The corporate services committee meeting was held on 5 May 2016. Apologies were received from Cr Mirfin and Cr Dowler for absence, and Cr Ensor for lateness. All other councillors were present.
The agenda (requiring no decisions of council, other than to receive reports) included: (1) Treasury presentation from PWC, (2) Treasury report, and (3) Corporate services activity report. A confidential (in-committee) report in relation to the proposed sale of 11 Fittal Street in Richmond was discussed.
Brett Johanson and Jason Bligh from PricewaterhouseCoopers (PWC) gave a presentation on treasury matters. This included responding to questions presented by councillors.
Cr Bouillir and myself submitted several questions on behalf of some concerned residents of Golden Bay – much to the frustration of the chair (apparently this was not normal practice). In my opinion, one of the roles of a councillor is to ensure residents concerns are adequately addressed and answered – even if they may disagree with the outcome.
Unfortunately, Cr Norris took the opportunity throughout the rest of the day (as a bit of a running joke) to ask councillors if they were asking questions on behalf of someone else. While I could see the amusing side, some people might suggest this is a form of bullying or intimidation (ie, don’t ask questions on behalf of others, otherwise I will make fun of you all day).
My three questions on behalf of a Golden Bay resident were:
1. Why is our local authority paying an interest rate higher than I could obtain by walking into my local building society? At the time of the question was submitted, TDC was paying around 5.331% in interest.
2. Could the TDC provide factual examples of local authorities that have derived significant financial benefit from dealing in interest rate swaps?
3. If interest rates were to fall to say 1% for the remaining duration of existing swap contracts, what would the financial impact on TDC’s finances be at that time?
Before jumping into PWC’s responses, its useful to understand how council borrows money and what “swaps” are.
At present, council continues to carry a large amount of debt. However, this total debt is actually made up of much smaller parcels of debt that have been entered into at different times, have different durations and end dates, and have different interest rate obligations. It’s also why council often talks in terms of “average” interest rates.
So what is a “swap”? A swap is a derivative contract whereby two parties exchange financial instruments (containing specified obligations). The swap agreement defines the dates when cash flows are to be paid and the way they are accrued and calculated. Swaps do not trade on exchanges.
Swaps can be used to: (1) hedge certain risks such as interest rate risk (which is what TDC is doing), or (2) speculate on changes in the expected direction of underlying prices or interest rates, in order to make money.
This later (revenue earning) type of swap is common in America, where local government might have their income (or total rates take) capped. In order to raise additional revenue above their cap (perhaps for an unexpected infrastructural expense), they use their capacity to service debt to raise income (by underwriting the interest rate risk of the other parties).
In the UK, the Hammersmith council entered into such an arrangement, and while making money at first (when interest rates were low), subsequently made substantial losses, when it had to underwrite the rising interest rate obligations of the other party. The TDC is “not” engaged in these type of swap arrangements. Rather, the TDC has entered into swaps to reduce exposure to interest rate risk, not make money.
The most common type of swap is an interest rate swap that has the effect of transforming a fixed rate loan into a floating rate loan (or vice versa). TDC has a number of floating rate loans. In order to obtain interest rate certainty and mitigate risk, TDC has entered into a number of swap contracts. Council also has the the opportunity to blend (and\or extend) SWAP agreements where they provide TDC financial advantage (ie as interest rates lower).
Is TDC paying to higher an interest rate?
PWC advised that TDC borrows at commercial rates, not domestic mortgage rates. TDC also borrows funds on longer terms than the average domestic mortgage. Most domestic mortgages will be on a short term 1-year floating rate, or fixed for short durations (perhaps 1-3 years, before they are reviewed). The approach of PWC is to borrow funds on the 5 year interest rate market. This is because most TDC assets will have a life expectancy of at least 5 years (or more). At present, TDC’s borrowing costs are tracking well below the 5-year mortgage rate.
Does TDC (or PWC) have evidence of swaps benefiting local authorities?
PWC advised that they did not have an immediate answer to this question (as they were not given these questions in advance of this meeting, but were open to providing this information from their global network of resources). At this point, the chair intervened, and suggested the question was not an invitation for PWC to charge TDC for making further investigations. The chair, then asked if I had any other questions.
In answer to the question, over the past 10 years, TDC has consistently achieved a lower interest rate than either budget or the 5-year mortgage rate (see above graph). Further, between 1999 and 2008, as interest rates were climbing, significant financial benefits accrued to TDC.
It is also widely acknowledged that some councils have benefited from swaps. Significantly, the following observation comes from a website (www.debtresistance.uk/the-ghosts-of-hammersmith-fulham-the-return-of-toxic-council-derivatives-debt/) that criticises some forms of swaps. It states:
… some councils had “guessed right” with their interest rate bets, and were profiting handsomely from the trades, whilst others, such as Hammersmith taxpayers faced a potential bill …
Importantly (and to avoid any confusion) the Hammersmith scenario was a different type of swap arrangement to the type TDC has entered into. Hammersmith was benefiting from rates going down (effectively covering others from rates going up), rather than hedging against rates going up.
TDC is not entering swaps to make money, nor is it covering other parties from interest rate increases. Rather it is using swaps to consolidate a mixture of different interest rates and debt parcels, as well as mitigate the risk of 5-year interest rates going up. Effectively, swaps are being used as a risk management tool.
In my opinion, the above information supports the proposition that some councils have benefited from swaps.
What happens if interest rates drop?
PWC advised that they are continually reviewing the swap market to take advantage of any downward movements. Unlike a domestic mortgage, TDC has a large number of loan arrangements that have different start and end dates. TDC does not have one single loan arrangement. Similarly there are a number of separate swap arrangements that cover those loans. As arrangements come up for renewal, there is an opportunity to take advantage of a lowering market. This is why TDC’s average interest rate has been falling over the last year or two.
In reality the Council acts within the overall strategy of keeping rates down, as interest rates move. When interest rates drop the Council uses tools such as “forward starts”, or “blends and extends”, to take advantage of the movement at the time and to capture the low rates, as swaps come due.
Council’s ability to manage the forward risk in interest rate movements is greater than the person who goes into their local building society and borrows say $100,000 for 2 years at a fixed interest rate of 4.99%. If interest rates fall to say 1% for the remaining duration of their loan agreement they are faced with a break fee or toughing it out until their mortgage matures. TDC has more options than that.
Council’s debt at 31 March 2016 stood at $134.5 million, with an average interest rate of 5.417% (contrasted to June 2015 when it was 5.166%).
Council’s actual weighted average cost of funds at 31 March 2016, including interest rate swaps, bank margins, and line fees at 5.464% against a budgeted rate of 5.7%. The gradual decrease is from more favourable terms resulting from the refinancing of the bank facilities and favourable 2 to 4-year term swap rates. The ‘spike’ in the weighted average cost of funds for September and December 2015 and March 2016 are due to a lower debt position. This has meant that the Council’s debt is currently over covered by interest rate swaps which are at a higher rate than current floating debt rates.
At 31 March 2016, the Council had $147.78 million of interest rate swaps in place, including some “forward start” swaps. After adjusting for the forward start swaps, $144.78 million is “live” which is equal to 108% cover over existing debt and 87% over forecast 31 March 2017 net debt (ie 12-month debt). I asked staff when the debt levels and swap coverage would realign. Staff advised that they anticipated alignment by the end of June 2016.
Existing committed bank facility expiry dates and term debt maturity dates are spread based on defined maturity band limits of 0-3 years, 3-5 years and 5 years plus. Minimum and maximum percentage limits within each time band ensure a spread of maturities and reduce the risk of maturity concentrations.
The Council currently has $30 million in private placements. The private placements allow the Council to place longer term debt in the years between the Local Government Funding Agency (LGFA) issues. The Council also has $90 million of debt placed with the LGFA.
|Bank||Cash/Cash Investments $Million||Notional Swaps $Million||Credit Exposure $Million||Compliance|
The objective is to have a mix of 80% debt capital markets (such as the LGFA, private placements and commercial paper) and 20% committed bank facilities. The current mix is as follows:
Corporate services activity report
Highlights from the manager’s report included:
- Finances. The department will end the year with a surplus, mostly driven by the treasury function. Tight and active management of treasury combined with benign external factors have reduced loan costs and high cash balances have increased interest income above budgeted levels. It is intended that part of the surplus will be used to repay outstanding treasury loans in relation to the LGFA share purchase.
- Commerce commission. Work on port charges (and valuation) by PricewaterhouseCoopers and Simpson Grierson is drawing to a conclusion and a response to the Commerce Commission from council should be made within the next 6 weeks (ie June 2016).
- Property. The Property section continues to operate at reduced capacity. A replacement for the Property Officer has been appointed and started on 2 May.
- Aerodromes. Aerodrome landing charges are set to increase by $1 from 1 July 2016. The Motueka road sealing (hangar access) is currently on hold and likely to be cancelled.
- Campgrounds. Overall campground income is up and expenditure down slightly on budgeted levels. The overall profit is $156,000 which confirms a good season and tight financial management. Infrastructure failures at Collingwood campground have stabilised.
- Mapua. The tail end of the works related to the Shed 4 build and improvements to the public areas is underway. A report on the budget over-run is being prepared and is subject of a separate report to this Committee. Council officers are arranging for an additional temporary resource to assist in developing a Strategic Plan for the wider Mapua area (including the wharf, waterfront park, Grossi Point and remediated land). This strategic plan will assist in managing the competing interests in the area and ensure that agreed outcomes are met. The prospective purchaser of the Mapua causeway has advised that they no longer wish to pursue the purchase option. They have a right of renewal for five years under the current license to occupy.
- Forestry. The forestry management tender process has been completed with PF Olsen Ltd being the successful tenderer. Income in forestry is forecast to be up on budget for the year due to higher market prices and increased cutting volumes. The current underspend on maintenance will correct by year end due to roading work in the Sherry and Borlase forests as we prepare for upcoming harvesting at those sites.
- Port Tarakohe. Volumes over the wharf are good. The marina occupancy is stable. The YTD profit (for February) is $20,000, against a budgeted loss of $78,000.
- Port Nelson. Port Nelson Ltd has declared an interim 2016 dividend of $1.5 million, of which $750,000 comes to TDC. Cr King is currently a director on the Port Board and is due to retire at the AGM on Friday 23 September 2016. His appointment was extended until March 2017 to allow a newly formed council to make the next appointment. It should be noted that council policy prohibits the reappointment of a director for a fourth successive term, unless there are special circumstances. Given the experience of other directors already on the board (see http://www.portnelson.co.nz/about-the-port/directors/), I cannot see why a any re-appointment of Cr King would be required.
- Legal. The Council sought legal advice around the ability to ban (wicked camper vans) from the Council’s campsites, the summary being: (1) Any ban needs to be around the offensive slogans or images, not around specific provider, (2) Leased sites are not able to be controlled by the Council, unless our leases specifically permit it (which they currently do not) or each lessee agrees to it. It would not be commercially prudent to exert this control over our lessees’ businesses. However, discussions with the lessees has indicated a willingness to work with the Council. Collingwood campground is the only current operated site that can be controlled via an immediate Council policy. All four Council-owned commercial campgrounds, regardless of being leased or operated, are insisting on those slogans being covered before entry into our campgrounds. Staff recommended that no formal action is required, as the matter is being dealt with effectively at each campground.
- Information technology. Digital Strategy interviews and staff workshops have been completed and the findings and proposed strategic priorities will go to a Councillor workshop on 28 April 2016. The new Council file structure is being tested across all departments between April and July 2016. Once testing has been completed and signed off, the new structure will be installed into our document management system and the process of moving departmental documents and records across will begin. This will involve document process reviews and training of staff to ensure the transition is successful. It is planned for all departments to be working within the system by the end of 2016. The final upgrade of the Confirm Enterprise asset management system took place during the weekend of 16 April 2016. Additional security cameras are being added to the Customer Services area of the Main Office. Information Services are now managing the security camera infrastructure.
- Nelson Airport. The airport half yearly report and draft 2016-17 Statement of intent were considered by the Joint Shareholders Committee (comprising the mayor, deputy mayor, committee chairs, and audit subcommittee chair) on 15 April 2016.
- Action items. Mapua land (vacant corner site) – Mike Drummond to report back within 12 weeks on potential alternate uses of this land.
Agenda and minutes
The agenda and minutes are located at: www.tasman.govt.nz/council/council-meetings/standing-committees-meetings/corporate-services-committee-meetings/?path=/EDMS/Public/Meetings/CorporateServicesCommittee/2016/2016-05-05.
The corporate services committee meeting was held on 15 October 2015. Apologies were received from Cr Mirfin and myself (also apologies for lateness from Crs Dowler and Bryant). All other councillors were present.
The agenda included: (1) Local government funding agency (LGFA) appointments, (2) rates remission application, (3) corporate services activity report, (4) financial report, and (5) treasury report.
Local government funding agency
The annual general meeting (AGM) for the local government funding agency (LGFA) is set for November. Nominations for the appointment of new board members was received by the LGFA. There were two nominations for two positions. TDC will likely be supporting those two nominations (although, it could vote against them).
The LGFA shareholder council is recommending an increase in the number of directors (from 5 to 6 directors) and a 15% increase in directors fees (spread over two years), as a result of a recent remuneration review. Apparently the boards current remuneration is 23% below the market for similar directorships. This translates to total board remuneration in 2015-16 of $324,000, and $348,000 in 2016-17. The board meets (no less than) 6 times a year.
TDC’s representative on the LGFA shareholder council is corporate services manager, Mike Drummond.
Rates remission application
The committee was asked to consider a rates remission application.
The owners of a property applied for remission of rates arising from a council initiated zone change for the 2015-16 year. The application was submitted two weeks after the due date, due to a family bereavement. Council had already granted a 100% remission (of $4,409) for the 2014-15 year on 20 November 2014. And 100% remissions for the 2012-13 and 2013-14 years.
I was not involved in considering the original application (in August 2013), but the subsequent applications had for consistency, carried over the earlier decision to allow 100% remissions, as there had apparently been no material change to the original facts.
On 4 October 2013, a resource consent was issued to operate a holiday park and construct a kitchen\laundry ablution block. The amenity building received consent on 15 August 2014 and according to the holiday park’s website, construction has been completed. The holiday park’s website (see http://www.holidayparknelson.co.nz/index.php/about-us) states (emphasis added):
The idea for Queen Street Holiday Park came about in early 2013 when Rod & Linda applied for planning permission to start a holiday park. Things have moved quite quickly since then with the introduction of a one bedroom fully self contained holiday unit. Then came the insertion of a roading system throughout the park, along with power and water access to over 58 powered and unpowered sites. The ablution block has recently been finished which gives campers a communal laundry and kitchen along with toilets and showers which offer separate facilities for wheelchair access.
Although, in their application they have stated that the ablution block is “not quite finished”. Council staff have also made phone calls to the applicant seeking clarification. The owners have confirmed that the ablution block is unfinished. At present, the holiday park caters to the self contained type of motorhome/caravan, and later in the year it is expected that they will open for those who don’t have self-contained toilet facilities.
The holiday park also has a cottage and holds 58 powered and unpowered camp sites. The holiday park advertises its cottage on trade me (see www.holidayhouses.co.nz/properties/59617.asp). The web page states:
This very comfortable self contained cottage is nestled in a corner of our ongoing newly developed Holiday Park situated just over 1 km from the Richmond CBD. With its own hedged in area, parking for two cars or maybe car and boat, relaxing lounge/dining/kitchenette with two single beds, separate bedroom with Queen size bed, bathroom, laundry, veranda with outdoor furniture and BBQ looking out to the lovely Richmond Hills this all makes for a relaxing holiday home away from home with an added advantage of maybe a friend with a caravan or motorhome parking up close by.
Wonderful view of Richmond Hills and the lights at night looking over Stoke & Nelson. Situated on a newly developed Holiday Park (ongoing development), on the front of the property we operate a Caravan & Motorhome sales yard
The owners also operate a caravan and motorhome sales yard (0.2ha of the 2.8965 ha property) at the front of the property. This business was present before the zone change (from residential to commercial). The commercial services committee on hearing the original application (in August 2013) for the first time, determined that no reduction in remission would be made for commercial activities, where the area used for that activity and the extent of the activity was unchanged from the period prior to the zone change.
In my opinion, this was a very generous concession in not excluding the caravan sales yard from the remission (as it potentially locks this land up for remissions in perpetuity). Whether it should be considered to be a precedent for future remission determinations might well be up for reconsideration.
Finally, the holiday park’s facebook page (see www.facebook.com/Queen-Street-Holiday-Park-437063009778241/, on 24 January 2015) stated:
Stage one now open! Self contained motorhomes and Caravan sites available with power and water. Also “Cottage in the Park” sleeps 4, fully self contained including laundry, kitchenette, separate double bedroom tv lounge/dining area, bathroom shower and toilet.
The facebook page also presents photo’s of customers using the park. As well as glowing endorsements from happy customers.
The remission policy
The councils remission policy (located at http://www.tasman.govt.nz/policy/policies/property-rates-policies/remission-policies/policy-on-rates-remission-for-land-subject-to-council-initiated-zone-changes/) states:
This Policy is to allow Council, at its discretion, to remit rates charged on any rating unit used for residential purposes that is rezoned as a result of a Council initiated zone change. The aim of this Policy is to allow the Council to consider remitting rates for those ratepayers most adversely affected by an increase in rates when the land value of their rating unit increases as a result of a Council initiated zone change. The Council’s preference is to allow a transition period before affected ratepayers are required to pay the increased rates in full. It is accepted that the rates remitted will be paid by other ratepayers.
Application to facts
First, in my opinion, council should allow the application to be considered even though it was late by two weeks. This is because of the following reasons. The lateness provides no advantage to the applicant. In fact, quite the opposite. It allows the council to consider other facts that might have appeared after the application was suppose to have been submitted. Further, given this is a remission application, the financial advantage is with the council, as without the remission being approved, the owner would have to pay the increased rates. I consider a bereavement to be a valid reason to waive any lateness. Finally, as noted earlier, the application is only two weeks late, which is not substantial.
In my opinion, the council has made a generous concession in not taking into account the caravan sales yard business in earlier remission applications. This is an activity that is consistent with the rezoning (ie commercial use). In my opinion, the concession should not have been made, as the logical conclusion of that concession is to provide a remission for that part of the land in perpetuity. That in my mind is not the purpose of the remission policy. In my opinion, the 0.2 ha should have been excluded, so that the original remissions were 94%, not 100%. I reach a figure of 94% by apportioning the excluded land (ie 0.2/2.9 ha = 6% used for business activity – 100% = 94% remission).
As I understand it, the purpose of the remission policy is to provide owners a transitional period to either undertake an activity consistent with the new zoning (so they can afford the rates increase from the zone change), or provide the owners enough time to dispose of the land, without being forced off their land or to sell at a lower than fair market price.
In my opinion, council should acknowledge that they made a mistake, but not seek to retrospectively claw back the concession. This would remove this treatment as a precedent for future remission applications.
The question then becomes whether the owner of the land has made the transition from a residential or rural activity (consistent with the original zone) to a business activity (consistent with the new zone). Where land has not been applied to a business use, some apportionment might be necessary, thus allowing for some remission.
In my opinion, no single fact should be determinative. Rather all the facts must be weighed together to determine if there is a business activity being operated on the land. While the holiday park webpage shows the owners are marketing a business, it is not absolutely clear if the webpage is still in development. It might be the business is still being established. For example, the webpage states the ablution block is finished, yet the owner states it is not.
However, the presence of other marketing initiatives on facebook and trade me would suggest that the there is now a business activity being operated from the land (consistent with the new commercial zoning). Subsequent enquiries have also confirmed that they are operating a business, although not at this stage for people requiring toilet facilities. The single ablution block, not being “quite” finished, should also not be determinative of whether a business exists (or not). All business operations will have ongoing development issues. This is one of them. The question to answer is whether there is a business activity now operating on the land consistent with the zone.
The residential home is described on the webpage as the manager’s onsite residence and should now be considered part of the overall business activity. Only a small portion of land at the end of the property appears to be unused. However, it is obvious, that this land is also earmarked for commercial development at a later stage and could be considered to be part of the overall holiday park activity.
Taking into consideration all of the evidence, I would decline the application. In my opinion, all of the land is being applied for a business activity consistent with the zone change. The owner is now using the commercial zone to operate both a caravan sales yard and holiday park. I suspect that the owners will be claiming their rates bill as a business expense and claiming tax deductions.
The committee unanimously resolved to decline the application.
Corporate services activity report
Highlights from the manager’s information update report are outlined below.
Overall, financial performance is good, with a strong positive variance on all budgeted activities. This has been driven in part by timing issues for information services expenditure, together with lower than budgeted interest costs (from good treasury management).
This was a significant milestone for the finance team. Improvements in the audit process ensured a smoother audit this year. Departmental overheads were under budget (due to cost containment and deferred work). Overhead surpluses were allocated across departments as a reduced charge.
The team is also revising reporting templates and input processes for budget managers, to ensure more accurate and timely data for the 2016-17 year.
A project to enable digital invoicing is progressing well. The project has provided an additional benefit of moving away from pre-printed invoices, which will provide the council greater flexibility.
In my opinion, a culture of continuous improvement appears to be establishing itself – and this is very welcome. Long may it continue.
Council has begun rolling out a new document management system (SilentOne), as well as upgrades to microsoft office (which is expected to be completed in early December 2015).
Out-of-region weekly data back ups (stored in Auckland) has begun. Nightly backups within Richmond continue.
IT has also tightened up user configurations in response to recent ransomware (where IT systems are locked up) and whaling attacks (where senior staff are targeted to approve financial transfers).
Mapua development (Shed 4) is now fully let (7 leases), with construction expected to be completed in mid-October and handover to council in November.
Shed 5 (Golden Bear building) will also undergoing re-development with the previous corner tenant (Hamish’s cafe) having departed and the Golden Bear taking over the lease from November.
Forestry management tenders have begun. A panel has been established to review the tenders. Recommendations will come back to council for approval. Co-sharing of recreational and forestry activities continues to create tensions for health and safety. Key areas for improvements involve greater separation, security, enforcement, and better communication.
The Motueka campgrounds repurchase of assets by council is planned for 9 October 2015. Work on building cabins started in August and will be completed by November 2015. Repurchase negotiations are continuing in Pohara. The urgent maintenance work in the Collingwood campground continues to take priority, with urgent works having been completed. One of the older cabins (at 3 William Street) is for sale to enable reinvestment in the campgrounds.
Port Tarakohe cargo volumes were up by 12% in September. Weigh bridge users are receiving weekly reports and are billed monthly. Talley’s have now accepted the councils methodology for weigh bridge billing, but disputed the treatment of TARE weights. A meeting was held to discuss a way forward. Their bills remain unpaid. A health and safety work plan has been developed. No serious incidences were reported for the past quarter. Recreational boating occupancy has remained stable at 77% and the storage compound at 30%.
A commerce commission complaint was made by the mussel farmers. The commission advised no action was being undertaken and advised the parties to reach a commercial resolution. Council has engaged PWC to review the charging methodology (including asset valuation and depreciation). This work is expected to be completed in January 2016.
Port Nelson will be updating its company constitution to enable the appointment of new directors without falling below its minimum number of directors.
The LGFA has declared a dividend of 6.43% for 2014-15. This amounts to $119,982 for TDC’s shareholding.
This was an information update report (no decision required).
For the 2 month period, ended August 2015, the councils financial performance has been good, with an operational surplus of $137,000 (against a budgeted deficit of $3.395 million) for this period. This represents a positive variance against budget of $3.532 million (excluding: development contributions, vested assets, interest rate swap movements).
The net accounting position shows income was down ($1.632 million below budget) and expenses also down ($2.208 million below budget). The net result shows the budgeted deficit of $631,000 for this period, is actually $56,000 – a positive variance (or saving) of $575,000 (I note that the spreadsheet refers to $576,000, which I suspect is due to rounding up within the spreadsheet). Key drivers were: write downs on interest rate swaps (-$2.823 million), reduced operating expenditure (+$1.718 million), and lower finance costs (+$0.377 million).
Capital expenditure for the year is $2.093 million (against an annual budget of $34.301 million). This figure excludes the capital carry forward of $14.853 million from the 2014-15 year into the 2015-16 year.
Total debt is $145 million. Projected (budgeted) debt for year end (June 2016) is expected to be $168 million. A revised forecast will be undertaken in October 2015.
The total amount owing from debtors reduced from $6.439 million in July to $5.456 million in August. However, this is higher than the $4.652 million owing at the same time last year. In my opinion, better management of debtors needs to be an area of focus for council. I would like to see some aspirational targets set. Why can’t we get this down to $3 million over the next year or two?
This was an information update report (no decision required). The report confirms council is complying with its treasury management policy.
As at 30 September 2015, total borrowings were $140 million (as excess cashflow from the first rates instalment was used to repay debt). The total cost of funds is 5.385% (compared to the budgeted cost of funds rate of 5.7%). The weighted average interest rate (cost of funds) on borrowings is 5.294% (compared to 5.166% in June 2015).
As at 30 September 2015, council had $147.78 million of interest rate swaps in place (including some forward swaps). Adjusting for forward swaps, council has 103% coverage for existing debt, and 87% coverage over forecasted (June 2016) debt. Remembering that council forecasts debt to be $168 million by June 2016.
Councils current debt mix is roughly: (1) bank debt, $21 million (15%), (2) private funds, $30 million (21%), and (3) LGFA debt, $90 million (64%).
Agenda and minutes
The agenda and minutes are located at www.tasman.govt.nz/council/council-meetings/standing-committees-meetings/corporate-services-committee-meetings/?path=/EDMS/Public/Meetings/CorporateServicesCommittee/2015/2015-10-15.
The corporate services committee meeting was held on 23 July 2015. Apologies were received from Crs Mirfin, Bouillir and Ensor. All other councillors were present.
The agenda included: (1) treasury report, (2) finance report, and (3) managers report. An informative presentation was also received from council’s treasury advisor Brett Johanson of PricewaterhouseCoopers, Wellington.
Council debt at 30 June 2015 totalled $145 million. The weighted average interest rate on borrowings is 5.166%. Council’s cost of funds including interest rate swaps, bank margins and line fees being taken into account is 5.257%, compared to a budget of 6.10%.
At current levels, the market is now pricing in one 25 basis point (bps) cut in the OCR in July, and one 25 bps cut in the OCR in September.
Prior to the end of the financial year a high level review of council’s bank facilities was undertaken. This review resulted in $20m of bank facilities being cancelled. Now that the long term plan (LTP) has been concluded a more comprehensive review of council’s bank facilities will be undertaken.
The underlying operational result was a favourable variance of $7.159m once the impact of development contributions, vested assets and interest rate swap movements were removed from the accounting result.
The net accounting position is a surplus of $10.365 million, against a budgeted surplus of $5.512 million. The income was $0.438 million below budget, and expenditure was $5.291 million below budget. The key drivers of this were: (1) mark-to-market write-downs on interest rate swaps (-$7.190 million); (2) higher than expected Development Contributions and Financial Reserve Contributions (+$2.893 million); (3) lower than budgeted maintenance expenditure (+$4.4 million); (4) lower than budgeted finance costs (+$0.991 million).
Capital expenditure for the year is $29.401 million against an annual budget of $48.682 million. Total debt is $146.0 million. The projected year-end balance of $168.3 million was not reached, as a result of the effect of the operational surplus, and a request for a number of projects to be carried over to the 2015-16 year.
Council’s working capital position at 31 May 2015 was ($5.178 million) compared to the year-end projection of ($9.616 million). The major reason for this is the lower current debt balance at the end of May 2015.
- Departments financial results. These are showing a strong positive variance against budget (basically expenses are down). The largest area of favourable variance is operating costs. The drivers were: (1) property (cleaning $51,000, main office $17,000, Golden Bay service centre $10,000 and district libraries $12,000); and (2) information services site support ($87,000) down across all it areas.
- Quarterly reporting. With the LTP now adopted the Management Accounting team moves straight to the review of the production of monthly financial reports. The work plan is to move to a more comprehensive format of reports on a quarterly basis. This will enable a higher degree of forecasting.
- Water charge invoicing. The transfer of the daily water charge to the general rates invoices requires ongoing clear communication with customers. This is being done via Newsline.
- Information services. IS staff worked with Community Development to complete the Government Broadband Extension Funding, Registration of Interest (ROI) document by 10 July 2015.
- Electronic document management system. Team workshops are being held in July and August as part of implementing the new document and records structure in our document management system. Work has also begun on upgrading the network connection to Port Tarakohe. GIS and development staff have also been working on the Land, Air and Water Aotearoa (LAWA) national initiative (see http://www.lawa.org.nz/explore-data).
- Property services. The Motueka Recreation Centre lift and stairwell project is on schedule. Wakatu Incorporation has given their approval, as joint land owners, for a minor extension to the Motueka Library (which is awaiting building consent) and the seismic repairs to the Motueka Memorial Hall. The boat shed leases at Kina have been received back from the lessees and executed by the Council. A notice of requirement has been served on members of the Ashton family at Best Island. The notice is to acquire land for road to service the residents at Best Island. The Fittal Street lease has been re-marketed.
- Mapua development. All leases are current, with no arrears. Leases have been signed for 4 of the 7 spaces in the new Shed 4 rebuild. The last 3 are in final discussions/documentation and we expect these to be concluded before month’s end. Hamish’s Cafe announced its closure as at 26 July 2015. The tender price accepted was $1.095 million. The total development cost is now expected to be $1.35 million.
- Forestry. Co-sharing of recreational and commercial activities within council forests has caused some health and safety and operational risk issues this year. A review is currently underway to identify policy and other responses needed to manage these risks.
- Camp grounds. The repurchase of assets at the Motueka park was approved and has been accepted by the lessee. Legal documentation is being prepared and a settlement date of 16 July 2015 was planned. The repurchase negotiations at Pohara have been delayed due to urgent work caused by infrastructure failures at Collingwood.
- Port Tarakohe. Reporting shows large volumes of trade entering and exiting the Port. Weighbridge user error continues with TNL in particular, with new parties not being trained well. They have now been advised that penalty charges will be incurred for incorrect behaviour. No serious health and safety incidences were reported in the past quarter. Moorings remain fully occupied (20 of 20 filled). There are 8 vacancies in the marina berths (32 of 40 filled). The less popular pile berths remain half full (11 of 20 filled). The storage compound is 30% full.
- Commerce commission. The Commission has responded to the marine farmers complaint over the basis for setting port charges. However, they have made no statement on whether charges are appropriate (or not). Rather, the Commission has requested that the parties reach a commercial resolution on this matter. A legal opinion has confirmed that council has set fees correctly under s 12 of the LGA 2002.
Agenda and minutes
The agenda and minutes are located at http://www.tasman.govt.nz/council/council-meetings/standing-committees-meetings/corporate-services-committee-meetings/?path=/EDMS/Public/Meetings/CorporateServicesCommittee/2015/2015-07-23.