FINANCES OF THE TRAMWAYS

Press, Volume LXX, Issue 21147, 24 April 1934, Page 12

FINANCES OF THE TRAMWAYS

■ * The Accountants' Report CRITICISM OF METHODS DEPLETION OF RESERVES CONDEMNED Strong criticism of tnc way in •which the finances of the C'nristchurch Tramway Board had been handled during the last few years, and the way in which the reserves had been drawn upon in an endeavour to pievent having to strike a rate, was made in the report of Messrs J. Anderson and H. A. C. North, public accountants, who were appointed to enquire into the finances of the board. The report sets out in detail the investigators' reasons for arriving at the conclusion that the board has no alternative but to levy a rate, and it condemns the provision that has been made since 1927 for renewals and depreciation. The report will be considered in detail in committee on Thursday night. The report was presented to the meeting of the board yesterday afternoon, when the following were present: —Messrs J. K. Archer (chairman), E, J. Howard, M.P., J. Mathison, G. Manning, C. E. Jones, W. J. Walter, E. Parlane, G. T. Thurston, and Mrs E. R. McCombs, M.P. The report stated: — Order of Reference The order of reference was as follows: (.l) What was the financial position of the board on December 3, 1933, and how did it compare witn the same period in the previous year? (2) Does the estimate of the financial position at the end of the current financial year, supplied by the general manager, appear to be reasonably correct, and how does that compare with the previous year? (3) Does the estimate of the financial position for the year ending March 31, 1935, supplied by the general manager, appear to be reasonably correct? (4) Does the published revenue account for the year ended March 31, 1933, correctly set out the profit and loss account of the undertaking for that year? (5> To what extent if any is the position affected by the fact that in the balance-sheet liabilities there are temporary loans amounting to £12,243 18s 2d and a bank overdraft of £12,850 18s, and on the assets side in the revenue reserve account there is a debit balance of £5471 6s 6d? (6) Trace the decline in traffic returns during recent years and the reason therefor, including the effect of the tramway strike in 1932. Compare operating expenses increase or decrease in the same periods.

(7) Compare the operating expenses of the Christchurch tramways with the operating expenses of other tramway undertakings in New Zealand as disclosed by Government .reports. 18) Compare the revenue of the Christchurch tramways with other undertakings in New Zealand and give reasons for the differences to the extent that they are ascertainable from official records. (9) What effect has the> board's recent loan conversion operations, including the repayment of loans due in October, 1934, upon the finances of the board? Have you any opinion to offer on the method employed of repaying principal in half-yearly instalments, (10; Do the proposed appropriations for renewals in the years ended March 31, 1934, and March 31, 1935. appear to be reasonable? HI) Can the collection of a rale to cover the deficiency at the end of the current year, March 31, 1934, be avoided? If so, how? (12) Can the collection of a rate to cover the estimated deficiency for the year ending March 31, 1935, be avoided? If so, how? Finances Compared The report states that for trams and trackless trams, from April 1, 1933, to December 3, the earnings were £115,729, compared with £119,356 for the same period in the previous year; the operating expenses were £83,519 compared with .£83,991, leaving net earnings of £32,310 compared with £35,305. Interest, sinking fund, and renewals amounted to £46,638 compared with £50,743. The earnings of petrol buses between April 1, 1933. and December 3 were £3269 compared with £3821 for the same period of the previous year. Operating expenses. interest, and renewals totalled £3915 compared with £5207. The deficiencies on both trams and buses from April to December were: Trams and trackless buses £14,428 in 1933, and £15,378 in 1932; on buses it was £646 in 3933 and £1386 in 1932. There was therefore an apparent improvement in the later period of £1690. The expenditure under the heading of interest was, however, much less than in the preceding year. There had been a slight reduction because of the conversion scheme, but the largest saving in interest was £1913 saved to the revenue account by the recent decision of the sinking fund commissioners not to charge interest amounting to £55 53 for the six months ended March 31. 1934, on the board's debentures held by them. The sinking fund contribution had also been reduced very considerably, and that had arisen because of the conversion and repayment schemes. Both the savings were, however, purely illusory, as both the depreciation and sinking funds were the board's own funds, and by the method adopted the funds were being deprived of revenue which they should have received. "We would say that in recent years there has. in our opinion, been a regrettable tendency to reduce the debits against revenue by various expedients none of which commend themselves to us," state the investigators. Kcvenuc and Expenses The earnings for the year ended March 31, 1934, amounted to £174,522, compared with £179.200 for the year ended March 31, 1933. The operating expenses amounted to £124,560, as against £121,282, the net earnings being £49,962, compared with £57,913. Interest, sinking fund, and renewals amounted to £66,007, compared with £74,943. The deficiency for last year on both trams and buses was £17,057, compared with £18,636 for the previous year. Concerning the proposal to transfer £2550, the balance of the invested funds of the reserve accounts to assist in reducing the deficiency, the investigators say: "We consider the course suggested to be most inadvisable. It is certainly trusted that the board will resist the temptation to deplete further the remaining special reserves represented by investments." "The tdebit for the sinking fund is

only £1857, which is occasioned by allowing for sinking fund payments for only two months from February 1, 1934, on the converted and renewal loans. Here again is an expedient to save the revenue account at the expense of the sinking fund." The investigators added that they were not at all satisfied as to the adequacy of the provision for depreciation. Estimates for 1935 The estimates for the year ending March 31, 1935, are Net earnings, £49,444; interest, sinking fund, ana renewals, mated deficiency of £18,072. That estimate appeared to the investigators to be reasonably correct. Referring to questions 4 and 5, the report shows that from 1927 to 1933 the deficits amounted to £45,449, and the surpluses to £24,456. Alterations, short-paid renewals, and interest taken from special reserve accounts bring the accumulated deficiency to £26,503. Reducing this by £5471, the amount of debit left in the revenue reserve account, leaves a balance of £21,032. "The report on the accounts for the year ended March 3!, 1933, clearly states 'that the budget has been balanced by bringing into account revenue reserves, items which hitherto had been kept in the fire and accident accounts.' No mention is however, made in the report that the interest on special reserve investments had also been utilised to reduce the deficiency, but these transfers are shown ii the reserve accounts concerned. In our opinion it would have been better if the word 'deficiency' had appeared in the revenue account, as to th general public it might appear on the face of the accounts as if the revenue account had been balanced in (he usual way. It must be borne in mind that the transfer of these reserves to balance the accounts for the year has been rendered effective by the realisation of securities held by these funds and the payment of the proceeds into the general bank account." It was shown that investments totalling £20,890 had been realised. The board, in deciding to realise those investments, saved the undertaking from levying a rate in 1933 and acted within its rights, as those reserves were not required by statute to be kept, says the report. "We are, however, definitely of the opinion that the step taken w;s inadvisable, as the reserves were built lip for the following purposes:—Public accident fund, employees' accident fund, and fire reserve fund. The temporary loans and bank overdraft showed that it had been found necessary to borrow money to carry on the undertaking." Traffic Decline and Strike

The traffic revenue dropped from £TJ3.047 in 1927 to £181,042 in 1933. in Auckland the drop was from £637,782 to £529,432, and in Wellington it was from £453,688 to £364.896". In that period in Christchurch the passengers carried dropped by approximately 8,750,000. The strike of 1932, of course, seriously dislocated the service and caused a considerable dropping off m revenue, but the investigators were unable to say whether it had a permanent effect on the returns. The returns for 1934 showed no recovery as compared with 1933, and the investigators therefore thought that the reason for the drop must be looked for elsewhere. It was interesting to note that the revenue declines to March 31, .1933, when compared with 1927 in Auckland, Wellington and Christchurch were as follows:—Auckland 16.99 per cent..; Wellington, 19.57 per cent.; Christchurch, 36.04 per cent. They considered that the depression and attendant unemployment had been, in the main, responsible for the drop and there was also the reason that in Christchurch a person could far more easily make arrangements lor an alternative method of transport than in either Wellington or Auckland owing to the level nature of the city. Tiie operating expenses in 1927 amounted to £210,897, and in 1933 to Expressed in terms of pence a car mile, they had dropped from 13.4!J6 in 1927 to 10.944 in l!) 33. (t is pleasing to sec that with such a serious fall in the revenue it was found possible m 1932 and 1933 particularly to reduce drastically the operating expenses. If this had not been done the already serious position would have been greatly accentuated."

Other Undertakings Compared A comparison with the operating expenses of other undertakings showed that the total operating expenditure a ear mile was as follows; Auckland, 1a.37d; Wellington, 15.08 ci; Dunedin, li.Old; Wanganui, 10.07 cl; Chrislchurch, 10.92 d; Invercargill, 1(J.76d; and New Plymouth, lO.fifid. The percentage of operating expenses to revenue shows: —lnvercargill, 80.29; New Plymouth, 76.52; Wanganui, 75.81; Auckland, 70.53; Wellington, 68.44; Christchurch, 04.80; Dunedin, 64.72. The traffic revenue to each car mile for electric trams only shows;— Auckland, 22.83 d; Wellington, 21.45 d; Dunedin, 18.14 d; Christchurch, 16.85 d; Wanganui, 13.91 d; New Plymouth, 13.7(5d; Invercargill, 12.33 d. The investigators show that in Auckland the capital outlay was £2,053,231, and the traffic revenue. £554,109; in Wellington the figures were £1,357,182 and £309,210 respectively, and in Christchurch they were £1,304,572 and £202,049 respectively. Christchurch had 53i miles of route, Auckland having 36, Wellington 31, arid Dunedin 18. Effect of Loan Conversion The report shows that the total interest payable on Ihe old loans was £52,201 a year, while on the conversion and repayment the amount payable will be £37,221, but the full benefit will not be received until after October 1, 1934. "The greatest portion of the interest saving is of course by the repayment of loans from the sinking fund, which is augmented, as authorised by statute, by the transfer of the whole of depreciation fund after making provision for renewals from this fund to March 31, 1934,'' states the report. "It is to be understood clearly, therefore, that the saving in interest on conversion is a very slight one indeed and it is also to be remembered that the sinking fund will be earning a lower income on its remaining investments." It is shown that the saving may amount approximately to £II.OOO a year. The investigators commend the system of repayment of the private investor's loan which will be redeemed over a period of 27J. years by half-yearly redemptions. The new proposal will enforce the repayment of principal regularly, and there will be no opportunity for the board to adopt the expedient of persuading the sinking fund commissioners to forgo any payments to help revenue as was done recently.

Proposed Appropriation Dealing with the proposed appropriation for renewals in the years ended March 31, 1934, and March 31, 1935, the investigators review the appropriations of previous years and say: "The guiding principle adopted by the board has been to see that the loan liability is never greater than the value of the undertaking, and it is for this reason that the sinking fund has been merged when considering the debit required for renewals, the view being taken "that the present generation should not present future generations with a free asset.' We consider, however, that there has been insufficient allowance for obsolescence. which, with rapidly changing conditions, is not a remote possibility. Indeed, none of the reports makes any such allowance, they being based entirely on the engineer's estimate of the life of the various assets, although it is plain that in the earlier days this was provided for, and in the 1920 act 2 per cent, depreciation and 2 per cent, renewals was laid down. This provision was, however, repealed in the 1927 act, and the basis used up to March 31, 1934, was adopted." The report shows that from 1907 to 1926 the allowance for depreciation and renewal purposes was £535,089, or £26,755 a year; whereas from 1927 to 1933 the contributions amounted to £130,457, or £18,637 a year. "It is considered that only two interpretations can be put upon these compara-

tive figures. Either in the first 20 years too generous an allowance for depreciation was made, or else in the last seven years insufficient provision was made. We are strongly of the opinion after careful consideration that in an endeavour to limit the debit to as low a figure as possible, the board allowed its strong desire 'to keep the undertaking off the rates' to dominate its discretionary power in fixing the amount for renewals, which, being the depreciation allowance, should be fixed entire'v from the point of view of "ie obsolescence and wearing out of the assets and without reference to the probable effects on the revenue account. "In addition sufficient depreciation should also be written off to provide for the obsolescence of the undertaking as well as the wearing out of the assets. The time has now arrived when borrowing will be necessary for actual renewals, and the main difficulty of the board is the high capital cost of the undertaking and the attendant loan liability. We feel that unless a more liberal allowance is made out of revenue for renewals the loan liability of the board will not be reduced at such a rate as wiil enable it to get its obligations down to a more manageable figure. On the contrary, it looks as if the loan liability is likely to increase. Renewal Allowances Too Low

"We would therefore say that in our opinion the proposed debit to renewals for 1934, in common with the immediately preceding years, is too low and should be reconsidered by the board before fixing the deficit for this year. Regarding the 1935 proposal*! which has been adopted by the board i. as the sinking fund earnings will be greatly reduced, and as there will be no depreciation fund earnings, we naturally expected to find that the proposed debit for renewals would be accordingly greater. Much to our surprise we find that the whole method of arriving at the debit has been changed for the new year. Section 2 of the Christchurch Tramway District Amendment Act, 1927, subsection 1. states that in fixing the renewal charge the basis shall be 'the original cost' of the undertaking of the board. Nevertheless, last year an exhaustive valuation of the undertaking at present-day costs of replacement was made and the depreciation to be charged in future suggested on the results of this valuation. In our opinion this does not comply with the act. and if we are correct in this the basis as adopted is wrong.'' The debit for renewals for the year ended March 31, 1934, was £18,629, but the investigators object to the deduction of £4072 which was the depreciation allowance on assets purchased bv the revenue account in previous years, as in their opinion that is definitely against sound commercial practice, and, moreover, is in their opinion contrary to the act. The effect of the new basis adopted was to lower greatly the debit that would have been tixed if the plan adopted in previous years had been adhered to to the extent of at least the difference between the earnings of the sinking fund and the depreciation fund in 1934 and the sinking fund alone in 1935. less the larger contribution to the sinking fund amounting to a shortage of approximately 118000. The proposed debit for 1931j will be £ 15.454. Tt is recommended that this matter tie reconsidered with a view to Ihe aclual amount, that is required and with no though), of the effect on the revenue account. "Criticisms .Justified" That the report justified many criticisms that he and others had levelled at the board in the past was the contention of Mr Howard, who expressed pleasure at the completeness and clarity of t'ne report. He contended that if the boai'd had had to meet its £25,000 debenture liability this year it would have been sorely put to it. It was a floating liability that the new board might have been called upon to produce within a few weeks of coming into office. Seme years ago the board adopted a .system of carrying its own insurance. The general manager had shown that the old boai'd had not carried out the system fairly. Previous boards had halved premiums when surpluses were shown, a tiling that could not have happened in paying to a private company. The same thing applied to public accident and fire accounts, for the old boards had gradually dropped the accounts and had taken the surpluses when finances began to go wrong, added Mr Howard. He quoted a statement from the report stating 1 hat the actions of the old boards were legally right but unwise. Workers' compensation. he added, should be a sacred fund when local bodies carried their own liability. "The report"' concluded Mr Howard. "shows that there is no way out', but that citizens must pay the debts of bad administration by a rate."

Fxtravajrancc Allowed Mrs McCom'os said lhat recent board!?, being faced with the necessity of a rate, instead of doing the obvious thing. 1 ransferred reserves. She had no rioniH thai: the accountants who were reporting opposed to such a course. The capital expenditure of the Christchurch Tramway Board had gone up out oi all proportion to the 'population of the district. That hart been one ot the worst feature's of the administration of tramway boards in Christchurch, and the public had to pay for it now. The board had gone in for extravagant innovations. Trolley-burjes were just going on the street, in Sydney, yet Christchurch. with a population of 120.000, had had them for six years. Mr Thurston said the last board had clone everything that was legally correct, but nothing that: was logically or morally correct. The principal offer rs of the board also were br ing put in a very bad light by the report—a very bad light, indeed. "L'conomies Forced by Necessity'' Mr Manning said he did not agree by any means with the whole of the report. He felt so far as reducing operating expenses were concerned, that any board in operation between 1930 and .1933 would have been forced bv necessity to reduce expenses. The board, in its prosperous 27 years—from its start up to 1927 had built up reserves for various purposes. paying attention to the public accident fund. In three years £18.719 had been paid out for public accidents, but' now that fund stood at £SOO. The board, in reducing that fund, had been guilty of a wrong action. The risk was always present, but where would the rnoncv come from if there were a big accident? Ihe present board should start to increase that fund immediately. If the employees' accident fund had not been reduced the interest would have been sufficient to cover expenses. The Citizens' Association's candidates had pledged themselves to the citizens of Christchurch that the system would not go on the rates. But the old board had used money from reserve funds and the present board had been left to get out of the difficulty. To get out of it without a ate was" mentally, physically, and morally impossible. * He felt that the board should put the system on the rates to wine out the deficits, and apologise for the old board's not having the wisdom to take that course. Mr Jones suggested that the report should be referred to three well-known accountants, who, he thought, would have sufficient public-spiritcdncss to give their services in tin honorary capacity. They might put a different complexion on the matter. It was impossible to pick up the report and consider it ..nalytically. Mr Howard: You never set up a commission to examine a commission's report. Mr Jones remarked that he put the suggestion forward in the interests of the board—every avenue should be explored. "Censure on Old Board" The chairman (Mr J. K. Archer) said that every accountant in the town would have the opportunity to review the report, and he felt that any citizen would make suggestions. The board had acted very wisely in the past to establish its own insurance, but it

should nevfer have been interfered with. Two things Mr Jones seemed to have overlooked in the report: One was its simplicity and the other point was the saving of £II,OOO in interest. "One former chairman tried to make party capital out of this. I would say j that either he himself did not under-i stand the position, or else he has wil-1 fully or wickedly misrepresented it to I the public," he said. j That £II,OOO was not solely the re- j suit of conversion—before conversion ; the board had £139,000, and that had: been paid out in debts. . i "Taken as a whole the report is a i very serious censure on the old board,; and unconsciously a smack at the j newspapers," remarked the chairman.; "The editors of all the city newspapers; at every election have urged the need j for business men on the board. Cer- j tainly the board needs business men,j but not men in business. Many men ; in business muddle their own busi- ! nesses, and could not be expected to; manage the business ol the community in a businesslike way. The past board, in fact, did not have a member who could be considered a first-rate business man." Mr Archer said that among the matters that the board would have to face in the future would be its policy concerning fares, a more frequent service j with fewer trailers, and the matter of the rate. A rate in his opinion was inescapable, at least this year, and probably next year also. Detailed Discussion Wanted j Mr Howard moved that an open meeting of the board be held on Thurs- j day next. At the same time he did j not wish to prevent the manager from j making a statement. However, his j statement was explanatory, and the report should be taken in conjunction, with the present position, and they should discuss it from the viewpoint of getting out of their difficulties. They had that day discussed the reasons for the present' position, and they should now endeavour to improve if. He did not agree with Mr Jones. The report stated that the liability in 1919 was £569.000 and in 1933 it was £1,170.000, but how nn'iny new lines had they laid since 1919? None. Mr Jones: You have some trolleybuses. Mr Howard said that they had : doubled their liability. i Mr Walter said the meeting was the j most disappointing he had attended. ! He thought the report would be con- j sidered page by page, but they had | criticised it and the only suggestion j made was that they should strike a j rate. They should have considered a wav of improving their revenue. The i report brought out their staff with ! flying colours, and it was a tribute to ; Mr Thompson and his stall" for their administration during the last six months. Since 1927 the board had lost nearly 9,000.000 passengers and if they wanted to get them back they had to reduce their fares, not increase them, j The whole trouble was that the old ] board members were too progressive—, Mr Howard: For what? 1 Mr Walter: Yes. too progressive. In ( 1920 Mr Sykes and the old member-: ; were too progress! ve, but I hey conltl not see what was ahead of them. They ] ran trams out into the suburbs. i Mr Howard: Not since 1919. Mr Walter said that Christchureh was the garden city of New* Zealand ; and it, was a good thing to take people ; to the suburbs. He said that the ; board had to adopt a constructive; policv. He thought they should have] a special meeting in committee, to go through the whole report page by page. (icncral ,Manager's Keply Mr F. Thompson i general manager* ] said there was only one thing he; wished to say. Mr Thurston had practically said that the general malinger; v/ns responsible for all the sins ot t:ie; old board. 1/ the general rnaanger was j to be made responsible for the policy j of the old board he was also to be: made responsible for the policy ot the j new board. Why, he asked, should Ihej general manager be blamed for all the | wrongs of the old board and receive j no credit for the good things that the; old board or any other board did? j Seeing that Mr Thurston had made; that charge publicly against lum -that j he was responsible for all the errors; of the olfl board Mr Thompson ashed j that they be made in writing npwific- j ally so that lie could deal with them; a fair and proper manner, lie wa < I sure Mr Thurston would not mind' that. ' The report was received and i! was I agreed that, a special meeting, in com-i nut tee, shuuid be held on Thursdav i ni glit. Air Thurston's Kxplanalien Mr Thurston said he did not lay any specific charge against the executive, officers. He did not mention the gen-' eral mnanger—he said the executive officers of the board. He did not make any specific charge at all other than what was in the report itself. The report referred to the recommendations' of the executive officers, and it was : to that that he was referring. He ; said that the executive officers were, put m a very bad light, as were | the members of the old board, and he] stood by that, because it was ineorpor- i ated in the report. He could make no j specific charges, but the report certainly did east reflections on the e.\( cu- ' tive o/lieers. There was no doubt about ■' that The chairman said he did not wish: to defend or explain the actions of the executive officers. An executive ofii-: cer was. of course, the servant of the' body and carried out jts policy. That j public body might from time to time! ask the executive officer for guidance! according to his judgment, and he t might make suggestions, but if those! suggestions were adopted thev were; not lhs but, the public body's, 'lie had; always thought tl ,it; no public body' should shelter behind its officers. He. could, not say more than that. He' presumed the officers of f|,„ board* i would follow thai policy and would I do the best they could according lo] their instructions on all matters of j policy, and the responsibility was that' of the board that was in existence. i