Brian Burnett, Finance Portfolio Holder

Transcription

1 DISTRICT COUNCIL Memorandum To: CC: From: Chief Executive Brian Burnett, Finance Portfolio Holder Finance Manager Date: 20 July 2010 Subject: CASH FLOW PROBLEMS When it comes to business, cash is king. Managing your business's cash (working capital) is one of the most important activities of a business owner. Unfortunately due to a number of reasons, Council's cash flow problems have become critical to the extent that as at 30 June 2010 there was only $2.8m in the bank. The cash flow problem areas in summary are as follows: Rates Debtors $2,244,779 Resource Consent Debtors $1,168,580 Roading $ 802,653 Kauri Coast Community Swimming Pool $ 650,000 General Debtors $ 511,181 District Plan $ 496,000 Taharoa Wastewater $ 484,000 Fires $ 332, 941 Library Relocation $ 107,368 $6,797,502 Causes 1. Collection of Rates Debtors The rate arrears for just the 2009/10 financial year totalled $1,129,905. Clearly the recessional impacts are evident. Council did well in recovering arrears up to 30 June 2009, because it was able to enforce the provisions of the Local Government (Rating) Act This Act allows Council to recover debts by going to the first mortgagee of a rating unit. However, the Act requires that an approach can not be made to mortgagee any earlier than 1 November in the financial year following the year in which the rates were first assessed. This means that there is a significant gap from the time the rates go into arrears to the time that collection is possible. The Act does not contain any powers that would assist Council to recover the rate arrears in the current year. Therefore, despite the best efforts and intentions of the Finance Team, while significant progress was made on the accumulated rate arrears up to 30 June 2009, unfortunately these gains were offset by the rate arrears for the 2010 financial year. 1nitials

2 2 ~ DISTIUCT Total R:rte Arrears by Year Based on Landholding $2,500,CXX) 0 l'vtla-i 0 Ohelj $2,CXX),CXX) $1,500,CXX) r- $1,CXX),CXX) - r- $500,CXX) r- n II n n fl r- $0 #' # ~ # rf,f i>~(j ~# The total rates arrears are shown in the graph above total $2,244,779. Given the increase in rates arrears due to the Global Financial Crisis and recession, and the cumulative effect of arrears over a period of time, the impact on working capital has been severe. Question: Why do we rate ratepayers namely Maori Land who we know are not going to pay us? 2. Collection of Resource Consent Debtors The Resource consent debtors as at 30 June 2010 totalled $1,168,580 which had increased from $730,790, an increase of $437,789 (60%). This increase was reflected in debtors aged 3 months or more; an indication that debtor collection processes had slipped. 3. Roading As at 30 June 2010, Reading expenditure that had been incurred but unable to attract a subsidy totalled $802,653. Consequently, Council will need to make a supplementary claim at the end of July when additional funds have been released. 4. Kauri Coast Community Swimming Pool At._the December 2008 Council meeting, two resolutions are noted: That Council accepts that there is adequate contingent funding available to fund the $6m Kauri Coast Community Pool project should fundraising not cover the shortfall. That the Trust be required to continue to fu ndraise to the maximum of their capacity to cover the remaining $2.44m. A report from the Commercial Manager was circulated which sought to address the shortfall in funding of the project. The report identified Council properties considered surplus and which might be used to underwrite the remaining fundraising. The Chief Executive tabled a report at the meeting which further clarified the position and which reflected further information gathered since the Agenda was issued. Each Councillor spoke to the issue and in the main supported the proposal. The one note of caution expressed by those in support was that it should not place any extra burden on ratepayers other than already agreed. However, in order to meet the construction and associated costs for the Pool, it had been necessary to borrow $2,500,000. mihals Fortunately, an application to LOTTO Significant Projects funding of last resort was successful, in that funding up to $2,255,983 was to be available towards the project costs. Cash Flow Problems Memo 10 CE 20 July 10

3 .. 3 DtSTltJCT Despite this windfall, it is estimated that as at 30 June 2010, Council's cash flow has contributed up to $650,000. This assumption is based on Reserves Contributions not being part of the funding. However, by removing the Reserves Contributions of $440,000, it is possible that Council does not comply with the funding criteria for LOTTO Significant Projects Fund. 5. General Debtors As at 30 June 2010, General Debtors totaled $511, made up principally two accounts, Fonterra for Maungaturoto water ($341,542) and Estuary Estates ($125,988).!J::;::; ~ z 6. District Plan District Plan expenditure as at 30 June 2010 exceeded funding by $496,000. It is therefore necessary for Council's working capital to be replenished by this amount. Council is to consider a paper from the Finance Manager at the July Council meeting for this funding to be provided from the loan market. It is also important to note that a private plan change requested by Mark Rothbottam from Estuary Estates totalling $125,988 and dated 12 February 2009, had not been paid. 7. Taharoa Domain Effluent Disposal In 2007, an upgraded system was installed. Council resolved that it was to be funded by loan and serviced from Forestry receipts. However, the loan was never raised. Council is to consider a paper from the Finance Manager at the July Council meeting for this funding ($484,000) to be provided from the loan market. 8. Fires Two substantial fires eventuated during the previous summer at Rototuna and Waipaoua. Consequently, the Fire Fighting budget was well overspent at year end. Cost recovery from the NZ Fire Commission is proceeding (two invoices totalled $513,997.35). However, there has been a delay in receiving these payments, although one of the invoices was paid on 30 June 2010 which totalled $181, Therefore $332,941 remains to be received. 9. Library Relocation At the January 2010 Council meeting, it was resolved to relocate the Dargaville Library from Hokianga Road to the old information centre at the corner of Normanby and Poto Streets. The paper included a heading titled 'Financial Implications' 'The move could be achieved with minimal cost, compared to that of building a new library in the future. Most shelving is transportable, and there is relatively little building work required other than setting up an after hours returns slot, modifying the counter area, and knocking out some walls to open up the space even more. This brings us to a ball park figure of $38,000. This is the absolute cost to make it perfect. We could do this in stages and work within the next two years existing budgets.' Expenditure as at 30 June 2010 totalled $107, Funding off the Balance Sheet or Deficit Funding For a number of years now, Council has made a number of expenditure decisions which have been funded off the balance sheet or deficit funded. In other words, Council's cash flow has been utilized at the expense of a decision being made to either fund from rates revenue, borrowings, and/or from other sources of financing. 1nilials - cash Flow Problems Memo to CE 20 July 10

4 4 ~ DISTRI CT 11. NZT A Monthly Roading Subsidy Claim Each month reading expenditure is claimed from NZTA the following month. NZTA processes have been streamlined to the extent that once a claim has been submitted on-line, there is now only one week (as opposed to three weeks previously) before the subsidy payment is received. Given the significant sum of money involved each month and the negative effects that has on cash flow, although only short term, the Finance Team submits the claim earlier than the previous practice to ensure that the subsidy is received before the payments are processed on the 20 1 h of each month. 12. Capital Expenditure The current practice is for Capital expenditure to be incurred throughout the year, and for a loan to be raised near year end. This practice results in a depleted working capital throughout the year, with a top up due from loan funds near year end. Possible Solutions 1. Improve Debtors Collection It is essential that all managers responsible for debtors, reyiew collection activities and step up procedures to improve the rates of collection. Personal phone calls and visits all help to improve the bottom line. Responsibility and accountability rest with the individual Managers to ensure that their debtors' performance is at an acceptable standard. 2. Invoice Factoring Factoring is a financial transaction whereby a business sells its accounts receivable to a third party at a discount in exchange for immediate money with which to finance continued business. Understandably, the older the invoice, the higher this discount rate. If you can secure an acceptable discount rate, this can pump immediate cash into your business. 3. Sale of Surplus Properties Council is currently considering the sale of surplus properties. This process needs to be fast tracked to enable the generation of additional funds that will improve Council's cash flow position. 4. Reduce and/or Delay Expenditure As part of the process of improving cash flow, there is a need to identify any areas where proposed expenditure does not need to proceed, or can be delayed. 5. Cease funding from Balance and Deficit Funding In future, where unbudgeted proposals are placed in front of Council, there needs to be a cessation of funding practices from the balance sheet and deficit funding. A decision needs to be made to either delay the proposed expenditure until the next Annual Plan round, or if this course of action is not possible, then a decision needs to be made at the time of considering the proposal specifically how the proposed expenditure is to be funded. As part of the consideration process, possible impacts on cash flow need to be identified, and wherever possible, minimized. 6. Bank Overdraft Discussions could take place with our bankers in order to put in place a bank overdraft facility, to assist at times when Council's cash flow requires a temporary injection of funds. init1als

5 Attached please find the Debtors Aged Trial Balance for 2009 (included for comparative purposes) and the 2010 financial year. 5 DISTRICT Michael Fleming Finance Manager inillals