Credit Management for Councils
Credit staff who are looking for a challenge should definitely consider working for a local council. Councils have a broader range of credit problems than virtually any other creditor. Their debts include (to mention but a few) lost library books, claims for repair of traffic lights and signs damaged in car accidents and pipes dug up by careless contractors, rubbish dumping charges, resource consent application fees, dog licences, and of course, rates. Many are just starting to develop good commercial practices. For example, in terms of credit management, few have anything like a credit application form for anyone who is opening an account and almost none that I have seen are Privacy Act-compliant. opening an account and almost none that I have seen are Privacy Act-compliant
However, in this column I wanted to talk about rates. Rates have an entire Act to themselves. The Rating Powers Act gives the councils tremendous powers - the sort of powers that would make commercial credit managers green with envy. The average ratepayer is blithely unaware that if his or her rates are unpaid, the council can make demand on the first mortgagee and the Rating Powers Act says that the first mortgagee will have to pay. The first mortgagee (usually a bank) will first contact the ratepayer and read the riot act. This usually persuades the ratepayer to pay. But if it doesn't, the mortgagee pays and adds it to the mortgage.
Perhaps surprisingly, most banks seem to like the councils to make demand on them promptly. There seem to be two reasons for this. First, it's an early warning sign of financial problems, and second, they want to know at a point when the problem can be rectified (that is, when there is only one rates instalment overdue), and not when the overdue rates are so large that the ratepayer can't dig him or herself out of the hole.
Amazingly, some council staff have said to me that they don't make demand on first mortgagees because they don't have time to do title searches (at a cost of $7 each) and generate standard letters to the mortgagee. Instead they send them to debt collection agencies which must consider such debts a gift from the gods - the easiest commissions they ever earned.
But what if there is no mortgage? Well, if the ratepayer is a tenant occupying the land, the council can make demand for unpaid rates on the landlord. Conversely, if the ratepayer has let the property, demand can be made on the tenants, who pay their unpaid rent to the council. Again, speed helps everyone. The administrator of a commercial property syndicate was complaining to me the other day about the fact that a council had made demand for $6000 worth of rates owed by the tenant of a building the syndicate owned. For that amount of rates to build up, the council had to have sat on its hands for two years through some mixture of inefficiency and false charity.
If none of the above applies - no mortgage, no tenant, and no landlord - the process for the councils is more complex and takes longer but is still generally satisfactory. They ask the High Court to sell the land. Alternatively, if the land has been abandoned for three years the councils can apply to the District Court to sell it themselves.
The council staff I have met have been extremely enthusiastic about fixing the short-comings in the council credit processes. They have some major issues to address, and of course, some have further to go than others. However, to generalise, there are a two key obstacles.
One is that many of the council staff dealing with credit issues at the front-line are part-time credit staff. Whereas the average $10 million annual turnover business has a full-time person who is called a credit controller or credit manager, the average $10 million annual turnover council does not. Instead, it has people who do a little bit of credit management once a month, or perhaps once every two months.
This is one reason why, at the start of this article, I suggested that credit staff who are looking for a challenge should definitely consider their local council. What many of the 70 plus councils in New Zealand need is an experienced, full-time credit manager.
The other problem is the perception amongst many council credit staff - rightly or wrongly - that the local body politicians do not want them to use all the powers that are available to them under the Rating Powers Act. The most misguided example of council soft-heartedness is perhaps the refusal to sell occupied properties for unpaid rates because of the potential for bad PR. But such properties would only be sold if there was no mortgage involved. I would argue that any property-owner without a mortgage a fits more easily into the category of "monied elite" than "deserving poor". Why should they get off when the rest of us poor mortgage-payers don't?
This belief that the powers-that-be won't support forceful action is common to credit staff in many organisations I have seen - not just councils - and often the belief is mistaken. However, some of the council staff I have talked to seem to have more valid grounds for their opinions than most. They know that they should be dealing with unpaid rates robustly, as envisaged by the Rating Powers Act but feel stymied. So I said I'd write an article to at least try to get the message to the powers-that-be. Mayors and councillors please take note.
Chartered Accountants Journal of New Zealand