Moreland City Council
Borrowing Strategy
A Sustainable Future
September 2011
1
Table of Contents
Background............................................................................................................................................ 3
Legislative Framework ......................................................................................................................... 3
Linkage to Council Plan ....................................................................................................................... 3
Strategy Framework ............................................................................................................................. 4
Principles of Sound Financial Management ..................................................................................... 5
Strategic Goals...................................................................................................................................... 6
2
Background
Loan borrowing is a legitimate and responsible financial management tool when used to fund
major projects, as it spreads the payments for such assets across the generations who
benefit.
The following extract from ‘Facing the Renewal Challenge – Victorian Local Government
Infrastructure Study 1998’ is still valid and provides comments on debt in the context of a
financial framework:
‘Borrowings are a useful mechanism for spreading the cost of assets over the time that those
assets are used to provide services to ratepayers, thus ensuring to a large extent that the
ratepayers who benefit from the assets pay for their consumption….’1
With an increased level of strategic property acquisitions and expanding capital expenditure,
Moreland City Council has in recent years significantly increased its debt level and currently
holds total borrowings of close to $30 million. It is therefore important that Council adopts a
responsible borrowing strategy that ensures long term financial sustainability.
Legislative Framework
The Local Government Act 1989 (The Act) provides Councils the power to borrow.
Section 144(1) of the Act states: ‘Subject to the principles of sound financial management, a
Council may borrow money to enable the Council to perform the functions and exercise the
power conferred on the Council under this Act or any other Act.’
Sections 145 to 149 of the Act further specify the circumstances in which the power to
borrow may be exercised, securities to be used for local government borrowings, and how
the borrowings should be disclosed, etc.
Linkage to Council Plan
Council Plan 2009 – 2013
One of the Key Strategic Focus Areas of the current Council Plan is ‘A Responsive
Organisation’ and the Key Strategic Objective (KSO) 19 within this area closely aligns to the
objectives aimed by this strategy:

Align financial resources of Council to meet the needs of the community now and into
the future.
One of the key strategic initiatives for this KSO is: a sustainable financial strategy.
Facing the Renewal Challenge – Victorian Local Government infrastructure Study Dec 1998, AMQ
international, Slilmar Systems Pty Ltd and Jeff Roorda and Associates.
1
3
Strategic Framework
The Moreland Borrowing Strategy is underpinned by the following framework:
Vision:
Responsible borrowing leads to long term financial sustainability
Strategic Goal 1:
Provide an
alternative funding
option for capital
works projects that
are of strategic
significance






Priorities:
Meet the principles
of sound financial
management;
Consider borrowing
as a potential
funding source for
capital projects;
Include debt
redemption payment
in rating
consideration.
KPIs
Meet DPCD ratios;
Meet VAGO
indebtedness ratio;
Loan redemption
payment included in
the adopted Budget.
Strategic Goal 2:
Manage Council’s
borrowing budget to
optimize cash flow
Priorities:
Fund capital projects
using working
capital during the
year before taking
up borrowing at year
end;
Access credit facility
during the year;
Consolidate loan
borrowings at year
end.





KPIs
Use of bank
overdraft no more
than 20 days per
annum;
Loan draw down for
expended capital
projects only.
Strategic Goal 3:
Develop and maintain
a borrowing structure
that achieves a healthy
balance between
predictability and
flexibility
Priorities:
Develop and maintain
a loan register;
Mixed use of fixed rate
and variable rate ;
Bi-annual review of
existing loan structure;
Leverage between
short-term and longterm fixed rate.






KPIs
Fixed rate
component at least
30%, no more than
70%;
Variable rate
component at least
30%, no more than
70%.

4
Principles of Sound Financial Management
In providing Councils the power to borrow, the Act requires Councils to exercise the
principles of sound financial management.
Both the Local Government Act 1989 (the Act) and the Local Government (Finance and
Reporting) Regulations 2004 (the Regulations) provide specific requirements in relation to
financial management and reporting in Local Government. This includes:

Budget or revised budget must include proposed borrowings (s146 of the Act);

The amount of proposed new borrowings, borrowing balance as at 30 June of the
previous financial year and current financial year, the projected debt redemption
amount, and the projected debt servicing cost must be disclosed in the public notice
for the proposed budget or revised budget (s9 of the Regulations);

Council must include in its annual accounts specific financial ratios for the financial
year to which the annual accounts relate and for each of the previous 2 financial
years (s15 of the Regulations). These ratios include:
-
Debt servicing ratio (debt servicing costs/ total revenue)
-
Debt commitment ratio (debt servicing and redemption costs/ rate revenue)
-
Revenue ratio (rate revenue/ total revenue)
-
Debt exposure ratio (total indebtedness/ total realisable assets)
-
Working capital ratio (current assets/ current liability)
The Department of Planning and Community Development (DPCD) has also in recent years
been using a number of financial ratios in its endorsement of councils’ borrowing allocation.
These ratios are:
Ratio
Green
Amber
Red
Working capital ratio (current
assets/ current liabilities)
>120%
110% - 120%
<110%
Debt management ratio (total
debts/ total rates and charges)
<60%
60% - 100%
>100%
Debt servicing ratio
<5%
5% - 10%
>10%
In addition, the Victoria Auditor General’s Office (VAGO) has been using a number of criteria
to assess Councils’ long term financial sustainability. One of the six long term financial
assessment criteria is ‘indebtedness’, which assesses non-current liabilities as a percentage
of own- sourced revenue.
Ratio
Indebtedness (non-current
assets/ own-sourced revenue)
Green
Amber
Red
<40%
40% - 60%
>60%
Although it is not a legislative requirement, it has been regarded as the ‘best practice’ across
the local government sector that borrowings should only be sought for capital projects that
deliver
long
term
benefit
to
the
community.
5
Strategic Goals
Goal 1
Provide an alternative funding option for capital works projects that are
of strategic significance
Loan borrowing is a legitimate and responsible financial management tool and the use of
loans to fund capital projects of strategic significance can be an effective mechanism of
linking the payment for the assets (via debt redemption payments) to the successive ratepaying populations who receive benefits over the life of those assets. This matching concept
is frequently referred to as ‘inter-generational equity’.
Moreland City Council has accessed debt funding in the past years to fund strategic property
acquisitions and major capital projects that will be enjoyed by the populations of the future.
Council’s five year capital plan projects a number of significant capital projects that will
partially rely on borrowing as a funding source. It is however important to note that borrowing
should only be accessed after other external funding options have been explored.
Priorities:

Ensure Council meets the principles of sound financial management and borrowings are
only used to fund capital projects. Borrowings will not be used to fund operating costs.

Assess the funding source of the key capital projects that are included in the five year
capital works plan. Borrowing can be considered as a potential funding mechanism after
exploring other external funding options, in particular government grants and third party
contributions.

Ensure debt redemption payment is included in the annual rating consideration. This is to
ensure the payment for the loan funded assets are charged to the successive populations
who receive benefits over the life of those assets. Debt redemption cost should not be
paid out of Council’s cash reserve unless there is sufficient cash surplus built from prior
years.

Wherever possible, link the term of loan to the life of the assets that are to be funded by
the loan, with a maximum term of 25 years.
KPIs:

Council’s working capital, debt management and debt servicing ratios meet or are close
to meeting the green light criteria recommended by DPCD.

Council’s indebtedness ratio meets or is close to meeting the green light criterion set by
VAGO.

The implication of loan redemption payment is included in Council’s adopted budget.
6
Goal 2
Manage Council’s borrowing budget to optimize cash flow
Council generally holds working capital in excess of $10 million and its cash flow fluctuates
during the year depending on the timing of major payments and revenue receipting deadlines
(e.g. quarterly rates instalments, insurance premium payments etc.). Whilst working capital is
invested in various investment accounts earning interest income, the interest rate on
investment is generally lower than the interest rate for loan borrowings. It is therefore
important to carefully manage the timing of borrowing in conjunction with operational cash
flow (working capital) to avoid both excessive cash in bank, and over-reliance on working
capital.
Priorities:

Wherever possible, use working capital to temporarily fund all capital projects during the
year, before taking up the loan borrowings at the end of financial year.

If large borrowings are budgeted for the year, consider arranging a variable credit facility
within the first half of the financial year, allowing multiple loan draw downs during the
year.

Consolidate all loan borrowings at financial year end and make necessary adjustments to
the borrowing structure.
KPIs:

Access of bank overdraft facility is no more than 20 days per annum.

Loan draw down for the expended capital projects only.
7
Goal 3
Develop and maintain a borrowing structure that achieves a healthy
balance between predictability and flexibility
With a borrowing portfolio of close to $30 million, it is important that the loan structure can
offer the following:

Stability in regards of repayment obligations. This can be achieved by obtaining a fixed
rate component. The fixed rate will protect Council from unexpected interest rate
increases in the market and provides a powerful tool for Council’s long term financial
planning.

Flexibility in regards to early repayments. This can be achieved by obtaining part of the
loan at the variable rate. This will give Council the benefit of not paying a premium
while variable rates are lower than fixed rates, and also allows Council to pay off the
debts quicker if cash flow permits.
Priorities:

Develop and maintain a loan register. This should be reported to the Audit Committee
and to Council on an annual basis.

When taking up new borrowings, explore both fixed rate and variable rate options.

Review existing loan structure at least every other year and when necessary re-finance to
achieve a healthy balance between fixed rate and variable rate components.

The loan structure review should also use the leverage between short-term and long-term
fixed rates to mitigate the financial risk. A borrowing rate that is fixed up to 5 years is
generally much lower than the rate that is fixed for 10 years or longer, however it does
not provide the same level (length) of certainty that is provided by long term fixed rates.
KPIs:

The fixed rate component of Council’s borrowing portfolio is no less than 30%, and no
more than 70%.

The variable rate component of Council’s borrowing portfolio is no less than 30%, and no
more than 70%.
8