Tauranga City Council is facing rates blowouts of Kaipara proportions in the next few years due to a massive sewerage scheme that will have to be paid for by ratepayers due to failed growth.

Tauranga accountant Ian Stevenson claims ratepayers will be forced to pay for the city's southern pipeline project because growth funding has failed.

Work on the southern pipeline.

'Tauranga City Council is borrowing all the money in the hope that in the future the predictions of Smartgrowth's concept called ‘Growth pays for Growth' will provide an avalanche of fees,” says Ian.

'That obviously undermines the project and its viability, but most importantly the ability to pay the debt resulting from it.”

To pay for the southern pipeline about 40,000 new houses will have to be built in Tauranga in the next 20-30 years, or the city will have to virtually double in size, claims Ian.

That means 1300-2000 new dwellings each and every year.

In 2006/2007 there were 1112 new buildings. In 2011/12 there were 690. For the first six months of the 2012/13 year there were 420 new dwellings, according to Ian, who cites the figures from Smartgrowth.

As incentive to building growth the city council discounted its building consent fees in July last year. That decision makes it more difficult for the council to raise the money to pay all the debt.

'Someone has to pay. It's not going to be the ‘growth' areas, so sooner or later it will fall back on the ratepayers,” says Ian.

'Due to the lack of consent fees being paid currently and for the short to mid-term, Council cannot sustain itself in its present form financially, and make its interest and debt payments annually.

'Interest rates are historically low now. That will not last. Normally the rates are 7-10 per cent, meaning that the current debt burden is low and a short term aberration.

'The council is in the invidious position where the self-imposed limit has already been exceeded. The result will be that the interest rate will increase on any new borrowings and when the existing debt comes up for renewal.”

At the end of the 2012 financial year Tauranga City's interest bearing debt was $460m. In 2002 it was $52m, $171m in 2007, and $394 million in 2010. The city's total income for the year ended 2012, is $168m. That makes the city debt to income ratio 274 per cent says Ian, past the self-imposed 250 per cent limit.

Tauranga City Council chief executive officer Leigh Auton disputes Ian's debt figure, saying the Council's published 2011/12 Annual Report states net debt at $391million as at June 30, 2012, with a debt to revenue ratio of 243 per cent, below the limit in the Treasury Policy of 250 per cent.

Ian's debt figure of $460 million is taken from the TCC audited annual accounts, page 161.

The total of $459.47 million is obtained by adding the current borrowings, payable in less than 12 months of $111.6 million, plus the long term over 12 months borrowings of $309 million – a total of 420.7 million.

'From this Council looks to have then deducted $26.279 million being the 'cash & cash equivalent” giving a 'net debt” of $394 million, not far away from the council's amount of $391 million,” says Ian.

The rest of the total comes from the Derivative Financial Instruments, which the council hasn't included, but Ian has because he says it is a debt, and is recorded in the balance sheet.

A ‘derivative' is a security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract with its value determined by fluctuations in the underlying asset.

Common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterised by high leverage.

'There is no information available to say exactly what the DFIs are and what therefore are the potential risks related to them are in the future, but I would suspect that the DFIs recorded are intended to limit the exposure to interest rate changes,” says Ian.

'The annual report records some information at note 17a-b, there is an indication of the amounts involved and the exposure the council potentially has. The notes to the accounts record that the DFIs are traded according to council policy. Regardless, they are a debt and have a cost. I included them in the figures I provided.”

The face value of the DFI assets is $135 million and the face value of DFI liabilities is $324.5 million, the net present value is a liability of $38.849 million recorded in the 2014 year, and that the net cost to TCC in the year to June 30, 2012 is $15.709 million.

The $15.709 million is the cost to council for the one year only, reflected in the increase in liability value recorded. It's easy to see in the change of value in the balance sheet from $22.533 million in 2011 to $38.849m of city council debt.

'If the council are saying that these are not 'debts/liabilities” then why are they recorded in the Tauranga City Council Balance Sheet, why is there a $15m cost deducted from income for the year on them,” says Ian.

When the DFI liability is added to the city council borrowings, the debt is $460 million.

Approximately 50 per cent of current debt is being repaid from rates; the balance is predominately from user fees, says Leigh.

So far nearly half of the pipeline, from Maleme Street to Memorial Park, has been completed at a cost of $40.4 million.

The harbour crossing to Te Maunga is due to be completed by June 2016 and is budgeted to cost $62.1 million. The project is currently within the $102.4 million budget, says Leigh.

'The southern pipeline is still required despite the recent slowdown in growth as the Chapel Street Waste Water Treatment Plant is already nearing capacity and struggles every time there is a storm event, resulting in sewage overflows further back up the line,” says Leigh. 'In fact the recent slowdown in growth has effectively bought us a bit of time.”

The council is currently collecting about $8-15 million a year (2010, 2011 and 2012) in subdivision impact fees and building impact fees, says Ian, much less than pre-2006, which he says leaves no likelihood of Tauranga City Council being able to pay off the capital debt or interest on the borrowings without adding significantly to all city rates.

The city council must pay someone else interest on the money already borrowed.

At current interest rates of about six per cent that amounts to $27.6 million a year, or 27 per cent of the annual rates. Rates income for the city in the 2011/2012 year was $99million, in the 2012/2013 year it is forecast to be $103m, including new ratepayers.

'Should future growth remain as is for the next five to eight years and the Southern Pipeline/Te Maunga rebuild be completed at a cost of around $290 million, then there is no way to pay the debt except by increasing rates, perhaps by as much as 100 per cent in four to five years' time,” says Ian.

'But I guess that unpalatable decision will not fall on most of the current batch of elected members.

'Regardless, the project needs to be stopped ASAP if Tauranga is to have a chance to survive.”