The Cassowary Coast Regional Council brought down their 2017-18 Budget earlier this week with a 1.65% general rate increase and balanced budgets projected into the future. Much was also made of the Council’s decision to pay off some $19 million of debt early to become debt-free as of this year. What has not perhaps been so well publicised is the fact that the 2016-17 Budget, which had been forecast as balanced, looks likely to have registered a $3.5 million deficit as a result of that decision.
Looking at the actual expected result for 2016-17 compared to the Budget last year we see that Revenues are slightly higher (approx $700,000) while Expenditures are approximately $4,200,000 higher. When we look more closely we see that the reason for the difference is $3,600,000 more finance costs paid to QTC; presumably early repayment fees incurred when the debt was repaid. So while the Council has indeed become debt-free it comes at a cost.
Running down the cash reserves to pay off the debt has two counteracting effects. Firstly it reduces the amount of interest payable by Council in future years, but secondly it decreases the interest earned by Council on those cash reserves. Using the 10 year projections in the Budget we see that the combined effect of the reduction in interest paid will be approx $7,700,000 over the decade. However, we also note that projected interest earned falls by $4,000,000 over the same period. When we add the $3,600,000 early repayment costs incurred this year we can see that over the decade the net effect is virtually zero. In addition it’s worth noting that the 2017-18 Budget projects the Council to borrow approx $4 million by the end of 2018-19 rising to just under $11 million by 2022-23; the Council won’t be debt-free for long.
Let me be clear, there is nothing wrong with making this decision. But we should be clear that over the long term it really does nothing for our financial position (indeed in the short term the upfront early repayment fee actually costs us; things don’t balance out until the end of the decade). In addition we should be aware that while Council is debt free for now, its own Budget projections have that situation lasting only a couple of years.