Debt-free local bodies?

Press, 29 February 1984, Page 16

Debt-free local bodies?

Local government finance, to many people, means a never-sated demand for rate money and a series of large loans that are frequehtly recycled or added to, but rarely reduced in total. The picture is fairly accurate for many local authorities when viewed from the critical standpoint of ratepayers; it need not be a fair reflection of the success of a local body in meeting the many demands for services and amenities that ratepayers, and other residents, place upon it. The financial affairs of local authorities are tightly prescribed by law and subject to careful audit. Within these guidelines there is scope for enterprising local bodies to save their ratepayers, and other customers, unnecessary expense. This may be by reduced spending, or by trading profits that permit charges to be held and even reduced, or that can be applied to paying off outstanding loans.

Thus it is that the Te Awamutu Electric Power Board has become the only debt-free power supply authority in New Zealand. The board is not large. Its loans since formation in 1919 have amounted to less than $1.4 million and the last repayment has been made. With no further loan servicing, the board will be able to absorb this year’s increase in bulk power charges without charging its customers higher tariffs. Among local bodies, power supply authorities are especially fortunate in that they trade in an essential and profitable commodity; they are better-placed than most local bodies to turn a profit. Nevertheless, the Te Awamutu board is unique among the 38 electric power boards in New Zealand. If being debt-free were the only measure of a local body’s performance, the Te Awamutu Electric Power Board would be at the top of the class. In Christchurch, the Municipal Electricity Department also has a remarkable record in the management of its finances for capital works. In the last five years, for instance, $3l million has been found for works and only $3 million has been raised through loans. Almost all the rest has come from depreciation reserves or from revenue from the sale of electricity. As a result, the M.E.D. is in the enviable position of having a modest loan indebtedness of $5 million compared with its assets, at historical values, of $67 million. The M.E.D. finances up to 90 per cent of its capital works from revenue while many of the other power authorities in New Zealand depend on loans for up to 50 per cent of their capital spending. These figures highlight the significance of the Te Awamutu board’s performance, even when allowance is made for its small size and stable investment requirements. Loans for capital works are a logical, even necessary requirement if the costs of improvements demanded by the community are to be spread fairly across all those who stand to benefit from them. Future ratepayers, residents, and other consumers will gain from

capital works undertaken now. It is only fair that they bear some of the cost, just as today’s ratepayers and residents are helping to pay off loans raised for work done many years ago, but from which they are deriving benefit. At a time when raising loans might be difficult, or when the costs of servicing them are high, a policy of spending from revenue and reducing loan indebtedness is prudent, as long as it does not restrict necessary work. The other side of the coin, however, is that present ratepayers or consumers are required to bear a high proportion of the cost of capital works through rates or power bills. This argument has been used to suggest that the M.E.D., rather than reducing its loan indebtedness, should increase it and reduce the charges on present consumers. The Mayor of Christchurch, Sir Hamish Hay, has said that such a policy could mean an across-the-board reduction in power bills. So it could; but there is no guarantee that it will. In the past, the M.E.D.’s surplus revenue has not been applied solely to reducing power charges or to reducing loan indebtedness; history has established a precedent in which the M.E.D.’s surplus revenue has been diverted for spending unrelated to power distribution. Another local body in Christchurch, the Drainage Board, also is looking at what to do with surplus funds. The Drainage Board has a heavy loan commitment and depends largely on rate revenue. Allowances in the board’s budget for wage increases that did not eventuate because of the freeze, and for contracted work that has fallen behind schedule, have left the board with a surplus this financial year of almost $1.3 million. One school of thought on the board suggests repaying some of the board’s loans that incur interest charges of 14 per cent; another school suggests using the money to pay unemployed people to do work that might not have been done otherwise. Both suggestions have merit; both could have pitfalls and the board has yet to decide what it will do. Many people appreciate the need to pay for the amenities that make their community a comfortable, safe, and enjoyable place to live. They also expect careful management and good husbandry of their investment in their community. The elected representatives and appointed servants of the community who are responsible for this management have a special responsibility to weigh the advantages of each opportunity to reduce the costs that the community must bear. Loan servicing is just one of those costs. At times, financial decisions may be clouded by political issues and shortterm advantages may prove to have no longterm benefit. Each decision will have to be made on its merits and explained to those who will have to pay for it. The decision-makers should take note of the example set by one small authority which has shown that local government finance need not be a merry-go-round of expensive loans.