November 2020
Impact of the crisis on municipal finances
Financial review The health crisis will inevitably have an impact on our finances, and we’ll have to take this into account by revising our forecasts for growth in the commune’s annual income, among other things.
For this reason, a special finance committee was asked to be convened (which met on September 22, 2020) – several experts were listened to on this subject – and the commune called in a specialist firm to help modify the multi-year plan to limit risks as much as possible, and to do so without waiting for the December 2020 budget review.
Given the current extremely low interest rates, it’s a good time to borrow. However, there’s no question of letting the municipal debt get out of hand and leaving this poisoned gift to future legislatures. In fact, the commune can only borrow up to the amount it is able to repay each year: this is the concept of self-financing margin (the commune’s net cash flow). In practice, the debt ratio must not exceed by much more than half the commune’s annual income. As far as investments are concerned, choices will have to be made, both in terms of roads and assets.
As far as operating costs are concerned, the same prudence is called for, and here too, every possibility of reducing the commune’s operating expenses will be examined in detail, while maintaining – as far as possible – the main priorities of the multi-year plan.
Why is it necessary to renegotiate the rate on the commune’s debt, and what will it cost?
Under the previous legislatures (2006-2012 and 2012-2018), some loans were contracted at variable rates, following a structure involving significant interest-rate risk (linked to the CMS Linear Spread 30Y-2 system). In the event of a rise in short-term interest rates and a fall in long-term rates (data over which the commune has no influence), the amount of interest to be repaid on the principal may increase significantly.
In other words, the Kraainemois citizen today bears a financial market risk that is perfectly conceivable in a normal situation, but increases in the event of a delicate economic situation, as is likely to happen over the next few months. At present, just over 70% of our loans are covered by this system (the commune’s total debt at 31/12/2019 amounted to EUR 8,016,215).
Bertrand Waucquez, alderman for finance :
“Aware of this risk, we asked Belfius, the commune’s banker, to propose different ways of switching the part of the debt currently at a variable rate under the CMS Linear Spread system to a fixed interest rate. The Finance Committee meeting in early July 2020 approved the principle.
The cost of hedging interest-rate risk should not exceed EUR 120,000. It may seem like a lot, but it’s a necessary evil. Indeed, if the yield curve were to move downwards, the price to be paid could be much higher.