Temporary freeze on capital, discretionary spend
11 December 2008
EW puts temporary freeze on capital and discretionary spending
Environment Waikato has announced new measures to help the council manage through the current difficult economic times.
As volatility on the financial markets continues, the council is carefully monitoring the performance of its multi-million dollar investment fund and adjusting its strategy, budgets and forecasts accordingly.
Chief executive Bob Laing said today there would be no new capital expenditure or discretionary spending until after February 2009.
“As these difficult market conditions continue, the council is not going to achieve the budgeted returns from its investment fund this year, returns which subsidise the general rate,” he said.
“In light of this, Environment Waikato will put a freeze on certain types of expenditure until February 2009, at which time the council will review and adjust its budgets.”
This freeze includes deferring the $830,000 cost of replacing the council’s barge used for river maintenance works and discretionary items including grants to schools and environmental groups.
The curb on spending is one of a range of measures the council has taken to mitigate and manage the effects of the international financial turmoil.
Also at today’s meeting, the council approved further steps to strengthen the operation of the investment fund.
Finance and audit committee chairman John Fisher said the council had effectively decided to stick with its current investment approach, and its advisers Russell Investments, but that new measures would help bolster council oversight of the fund.
Russell’s gives the council investment advice and oversees the placement of funds into managed accounts.
“We have agreed to have Russell’s decisions independently audited on a periodic basis to demonstrate regularly the soundness of our governance arrangements,” said Mr Fisher.
The council opted to stick with the current ratios used when deciding how much of the investment fund will go into which investment area. “Our review has found that having 65 per cent of our fund in fixed interest and 35 per cent in equities is appropriate for the type of fund EW operates. This asset mix provides a diversified portfolio that aims to provide increased returns and less volatility over the medium term.”
This 65/35 percentage split will now be reviewed on an annual rather than a three-yearly basis.
Mr Fisher said another measure to be implemented, due to the volatility of share prices in the current environment, is for the time being to only budget returns from the fixed interest portion of our investments.
It was generally accepted that to sell council’s equity investments now to avoid risk in this area would result in realised losses, and a real reduction in the value of investments held. As such, it is recommended that the current level of investment in equities be maintained.
The effect of not budgeting a return from equities will reduce, in the short-term, the amount available to help keep rates down.
“But, when markets eventually settle and share price growth resumes, we can expect income again from this area,” Mr Fisher said.
Mr Fisher said there would also be a full review of all EW’s Treasury policies carried out by an external agency to ensure they comply with best practice. Results of that review are expected by February.
“Such measures demonstrate comprehensively that EW is managing the investment fund wisely in difficult times,” Mr Fisher said.