DCC Annual Report to 30 June 2012 – borrowing and interpretation

DCC Annual Report (PDF, 1.1 MB)

Comments received.

Mike
Submitted on 2012/11/18 at 12:48 pm
well spotted – so in essence DVML quietly borrowed an extra $8.5m and managed to transfer it to the DCC without incurring any tax because it was a ‘capital gain’ rather than a ‘dividend’

Rob Hamlin
Submitted on 2012/11/18 at 2:07 am
Another little gem from the DCC annual accounts. A positive little Kimberly it is. Calvin Oaten and I found this little morsel from the sewers of local government yesterday and will now share it with you.

On page 132 it has a table of figures titled ‘Separately Disclosed Revenue’. One line entry towards the bottom is particularly interesting. The title is ‘Profit on sale of Stadium (2012)……. $8,480,000’. This profit appears in both ‘Core Council’ (DCC only) and ‘Consolidated’ (Council & DCHL) columns.

Initially, this seems like great news. We’ve sold the bloody thing and got eight and a half million dollars for it. But, as is always the case, things are not all as they appear.

Nearly sixty pages later, on page 188, we have the following sheet of gibberish:

“Sale of Forsyth Barr Stadium to Dunedin Venues Limited

On the 31 May 2012 the Council sold it’s [sic] interest in the stadium to a wholly owned subsidiary Dunedin Venues Limited. This was the culmination of a project spanning five years during which time the method of delivering the project changed and as a result there is a technical accounting surplus on disposal of $8,380,000. The following note is an explanation of these technical accounting issues.

Book Surplus on disposal of the stadium $ ‘000
Sale price 225,000
Capitalised stadium cost including interest 216,520
Surplus on sale of asset as per 2012 Annual Accounts 8,480
Less stadium costs written off to operations in 2007-2008 5,537
Plus stadium revenue included in operations in 2007-2008 (583)
Surplus on disposal 3,526

Book surplus on disposal of the stadium
The method of undertaking the stadium project changed over the years of the project. The accounting treatment always followed the method of project delivery and was audited as being the correct treatment at the time. In 2007–2008 year it was expected that the project would be delivered by a third party and that the Council expenditure was therefore operational. This resulted in $5,537,000 being correctly expensed in 2007–2008 year. In subsequent years once the decision was made that the Council would build the stadium, the expenditure was correctly capitalised. The surplus of $3,526,000 would remain as it is the difference between all the costs incurred by the Council and the sale proceeds received.”

Also on page 123 we have this note to one of the CCO fragmentary reports:

CCO Property Plant and Equipment
All CCO property, plant and equipment is stated at cost less accumulated depreciation and any accumulated impairment losses.
The Stadium is a separate class of asset and is recorded at cost less any accumulated depreciation and any accumulated impairment losses.”

So what happened? Well, you may remember that the total cost of the Stadium came in at around $216.5 million. Then, last year the DCC acquired a ‘valuation’ for the Stadium (God knows how and God knows from who) of $225 million. Its commercially realisable value is in fact, as we all know, the commercial value of the site minus the costs of demolition and removal, which is as near zero as makes no difference.

However, it now appears that DVL then ‘bought’ the stadium from the DCC at this higher valuation. It is hard to see any good reason why they would do this, as the historical cost of the stadium itself was $216.5 million – this figure would have fitted well with their own policy for valuation in the note on page 123. As the structure was brand new when ‘bought’, a second valuation was unnecessary. The historical cost of construction would have been more than adequate as a transfer price.

However, it appears that this unnecessary valuation exercise and its absurd outcome has allowed a further $8.5 million to be transferred from DCHL to the DCC this year on top of the $17.95 million handed over as a dividend, for a total of $26.45 million. It can also be claimed now with a straight face that DVL are acting in accordance with their requirement to record assets at cost as $225 million is what they ‘paid’ for it!!

Now let’s deal with the gibberish on page 188, which covers the financial year 2007-2008 (presumably ending 1 April 2008). Apparently, this specific structure incurred over five and a half million dollars of costs and over half a million dollars of REVENUE!!! before it had been fully designed or even approved as a specific entity that the DCC was actually going to construct! The final approval came nearly a year later I seem to recall.

I personally find this reduction in this ‘accounting profit’ to be wholly incredible. I can also find no adjustments matching this $5 million or so in the costs side of the DCC’s figures – even though the $8.5 million extra revenue appears in its entirety. Mind you, in the 200 pages plus of fragmentary and largely useless figures, I guess that I could have missed it.

Page 13 is also interesting. It is entitled ‘Audit Report’. Properly audited accounts require a signed statement by the auditor to form part of them, stating that the auditor’s unqualified opinion that they are satisfied with the accounts – or a statement of their reservations (qualifications) if they are not.

Page 13 is blank (surprised?)

On page 1, we have the following statement:

“This report asks the Council to approve and adopt the Annual Report for the year ending 30 June 2012.

The Director of Audit New Zealand responsible for the audit and the Audit Manager will attend to discuss the audit and answer any questions from councillors.”

In my opinion this is utterly inadequate basis upon which to approve this report. It should not have been even presented to Council, let alone approved, without a complete auditor’s report being attached to it.

It seems that the Council will have to find $25 million plus in savings by next year just to tread water, and that’s if we don’t get any more unpleasant surprises. Interesting times.

[ends]

Posted by Elizabeth Kerr

16 Comments

Filed under Business, DCC, DCHL, DVL, DVML, Economics, Name, People, Politics, Project management, Property, Site, Stadiums

16 responses to “DCC Annual Report to 30 June 2012 – borrowing and interpretation

  1. Elizabeth

    There is an unfortunate surprise immediately on the horizon.

    • Elizabeth

      The audit report for Dunedin City Council’s consolidated accounts will be released this week, we hear. Possibly it should have been Friday 16 November.

  2. Anonymous

    Probably included at the bottom of a reading pile at 3 o’clock when cakes and coffee are served up by Syd’s Cafe to keep the Stadium Councillors and chums Lesser Dunedin distracted. Next they’ll be thinking an iPaid equiv device will somehow help them read said material… probably hire a consultant to write a report confirming this provides multi-purpose benefits… Sigh. Sorry, I just can’t keep the joke going with this corrupt council.

  3. JimmyJones

    National Radio today reports that Standard and Poor’s (S & P) has put the DCC on negative credit watch. The credit rating is unchanged but this negative credit watch means that a downgrade is being considered. The DCC have a press release here >> http://www.dunedin.govt.nz/your-council/latest-news/november-2012/financial-discipline-at-the-forefront . National Radio says the debt has increased to $620 million.

    S & P are very polite to their paying customers, so when we hear that The agency said the negative outlook was because the council might not achieve its financial targets and because of an investigation recently begun by the Auditor-General into property purchases by Delta, a council subsidiary, I think that we should be suspicious. I suspect that this statement was a co-operative effort with the DCC’s spin-doctors because the reasons seem insufficient for a downgrade. A more likely reason is that S&P have discovered the seriousness of the state of affairs of DCHL, DVL, and DVML.
    The S&P credit report is released about this time every year. For us and our news-media to know what’s going on, we need to see the actual credit report and disregard whatever the DCC has to say, and whatever the ODT says that the DCC has to say.

    • Elizabeth

      ### radionz.co.nz Updated at 1:45 pm today
      RNZ News
      Dunedin council on negative credit watch
      A credit ratings agency has given Dunedin City Council a negative outlook. Standard & Poor’s confirmed the council and its treasury arm at the rating level of AA/A-1+, but said there was a one-in-three chance of it being downgraded in the next two years. The agency said the negative outlook was because the council might not achieve its financial targets and because of an investigation recently begun by the Auditor-General into property purchases by Delta, a council subsidiary. Standard & Poor’s said the council has good financial management, but relatively high debts and restricted ability to service debt. Dunedin’s total debt is about $620 million.
      RNZ Link

      ****

      ### radionz.co.nz 5:20 pm on 22 Nov 2012
      Checkpoint
      Dunedin Council’s credit rating downgraded
      The outlook for Dunedin’s credit rating has been downgraded in a sign of growing nervousness from credit ratings agencies about the council’s large debts. (3′46″)
      Audio | Download: Ogg Vorbis MP3 | Embed

      • Elizabeth

        ### ch9.co.nz November 22, 2012 – 5:41pm
        Council’s financial woes may be about to get worse
        The Dunedin City Council’s financial woes may be about to get worse. It emerged this afternoon credit rating agency Standard and Poor’s has put the local authority on notice of a rating downgrade.
        Video

        ****

        ### ch9.co.nz November 22, 2012 – 7:00pm
        Nightly interview: Mayor Dave Cull
        Dunedin Mayor Dave Cull has warned city council cost-cutting will continue next year, as the local authority looks to again cut into the rates increase. He suggested in an opinion piece in the Otago Daily Times debt and economic development were the headline issues. He is here to tell us why.
        Video

      • Elizabeth

        Dunedin City ‘AA’ debt rating may be cut by S&P
        Thursday, 22 November 2012, 9:54 am
        http://www.scoop.co.nz/stories/BU1211/S00848/dunedin-city-aa-debt-rating-may-be-cut-by-sp.htm

        ****

        STANDARD & POOR’S Rating Services
        Dunedin City Council
        http://www.standardandpoors.com/prot/ratings/entity-ratings/en/us/?entityID=272160&sectorCode=GOVS

        S&P Statement:
        Outlook On New Zealand’s Dunedin City Council Revised To Negative; Ratings Affirmed At ‘AA/A-1+’
        Publication date: 20-Nov-2012 23:07:36 EST
        http://www.standardandpoors.com/prot/ratings/articles/en/us/?articleType=HTML&assetID=1245343655677

        MELBOURNE (Standard & Poor’s) Nov. 21, 2012–Standard & Poor’s Ratings Services’ said today that it has revised its outlook on New Zealand’s Dunedin City Council (Dunedin) to negative, from stable. At the same time, the ‘AA/A-1+’ issuer credit ratings on Dunedin were affirmed. The outlook on Dunedin City Treasury Ltd. was also revised to negative, and the issuer credit ratings were affirmed at ‘AA/A-1+’.

        “The negative outlook reflects our view that there is a one-in-three chance of a downgrade in the coming two years,” said credit analyst Anthony Walker. “This is based on our view that Dunedin may not achieve its financial targets outlined in its Long-Term Plan, with its after-capital account deficits not improving as quickly as forecast. If this scenario were to materialize, we consider that Dunedin would have limited budgetary flexibility to improve its financial position without deferring asset renewals, which may lead to future infrastructure backlogs.”

        Further downward pressure could be placed on the ratings depending on the Auditor General’s investigation into the management of Dunedin’s council-controlled trading organization (CCTO)–Delta Utility Services–which may weaken our assessment of Dunedin’s management of CCTOs; or if there was a change in policy direction such as the introduction of a hard rates cap, or a revised capital-expenditure program without an offsetting increase in revenue which would result in Dunedin’s after-capital account deficits not improving as forecast.

        “The ratings could be revised to stable if the council’s budgetary performance strengthens as it forecasts, specifically if the council achieves after-capital account deficits of about 2% of consolidated operating revenues in 2014 and beyond, while maintaining its current budgetary flexibility, and a stable political setting,” said Mr. Walker.

        Dunedin City Council’s (Dunedin) individual credit profile reflects the predictable and supportive institutional framework available to local and regional councils within New Zealand, plus our very positive view of Dunedin’s financial management, and the council’s modest contingent liabilities. In our view, these strengths are partially offset by Dunedin’s high debt burden relative to international peers, and low debt-servicing ratio.

  4. Anonymous

    I agree JimmyJones. It’s polite language for ‘it’s hitting the fan’. This change quietly causes ripples within corporate banks which end with increased interest rates and increasing debt. Six hundred and twenty million is massive iceberg but I believe even the financial diddlers fiddling DCC do not know how big it is under that Spook-managed waterline. The remaining rats will be giving serious consideration to Jim Harland’s approach – leave the city’s ratepayers stranded and distracted by the ODT Band playing on.

  5. JimmyJones

    Anonymous, in August 2010, Dave Cull as a Mayoral candidate wrote this:
    The stadium is being built. What concerns me now is the future. That decision, and the debt it entailed, particularly on top of already committed debt for other projects, has taken Dunedin City to the brink: to the limit of its credit. Neither the Council nor the Council companies on which the debt was loaded, are in a position to borrow any more.

    From those words you would think that some appropriate action would follow to prevent the debt increasing, but no.

    Just yesterday, Dave wrote some more words (ODT: Debt reduction, economic development focus). He now says much the same as before:
    Essential to both debt management and economic development is a far more rigorous, businesslike approach to weighing options and making decisions than has been displayed in previous years by either the council or its companies. We can no longer afford to “spend and hope”, blithely ignore clear economic signals or believe our city can buck the trends, and evidence, commanding the attention of the rest of the world.

    Our Mayor has had two years to avoid the iceberg, but keeps heading in the same direction. Apart from the talk, Dave has changed some of the DCHL crew, but nothing else. DCHL’s debt keeps increasing, and its profit keeps decreasing. The DCC’s wasteful spending (OSM, Dunedin Centre, cycle lanes, duplicate libraries ~) continues to push-up the debt. Dave’s councillors can’t control their spending urges; how hard can it be for them to spend the same as they did one year ago.

  6. Calvin Oaten

    Dave Cull’s performance on Chanel 9 tonight was the most ‘stilted, groping, disconnected’ display of trying to ‘hide the parcel’ I’ve seen in a long time. It is obviously a belated attempt to poor oil on turbulent waters, and with this latest bulletin from Standard and Poor’s (S&P), he and his ‘nervous nellies’ are starting to panic. Sadly, for Dave Cull he doesn’t do this sort of thing well. He doesn’t have the panache of the seasoned lying politician. He just comes across as terribly naive, ill at ease and out of his depth. To understand why S&P have made this ‘threat’ one only has to read in its entirety DCHL’s Chairman’s review. That in conjunction with the Group’s Financial Assets and Financial Liabilities (pages 63-64) to see the very serious mess there. Total Assets of $445.685m (including $366.126m advance due from the DCC) against Total Liabilities of $796.051m. To me that suggests an operation that in normal terms is insolvent. Combined with the forward projections of trading conditions as outlined by chairman Shale, the prospects of growth in order to handle and overcome this position is stark. On top of that, Cull and co show very little sign of understanding, or acknowledging the position, and are still spending, with ideas of perhaps saving on paper clips, using two sides of paper, and perhaps putting out one of every three lights. He is a bit like Lord Nelson when he famously put his telescope to his sightless eye and ordered full speed ahead into battle. 2013 is going to be a very interesting year indeed.

  7. Hype O'Thermia

    How long will it take for realisation that “making it -the stadium- work” doesn’t work? Will S&P manage to point out the bleeding obvious, that irrespective of the costs that go on day by day, holding events that cost more on top of that basic $number, that isn’t paid for, just makes the problem worse? That, when reality gets past the rose-tinted glasses, is going to put the ki-bosh on attempts to morph it into a “community asset”.

    Hey Dave, do you think the pig would look better with a peachier shade of lipstick?

  8. Peter

    Dave Cull describes City Forests as a ‘lazy’ asset, to be put up for consideration for selling, as it only earns around 1%. He also describes the stadium as an ‘asset’. That one is a ‘losing’ asset, as we all know. Yet, we are ‘stuck with it’, according to him, and we just have to pay off its debt. No consideration of somehow offloading that ‘asset’ even if we have to take a hit. OK, it won’t be an easy sell, but it is bleeding us further into debt as things stand. Can they really hope to start paying off the capital, not just the interest, as he states? It looks like, to do this, they are going to sell ‘lazy’ assets, to pay the debt off a totally dysfunctional asset, which will just accrue more debt the longer its doors stay open. Talk about a dog chasing its tail.

  9. Peter

    Dave Cull wants to contain spending. But, hold on, he said we can’t stand still and do nothing for the next ten years or so and that hotel he is so keen on wants us to chip in with the infrastructure to help get the patrons to the inconvenient site. Only about $1m, according to Steve Rodgers. I’m one confused little bunny.

  10. Anonymous

    Um, hasn’t he been standing tall for rugby over the last couple of years but now seems to have realised there is an election next year. So far ODT and Ch 9 appear to be accommodating but my guess is parent company Allied Press has both a safe card and a trump up their sleeve this time. Syd’s there as the Joker but that one is so worn and crinkly the punters would see the dodgy dealer shuffling it into position.

  11. Peter

    Anonymous. I think that is a dud pack of cards with more than one Joker.

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