What’s the best way to measure municipal debt?

15 July 2015

Municipal debt (by which I mean the money owed to municipalities) is a big problem. Or is it a growing problem? Or is it both?

Before we get to the how and what of municipal debt, let’s talk about the why: why should we care about it?

Here’s the picture: many municipalities, maybe most of them, have some or other problem with municipal debt. Debtors books are growing too quickly, old debt is not written off, and sometimes there isn’t even a proper record of a municipality’s debtors.

Meanwhile, municipal infrastructure backlogs and the knock-on effects of Eskom tariffs are no longer lurking on the horizon but are now lumbering across the present and into the medium-term future.

The trends in the municipal debtors books show that municipalities aren’t collecting enough of the rates and taxes they’re charging to residential users, and this is partly due to the above-average increases in water and electricity charges.

If debtors books are growing too quickly – and it looks like they are –  it means that municipalities aren’t meeting their revenue targets. The faster the growth in the debtors books, the higher the risk of a financial crisis.

So debtors books are important, but the way we normally report on municipal debt isn’t that useful. We normally measure municipal debt by its stock, rather than its flow: we look at the size of the debt pile at a particular point in time. Maybe we compare the size of the debt with the size of the operating budget at that point in time.

The problem with this approach is that trends in operating budgets are more predictable than trends in municipal debtors books. Budgets for salaries or transfers will increase with inflation or some other formula. Debtors books, in theory, should be easy to read. But they aren’t for a number of reasons.

Firstly, sometimes the municipalities’ books are just a mess. Some municipalities haven’t provided evidence for their debtors books in years. They’re obviously in trouble already. But many of the bigger and more functional municipalities are also bad at this part of financial reporting, and they are bad in the following ways: they don’t make proper provision for bad debt in their operating expenses. There is either no budget for bad debt, or no debt is actually written off on a quarterly basis

Secondly, many municipalities don’t write off a good portion of their debt ever. It doesn’t look like they even try to recover the debt, but rather leave it on the books to accumulate. Once in a while, a portion of the debt will be cancelled – not written off on a regular, predictable, quarterly basis.

Imagine that this municipal debt is being produced and processed in an actual factory. There’s a machine that produces debt in one corner. The debt is loaded onto a conveyor belt and carried to the other corner.

There’s a small problem at the beginning of the process, because the debt is sorted before it’s loaded onto the belt. That’s the first 30 or 60 days of debt, where some bills come late and a few arguments are had at the council offices. But as the debt moves along the conveyor belt to the other end of the factory, it moves at a steady rate.

There’s a much bigger problem at the end of the process, where the conveyor belt dumps the debt unceremoniously in a heap. Once in a while a big dump truck comes and takes some of the heap away, and it is never seen again. But it’s not easy to predict when the truck will come and how much it will take away.

When we look at the problem, we normally measure the size of the heap in the corner, rather than the size of the stack on the conveyor belt. The heap might have been partially cleared a week or a month before we came to analyse it, but the stacks are mostly the same from month to month.

You can see this if you look at the latest municipal debtors books. The most recent municipal financial data is here, on the Treasury website. It has the latest quarterly information for municipalities, including their debtors books. Remember, this information is updated every quarter and most of the information is presented quarterly, except for debtors (and creditors) books, which are presented monthly.

The debtors books show a detailed breakdown for the first three months of debt (0 to 30 days, 31 to 60 days, and 61 to 90 days) and then an aggregated figure for debt older than 90 days.

Unsurprisingly, that’s quite a short conveyor belt. Most municipalities have 70 per cent, 80 per cent or even 90 per cent of their debt that is older than 90 days. So let’s extend the conveyor belt and look at more detailed breakdown of the debt, which you can find here.

This spreadsheet of unbundled debtors books will give the size of the monthly debt for the first six months (0 to 30 days, 31 to 60 days, etc, etc, up to the 151-to-180-days mark). It then gives the figure for the next six months (181 to 360 days) and then a figure for all debt older than 360 days.

If you scratch around with the numbers, there’s a clear trend. The amount of debt levels off quickly after the first two months. The debt levels for the third month are pretty much the same as the fourth, fifth and sixth months.

You can take the size of the debt between 60 and 90 days old, multiply it by three and .you’ll have a pretty good estimate for how much new debt is passing through the system in any given quarter. This quarterly increase in debt can be compared with other quarterly figures, like operating expenditure.

Scratch around with the numbers I did, and I found a range of values for my new-debt-to-operating-expenditure ratio. Many municipalities have ratios below 5 per cent, and a few more were below 10 per cent. That’s encouraging: it suggests that collection rates are between 90 and 95 per cent in these municipalities.

Other municipalities have ratios around 20 per cent, others are above 40 per cent. One is higher than 50 per cent. What does it mean when your collection rate falls below 80 per cent or even 60 per cent?

There’s a political dimension to the debt also. Residential debtors – specifically non-indigent residential consumers – make up the bulk of the debt. In most municipalities they owe at least two-thirds of the total debt, in a few municipalities they owe even more.

Some of this debt is no doubt due to the higher electricity and water tariffs and some may be due to poor billing systems. But some of it may be due to the reluctance of municipal councils to collect on the debt owed by an important political constituency.

In a few months the municipal demarcation process will be over, in time for next year’s elections. It is expected that a few municipalities, maybe between 10 and 20, will be absorbed into other municipalities. It’s going to be interesting to see what their debtors books look like.



One thought on “What’s the best way to measure municipal debt?

  1. Pingback: Broken cisterns: will local government do away with free basic water? | paul berkowitz

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