Council Debt

An upward trend.

The good, the bad, the ugly.

The gift that keeps on giving.

These, and others were in the running for a subtitle on this post. But I decided to just run with “Council Debt.” I will let you choose the subtitle.

There a couple of different views prevalent around the council table when it comes to debt. One view suggests that debt is good, that we are running a debt level that is low (even too low). The other view is that debt is a burden that exposes us unnecessarily to interest rate hikes and the interest on debt consumes a lot of rates that could otherwise build libraries and fix storm water issues.

The view that our LVR (Loan to Value Ratio) is low is in this councilors opinion flawed. It based on a business model. I agree that if you are in business and your LVR is $130 million of loan to $1.5 billion of assets then you are in good shape if not over-capitalized.

The problem is that council is not (primarily) “in business.”  Some of that debt is associated with business ventures such as ports, camping grounds, and shed 4 (for better or worse), and this debt is now “ring-fenced” to the commercial activities that generated it (thanks to the foresight of the likes of Councillor Greening). However, there is a lot of debt that is generated by the many assets that council owns which are not income generating. In this category, we have the likes of roads, parks, water and wastewater, and a swimming pool (don’t get me started).

The funding for all of these non-income generating assets and the servicing of the associated debt falls back on the rate payer. Another mortgage on your property if you will. Like with any mortgage, when interest rates go up you have to pay more.  Unlike the business model where interest is tax deductible and increased costs just mean a lower shareholder return, this is private debt that you will have to find extra money to pay (in the form of rate increases).  The only way to maintain rating levels with rising interest rates is to cut services.

Some current councilors believe that our current debt of around $4000 per rate payer is too low. However, only 10 years ago that level was around $1700 per rate payer, and only 15 years ago was around $650 per rate payer. Because interest rates have been lower than expected, and we have been fortunate enough to not experience any major natural disasters the past couple of years, this council was in the position to hold the rate level at a below inflation increase.

While that seems like good news, it is not as good as it would have been had our debt been at the 15 year ago level. Nor was this current lolly scramble a unanimous choice as we look ahead to interest rates already starting to trend upward. We have been in unprecedented conditions to make a serious attempt at getting our debt down and have not capitalized on that opportunity as we could have, and by that, I mean actual debt reduction, not the often bandied about “lower than forecast” debt (which is not hard to achieve when you understand that forecast debt includes the unrealistic wish list). A choice that we will likely pay for in the future.

If you are at all concerned about the percentage of your rates going toward debt servicing it would pay to quiz candidates in future elections about what they mean by “concerned about debt” and “rate affordability” because it has vastly different meanings to those around the current council table.