DRAFT LTP book.indb - Hurunui District Council

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www.hurunui.govt.nzInternal Financing PolicyIntroductionCouncil has developed a system of internal fi nancing for variousactivities within the organisation. The system is designed toprovide funding for communities to meet the cost of capitalexpenditure rather than setting its rates at a level to cover theentire cost in the year that it is incurred. The system allowscommunities to spread the cost of such capital expenditureover a longer period than just one year.The system is used instead of the Council specifi cally setting itsrates 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 Act2002.The internal fi nancing system is applicable those activities thatare funded by a Targeted Rate, which requires the Council toensure that the funds generated from rates are only applied tothat activity, or there is reasons to separately account for anactivity. As a result, the internal fi nancing system is applied tothe 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 ContributionFunds• Hanmer Springs Thermal Reserve (with regards to thedebt resulting from expansion work)Mechanics of the SystemEach activity has a capital balance, which in essence is an individualbank 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, CouncilOverheads etc. and Capital Expenditure – are withdrawn fromthat account. The result is that at any stage, that bank accountmay be in funds or it could be overdrawn.Like most bank accounts, if there are funds in the account fromthat activity, then the Council will pay interest to that activity.Conversely, if the bank account is overdrawn, then that activitywill be charged interest.Debt RepaymentThere is also a need for those activities whose bank accountsare overdrawn to make provision to get out of overdraft. Thisis most likely done by setting rates at a level to not only paythe annual operating costs and interest charge, but to also fundadditional amounts that will offset the overdraft. The Council’spolicy is that debt should be repaid over 20 years (or such termCouncil deems appropriate in particular circumstances) and asa result, communities are required to fund at least 5% of theopening balance of their loan as repayments and set the ratesaccordingly.Increasing the AccountAs a way of increasing the account so communities are ina position to cover some or all of the cost of major capitalprojects in the future, the communities are encouraged tocontinue setting its rates at a level to cover the annual operatingcost but also additional amounts (as a deemed affordable) whichwill increase the balance of the account. As a result, there will bea number of activities whose bank accounts will increase overtime, with the knowledge that those funds will be utilised oncapital expenditure.Interest ComponentTo ensure consistency throughout the entire organisation, withthe exception of the Hanmer Springs Thermal Reserve, theinterest rates have been set as follows:• Interest rate on Overdrawn Activity Accounts is chargedinterest at 100 basis points (1%) above the interest ratethat Council is charged for any external debt.• Interest rate on Activity Accounts in funds receivedinterest at the interest rate that the Council receiveson its call accounts.Hanmer Springs Thermal ReserveThe Hanmer Springs Thermal Reserve is an exception to theInternal Financing Policy.268
Draft Hurunui Community Long Term Plan 2012 - 2022As any development that the Hanmer Springs Thermal Reserveundertakes is of a commercial nature, there is an increased levelof risk involved and as such, the interest rate charged for anydebt drawn down by the Thermal Reserve attracts an interestrate of 250 basis points (2.5%) above the interest rate thatCouncil is charged for any external debt.It is intended that any debt funding provided to theHanmer Springs Thermal Reserve crystallises with the ThermalReserve not required to actively repay debt unless requiredto by Council. This will result in the Council holding both adebt investment as well as an equity investment in the ThermalReserve.Use of InterestAll interest derived from internal fi nancing is accumulated bythe Council’s treasury function. Costs associated with treasury,such as any external interest, external advice, and Counciloverheads, are paid from the interest derived with the overallsurplus from the treasury function used actively to offset theDistrict Rate requirement.269
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DRAFT LTP book.indb - Hurunui District Council

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