Posted 24/6/08


MRRA's 2008 "Budget Myths"



Budget Myth # 1:  Council is waiting to be informed on the costs of Kyneton pool before making any commitment to it.


WRONG.  Council may not have final costs for the Kyneton pool but the draft Budget includes new borrowings of $3,000,000 for it so there are 3 million commitments in the draft Budget. 



Budget Myth # 2:  This is a responsible - fair - budget


No, it's not.  It's as much about what's not there as what is.  The Kyneton pool has already sucked funding from other projects which have been eliminated to cut spending to the bone.  That $3,000,000 loan for one project - the pool - means spending money or taking out small loans to deliver other projects isn't an option.  And it's not as if the time is exactly right to be over-extending yourself financially, is it!  Most people are tightening their belts, but not it seems those who support the Kyneton pool.



Budget Myth # 3:  There are no costs in this budget for the Kyneton Pool


Council has been spending money to get final costs, undertake feasibility studies, and prepare plans and tendering documents.  All up so far, reports are that the amount could be anywhere from one to several hundred thousand dollars.  That expenditure doesn't seem to be in the draft Budget. If Council is using State funding for these items, and the pool doesn't go ahead, will that funding have to be paid back?  Or are reports that the State government hasn't handed over any money yet correct?  In any event, where's the accounting for the money Council is spending?


On top of which, if the pool is approved early next year, and the $3,000,000 loan is taken out as suggested in March, ratepayers' will will pay some three months' interest (apparently, $3M x 9%pa x 3 months = around $70,000 interest), additional to interest on existing debt.


Here's how the draft Budget says that debt will look.  MRRA has added a comparison with 2007/2008 Borrowings' information:


COUNCIL DEBT & BORROWINGS (Appendix B, 2008/2009 draft Budget)
"The 2008/09 Budget includes the provision for new borrowings of $3,000,000, if required, for the construction of the Kyneton Sports & Aquatic Centre. Council has not yet made a decision to proceed with this project, but if it does proceed, the Budget includes the raising of this loan."
Balance [of debt] as at 1 July 2007 1 July 2008 +/- in 2008/09
  $7,291,572 $7,473,972 +$182,400
Less principal repayments in 2007/08 2008/09  
  $1,098,013 $965,992 -$132,021
New Borrowings 2007/08 2008/09  
  $1,080,000 * $3,000,000 **  
Balance [of debt] as at 30 June 2008 30 June 2009  
  $7,273,559 $9,507,980 +$2,234,421
Interest payable in 2008/09 2006/7 ***  
  $421,805 $535,850 +$114,045

* Refurbishment of Kyneton Mechanics Institute and improvements to Kyneton Saleyards  loan not yet taken out in 07/08 financial year
** Kyneton Sports and Aquatic Centre

*** Either this was intended to be interest payable in 2007/08, or the method of reporting has changed.



Budget Myth # 4:  We can afford the pool


This depends upon your interpretation of "afford".  If "afford" means "have the funds for", then no, we can't afford it. But if "afford" means "heavy borrowing and high rates", then how can we "afford" it?   See also Budget Myth 5.


As we still don't know what the pool will finally cost, and with interest rates and oil costs going up, isn't including any part of the pool costs in this budget like handing over a blank cheque?  


The pool was costed last year (2007) at around $9 - 10 million.  That's before oil prices and interest rates started to haemorrhage. 


Do the sums.  The State government has put in around $2 million funding, and in 2008/09, Council is taking out a $3,000,000 loan.  That comes to $5 million, out of a $9 - 10 million project.  Guess what happens in the 2009/2010 budget?  Another loan, this time $4 - 5 million... at least.


Here's what that could look like:


Timeline New Borrowings Total Debt +/- Previous Year
Debt at June 2007   $7,291,572  
Debt at June 2008   $7,473,972 +$182,400
New borrowings 2008/2009 if pool goes ahead $3,000,000    
Debt at June 2009 (projected in 2008/2009 draft Budget)   $9,507,980 +$2,234,421
New borrowings in 2009/2010 if pool goes ahead $4,500,000    
Potential debt at June 2010 (estimated)   $14,000,000 * +$4,492,020

* This amount does not include any repayments which might be made in 2009/2010 against principal.


Somewhere along the line, all of that money has to be paid back.  It will come from your rates.


Debt this year was almost $200,000 more than this time last year. 

The proportion of interest in total repayments was higher this year than last.

If the pool goes ahead...

This time next year, debt is projected to be some $2 million more than this year.

With another multi-million dollar loaned needed, total debt in 2010/2011 (two years from now) could be around $14,000,000.

Council will need to increase rates to pay for the loans.



Budget Myth # 5:  Council's debt and repayment levels comply with Council's debt strategy


The draft Budget says (at Appendix B): "The principles of the debt strategy as outlined in the Strategic Resource Plan are that Council Will retain the amount of debt to be no more than 50% of annual rate revenue.  In addition, the annual interest and principal payments shall be less than 6% of annual rate revenue.


This principle is generally being adhered to as the balance of outstanding debt represents 36.9% of total rate revenue, and, the annual interest and principal repayments is 5.8% of rate revenue."


What the draft Budget doesn't tell you is that the way Council has calculated the debt to revenue ratio has changed from last year.  The key words are "annual rate revenue".  It seems "annual rate revenue" ain't "annual rate revenue"


Last year (2007/2008) Councilís debt level was measured against rate revenue (income from rates only)  and came in at 39.5%. Revenue from rates only in 2008/2009 is ,


This year, Council has measured its increased debt level (with a new $3,000,000 loan in 2008/2009) against rates and charges revenue (), which produced the 36.9% debt to revenue ratio shown above. 


However, if debt had been measured against rate revenue only, as it was last year, the ratio would have been 48%, almost at Council's 50% limit.  So what you see in the budget is actually the tip of the iceberg.  Is it being submerged to hide the real size of the problem for ratepayers?


Borrowings V Revenues





Balance of Debt (@ 30/6)





% of Total RATE Revenue





% of Total RATE & CHARGES Revenue





Total Repayments (Principal & Interest)





% of Total RATE Revenue





% of Total RATE & CHARGES Revenue






We smell a rat. Is Council fiddling around with formulas to try and 'technically' get away with putting the Shire into so much debt?  Fiddling, so to speak, while the Shire burns financially? 


The current debt strategy explicitly defines rate revenue as NOT including charges, just rates.  MRRA understands Council will change the debt strategy in its Strategic Resources Plan on Wednesday night to include rates and charges, albeit after the fact of having without warning already used that formula in this budget.  MRRA would like to know how charges, which are usually declared and raised for specific purposes such as garbage collection etc, can be considered or used as general rate revenue. 


But even that may not save Council's bacon.  If Council goes ahead with the Kyneton pool, in the 2009/2010 budget next year, another (new) $4 Ė 5 million loan will be needed, raising Councilís debt level yet again.  It will take the debt ratio over 50% of revenue, based on rates being paid in 2008/2009, unless of course rates go up in 2009/2010 to the point where this mountainous debt can still return a debt ratio at or below 50% of rates revenue.


The same problem occurs with the amount Council is paying to service the debt.  The figure in this yearís budget says servicing is 5.8% of rates revenue (i.e. and charges).  When measured against rate revenue only, as last year, the figure becomes 7.6%, well over the 6% strategy cap.