What do we do with the rates surplus?

The Hastings District Council has revealed a surplus of over $2million for the year ended June 2012. Pleasing but it was mostly the result of the very unfavorable economic times we are living through.

The surplus arose from two situations. The first was a decline in interest rates of about 1% on borrowings of some $60 million. The second was that borrowings were almost $20 million below budget because many anticipated capital works have not been necessary.  At a budgeted interest rate of 7% this alone equates to a saving of some $1.4 million.

When the rate was struck interest rates were expected to be much higher and therefore included in the amounts ratepayers were required to pay. So effectively the rates surplus was the result of ratepayers being charged more than the actual cost of the interest charges to the council.

Never the less having a surplus is very much better than having a deficit. But what should be done with that surplus? Some costs are up and some down and when they are up this is passed onto ratepayers. For instance following the Christchurch earthquakes insurance charges  rocketed,  and of course council has passed those on for the current year.

Even after a number of these unforeseen needs were identified there was still a sizable surplus  and management proposed using some of it to reduce debt.  I an some other  councillors preferred allocating a portion to off setting an expected rates rise of around 4% next year thereby halving next years likely increase.

Normally I have an aversion to debt, so why did I not support the proposed debt reduction?

Well in the first instance I think it would just make it easier for council to increase borrowings in the future. For instance the Hastings District Council is proposing to gift $1 million to the Napier City council funded by increased borrowing to support the museum extensions.  Another example is the recent decision  to proceed with a major debt funded upgrade of Civic square, that somewhat scruffy area between the Art Gallery and the Library. Not cheap at $8 million and likely to double with interest charges. 

For the record I voted against both items.

The main reason I preferred the rebate option is Council reasons funding major projects with debt spreads the full cost over the generations who are expected to benefit.  Its a bit like depreciation which spreads costs over the life of an asset. Just as depreciation allowances are fixed irrespective of  profits or cash flow so should inter-generational financing.  That is if we truly believe  future generations should  be contributing we should stick to that ideology not tinker with it on a whim or a surplus.