The borrowers

June 27, 2009
At a time when world economies have been crippled by debt and its various ramifications, Nelson's two local bodies are signalling plans to ramp up their debt threefold. Geoff Collett reports. --------------------
If ever there was a ready- made stick to beat Nelson's local government with over its just-completed 10-year planning exercise, it is debt. Nelson City Council and Tasman District Council are planning to spend the next decade ramping up borrowing two to three times, arguing it is the best way to ensure their communities keep moving while avoiding crippling rate rises.
On the surface, at least, the timing looks bad - certainly to the group of trenchant and outspoken critics of Nelson City Council, who have been waging a long-running campaign against its financial management. After all, debt and some increasingly creative ways of managing it is widely seen as lying at the heart of last year's financial collapses which triggered the current recession, as Grey Power has forcefully pointed out.
"What advice has this lay council received that gives it the assurance and certainty to embark upon the very course of action that has brought the rest of the world to its knees?" Grey Power demanded of the city council in its submission on the city's long-term plans - the "course of action" being to "perversely increase debt levels by over 300 per cent".
It is not just the amount the city council is borrowing which has triggered such outrage, but its plan to suspend repayments of principal on its debt for five years, again to reduce the pressure on rates. This has been criticised not just by its usual detractors but by some businesspeople who question the wisdom of taking what Grey Power has labelled a "mortgage holiday", particularly when interest rates are low.
Especially controversial is that a sizeable chunk of the city council's increased debt is planned to go to building a new performing arts centre, triggering strong protests.
But in terms of the size of debt, it is Tasman District Council whose accounts show the real surge. Its borrowings will balloon from $108m to $276m by 2019, compared to Nelson's increase from $57m to $170m. One comparison, prepared in a Department of Internal Affairs review of council's draft 10-year plans for 2009-19, showed the TDC would have the second highest debt of all the country's 30 provincial councils over the next 10 years. (Nelson city was in seventh place.)
Tasman was second only to Queenstown Lakes District Council, whose projected debt is so large the auditor-general refused to approve its plan as financially prudent.
While various Tasman ratepayers have expressed alarm over the size of the district council's planned borrowings, the TDC has been spared the sort of attacks on it by Grey Power's local government guardians. In fact, both Nelson and Tasman councils' plans have withstood the scrutiny of the auditor- general, who has ruled them to be acceptable, and they are in line with a growing argument in local and central government circles that councils can and should bear far more debt than they have traditionally accepted.
Among those arguing so was the Government Rates Inquiry of 2007, which included in its recommendations advice that "local government look favourably on making more use of debt to finance long-term assets".
Peter McKinlay, who heads the local government centre in the Institute of Public Policy at the Auckland University of Technology, is another advocate. His analogy is the obvious one, that expecting councils to pay for all of their spending demands out of current funds is akin to expecting a budding homeowner to save 100 per cent of the money to buy their new home.
The key principle is so-called "intergenerational equity" - spreading the bill for long-term projects like new roads or sewerage systems over decades, so future generations who benefit from them help pay.
The resistance to councils taking on debt, "when you think it through, doesn't make a great deal of sense", McKinlay argues. Councils can afford it, they typically have extensive assets to provide security, and they have the ability to raise taxes.
McKinlay sees a simple explanation for the wariness among councils about ratcheting up their indebtedness - "if a local authority puts up debt, the media has a field day", and that frightens off the politicians.
Raymond Horan, a senior analyst at the Society of Local Government Managers, who has also advocated for councils to make better use of debt to spread the costs of their long-term spending, echoes McKinlay's observation. Mud sticks, and he recalls more than a decade ago a "myth" spread by some in the business sector that local government was "debtaholic". It's a catchy phrase, he admits, even if he considers it false: "It makes a far better headline than, 'Local government using debt well', he says.
McKinlay has argued through various forums for local government collectively to do more work on figuring out how councils can make better and more use of debt to reduce the rates burden. There has not been much formal progress, but Horan suspects councils are getting bolder in their use of debt. The number of councils claiming (or planning) to be debt free is down to almost zero, and the country's local bodies are collectively planning to roughly double their debt burden over the next 10 years (for the just- completed 2009-19 plans, it appears to be projected to move from $5 billion to $10b).
Horan argues such figures are not as alarming as the debt-phobic may make out: after all, it needs to be considered against local government's asset base of roughly $100b, meaning that, at the projected maximum, for every $1 of local debt there will be $10 worth of assets to cover it. It is a vastly better position than central government, or many households for that matter, are in.
Peter McKinlay acknowledges that many older New Zealanders in particular fear debt because of bad memories of past economic crises (and Horan recalls the early-1980s, when the country was virtually borrowing to buy the groceries and within a whisker of defaulting on loan repayments). McKinlay suspects that many elected councillors struggle with "the nuances of all this - this stuff gets pretty complicated".
He sees the crusade threatened by Local Government Minister Rodney Hide against local government spending as likely to push councils further towards debt funding; rethinking the way a council leverages more spending power will become more tempting.
From a political perspective, it will remain contentious, certainly judging from the tenor of letters to The Mail.
Or, as one submitter warned the rating inquiry when it was advocating greater debt: "Borrowing . . . creates high costs for ratepayers well beyond the lifetime of the initiating councillors, who are thus not accountable for such costs."
* Additional reporting: Tracy Neal and Alice Cowdrey.
WHAT'S THE MONEY FOR?
The Tasman District Council's debt (based on its draft 10-year plan) is forecast to increase by about 2 1/2 times between now and 2019 - from $108.5 million to $276.4m. Its borrowings will mostly grow in the range of $27m-$33m a year. The biggest single borrowing year is expected to be 2012-13, when it expects to raise $39m in loans. Its top loan-funded projects include:
Motueka's new town water supply ($19.3m total cost, $16.4m loan-funded)
Stopbanks for Motueka ($14m total cost, entirely loan-funded)
Various roadworks ($67m total cost, $33.2m loan-funded)
The Tasman coastal pipeline ($11.7m total cost, $7.5m loan-funded)
The major criticism of the council has been the sheer size of its debt.
A comparison of 30 provincial councils' financial plans, compiled by the Internal Affairs Department, showed that the TDC would move from having the sixth-largest debt now to the second-highest (behind only Queenstown Lakes, whose debt projections have been labelled unsustainable).
Chief executive Paul Wylie defends the projection, however: while it is a "large sum" of money, "it's very low" when expressed as a debt-equity ratio, he says.
"Our equity is very, very high, and if you were a home owner and going along to the bank, asking to borrow 20 per cent of your house value, the bank manager, even in these times, would say, 'Step right in'."
While he accepts that the council will be in "the top end" of indebted councils, Wylie says it will be nothing like Queenstown or Tauranga (another council that had its finances rejected by the auditor-general as not being fiscally prudent).
"We still believe it's very much within prudent levels, and obviously the Audit Office was happy. It's not how much that's borrowed that's important, it's the quality of the spending. If you put it into basic infrastructure, it has a long-term benefit. You are making an investment in the future growth of the district."