||12 May 2020
||Chief Financial 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 ensures that the City 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).
This policy applies to the City when considering and determining the annual budget.
City 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).
This section defines the key terms used in this policy.
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 (DCPs) - 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 (LGPRF) - 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 Act 1987.
Victorian Auditor Generals Office (VAGO) - Examines and reports on the management of resources within the public sector.
City - The City of Greater Geelong organisation led by the CEO.
Council - The City of Greater Geelong Council comprised of elected councillors and led by the Mayor.
ELT - The Executive Leadership Team of the City, as constituted from time to time.
Policy Statement of Principals
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 the organisations long term financial plan and all borrowings must 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.).
The 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 (for example: 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 project type.
- Cash flows will be phased in order to consolidate the principle and interest requirements of approved capital projects.
- The term of any loan must not exceed the expected economic life of the asset.
- To ensure the City’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 the City’s Loan Book.
- Manage cash flow
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 (percentage)
||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 percentage, 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 to 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 percentage, 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 for contributions.
|More than 60% - High
40 to 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 to 10 percent); and
Borrowing Rates Ratio measured as interest bearing loans and borrowings / rate revenue (recommended target 0 to 10 percent).
The City will operate within the target ratio as set by the LGPRF.
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 City.
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 or variable).
Implementation of this Policy
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.
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 borrowed for:
- 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 the City with revenue or cost savings not linked to rates
||General – Income or cost savings linked to a Capital project (e.g. 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.
The City 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 (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.
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 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 documents.
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 this policy.
A person who is uncertain how to comply with this policy should seek advice from this person or from their Manager.
The City must retain records associated with this policy and its implementation for at least the period shown below.
||Retention / Disposal Authority
||Manager Financial Services
||Financial Management - Publications
The Policy and Borrowing Strategy will be reviewed annually during budget development and endorsed by Council.
The review will include advice from appropriate financial institutions.
- Local Government Performance Reporting Framework (LGPRF)
- The Local Government Act 1989.
- Victorian Auditor General’s Office (VAGO).