Debt Can Save Says Council
15 March 2006.
Debt Can Save Says Council
Debt is a fact of modern commercial life, and can even be a compelling, cost-saving tool on behalf of the community if used responsibly.
That’s the view expressed in Rodney District Council’s draft Long Term Plan adopted for public submission by the Council on 16 March 2006.
The council’s chief financial officer Kevin Ramsay says there are many misconceptions about debt and many of those stem from times of high interest rates and very little understanding of the positive aspects of borrowing.
“We are often told to pay off our debts such as mortgages as soon as possible, and that is sound financial advice,” he says. “But it is also a fact that without a loan many of us couldn’t afford to buy a home when we needed one and would in any case wind up paying much more if we delayed purchasing.”
Mr Ramsay says it is “much the same” for council business. He says that expenditure on capital items such as infrastructure and the purchase of community assets such as parks and reserves would not be possible if funded from rates alone. He points out that with Rodney’s relatively low rating base it would be impossible to accumulate the large financial reserves to pay “cash” for large items.
Another advantage of using loans to pay for items is that it avoids the financial burden being placed on just one generation of ratepayers. Mr Ramsay uses an example of a new water supply pump that may have an effective lifespan of 20 years. With Rodney’s rapid growth, says Mr Ramsay, that means the cost of that pump and the servicing of the debt can be spread over a far greater number of ratepayers that will use that asset and not place the burden solely on today’s community.
“It’s user pays with those using the asset over its life paying for it.,” says Mr Ramsay.
Despite the advantages, there is still a downside to debt. And Mr Ramsay is well aware of it. He says that for debt to be used effectively and positively it has to be managed and maintained within sustainable levels.
He points out that Rodney District’s Treasury Management Policy sets out parameters for what were believed to be prudent debt levels and borrowing costs. Mr Ramsay also points out that the Long Term Plan shows that Council will move outside of these targets in a couple of cases. However Mr Ramsay added that these targets are generally conservative compared to the private sector, and need to be reassessed for the current economic climate.
“Debt is one of the funding tools available to this Council and provided it is used prudently it is a valid option to provide the impetus and resources for the growth our community needs without placing an unmanageable financial burden on that community or future generations,” concludes Mr Ramsay.
The Rodney District Council Long Term Plan, which incorporates this year’s Annual Plan, is available for viewing at council offices, libraries, information centres and on the Rodney District Council website www.rodney.govt.nz. A summary of the plan will be distributed to all households in mid-March.
Submissions to the plan close on Tuesday 18 April at 5.00pm.