By Gareth Vaughan
The beleaguered Kaipara District Council, which has more than NZ$80 million of debt and is under the cosh from a rates revolt following a botched sewage and wastewater scheme in Mangawhai, says it wants to join the Local Government Funding Agency (LGFA), the so-called council bond bank, to gain access to cheaper loans.
The Kaipara District Council says the decision to join was made and adopted as part of its 10 year plan, which was signed off last week. However, LGFA chief executive Phil Combes told interest.co.nz that the troubled Kaipara council has not actually joined the LGFA. Rather, it has merely taken the first step towards joining, being consulting with its community and incorporating a desire to join in its 10-year plan.
"We're under no obligation to accept into LGFA any council," Combes said. "It's not automatic that you join the LGFA. That ultimately requires you to meet a series of steps. Clearly there's a number of questions and a number of discussions that we'd want to have in this particular (Kaipara) situation."
One of these, for a council like Kaipara that doesn't have a credit rating, is to have a debt-to-revenue measure that's less than 175%. With total 2011 income disclosed in its annual report of NZ$41.2 million and debt of NZ$82.9 million, Kaipara's debt-to-revenue is over 200%.
However, in a statement entitled Council seeks cheap loans, the Kaipara District Council says it will join the LGFA as a guaranteeing local authority, saying if it didn't join as a guaranteeing member, it would have been unable to access loans of more than NZ$20 million.
The council says the majority of its debt is with banks. The bulk of this debt stems from the Mangawhai wastewater scheme.
Kaipara CEO strives to soothe guarantee concerns
Kaipara District Council chief executive Steve Ruru said during consultation on the 10 year plan, some people raised concerns about the council joining the LGFA as a guaranteeing member.
"People thought it might put the council at risk from having to bail out other indebted councils," Ruru said.
He said although there was a guarantee being provided, the chances of it ever being utilised were minimal.
“There are multiple forms of funding and security in place and these are provided by all local authorities who borrow through the agency. These arrangements allow the LGFA to draw upon the resources of all local authorities to avoid defaults should a problem ever arise,” said Ruru.
“There is a big difference in the interest rates charged by the bank, and those which are charged by debt provided via the LGFA. We estimate Council will save in the order of NZ$250,000-NZ$350,000 a year by having access to this funding source.”
The LGFA launched earlier this year. It issues local government bonds to institutional, or professional, investors and on-lends the funds raised to participating local authorities to help meet their funding needs. The idea is that this pooled approach will help local authorities borrow money at lower interest rates. The LGFA has now held six bonds tenders and borrowed more than NZ$1 billion.
Special consideration possible
Combes said if they don't meet entry criteria, councils can apply for special consideration to join the LGFA. However, none had yet done so and it wasn't clear "how that would go" if one did. Asked whether the LGFA would let a council in if the central government asked it to, Combes said its decision making was independent of the government.
"The LGFA has been set up by local government for local government. We do benefit from central government support, which we appreciate very much. But it's certainly worth making the point that some of the key decision making is quite independent of central government," said Combes.
The LGFA is 20% owned by the central government, with the remaining 80% initially held by 18 local councils including the Auckland Council, Christchurch City Council, Whangarei District Council, Western Bay of Plenty District Council, Tauranga City Council, Hamilton City Council, Wellington Regional Council, Wellington City Council, and Tasman District Council. LGFA chairman Craig Stobo told interest.co.nz earlier this year he expected more than 40 councils to join before year's end, just over half the country's 78 local authorities.
Combes said there are new council members on the horizon, with admission of the first of the next wave of members hopefully not too far away.
"But Kaipara is not one of those councils that's well advanced in the process," said Combes.
Govt brings in commissioners to run the Kaipara District Council given 'serious governance & financial challenges'
Last Thursday Local Government Minister David Carter released a report into the Kaipara District Council and announced the appointment of four commissioners to replace its elected councillors. Carter said the review team identified serious governance and financial challenges facing Kaipara District Council that were "beyond the current councillors’ ability to resolve.”
“The Government’s decision to appoint four commissioners reflects the significant workload ahead in rebuilding the relationship between the council and the communities of Kaipara. It is likely the commissioners would be required until 2015," Carter said.
Government involvement comes after the council proposed, in April, an average 31% rate increase for the 2012–13 financial year largely due to the Mangawhai Scheme, which has led to the rates revolt thought to involve around a third of Kaipara ratepayers. Last week the council said it had been too aggressive and said it was now proposing an average rate increase for 2012/2013 of 19%.
The report from Carter's Kaipara District Council Review Team says the council had collected NZ$17.3 million of invalid rates. Furthermore, the debt incurred by the council to fund the Mangawhai Scheme, which was initially expected to cost NZ$35 million but saw it borrow NZ$58 million, and other capital works, make it one of the most indebted councils in New Zealand on a per capita basis.
"The debt per capita in the Kaipara District for the 2010–11 financial year was NZ$4,436, compared to a national average of NZ$1,296 (excluding Auckland councils).The average for rural councils was NZ$1,042. (source: Statistics NZ Local Authority Financial Statistics 2011 and population estimates for the relevant year," the report says.
Among other things, the report also notes;
The council borrowed money to meet operating costs. Some of this was for the Mangawhai Scheme and was planned. However, some appears to have occurred because of poor budgeting practices. Generally, borrowing to meet operating costs is regarded as financially imprudent.
The Review Team was required to provide a progress report to Council and the Minister by 17 August 2012 with a final report due by 31 October 2012. However, following its first round of meetings the Review Team formed a view that the issues faced by the Council were so significant and in urgent need of resolution that it decided to report its key findings to the Minister and Council by 17 August to enable the Government to take urgent action.
To a large extent the Council’s external debt of approximately NZ$80 million relates to the Mangawhai Scheme. The Review Team understands that the Council has borrowed approximately NZ$58 million to fund the Scheme.
The level of debt that the Kaipara District Council is carrying ($80 million) leaves it very exposed. It is the Review Team’s understanding that for the loan funding the Mangawhai Scheme, additional debt was acquired to pay the interest and operational costs of the Mangawhai Scheme, and that this would continue until there were sufficient ratepayers connected to it. This is clearly a risky approach but is proposed to be changed through the 2012–22 long term plan so that borrowing is only used to fund part of the interest costs associated with the debt raised to service the cost of the Scheme that is reserved for future development. These costs are expected to be recovered through development contributions.
A priority for the Council is to reduce reliance on debt and to fully implement its debt management/treasury policy recently developed for the Council by Asia Pacific Risk Management, to prudently manage a loan book of this size. This is an area that commissioners, if appointed, should carefully monitor.
Several people raised with the Review Team whether the Council’s auditors, Audit New Zealand, should have identified some of the issues that have only recently come to light in completing audits of the Council’s long term plans and annual reports. The people expect Audit New Zealand to accept liability for these failings. For example, in his financial health and sustainability audit, Phillip Jones notes that the Council’s 2009–19 long term council community plan received an unqualified audit opinion. However, he identified that the Council did not comply with section 100 of the Local Government Act 2002 as the Council was shown to be operating deficits in at least two of the years.
Similarly there is a question about whether the invalid rates and lack of a clear development contributions and internal borrowing discussed above should have been identified by the auditors – issues that have created significant problems for the Council. The Review Team therefore recommend that commissioners, if appointed, seek legal advice on the perceived failure of Audit New Zealand in auditing the Kaipara District Council’s long term plans and annual reports to identify any of the issues that have contributed to the current financial problems of the Council.
At the Review Team’s request Watercare investigated the state of water infrastructure in Kaipara and the potential for Watercare to deliver water and waste water services in the Kaipara district.
The Auditor-General Lyn Provost has decided to carry out an inquiry into the Kaipara District Council’s management of the Mangawhai community wastewater scheme.
The commissioners appointed are chairman John Robertson who is an ex-MP and former Papakura mayor, Richard Booth a Whangarei-based business owner and farmer, Colin Dale who was chief executive of Manukau City Council for 21 years, and Peter Winder a former chief executive of Auckland Regional Council and chief executive of Local Government New Zealand.
(Update adds comments from Phil Combes saying the Kaipara District Council hasn't actually joined the LGFA and that it's under no obligation to admit any council that wants in).