SALGFMG

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SALGFMG Shaping the Future Conference BETTER
USE OF DEBT its critical role in improving
financial sustainability
John Comrie JAC Comrie Pty Ltd
8 December 2006
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PERSONAL TREASURY MANAGEMENT

• cash in bank
• credit card, no debt, large credit limit
• buy new plasma TV on credit card
• should then pay off statement in full or make
  minimum payment?

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2004/05 SA LOCAL GOVT DATA

• financial assets 300 million
• loans 440 million
• margin between borrowing and lending rates say
  1.25
• councils could have saved 3.75 million if
  utilised existing financial assets to reduce
  loans

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LG TREASURY MANAGEMENT

• sub-optimal/costly
• often financial assets reserved for specific
  future purpose
• reflects cash accounting mindset / lack of
  sound policy

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SOUND TREASURY MANAGEMENT

• cash and investments should be used in preference
  to additional debt
• only borrow when need funds
• not for particular project
• not long-term if likely to have surplus cash in
  future

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DEBT - IMPACT ON FINANCIAL SUSTAINABILITY

• For individuals and councils
• additional debt doesnt allow acquisition of
  things that cant be afforded
• allows access to funds to acquire things but
  does have cost

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DEBT - IMPACT ON FINANCIAL SUSTAINABILITY cont..

• interest expense has adverse impact on operating
  result
• overall impact depends on what do with funds -may
  be favourable or unfavourable

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DEBT ASSET MANAGEMENT

• local govt by far most asset intensive sphere
  of govt
• most councils under-funding asset maintenance and
  have substantial asset replacement/rehabilitation
  backlogs

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FINANCIAL SUSTAINABILITY REVIEW BOARD

• desirable that debt levels be as low as possible
  (all other things being equal)
• but
• borrowing to fund needed asset rehabilitation
  and replacement could improve financial
  sustainability

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FINANCIAL SUSTAINABILITY REVIEW BOARD cont..

• deferral of infrastructure renewal/replacement
  worse sin than not borrowing to finance
  renewal/replacement if cost effective to do so

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FINANCIAL SUSTAINABILITY INQUIRY
FINDINGS/PROPOSALS

• infrastructure spending too low
• lagging asset management practices
• stronger focus on operating bottom line
• use debt to address asset management

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INQUIRY LGA RESPONSES/SUPPORT

• comprehensive, including -
• FS Advisory Committee and Project Gps with FMG
  representation
• support programs material eg
• financial targets debt management information
  papers (which this presentation based on)

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MORE DEBT?

• Most councils have capacity to better serve
  communities by making greater use of debt -
  particularly for addressing asset rehabilitation
  and replacement needs, providing.

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MORE DEBT? cont..

• they are committed to strategies that ensure
  financial sustainability and have good long-term
  financial planning
• in the absence of such commitments and needs
  additional debt should not be raised

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DEBT TARGET

• no specific amount of debt that is right or
  optimal
• high debt level council may be more or less
  financially sustainable than one with low level

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DEBT TARGET cont..

• too much or can afford more depends on needs
  and operating position/capacity
• if have operating deficit then no capacity to
  raise additional debt unless committed to
  reducing other expenses or willing to raise
  revenue

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DEBT TARGET cont..

• should have regard to stage of development of
  financial governance policies/practices
• eg more conservative in absence of soundly
  developed I AMP and LTFP

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FMG/FSAC DEBT INDICATORS/TARGETS

• Net Financial Liabilities
• Net Financial Liabilities/Operating Revenue ratio
• (suggested target gt 0 and lt 100)

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FMG/FSAC DEBT INDICATORS/TARGETS cont..

• 3. Interest Cover Ratio
• (net interest/operating revenue)
• Suggested target gt 0 and lt 10

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COMPARATIVE FINANCIAL DATA

• uses 2004/05 audited financial
  statements and SA Grants Commission
  data
• Adelaide excluded from metro average but Gawler,
  Adelaide Hills and Mt Barker included
• rural and regional, all except Adelaide and those
  included in metro average

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OF OPERATING REVENUE

• Net Debt Net Fin Liab
• metro 24 38
• rural/regional 8 17
• statewide 18 30
• Suggested target up to 100

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NET FINANCIAL LIABILITIES AS OF ASSETS

• metro 3.8
• rural/regional 2.4
• statewide 3.4
• LG net financial liabilities very low relative to
  asset base ( equivalent to 10,200 mortgage on
  300,000 house)

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NET INTEREST AS OF OPERATING REVENUE

• metro 1.6
• rural/regional 0.5
• statewide 1.1
• Suggested target up to 10

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CAP EX AS DEPRECIATION

• metro 97
• rural/regional 75
• statewide 102
• Data is total Capital Expenditure (net of
  proceeds from sales). On average over time net
  Cap Ex on renewal/replacement only (separate
  data not avail) should equal depreciation

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INTEREST RATE RISK

• all councils exposed to risk of financial loss as
  a result of movements in interest rates
• loans with fixed rates of interest do not obviate
  such risk
• a range of different types of borrowings spreads
  risk

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TYPES OF DEBT

• fixed and variable interest rates, and short,
  long or open-ended duration?
• likely optimum - variable interest rate
  borrowings not requiring regular principal
  repayments for major portion of debt
• just because used to fund acquisition of long
  lived asset doesnt mean loan should be long-term
  

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KEYS TO SOUND DEBT MANAGEMENT

• manage to targets (debt and other) that ensure
  financial sustainability
• sound debt/treasury management policy/practices
• well researched LTFP I AMP

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SALGFMG Shaping the Future Conference BETTER
USE OF DEBT its critical role in improving
financial sustainability
John Comrie JAC Comrie Pty Ltd
8 December 2006