Thirdslide

Borrowing Policy

Borrowing Policy Document No: CPL510.4
Approval Date: 26 April 2017
Approved By: Council
Review Date: May 2019
Responsible Officer: Manager – Financial Services Version No 01
Authorising Officer: Chief Executive Officer

1. Purpose

Council recognises that borrowings, for capital works, provide an important funding source as the assets will be used by present and future ratepayers.

The Borrowing Policy provides the appropriate parameters for Council to undertake borrowings without compromising the application of sound fiscal management principals. The policy framework allows Council the flexibility to respond to funding requirements while minimising risk.

The Borrowing Policy(1) ensures that Council has a sound financial framework on which to:

  • undertake borrowings;

  • manage its loan portfolio; and

  • adhere to the provisions of the Local Government Act 1989 (LGA).

(1) The effective date of the Borrowing Policy is the 2017-2018 budget process.


2. Scope

The Policy applies to Council when considering and determining the annual budget.

Council officers must consider the application of this policy when:

  • Considering new borrowings; and

  • Refinancing existing borrowings (where long term benefits of refinancing are greater than the cost of exiting the loan).


3. References

  • Loan Council Allocation (LCA)

  • Local Government Performance Reporting Framework (LGPRF)

  • The Local Government Act 1989

  • Victorian Auditor General’s Office (VAGO)


4. Definitions

  • Capital project is a long term investment project requiring relatively large sums to acquire, construct and/or renew a capital asset (such as buildings) The project would result in a new, expanded or replaced asset.

  • Developer Contribution Projects (DCPs) are projects which operate in line with section 173 Agreements and are in the defined Urban Growth Development areas of Armstrong Creek, Jetty Road and Lara West.

  • Loan Book is the collective value of loans held by Council. The collective value of Council’s Loan Book as published in 2015-2016 Annual Report (excluding Old Post Office and Geelong Gaol) is as follows:

  • Loan Council Allocation (LCA) issues requests for advice of Council borrowing levels and approves borrowing requests as part of budget process.

  • Local Government Performance Reporting Framework (LGPRF) outlines measures to be included in Council’s performance report.

  • Section 173 agreement is a legal agreement made between Council and another party or parties, under Section 173 of the Planning and Environment Act (1987).

  • The Local Government Act 1989 states that Council's power to borrow is subject to the principles of sound financial management. The Local Government Act 1989 (Vic) also, includes provisions regarding the circumstances in which: the power to borrow money may be exercised (s 145), use of loan funds for different purposes (s 147), securing borrowings (s 148) and overdrafts (s 150).

  • Victorian Auditor General’s Office (VAGO) examines and reports on the management of resources within the public sector.

  • Defined benefit fund is a closed plan to new members from 31 December 1993. The future liabilities of the fund relative to investment performance may necessitate future funding calls.


5. Council Policy

5.1. Policy Objectives

5.1.1. To ensure Council’s new borrowings are sustainable and comply with legislative requirements.
5.1.2. Loan type and term of loan will be treated on a case by case basis in order to optimise Council’s Loan book.
5.1.3. Manage cash flow.


5.2. Statement of Principles

Council’s Borrowing Policy is in accordance with the Strategic Resource Plan and is underpinned by the following principles:

5.2.1. The Policy will be adhered to in developing Council’s long term financial plan and all borrowings are to be identified in the plan.
5.2.2. Council will not borrow to fund operating expenditure. This type of expenditure is to be funded from operating revenue streams (rates, fees and charges etc.).

The exception to this principle is calls to ‘defined benefit’ Superannuation Fund. Large calls to ‘defined benefit’ fund will require a separate report to Council which will include recommended method of funding - use of working capital, Superannuation Fund or borrowings.
5.2.3. Council will not borrow to fund recurrent capital works which is inclusive of acquisition, replacement or renewal of assets (for example: road resurfacing). This type of expenditure is to be funded from operating revenue streams.
5.2.4. Council will measure and report on renewal/upgrade expenditure relative to depreciation in order to highlight any renewal gap. This is to ensure assets are renewed as planned without the use of borrowings.
5.2.5. Borrowings are to be linked to the financing of capital project type.
5.2.6. Cash flows will be phased in order to consolidate the principle and interest requirements of approved capital projects.
5.2.7. The term of any loan should not exceed the expected economic life of the asset.

 



5.3. Borrowing Ratios and Limits

 

Victorian Auditor General Office requirements (VAGO)

5.3.1. VAGO reviews and reports on the financial sustainability of the local government sector. Two indicators best assess the financial sustainability risks associated with borrowing. Council will report on the following indicators:
  Indicator Formula Description Risk
  Internal financing (%) Net operating cash flow / net capital expenditure This measures the ability of an entity to finance capital works from generated cash flow.
The higher the % the greater the ability of the entity to finance capital works from their own funds.
Net operating cash flow and net capital expenditure are obtained from the cash flow statement
Less than 75% - High
75-100% - Medium
More than 100% - Low
  Indebtedness (%) Non-current liabilities / own-sourced revenue Comparison of non-current liabilities (mainly comprising borrowings) to own-sourced revenue. The higher the % the less the entity is able to cover non-current liabilities from revenues the entity generates itself.
Own source revenue is used rather than total revenue because it does not include grants or contributions
More than 60% - High
40-60% - Medium
40% or less - Low
  Council will operate within the low risk target ratio of more than 100% for internal financing in order to provide flexibility to respond to funding requirements for new or unplanned capital expenditure.
5.3.2. Council will report on the internal financing and indebtedness ratios as part of the budget process and in the annual report.
 

Local Government Reporting Performance Framework (LGPRF)

5.3.3. LGPRF includes two additional ratios:
  5.3.3.1. Debt Commitment Ratio measured as interest and principal repayments on interest bearing loans/rate revenue (recommended target 0% to10%); and
  5.3.3.2. Borrowing Rates Ratio measured an interest bearing loans and borrowings/rate revenue (recommended target 0% to10%).
5.3.4. Council will operate within the target ratio as set by the LGPRF.
5.3.5. Council will report on debt commitment and borrowing rate ratios as part of the budget process and in the annual report.
 

Loan Council Allocation (LCA)

5.3.6. Council is required to seek approval from the LCA for any borrowings identified during the budget process.
 

Credit rating

5.3.7. Council’s credit rating will be assessed by the Financial Institutions as part of the tender process for new borrowings and will be disclosed to Council.


5.4. Determination of loan term and interest rate type

Council will complete an analysis of the market to enable a recommendation on the loan term (number of years) and the interest rate type (fixed or variable).


5.5. Determination of Lending Institution

5.5.1. New borrowings will identified as part of the annual budget process and will be subject to Public Tender.
5.5.2. A Council report specifying length of loan, type of interest rate (fixed/variable) and delegation to Chief Executive Officer is required prior to commencing the procurement process. Under LGA section 98(1)(c) Council cannot delegate the power to borrow money.
5.5.3. The Public Tender process will be in accordance with Council’s Procurement Policy (CPL565.3) and the Local Government Act.
5.5.4. This procurement process will be undertaken by the Financial Services Department and Council’s Procurement Department.


5.6. Loan Type and Term

5.6.1. Council borrowings for the following projects will be a mixture of interest only and principal and interest (P&I) based on the following table.
5.6.2. The classification loan type and term are based on Council’s ability to recover the cost of the loan from the service/activity being borrowed for:
  5.6.2.1. DCPs;
  5.6.2.2. fees and charges from the service/activity where the financing costs are recoverable (for example: Aquatic Centres, ICCs); and
  5.6.2.3. service/activity where there is the opportunity for cost reductions (for example: renewables) and/or where a number of services/activities can be aggregated where there is an element of cost reduction.
5.6.3. The loan type and term may be varied in accordance with section 5.4.


Classification

Borrowing

Loan Type

Term of Loan

Rationale

DCP – fully funded DCP Projects – land acquisition or where State/Federal contribution to Project provides funding Interest only Flexible Income is to be received over a number of periods and the principal will be reduced accordingly
DCP - other DCP Projects which create an asset with Council responsibilities P&I Up to 10 years P&I repayments to be factored into budget estimates each year
Incremental Revenue – projects which provide Council revenue not linked to rates Community Asset Projects
Construction projects which create a community asset
P&I Up to 10 years P&I repayments to be factored into budget estimates each year
Incremental Revenue or Cost Reduction – projects which provide Council with revenue or cost savings not linked to rates General
Income or cost savings linked to a Capital Project (for example: Landfill Cell, LED Street lighting)

 

Interest only
Or
P&I
Flexible Interest to be charged and to form cost of service delivery.
Principal to be recovered and accounted for through identified cost savings.


5.7. Leases

Leasing as a funding option forms part of Council’s overall borrowing strategy.

There are two types of lease:

  • An operating lease is where Council hires the asset for a set fee per period and at the end of the agreed time ownership of the asset remains with the lessor or the hire company. Council can terminate the lease at any time without incurring a penalty.

  • A finance lease is where Council agrees to a series of payments and a residual value for the asset. There is a penalty for terminating the agreement prior to the finishing date. At the end of the period it it’s expected that Council purchase the asset for the agreed residual value.

Council will undertake a lease versus buy analysis for assets:

  • Which diminish in value quickly (for example: motor vehicles, IT and Gym equipment);

  • Where assets will be disposed of in a short timeframe; and

  • Where the lease option transfers responsibilities to the asset owner for maintenance and disposal.

Council will not consider a Finance lease as an ownership option.


5.8. Cost allocation of borrowings

5.8.1. If the capital project is for a service that is funded by user charges (for example: leisure services, waste) and borrowings are the agreed funding source then the user charges pricing model will be updated to reflect the total cost of the borrowings.
5.8.2. If the capital project is for a service that is not funded by user charges then borrowings should only be considered where the project is considered by Council to be beneficial to the majority of ratepayers and costs will not be directly attributed to a service.


5.9. Restriction

Council will abide by LGA section 146 whereby money cannot be borrowed unless details of the proposed borrowings are included in the annual budget or revised budget.

5.10. Policy Review

5.10.1. The Policy and Borrowing Strategy will be reviewed annually during budget development and endorsed by Council.
5.10.2. The review will include advice from appropriate financial institutions.

 

5.11. Access

5.11.1. The community will be able to access information about borrowings from Council’s website in the annual budget and annual report documents.


6. Quality Records

Quality Records shall be retained for at least the period shown below.

Record Retention/Disposal Responsibility Retention Period Location
Adopted Budget Manager – Financial Services   Corporate Records


7. Attachments

None.



Page last updated: Thursday, 14 September 2017
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