Mangawhai Fails Going Concern Test

There are all sorts of definitions of being a "Going Concern". It seems that when the bunsen burner got put under Kaipara District Council (KDC) last year by Central Government (because of the Mangawhai EcoCare Sewage scheme fiasco), the banks were anxious to protect their loans, and needed to be reassured that KDC was indeed a going concern.

The banks wanted reassurance that KDC would meet its obligations in regard to the loans. I haven't seen the precise wording of any contract that may exist between KDC and the banks, but it could be expected to spell out the interest rate, dates when the loan would need to be re-financed and such like. Presumably adequate reassurance was given - because the loans are still in place today.

That's one way of looking at KDC as a going concern. The bank's way. There's also the ratepayers perspective on what is a going concern, and what is not a going concern.

If you've followed this saga, you'll be broadly aware of the financial history. Goes like this:

Between the years 2005 and 2007 KDC made decisions that were unlawful in terms of the Local Government Act (KDC concedes this in the Validation Bill) and borrowed money. Because ratepayers were not consulted no-one knew how big these loans were. In fact between the years 2007 and 2011 the KDC issued no rate demands relating to the loans. It appears that any interest that was owed, was paid, capitalised, and simply added back to the loans. Then in 2012 KDC proposed a Long Term Plan (2012-2022) with huge rate increases to make loan payments. This resulted in widespread protest action and to Government intervention last year - when commissioners were appointed (to fix up the mess).

This was when the banks wanted reassurance.

Following advice from Dept of Internal Affairs KDC developed and adopted (without consulting ratepayers again) a substantially different Long Term Plan (2012-2022) which also provided for rate increases to pay interest on the loan - but was silent on the loan principle itself apart from assuming that new development levies would provide a capital revenue stream. 

 That brings us to this year, and the Draft Annual Plan (2013-2014) (DAP) that is under consultation and finalisation now. In fact Commissioners came to Mangawhai Heads on Wednesday to hear oral submissions from ratepayers. At its heart the DAP proposes a revised approach to the management of debt and advises how the Commissioners believe the Ecocare debt should be “attributed” to ratepayers. Put simply the debt of $58 million has been attributed as follows:

• $13.4 million to those existing Mangawhai households that have not paid the full connection fee already
• $18.4 million to the whole Kaipara District
• $26.2 million to future developments over the next 30 years

The DAP also includes ways and means for the interest that is payable on this debt to be paid by ratepayers, and how this will be apportioned across the district.

This posting is about whether KDC is a going concern or not. My personal focus on the DAP was its plan to allocate or attribute responsibility for $26.2 million of debt to future developments (within the EcoCare catchment) over the next 30 years.

The growth assumptions for the Mangawhai EcoCare catchment area are set out in the DAP. These predict that in each year from 2012/2013 to 2015/2016 there will be about 34 new properties each year (1.6% growth rate), and that the capital contribution paid from each of these will be $17,590.

This rate of development would generate around $598,000 in hard cash each year to be ploughed into reducing the debt.

Then in the years 2016/2017 to 2021/2022 the growth rate will increase to an average of about 59 new properties each year (2.5% growth rate).

The Deloittes audit report that came with the DAP states that assuming a rate of growth and development that will generate this revenue could be wrong, and that if the growth estimates are wrong then the budgeted  chunk of debt would not be cleared by development contributions. I was concerned that the DAP growth rates were optimistic, so I asked KDC for information. The questions I asked and the answers I received in an email dated 1May 2013, follow:

What monies were received by KDC in the 2011/2012 year, that were paid as Development Contributions for EcoCare?

Answer: $54,114

How much of this money was used to retire EcoCare debt?

Answer: None has been applied as yet, we are picking it up as we finalise the proposed amendment to the Long Term Plan 2012/2022.

What monies have been received by KDC in the 2012/2013 year so far, that were paid as Development Contributions for EcoCare

Answer: to date $82,837

How much of those monies have been used to retire EcoCare debt?

Answer:  None has been applied as yet, we are picking it up as we finalise the proposed amendment to the Long Term Plan 2012/2022.

My purpose in asking the questions is based on my understanding that when preparing a budget for the years ahead - particularly the next couple of years, it's sensible to base it on what happened in the last couple of years. You can see that for the full year 2011/2012 $54,114 was received (against a budgeted revenue figure set out in the DAP of $598,000).

And for the current financial year (which has not ended yet by the way), $82,837 was received - with two or three months to go (year end is June 30), against a budgeted revenue for the year of $598,000. 

This loan is unaffordable by the local community.

Going concern? Don't think so.