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Bondage and debt.

As you may be aware, Manningham Council has a loan of around $7.9m with the Commonwealth bank to cover a shortfall in their staff superannuation fund.


Government workers are on 'defined benefit' superannuation schemes. Basically this means they are paid a defined fixed amount when they retire.

Superannuation schemes in the commercial world are different in that they are basically savings schemes where the money is invested and retirees receive the returns on the investment less fees, etc. Such schemes are dependent on the performance of the investments. If markets do not perform, superannuation payouts decrease, as happened some years back to many retirees as a result of the Global Financial Crisis.

A 'defined benefit' superannuation scheme also puts money into different investments. The amount of money they have in their fund also depends on the performance of their investments. However these 'defined benefit' superannuation have a set (or 'defined') amount they payout to employees upon retirement. The payout to staff is not tied to the performance of their investments. These defined benefit superannuation funds need to have a the money on hand to cover payouts when they arise. And this is how our Council's superannuation shortfall came about. Their investments did not perform, and now they do not have the money on hand they require.

Our council decided to take a loan out with the Commonwealth Back to cover the shortfall. That is all fair enough. But this is also where it get's interesting.


Does a loan make sense?

The loan taken out with the Commonwealth bank was an 'interest only' loan which had to be 'rolled over' mid 2014. That is, this loan had to be paid off and another means of raising the money had to be found. Note that the loan with the Commonwealth Bank was an 'interest only' loan. The council's repayments only paid for the interest on the loan. The council was not paying down the principle.


The first problem I have with this arrangement is why did we need to take out a loan in the first place?

The council has enough cash in the bank to meet the superannuation shortfall quite easily and has been able to easily meet this shortfall for some time. The Manningham Council cash reserves from four prior performance reports are as follows:



At Call

Term Deposit



'Dec 13





'Sep 13





'Mar 13





Cash on hand does go up and down. In November 2013 cash investments increased by $7.49m. In December 2013 they decreased by $2.37m.

But as you can see, our council consistently has had some $35m to $40m cash reserves available for a long period of time. The point remains that our Council has had the cash to easily meet this shortfall. So why do we have this loan and why are we paying interest on the loan?


Typically, the interest paid on a loan is far more than the interest earned on cash investments. This is the way it works for you and me and also is the way it works for our Council. It is always a better investment to pay off debt than to invest cash at the bank. Please let me explain.

The interest rates the council gets for their cash reserves ranges from 2.75% to 4.0%.

Off course we all pay tax on any interest we earn. If our council pays the company income tax rate of 30%, then the interest they earn on money in the bank is not 2.75% or 4.0% but rather 1.93% and 2.8%.


The interest paid on the loan appears to be much higher than either of these rates.

I cannot find anywhere where the council has published the exact interest rate they are paying on this loan with the Commonwealth Bank, but on page 1226 of the council minutes for 30 April 2013 we are told the principle for this loan is $7.9m and the interest repayment for the first year is $460,000. This means the interest rate we pay is somewhere around 5.8%

Our council keeps telling us in their reports that they are financially 'prudent' and 'responsible'. Then why are we paying 5.8% in interest for a loan when we have the money on hand to easily meet the shortfall. How can you justify keeping the cash in the bank and earning 1.93% to 2.8% on it after tax, while you pay 5.8% interest to get a loan simply for more cash? We have some $40m in cash reserves at the bank for over 12 months. I don't see the point or the sense in any of this.


This, to me at least, seems neither prudent or responsible. At the very least this is highly questionable, if not simply wasteful.


Could there be politics at play here?

Our council may not want to be seen using the council's cash reserves to meet a shortfall in the staffs superannuation fund. I hope the decision to obtain a loan to cover the shortfall was not made for simply political reasons.


Or the council may have this $40m earmarked for something. Or it could be there to make their performance look good against financial performance formulas established by the Victorian Auditory Generals Office. I simply do not know.

And it gets stranger still.


Just who does our Council serve?

This loan with the Commonwealth Bank must be rolled over into another loan by 30 June 2014. Manningham council has to address this and find a way to refinance their current loan.


The Municipal Association of Victoria (MAV), the peak body for Victoria's 79 councils, has come up with a plan to go to the bond market to finance the shortfall in their superannuation fund. This is because councils across Victoria are in the same situation as the Manningham council regarding their staffs superannuation fund. State-wide, the funding shortfall in Vision Super's fund for council employees is some $478m.


Our council calculates that it can save 15% over the interest rates offered by the banks:

"The estimated savings to councils is in the order of 15% in interest charges when compared to traditional borrowings from Banks." (Supplementary Paper, 26 November 2013, Section 14.1 paragraph 1.7.)

This reduced interest rate will represent a saving for our council. And Manningham council has recommended they participate in this Local Government Bond issue.


Now the important question is, what will our council do with this saving in their interest repayments?

Being the financially prudent people they are, you would think they would use it to assist meeting the shortfall in their superannuation fund - the shortfall that gave rise to the need for a loan in the first place.

But you would be mistaken. That is not what they are going to do.

"The ability to access loan funds at lower than retail lending rates provides an opportunity for Council to undertake additional works from the resources available" (Supplementary Paper, 26 November 2013, Section 14.1 paragraph 6.1.)

So the council is going to spend this saving on additional works and services.



As I said, I can't see why we need this loan. But now we have it, and we are going to make a saving, then why not at least use the saving to reduce the shortfall. Why simply spend it?

Some people will say that services are needed. Probably they are. But I don't think that is all that is going on here.

Next time you go to the council offices, try to see behind the dividing walls and partitions that shield you from the council workers and their workplace and try to observe how they work.

When I have had opportunity to do this, I have seen a group of unmotivated people with little to do. I have never seen people walk so slowly. I have never seen people spend so much time serving themselves coffee. From what I have seen they are an overpaid, under-worked, under-motivated group of loafers.

They are hidden behind those partitions and we can't see what they do and how little they do. My experience has been that when you ask one of them to come from their desk to attend to you, they behave as though they have just left a party.

And those whose job is to serve the public are usually engaged in private conversations. My experience has been that if you go to them for assistance they treat you as an unwanted intruder. You have to wait for them to finish their private conversation before they will attend to you.


Also if you observe the council maintenance crews at work in the streets, you see this same attitude.

Since I have been criticizing them, the maintenance staff are at least giving the appearance of doing more. Certainly Mr Sleepy, who mows the lawn in the parks, has ceased his 45 minute long naps in his truck near my house and his additional 45 minute long naps further down the road near my neighbors house. (I am still watching him closely to see how and where he slacks off now). And now that I am critical of the office staff, they also might give the appearance of changing their ways.


But to come to the crux of the matter, what I think they are actually doing by offering more services is not so much helping us, but helping themselves. Government at all levels are good at this – pretending to help us while in actual fact they are helping themselves.

Providing more works and services sounds good. But it also justifies high staffing levels and provides more easy, secure work for under-worked, overpaid people who happen to have a very generous superannuation plan waiting for them when they retire, provided they can retain their jobs. By taking on more services, what they are probably doing is justifying their own jobs.

So are they really looking after us or looking after themselves?

It is also worth noting that a good number of the services our council provides could probably be done at a fraction of the cost by volunteer and charitable organisations, as was the case many years ago.


Perpetual Debt and Bondage.

And there are dangers if our council goes to the bond market for cheaper loans.

Please let me explain.


Assume you had a loan with a bank and you went to see the bank manager and asked for a second, bigger loan. When he asked why, you said you wanted to pay off the first loan and have some additional money to further fund your indulgent lifestyle.

Now the bank manager may agree to this once, but if you keep doing it, taking out bigger and bigger loans to repay prior loans and obtaining more and more money for an indulgent lifestyle, after a very short while the bank manager will say 'no more' because he will think you are living beyond your means and are being irresponsible.

While a bank manager may stop you from a headlong plunge into debt when borrowing from a bank, in the bond market there is no one to stop you. And this is the trouble that national governments of nearly every country in the world have gotten themselves into. They issue bonds to fund public works. When these loans (because that is what a bond is) fall due, they simply issue more bonds to repay the old loans and get even more money to fund their lavish spending programs.

This is how countries like England have run up massive debts. The USA is doing this very thing right now. Many countries in financial trouble in Europe did the same thing. Cheap money is like a drug and once governments are hooked on it, they go into a headlong plunge into addiction.

England for instance, has run up a government debt more than their annual GDP. This means that to pay off this debt, everyone in England has to live on nothing but fresh air and sunshine for one year and give every penny they earn to pay off the national debt. For some countries their debt is several times their annual GDP. Their headlong plunge into debt is simply unsustainable and they have no chance of paying it off.


If national governments get addicted to borrowing money at low interest rates to the point that they bankrupt their country, do you think the local councils will show more principle and backbone? I hope they can, but I doubt it very much. Money is like a drug to any level of government.

Irresponsible spending and borrowing has also bankrupted cities in the USA (consider Detroit), and this could be the start of a similar route to bankruptcy here. Again, I hope it is not.

I hope that what I have said about out of control debt never happens to councils in Victoria. But we need to acknowledge that many national governments have gone down that path, and that in the USA, several cities have followed also. I am sure that cities in the USA started on the path of ever spiraling borrowing in very similar circumstances and for very similar reasons as those in Victoria.



In conclusion, I think it is time that our council showed proper prudence and proper financial sustainability and stopped playing with words to hide their poor management of money and resources.


05 Feb 2014.

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