Using Loan Funding for Capital Works and Replacement

Council has long had a policy of using loan funding for Capital Works and Replacement. Doing so spreads the burden of capital expenditure over current and future rates.

Following on from my post introducing this years budget, if you look deeply into this years draft budget you will see that we are planning to have $15.7m of loans outstanding as at June 2018. This is $ 1.0m more than predicted for June 30 this year.

Our capital expenditure will actually grow by $ 3.5m during the next twelve months.

Most of this will be to fund our contribution to the Brownhill Creek Flood Mitigation Scheme. Part will be to fund the upgrade of the Goodwood Oval Grandstand. Part to provide detailed concept (project shovel ready) plans for the Goodwood Oval and Millswood Sport Grounds improvement plan. The Unley Oval improvement plan and the King William Road master plan will also be funded this way.

Whilst committing funds to these projects we will be paying back our current loans to the tune of $ 2.5m.

Loans of such magnitude can be frightening to some not personally used to loans of this size, including elected members. Having said that I remember when I first secured a home loan I could borrow 7 times my annual wage. Using that formula Council could conceivably borrow $ 280m.

That said this will not ever happen. We have a commitment to borrow no more than 80% of our net operating revenue (or approx $ 32m on today’s revenue).

Some might also suggest that we should not penalise future generations by burdening them with “such high” loans. If you have the cash to do this that is a reasonable observation.

The only way we could do this would be to increase the rates. If we did this to fund just $ 1.0m of capital expenditure we would need to increase rates in the order of 2.5%, nearly as much again as what we are currently proposing this year.

Council will continue therefore with a policy of using loan funding for Capital Works and Replacement.

DRAFT 2017-18 ANNUAL BUSINESS PLAN AND BUDGET OUT FOR CONSULTATION

Before Council settles on it’s 2017-18 Annual Business Plan and Budget we are looking for your input.

At last night’s Full Council Meeting we moved and approved that:

1. The report be received.
2. The proposed list of net Operating Projects of $1.232 m be endorsed for community consultation.
3. The proposed list of net New Capital of $3.790 m be endorsed for community consultation.
4. The proposed list of net Capital Replacement of $7.445 m be endorsed for community consultation.
5. The Draft 2017-18 Annual Business Plan and Budget be endorsed for the purpose of community consultation, to be conducted between 3 May and 26 May 2017.
6. The Chief Executive Officer be authorised to make any necessary minor edits required for consistency or clarity to the Draft 2017-18 Annual Business Plan and Budget, if required.
7. The community consultation process outlined in the report be endorsed.

I encourage you to examine the 2017-18 Annual Business Plan and Budget so that you may become familiar with what we are proposing. Tell us what you believe we should be doing; what services we have not included you believe we should include, those services we have included but you believe are not required; or what should be modified

The 2017-18 Annual Business Plan and Budget can be found here at page 19, item 832: It provides detailed information regarding the:

• proposed projects to be undertaken
• services provided by Council to the community,
• resources required by the City of Unley to deliver the services and projects, and
• funding required (proposed rates increase and estimated borrowings).

To deliver all proposed projects and maintain current service levels. We will require a rate increase of 2.8% and new borrowings in the order of $3.4 m

Please take the opportunity to examine the 2017-18 Annual Business Plan and Budget and provide us your observations.

Watch out for invitations to examine and observe in the following:

Advertising in the Eastern Courier Messenger

• Online consultation on Your Say Unley

• Notification on Council’s website with appropriate links to the Draft Annual Business Plan and Your Say Unley

• Advertising in the Unley Life Column

• Development of a video for social media and website (This is page 22 of the Council Agenda Reports for 24 April 2017)

Further, why not attend one of three public meetings/community information sessions. Timing is proposed as follows:

Goodwood Library 15 May 10.30am- 11.30am

Fullarton Park Community Centre 16 May 2 pm – 3 pm

Civic Centre 24 May 5.30pm – 6.30pm

State Government 2016-17 budget in black courtesy of Local Gov.

It has been just short of a week since the State Government 2016-17 budget was handed down. This was amid wide acclaim for bringing in a surplus that has previously escaped them. Thanks that is to councils and rate payers.

While the Treasurer trumps his State Government 2016-17 budget surplus of some $ 250 million many in the community are bemoaning council rate increases.

The facts are the State is doing well but mainly on the back of imposts and charges being collected via property taxes. Much of this is collected by Council.

Yes! As the Opposition promote rate capping because Councils can’t be trusted the state government, although ruling out a land tax, are using council rates as a stealth alternative.

Unprecedented increases in the Solid Waste Levy will see around $35 million per annum paid by councils by 2019/2020. This is despite the state government refusing to release $90 million of previously collected Waste Levy funding. More than a third of this was contributed by councils and rate payers. Councils have contributed $110 million to the Waste Levy over the past ten years and will contribute another $122 million to state government coffers over the next 4 years.

The state government is taking more and more property taxation – local government’s traditional and only tax base. The attached graph illustrates that the State is now raising 56% of property taxes to local government’s 44%. As I have noted in recent blog posts on rate capping less than 4% of tax nationally is collected by Councils. Adding to this state and federal budget decisions are squeezing council budgets from every direction and forcing ratepayers to pay more in rates.

20160714_133932[1]

State Government 2016-17 budget

Curiously the rebate offered by the Government last year in lieu of the rebate deducted from council rates previously, is offered to help you (if you qualify) with a subsidy to help pay such things as your water and other utility rates, but NOT council.

Budget Approved at 2.2%

After months of work and a seemingly never ending conversation Coucnil last night approved the 2016/17 budget.

 

imagesIn recent days that conversation became quite polarised with a small number of councillors pushing for a 2.7% increase. The change in the conversation during this time alarmed me in that there was no prerequisite to raise the rate increase we had worked on all that time. Just an arbitrary and without foundation we believe it should grow by 0.5%.

 

Thankfully Coucnil showed a maturity and demonstrated leadership by approving the 2.2% rate increase which had been nominated in our public consultation. A rate increase we had no fewer than 4 outside experts confirm as a responsible rate increase and a responsible and sustainable level of debt.

With the lowest rate rise in the time I have been on council I believe we have set a responsible and sustainable budget.

It includes from those of us who live in the west of Unley’s point of view the following:

      Councils contribution to the under-grounding of power lines @ $ 300,000 of Goodwood Road

      Upgrade of Goodwood Road streetscape and way finding @ $ 3.3 m (using loan funding)

      Continuation of the implementation of the King William Road Master Plan

      An increase in funding to address issues raised thus far in our LATM study

      $ 250,000 towards preliminary works on Brownhill Creek

      Safety road works around the Goodwood Primary School

      Footpath replacements in Laught Avenue Black Forest. The remainder of footpaths in the Clarence Park ward are scheduled for 2017/18 when the program terminates.

      Tennis Court resurfacing and fence repair at Page Park.

      A catch up of CPI for our community grants scheme.

      Fruit trees in Princess Margaret Playground

      Responding to tree risk assessment in Dora Guild Playground

In signing off I note that a 2.2% increase on annual rates paid say of last year at $ 1,600.00 equates to an increase of $ 35.00. This is of course subject to whether your homes value (as determined by the Valuer General) alters at the same rate as the combination of all properties in Unley. In other words there may be some variation to this.

The minimum rate will increase by $ 17.00 to $ 758.00

 

2.2% or 2.7% rate increase or something else the question for council

Council sits on Monday night to consider our annual business plan and budget. The focus will be whether or we adopt a 2.2%, 2.7% rate increase or something else. That is the question for council.

Rate CappingAs mentioned in my last blog post Council up to now at least seems divided on what this years rate increase should be. You would be well aware by now that we have been long considering a 2.2% increase. Coupled with that is an intent to increase loan funding by $ 3.3m to fund long term projects.

We are likely to debate on the night increasing the rate increase the rate by 2.7% and reduce the increase in loan funding we have been considering.

The theory behind this is we should not be diverting funding of today’s projects to future generations. Put them in debt so we can enjoy now. Sounds a bit like the spend the kids inheritance now statement we are all familiar with. Having said that much of what we are contemplating is to the benefit of the future generations more so than it will be for the coming generation. The challenge then is to determine how much should be paid for now verses how much the next generation should pay for given projects.

As I see it Council is no different to our rate payers. Council has an annual income, so do we. The method of creating that income and the control over how much income can be achieved of course differs but I am not going to talk about that here. Council owns “real” assets (property, roads, footpaths, parks). So do we.

When we need to improve or redevelop our property we will be faced with how to finance any such project. The larger the project the more likely we are to finance it by way of loan funding. This is because the larger the project the more likely it is we cannot fund it without loan funding. The same applies to council. Indeed I would suggest the longer the life span of a newly created an asset we purchase the more we should consider using loan funding for it, unless of course we have won the lottery and can afford to pay cash.

If we build an addition to our home the chances are we are going to use loans to fund it, assuming we can service the loan. If we cant service the loan we cant pay cash and we should not be undertaking the project.

So….2.2% or 2.7% rate increase.

And I know I am right.

And I know I am right is how Cr Michael Hudson from our Parkside Ward sums up a recent blog post on his Grumpy In Unley website on our current proposed rate rise.

 

Consistent to his views in the time I have been on council and I suspect way before I joined council he believes that Council is always exposing itself to too high a level of debt. As reported in this week’s Eastern Courier he made sensational claims at last weeks council budget meeting of us “cooking the books” in order to look good by keeping the current rate increase low.

Before going to bed he wrote a blog which you can read here. https://grumpyinunley.wordpress.com/2016/04/20/unleys-rates-rise-maze/.

dollar-sign-on-treadmillExpecting a backlash from Council in that blog he indicated that he will use the defence of truth to justify his outburst and subsequently leaving the room. “His” truth as identified earlier in this blog.

It is unfortunate that “grumpy” as he likes to be called left the meeting. By doing this he failed in my opinion to meet his obligation to you to vote on the budget and what goes out to public consultation.

It is unfortunate also that he was not in attendance at two meetings convened earlier this year to hear from an independent consultant who we commissioned to provide opinion on our financial status and management.

Councillors as a group are far from financial wizards. Hearing from an independent expert in the field was an opportunity I for one was happy to embrace. Having said that I was pleased to receive congratulations from this expert that we are financially sound and are managing our assets well. His take on our finances helps me to make a decision with more confidence than I otherwise would.

We, or at least I, were reassured that our policy of always using loans to fund capital works is appropriate. I was also reassured that our level of debt, based on recognised accounting practices, is appropriate. The independent members of our audit committee who are well respected in the financial industry are likewise supportive of our approach. I expect they would feel Grumpy’s comments are an unwarranted and unfair blight against their reputation.

Grumpy is right that our level of debt is budgeted to increase and up some $ 5m in the last 3 years from $ 8m to $ 13 m. Notably the work scheduled for Goodwood Road to take advantage of the current State Government PLEC works takes up $ 3.3m of this. Also notable is the advice we received from the independents noted above that our self imposed maximum lending rate of 80% of rate income (which equates to $ 30m, double our current projections for debt limits in the ensuing years) is an appropriate and manageable limit. Curiously the chart he uses to back up his argument also shows our debt this year is budgeted to be leas than it was 10 years ago, and next year marginally above it.

Finally; the annual business plan and the financing of that plan including a proposed 2.2% rate increase is available for you to look at and comment on. The opportunity for the issue of debt to be robustly discussed both internally and within the community is available now as it goes out for public consultation. This is your chance to contribute to ensuring the rate increase we are proposing is appropriate or not, and that our debt level you can accept or not.

Waiting for your input once the consultation is up on our website.

And that is my truth, and I know I am right.