LOAN CONVERSION

Southland Times, Issue 22107, 30 August 1933, Page 8

LOAN CONVERSION

TOWN CLERK’S SCHEME ADOPTION BY CITY COUNCIL CR. HEWAT’S OBJECTION When at last evening’s meeting of the City Council a clause in the Finance Committee’s report recommending that the conversion scheme drawn up by the Town Clerk be approved and submitted to the Local Bodies’ Loan Board came up for consideration, Councillor B. W. Hewat, while commending the Town Clerk for bringing forward the scheme and endorsing its general principle, voiced certain objections to it. “In 23 years the whole of debt held in New Zealand disappears whereas under our present system there would at the end of that period be upwards of £60,000 still to find,” said the chairman of the committee (Councillor Ritchie) in moving the adoption of the clause. “Under the conversion scheme the yearly payments are less by just on £7OO per annum, representing a further saving of approximately £14,000 over the period. Our Town Clerk’s latest idea to redeem debentures half-yearly instead of annually means an added advantage difficult to calculate, but surely running into thousands of pounds over the term, by using the council’s revenue in half-yearly redeeming debentures instead of having large sums lying at credit in the bank or earning very small interest on temporary deposits. “Probably ever since the history of the city commenced we have been paying interest on loan moneys while for a larger part of the year our district fund is in credit to the extent of thousands of pounds, so it will be seen that this latest saving does no harm to the debenture holders but merely uses what has always been idle money. Every year were we not converting we would be spending money in raising renewal loans. This year we have £250 on the estimates for that purpose. Once converted this expense ceases. Under the old system of sinking funds any fall in the earning power of money had a very serious effect on our ability to pay off loans. Under the new system we redeem debentures as we go along, having no sinking funds at all. The merits of this conversion of Invercargill’s loan are recognized by the Treasury officials in Wellington and we can with confidence look forward to the scheme being approved by the Loans Board. The debt to be converted totals no less than £853,060 or the best part of one million pounds. The Town Clerk is to be congratulated on his scheme.” Mr A. W. Jones seconded the motion. It It Suitable? “I consider the scheme a good one of its kind, but have grave doubt about its suitability for this corporation,” said Councillor Hewat. “The scheme is admirably suited to a person with a fixed income and no necessity to provide for future capital expenditure who wishes to wipe out an old liability and leave his estate free of debt to his successors. It is not suited to a corporation which wishes to keep down the amount of its demands for rates from its citizens and to carry out developments which shall be useful to future generations. A scheme should be a means of carrying into effect some definite policy adopted after full consideration. What is the policy behind this scheme? It is apparently to wipe out the liability of the corporation for loans domiciled in New Zealand within 23 years by making annual payments of amounts approximately equal to present annual payments on loans for interest and sinking fund. If the scheme is adopted and no new loans are raised during the period, the city is then free of loan liability. The ratepayers of the period would have completely relieved ratepayers of the future from a liability for payment for advantages enjoyed by them. Unless trading concerns are in difficulties no further rating would be necessary.

“The objective is not based on sound policy,” Councillor Hewat continued. “Future ratepayers should be left with some liability. If it is admitted that further loans will be necessary every loan raised during the period will automatically increase the annual charge on the city by the amount of its interest and sinking fund. New loans will be necessary for—(a) Replacement or renewal of tramways; (b) reading; (c) footpaths and kerbing; (d) new library; (e) alteration of Colonial Chambers; (f) museum and art gallery; (g) avoidance of level crossings, etc; (h) waterworks. If no new loans are to be raised there is no necessity to liquidate the present liability within 22 years. The present system is not satisfactory because (a) Under it the corporation pays interest on the full amount of the loan for the full period of the loan and receives a lower rate of interest on the sinking fund which is being built up; and (b) loans are continually maturing _ and cost money for renewal. But it has certain advantages, namely, the period of repayment is spread to cover a long period. Out of the present loan liability of £853,000 only £350,000 will be repaid within 23 years if the old scheme is continued. It is proposed to hasten the repayment of the other £500,000 so as to repay the whole £850,000 within the 23 years. “An advantage of the old system is that the corporation has frequent opportunities of adjusting its annual charges for loan moneys by adjusting the payments on sinking funds when renewing loans or borrowing for longer terms. Within three years from now over £350,000 of loans mature. These loans must be renewed after sinking funds on hand have been used in partial repayment. Under the ordinary method of borrowing these loans would be renewed upon such terms that a sinking fund would again be created to reduce them but not to pay them off in full. Modification Necessary. “The scheme requires modification,” said Councillor Hewat. "It must be made more elastic to allow future borrowing for development. It can possibly be made more satisfactory by extending the term, or by leaving a balance to be satisfied by a renewal loan at the end of any period decided upon. This council should not adopt a policy which will prevent all councils of the next 23 years from borrowing further moneys unless they are prepared to increase the rates. Rates are a charge on property, which property will continue to take the advantages bought with loan moneys long after the present generations have gone. The scheme unduly penalizes the persons who will be ratepayers during the next 23 years. “I move an amendment: (1) That the scheme of loan conversion proposed by the Town Clerk be referred back to the Finance Committee for further consideration; and (2) that the Town Clerk obtain particulars of the conversion schemes under consideration by all other cities in the Dominion and submit particulars of the various schemes together with his report thereon to this council.” The amendment was seconded hy Councillor R. N. Todd. The Mayor, Mr John Miller, remarked that the Town Clerk’s scheme had ‘been considered by the authorities in

Wellington and had been approved by them. After some discussion round the table the Town Clerk briefly replied,' submitting that the scheme proposed by him would not increase the rates. Instead of the council having about £63,000 to find at the end of 23 years it would be free of debt. The amendment was lost by seven votes to five, the division being:— For Against Tattersfield Doig O’Byme Ritchie • Hewat Tapley Todd Brodrick Webb Jones Reed Denham The motion adopting the clause was carried, Councillor Hewat asking that his vote against it be recorded.