||12 May 2020
|Responsible Officer: Manager – Financial Services
||Chief Executive Officer
The purpose of this policy is to provide the appropriate
parameters for the City to undertake borrowings without compromising the
application of sound fiscal management principals. The policy framework allows the City 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 2020-21 budget process.
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 the existing loan).
Local Government Performance Reporting Framework (LGPRF)
- The Local Government Act 1989
- Victorian Auditor General’s Office (VAGO)
- CAPITAL PROJECT
Means 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.
- 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.
- DEVELOPER CONTRIBUTION PROJECTS (DCP’S)
Are projects that 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
Means the collective value of
loans held by the City.
- LOCAL GOVERNMENT ACT 1989
States that the City’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).
- LOCAL GOVERNMENT PERFORMANCE REPORTING FRAMEWORK
Outlines the measures to be
included in the City’s performance report.
- SECTION 173 AGREEMENT
Is a legal agreement made
between The City of Greater Geelong and another party or parties, under section
173 of the Planning and Environment Act1987.
- VICTORIAN AUDITOR GENERALS OFFICE (VAGO)
Examines and reports on the
management of resources within the public sector.
The City of Greater Geelong
organisation led by the CEO.
The City of Greater Geelong
Council comprised of elected councillors and led by the Mayor.
The Executive Leadership Team
of the City, as constituted from time to time.
5. Council Policy
5.1. Policy Objectives
||To ensure Council’s new borrowings are sustainable and comply with legislative requirements.
||Loan type and term of loan will be treated on a case by case basis in order to optimise Council’s Loan book.
||Manage cash flow.
5.2. Statement of Principles
The Borrowing Policy is in accordance with the Strategic
Resource Plan and is underpinned by the following principles::
||The Policy will be adhered to in developing Council’s long term financial plan and all borrowings are to be identified in the plan.
The City will not borrow to fund operating
expenditure. This type of expenditure is
to be funded from operating revenue streams (rates, fees and charges etc.).
exception to this principle would be a call to ‘defined benefit’ Superannuation
Fund. Large calls to ‘defined benefit’
fund will require a separate report to Council which will include a recommended
method of funding – use of working capital, superannuation fund or borrowings.
||The City will not borrow to fund recurrent capital
works which is inclusive of acquisition, replacement or renewal of assets (e.g.
road resurfacing). This type of
expenditure is to be funded from operating revenue streams.
||The City 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.
||Borrowings must be linked to the financing of capital
||Cash flows will be phased in order to consolidate the
principle and interest requirements of approved capital projects.
||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)
VAGO reviews and reports on the financial
sustainability of the Local Government sector. Two indicators best assess the financial sustainability risks associated
with borrowing. The City will report on
the following indicators:
|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
||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
The City 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.
||The City 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)
||LGPRF includes two additional ratios:
||Debt Commitment Ratio measured as interest and principal repayments on interest bearing loans/rate revenue (recommended target 0% to10%); and
||Borrowing Rates Ratio measured an interest bearing loans and borrowings/rate revenue (recommended target 0% to10%).
||The City will operate within the target ratio as set by the
||The City will report on debt commitment and borrowing rate
ratios as part of the budget process and in the annual report..
||The City’s credit rating will be assessed by the financial institutions
as part of the tender process for new borrowings and will be disclosed to the
5.4. Determination of loan term and interest rate type
The City will complete an analysis of the market to enable a
recommendation on the loan term (number of years) and interest rate type (fixed
5.5. Determination of Lending Institution
New borrowings will be identified as part of the annual
budget process and will be subject to public tender.
A council report specifying the length of loan, type of
interest rate (fixed/variable) and delegation to Chief Executive Officer is
required prior to commencing the procurement process. Under section 98 (1) (c) of the Act, Council
cannot delegate the power to borrow money.The public tender process will be in accordance with the
City’s procurement policy (CPL565.3) and the Act.This procurement process will be undertaken by both the financial
services department and the City’s procurement department.
5.6. Loan Type and Term
City borrowings for the following projects will be a
mixture of interest only and principal and interest (P&I) loans based on
the following table.
The classification loan type and term are based on the
City’s ability to recover the cost of the loan from the service/activity being
- Fees and charges from the service/activity where the financing costs are recoverable (e.g. aquatic centres, ICC’s); and
- Service/activity where there is the opportunity for cost reductions (e.g. renewables) and/or where a number of services/activities can be aggregated where there is an element of cost reduction.
The loan type and term may be varied in accordance with
section ‘Determination of loan term and interest rate type’.
||Term of Loan
|DCP – fully funded
||DCP Projects – land acquisition or where State/Federal contribution to Project provides funding
||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
||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
||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
Income or cost savings linked to a Capital Project (for example: Landfill Cell, LED Street lighting)
||Interest to be charged and to form cost of service delivery.
Principal to be recovered and accounted for through identified cost savings.
Leasing as a funding option forms part of the City’s
overall borrowing strategy..
There are two types of lease:
- An OPERATING
LEASE is where the City 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 hire
company. The City can terminate the
lease at any time without incurring a penalty.
- A FINANCE LEASE is where the City 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 is expected that
the City purchase the asset for the agreed residual value.
The City 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.
Cost allocation of borrowings
If the capital project is for a service that is funded by
user charges (e.g. 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.
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 the City to be beneficial to the
majority of ratepayers and costs will not be directly attributed to a service.
The City will abide by section 146 of the Act whereby
money cannot be borrowed unless details of the proposed borrowings are included
in the annual budget or revised budget.
The community will be able to access information about
borrowings from the City’s website in the annual budget and annual report
Monitoring And Reporting
The application of this policy will be monitored
through the development and update of the City’s Long Term Financial Plan,
annual budget document and annual financial statements. The documents report on
the City’s loan portfolio and identify current borrowings.
Advice and Assistance
The Responsible Officer for this policy manages the provision of advice to the organisation regarding
person who is uncertain how to comply with this policy should seek advice from
this person or from their Manager.
The Policy and Borrowing Strategy will be reviewed
annually during budget development and endorsed by Council.
The review will include advice from appropriate financial
Quality Records shall be retained for at least the period shown below.
||Chief Financial Officer
||Financial Management - Publications