Balancing our approach to debt to deliver projects

Getting the council back in the black, while delivering significant projects.

Similar to how people use mortgages to spread the cost of a house to make it affordable, councils use debt to pay for large and long-life infrastructure, so the cost is spread over all the people who will use it now and in the future.

While major projects such as a new water pump station, a replacement bridge or a museum carry a significant upfront price tag, we spread the cost out over a number of years, so it is paid by all the people who will use it over time.

This means that these large capital projects have less effect on your annual rates bills than our day-to-day costs. There are two important numbers when it comes to Council debt.

All our lending comes via the Local Government Funding Agency, which allows us to borrow up to 2.8 times our operating income (280%). This is the maximum amount of debt we can take on, so in total this would be about $485 million in this ten-year plan based on our projected rates increases.

The second number is our self imposed debt cap, which currently sits at 2.1 (210%) times our income or about $280.3 million. This means we still have some headroom, just under $100 million if something significant like a natural disaster occurs

However, at the 2.1 cap we can’t deliver everything that is planned over the life of this plan and keep rates rises at a reasonable level.

Our preferred option is raising this cap to 2.5 (250%) times our income. If you look at the graph below, you’ll see that we get close to this cap for a few years, then it begins to go down as we get back into surplus and start paying down debt.

Our overall amount of debt will increase, but we will still have a significant amount of headroom in case of a disaster, such as the Rangitata floods we experienced recently.

We want to know how comfortable you are with our plan to raise the debt cap to 2.5.

Graph showing proposed net debt to income peaking at 250 percent

Do you agree with our proposal to set our debt cap at 2.5 over this 10-year plan?

The options

Our preferred option is option 2.

Lower Debt Cap (2.1)
Option Summary
Cuts across capital investment and
infrastructure and community
facilities.
Effect on debt cap: $353M
(2.1 Debt cap)
What this Option will look like

Pros:

  • The overall net debt of the council will be
    $59m less.
  • We will have reduced interest costs
    compared to if the debt cap is raised.
  • There will be more financial headroom for
    unexpected spending due to a disaster or
    financial shock.
  • The council’s credit rating is preserved,
    leading to better long-term cost of borrowing.

Cons:

  • We cannot deliver as much of the capital works planned as part of previous Long-Term Plans.
  • We will be unable to replace critical infrastructure and upgrade community facilities within a reasonable timeframe.
  • There will be more operational expenditure due to ageing infrastructure failing more often.
  • Future generations face higher costs to replace assets when they fail.
Impacts
  • No impact on planned rates rises in years 1-4 (15% in year 1). Approximate interest savings of $3 million per annum from year 5 compared to 2.5.
  • Sale of non-core Council assets and properties.
  • Deferment of footpath and water renewals, as well as reducing levels of service in areas such as playground renewals or parks maintenance.
2.5 Debt Cap
Option Summary
We can deliver most of our capital works.
Amount of debt: $412M
(2.5 Debt cap, reaching 2.47 at peak)
What this Option will look like

Pros:

  • We can deliver most of the capital works planned as part of previous Long-Term Plans.
  • The Council is able to replace critical infrastructure and upgrade community facilities within a reasonable timeframe.
  • Reasonable capital investment will lower operational expenditure required for maintaining end of life infrastructure.
  • There remains headroom for unexpected spending due to a disaster or financial shock.
  • The Council’s credit rating is preserved, leading to better long-term cost of borrowing.
  • Spending for long-term projects is spread out over generations.

Cons:

  • The Council’s net debt is higher than before.
  • We will be paying more in interest when the debt peaks in year 2030.
  • There is less headroom than previously for unexpected spending due to a disaster or financial shock.
  • Some projects will still need to be deferred or cancelled.
  • Moderate rates increase still required.
Impacts
  • Rates rises as planned in years 1-10 (15% in year 1).
  • Additional interest costs of approximately $3 million per annum from year 5 compared to 2.1.

Main projects delivered under preferred option:

  • Theatre Royal and Heritage Facility
  • Aorangi Stadium Upgrade
  • Claremont Treatment Plant Upgrades
  • Geraldine Water Main and Reservoir Upgrade
  • Completion of District Plan
  • Bridge Renewals

Main projects deferred under preferred option:

  • Timaru CityTown Masterplan Enabling Programme.
  • Aigantighe Art Gallery Extension.
  • New Library Building in Temuka.
  • Road Seal Extensions.
  • New Cycleways Walkways.
  • Highfield Park Development.
Higher Debt Cap (2.8)
Option Summary
We can deliver more of our capital
works, no financial headroom if
required.
Effect on debt: Borrowing maximum
$485M (2.8 Debt cap)
What this Option will look like

Pros:

  • Financing is available for new projects.
  • We can deliver more of the capital works planned as part of previous Long-Term Plans.
  • We will be able to replace critical infrastructure and upgrade community facilities in a proactive way.
  • Lower operating expenditure as there will be less maintenance due to old infrastructure.
  • Spending for long-term projects is spread out over generations.

Cons:

  • The Council’s net debt is higher than before.
  • We will be paying more interest and will require higher rates over the long term to pay it.
  • No headroom for unexpected spending due to a disaster or financial shock as will be at borrowing limit.
  • The Council’s credit rating is at risk of downgrade, leading to more expensive
    long-term cost of borrowing.
Impacts
  • Rates rises are planned in years 1-4 (15% in year 1). Additional interest costs of approximately $4.3 million per annum from year 5.
  • Projects as per option 2 with addition of items Aigantighe Art Gallery Extension, New Cycleways/Walkways.

Preferred Option

1

Lower Debt Cap (2.1)

2

2.5 Debt Cap

3

Higher Debt Cap (2.8)

Option Summary

Cuts across capital investment and
infrastructure and community
facilities.
Effect on debt cap: $353M
(2.1 Debt cap)

We can deliver most of our capital works.
Amount of debt: $412M
(2.5 Debt cap, reaching 2.47 at peak)

We can deliver more of our capital
works, no financial headroom if
required.
Effect on debt: Borrowing maximum
$485M (2.8 Debt cap)

What this Option will look like

Pros:

  • The overall net debt of the council will be
    $59m less.
  • We will have reduced interest costs
    compared to if the debt cap is raised.
  • There will be more financial headroom for
    unexpected spending due to a disaster or
    financial shock.
  • The council’s credit rating is preserved,
    leading to better long-term cost of borrowing.

Cons:

  • We cannot deliver as much of the capital works planned as part of previous Long-Term Plans.
  • We will be unable to replace critical infrastructure and upgrade community facilities within a reasonable timeframe.
  • There will be more operational expenditure due to ageing infrastructure failing more often.
  • Future generations face higher costs to replace assets when they fail.

Pros:

  • We can deliver most of the capital works planned as part of previous Long-Term Plans.
  • The Council is able to replace critical infrastructure and upgrade community facilities within a reasonable timeframe.
  • Reasonable capital investment will lower operational expenditure required for maintaining end of life infrastructure.
  • There remains headroom for unexpected spending due to a disaster or financial shock.
  • The Council’s credit rating is preserved, leading to better long-term cost of borrowing.
  • Spending for long-term projects is spread out over generations.

Cons:

  • The Council’s net debt is higher than before.
  • We will be paying more in interest when the debt peaks in year 2030.
  • There is less headroom than previously for unexpected spending due to a disaster or financial shock.
  • Some projects will still need to be deferred or cancelled.
  • Moderate rates increase still required.

Pros:

  • Financing is available for new projects.
  • We can deliver more of the capital works planned as part of previous Long-Term Plans.
  • We will be able to replace critical infrastructure and upgrade community facilities in a proactive way.
  • Lower operating expenditure as there will be less maintenance due to old infrastructure.
  • Spending for long-term projects is spread out over generations.

Cons:

  • The Council’s net debt is higher than before.
  • We will be paying more interest and will require higher rates over the long term to pay it.
  • No headroom for unexpected spending due to a disaster or financial shock as will be at borrowing limit.
  • The Council’s credit rating is at risk of downgrade, leading to more expensive
    long-term cost of borrowing.

Impacts

  • No impact on planned rates rises in years 1-4 (15% in year 1). Approximate interest savings of $3 million per annum from year 5 compared to 2.5.
  • Sale of non-core Council assets and properties.
  • Deferment of footpath and water renewals, as well as reducing levels of service in areas such as playground renewals or parks maintenance.

  • Rates rises as planned in years 1-10 (15% in year 1).
  • Additional interest costs of approximately $3 million per annum from year 5 compared to 2.1.

Main projects delivered under preferred option:

  • Theatre Royal and Heritage Facility
  • Aorangi Stadium Upgrade
  • Claremont Treatment Plant Upgrades
  • Geraldine Water Main and Reservoir Upgrade
  • Completion of District Plan
  • Bridge Renewals

Main projects deferred under preferred option:

  • Timaru CityTown Masterplan Enabling Programme.
  • Aigantighe Art Gallery Extension.
  • New Library Building in Temuka.
  • Road Seal Extensions.
  • New Cycleways Walkways.
  • Highfield Park Development.

  • Rates rises are planned in years 1-4 (15% in year 1). Additional interest costs of approximately $4.3 million per annum from year 5.
  • Projects as per option 2 with addition of items Aigantighe Art Gallery Extension, New Cycleways/Walkways.