SINKING FUND PAYMENTS

Nelson Evening Mail, Volume LXVI, 21 June 1932, Page 7

SINKING FUND PAYMENTS

MOVE FOR REDUCTION OR SUSPENSION NOT FAVOURED IN CHRISTCHURCH Since the induction of interest rates authorised by the National Expenditure j Adjustment Act will materially reduce I the earning power of sinking iuml mvestments (in the case of the Christchurch City Council the initial reduction is estimated at £2700) local bodies in New Zealand are looking for some menus of reconciling this reduced income with tlie returns from sinking funds which are required of them. The suggestion lias been made in Auckland -,nid Blenheim that local bodies should seek power to reduce or temporarily to suspend payments into their sinking funds, and this proposal is being put before the New Zealand Municipal Association probably at its meeting in Wellington to-day. It is not generally favoured in Christchurch, however, for local bodies here consider that they can meet all requireigcnts without any such drastic action (reports the “Press’’). After considerable discussion last week the Auckland City Council decided to take no action that might indicate support for a proposal to reduce or suspend sinking-fund payments. The plan proposed by the chairman of tin: ! Auckland Transport Board (Mr J. A. C. Allum) for a reduction in the rates of sinking funds for loans raised by the City Council for the tramways was the subject of an unfavourable report by the Mayor (Air G. W. Hutchinson), who recommended that no action should be taken. Mr G. L. Taylor, a member of the Council, declared that, the postponement of sinking fund payments was the first cousin to repudiation, and Mr G. [Grey Campbell pointed out that sinking fund payments had a most important bearing on the Dominion’s credit overseas. SUGGESTION FROM BLENHEIM Witll the object of reducing the rates a similar proposal lias been made by the Blenheim Borough Council, and has been placed before all local bodies in New Zealand in a~circular letter, of which the following is an extract: “After serious consideration of the question of how ratepayers may be given some relief by a reduction of rates, my Council has come to the conclusion that to postpone the payment of loan sinking funds for a period of at least two years would be the best, and is t perhaps, the only method now available. “My Council, in common with most local bodies in the Dominion has reduced salaries and wages and cut down all expenditure during the past two years until the minimum has been reached. The recent 10 per cent, reduction in interest (i.c., reduction of stamp duty on debenture interest) will, of course, help somewhat, but tlie saving in this direction for most boroughs is a small one, and on the other hand, the high sinking fund rate lately insisted upon by the Loans Board for renewal loans has resulted in the maintenance of fixed annual charges at the old, high figure.-” The Borough suggested that the example of Government lending Departments in postponing the repayment of principal (equivalent to sinking fund) until the end of the loan period should he followed hv local bodies; and asked for the support of the authorities to whom the circular was sent. (Nelson turned down the proposal). POSITION IN CHRISTCHURCH The position arising from tlie reduction of interest rates was brought) bofore the Christchurch City Council recently by the City Sinking Fund Commissioners (Messrs A. MeKcllar, J-. K. Archer, and J. S. Neville) in tlieir annual report. The Commissioners pointed out that in tlie case of the Council tlie total reduction would account to some £2700 and suggested that its effect upon tlie existing sinking funds and the interest basis on which fresh loans were issued should he given consideration. The Finance .Committee of the Council has' now in hand the question of additional sinking funds. A decision has not yet been reached and probably will not be reached until the estimates are prepared. The Council does not propose to take any action to postpone or reduce the payment of sinking funds, and tile Riecarton Borough Council, at its meeting, made the same decision. BASIS OF INVESTMENT The City Council bases the earning power of its’sinking funds at 5 per cent, per annum, and the amount set aside per annum for the sinking fund on each loan varies according to the term of the loan in years. If the loan is for a period of ten years the sinking fund which lias to be set aside is £7 I!)s per cent. Similarly, if the loan is for twenty years the sinking fund is £3 per cent.; if it is for 25 years the fund is £2 per cent.; and if it is for ■{li.i years the fund is precisely £1 l Hiy cent. Although their earning power is based at 5 per cent., in spine cases sinking funds have been able to earn up to 0 per cent. The average rate of intcrest earned on the City Council s investment? at 31st March last was actually 5.945 per cent. Thus small reserves have been created for some ot the funds, and these reserves will go towards meeting any deficiency in the earning powers of the funds during the next three years. The City’s available funds have been invested in first mortgages, debenture's, and other securities submitted by Duncan, Cottcrill. and Company, who act as the Commissioners’ accountants. NOT SUPPORTED BY BOARD The secretary ot the Christchurch Drainage Board (Air C. F. Chapman) said lie did not think that the -Board would give any support for a reduction or a suspension of sinking fund payments. Each one of the Board’s loans is covered with a sinking fund which will pay it off at the time of its maturity. The sinking funds are in every case invested in gilt-edged Government and local body securities.