Long Term Community Plan 2012-2022 - Hurunui District Council

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www.hurunui.govt.nz Internal Financing Policy Introduction Council has developed a system of internal financing for various activities within the organisation. The system is designed to provide funding for communities to meet the cost of capital expenditure rather than setting its rates at a level to cover the entire cost in the year that it is incurred. The system allows communities to spread the cost of such capital expenditure over a longer period than just one year. The system is used instead of the Council specifically setting its rates to cover the cost of depreciation on some of its assets (notably Water, Sewer, Stormwater and Community Facilities), which is generally required under the Local Government Act 2002. The internal financing system is applicable those activities that are funded by a Targeted Rate, which requires the Council to ensure that the funds generated from rates are only applied to that activity, or there is reasons to separately account for an activity. As a result, the internal financing system is applied to the following: • Ward Amenities • Rural Fire Control • Animal Control • Household Refuse Collection • Water Supplies • Sewerage Schemes • Stormwater and Drainage Schemes • Medical Centres • Foreshore Protection Schemes • Special Funds including Development Contribution Funds • Hanmer Springs Thermal Reserve (with regards to the debt resulting from expansion work) Mechanics of the System Each activity has a capital balance, which in essence is an individual bank account for that activity. Receipts from that activity – Rates, Fees & Charges, and Development Contributions etc. – are deposited into that account. Payments for that activity – Employment Costs, Direct Operating Expenditure, Council Overheads etc. and Capital Expenditure – are withdrawn from that account. The result is that at any stage, that bank account may be in funds or it could be overdrawn. Like most bank accounts, if there are funds in the account from that activity, then the Council will pay interest to that activity. Conversely, if the bank account is overdrawn, then that activity will be charged interest. Debt Repayment There is also a need for those activities whose bank accounts are overdrawn to make provision to get out of overdraft. This is most likely done by setting rates at a level to not only pay the annual operating costs and interest charge, but to also fund additional amounts that will offset the overdraft. The Council’s policy is that debt should be repaid over 20 years (or such term Council deems appropriate in particular circumstances) and as a result, communities are required to fund at least 5% of the opening balance of their loan as repayments and set the rates accordingly. Increasing the Account As a way of increasing the account so communities are in a position to cover some or all of the cost of major capital projects in the future, the communities are encouraged to continue setting its rates at a level to cover the annual operating cost but also additional amounts (as a deemed affordable) which will increase the balance of the account. As a result, there will be a number of activities whose bank accounts will increase over time, with the knowledge that those funds will be utilised on capital expenditure. Interest Component To ensure consistency throughout the entire organisation, with the exception of the Hanmer Springs Thermal Reserve, the interest rates have been set as follows: • Interest rate on Overdrawn Activity Accounts is charged interest at 100 basis points (1%) above the interest rate that Council is charged for any external debt. • Interest rate on Activity Accounts in funds received interest at the interest rate that the Council receives on its call accounts. 262
Hurunui Community Long Term Plan 2012 - 2022 Hanmer Springs Thermal Reserve The Hanmer Springs Thermal Reserve is an exception to the Internal Financing Policy. As any development that the Hanmer Springs Thermal Reserve undertakes is of a commercial nature, there is an increased level of risk involved and as such, the interest rate charged for any debt drawn down by the Thermal Reserve attracts an interest rate of 250 basis points (2.5%) above the interest rate that Council is charged for any external debt. It is intended that any debt funding provided to the Hanmer Springs Thermal Reserve crystallises with the Thermal Reserve not required to actively repay debt unless required to by Council. This will result in the Council holding both a debt investment as well as an equity investment in the Thermal Reserve. Use of Interest All interest derived from internal financing is accumulated by the Council’s treasury function. Costs associated with treasury, such as any external interest, external advice, and Council overheads, are paid from the interest derived with the overall surplus from the treasury function used actively to offset the District Rate requirement. 263
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Hurunui Community Long Term Plan 20
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About the Plan Introduction The Loc
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How Your Rates are Spent The Counci
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Council Activities Introduction In
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Water Supply Overview Water Supply
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Annual Plan Year 1 Year 2 Year 3 Ye
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Funding Impact Statement (and Rates
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Development Contributions Policy In
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Page 211 and 212: Hurunui Community Long Term Plan 20
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Page 265 and 266: Representatives of our District Hur
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Page 285: Phone: 03 314 8816 Fax: 03 314 9181
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Long Term Community Plan 2012-2022 - Hurunui District Council

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