would not look so bad if TDC was not predicting through its Annual Plan process that its debt will double by 2020. This may not look so bad either, until it is pointed out that Marlborough District Council has virually no debt. Marlborough District covers a large area like TDC. Has two towns, Blenheim and Picton, similar to TDC's Richmond and Motueka and a similar number of small townships. But unlike TDC, Marlborough District Council has been able to balance its expenditure with income for many years.

But TDC has been spending more than it income for about 10 years and covering the difference by borrowing. Mostly by means of 20 year loans for capital works. At 5%, the interest on a 20 year loan equals the sum initially borrowed. This means that TDC ratepayers are paying twice for the same work.

TDC uses the argument that by borrowing over a 20 year period, the cost is being shifted to the next generation. 20 years is not long enough for that. It will mostly be the same generation paying twice.

Comment by Petra Stephenson:
[Posted 13 November 2013]

I totally agree with Jim Butler. Not only are we paying twice, this second 8 million doesn't give us anything of value but actually leaves our district to overseas banks. Each year the money gets syphoned off. Imagine what we could do as a district with this 8 million each year.

But now I would like to make the community aware that many of you are also paying twice for your own borrowing. Every time you upgrade to something newer or bigger, if you don't pay cash, you are paying interest to overseas banks (unless you bank with NBS). All this money is leaving our district. A study was done on Raglan, a similar size town to Motueka. They estimated that each year 12 million dollars leave the town due to borrowings and associated interest. See www.le.org.nz/savings-pools/85.

Imagine now, how we would flourish if Motukea/Tasman plugged its leaks. This is why I have been looking into timebanks, local currency and savings pools. These are all means to stop the leak and strengthen our community.

Further comment by Jim Butler:
[Posted 14 November 2013]

What the contractor gets paid for doing the work is much less than ratepayers end up paying. For with some of works paid for by TDC ratepayers, three parties can be involved in the planning, TDC in-house planners, their consultants and the contractors doing the work. Plans can circulate between these parties for years in extreme cases.

For 7 years in the case of the Motueka River stopbanks for example, where no contractor has yet been hired. $600,000 was paid to the consultants and as time is money with TDC staff, I estimate that at least one million dollars of ratepayers money has been spent to date. In private industry some senior staff would have lost their jobs over this mismanagement.

While it is very easy to be very wise with hindsight, if instead of covering 20km of stopbanks in one project, it had been broken into upgrading one km stretches at a time, the money now spent could have probably upgraded some of the weakest sections by now. And possibly paid for out of income so avoiding borrowing.

I was pleased to learn from Cr Dowler that the upgrading of the the Motueka Sewage Works is to be staged. And if the time between each stage is long enough, only short term borrowing may be required.

The proposed Hub for Motueka is a great idea, but I cannot see it ever being started unless it is staged. Have the Library built first alongside the I-site building. They can be joined. Next stage, when finance becomes available, move the TDC Service Centre over or provide a new building. And so on until all the facilities required are on-site with only short term borrowing. The short term loans can be repaid before the next stage begins and this staged construction should simplify the planning.

>> , to be added to the page. [If this link doesn't work, use this form instead]

[ Return ]
[ Other news articles ]

We wish to thank these local community-minded businesses who generously sponsor our site. They recognise the value of supporting this community asset, and in return Motueka Online is pleased to use and recommend their services whenever appropriate.

Ray White Motueka, Motueka Floral Studio, Nelson Building Society, House of Travel,
Greenwood Active Health, Lynette Mytton,