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Long Term Financial Strategy Keeps Rates Steady
Christchurch City Council's Draft Plan :1997 Edition has been developed within the framework of a long term financial policy based on strict financial ratios related to debt, operating revenue, turnover and total assets.
The policy was recommended to Council in 1994 by the international accounting firm of Ernst and Young to ensure Council debt is maintained at manageable levels in the long term. Two of the important constraints in the policy are that the net debt of Council is never greater than 12% of the value of all Council's assets and that the net interest costs are less than 8% of operating revenues.
A comparison of these ratios with the relationship of the mortgage, income and assets of an average family helps to set the level of Council debt into perspective as modest and reasonable.
The Draft Plan projects all the Council's expenditures and revenues for the next ten years and over that time frame illustrates that the City's debts are able to be managed within the Financial Policy constraints.
The Council expects to produce an operating surplus in two years - the first time a surplus has been achieved since accrual accounting was introduced in 1989 - and one year ahead of the target set in the financial policy.
This operating surplus will mean the proportion of capital works funded from borrowings will decrease from 49% this year to 33.5% by the year 2007.
Council borrows money to pay for major construction works, such as those periodically necessary to improve the streets, water supply or sewerage of Christchurch. Under the financial strategy the costs of these assets are accounted for over the lifetime of each asset rather than being paid all at once. This is similar to a homeowner taking out a mortgage and paying it off in instalments, including capital and interest over 20 years, instead of as a total lump sum in the first year. It also means that future ratepayers bear their share of the cost for the asset.
Over the next ten years, the financial strategy will help ensure the City's capital and operating expenditure and debts are balanced in an affordable way by the ordinary income, interest earnings, rates and dividend income from it's trading enterprises. These include Southpower, Lyttleton Port Company, and Christchurch International Airport Company.