D-day for local govt bond bank

Bill establishing local council bond bank, designed to cut cost of local authority borrowing and deepen capital markets, set to be passed tonight

14th Sep 11, 4:02pm by Gareth Vaughan

By Gareth Vaughan

The Local Government Borrowing Bill, which will establish the Local Government Funding Agency (LGFA) which aims to reduce local council's borrowing costs and allow the Auckland Council to borrow in foreign currencies, is set to be passed into law tonight.

Overseen by ACT Party MP and Minister of Local Government Rodney Hide, the Bill's third reading in Parliament is set for today and is expected to be passed before the House rises tonight, a spokesperson for Hide told interest.co.nz.

Hide says the LGFA will issue local government bonds to investors and on-lend the funds raised to participating local authorities to help meet their funding needs. This pooled approach will help local authorities borrow money at lower interest rates than they currently can, says Hide, noting industry body Local Government New Zealand estimates the LGFA will save councils about NZ$25 million annually through scale and by obtaining a strong credit rating at or near AAA.

In a submission on the Bill a Steering Group set up to represent the LGFA's nine establishment shareholder councils, says current long-term council plans suggest local authority debt will double over the next five years to more than NZ$11 billion.

Representing Auckland Council, Christchurch City Council, Whangarei District Council, Western BOP, Tauranga City Council, Hamilton City Council, Wellington Regional Council, Wellington City Council, and Tasman District Council, the Steering Group says local authorities’ debt funding options are currently limited to the domestic banks, private placements and wholesale bond issues to domestic institutional investors and, to a lesser extent, retail bond issues to domestic retail investors.

'Borrowing restrictions need to be lifted'

The Steering Group notes the local government sector is fragmented with 78 local authorities and that, on their own, a significant number of these lack scale. However, the 10 biggest ones account for 68% of total sector borrowings with average borrowings of NZ$470 million and the remaining 68 have average debt of NZ$33 million. Existing regulatory restrictions such as local authorities not being allowed to tap overseas foreign currency capital markets, a "burdensome" compliance process for local authority retail bond issuance, and the sector's big borrowing needs and strong security position through a charge over rates, creates the opportunity to address these issues and to "rectify" the situation.

Hide says 35 local councils plan to participate as shareholders in the LGFA with another 14 planning to participate in the scheme as guaranteeing borrowers. However, his spokesperson declined to name them citing ongoing negotiations between the Department of Internal Affairs and various councils over the LGFA's establishment.

Meanwhile, Hide - reiterating what the government's Capital Market Development Taskforce said in 2009 - says the LGFA will strengthen New Zealand’s capital markets by establishing a new high-quality investment option.

Hide notes the Bill specifically states that the government doesn't guarantee the obligations of the LGFA but it does give Minister of Finance Bill English the authority to lend money to it in "exceptional circumstances" with this authority expiring after a decade.

The Bill will also enable the Auckland "super city" Council to be able to borrow money in foreign currencies, something local councils are currently prohibited by law from doing. The Auckland Council says borrowing money in currencies other than the New Zealand dollar will ultimately save it about NZ$10 million a year and says it'll hedge its exposure to interest rate and foreign currency fluctuations. See more on the Auckland Council's plans here.

Other local authorities will be able to borrow through foreign currency markets indirectly through the LGFA.

Parliament's Local Government and Environment Committee unanimously recommended the Bill be passed in July, recommending just minor technical changes. See more on this here.

The LGFA will be a council-controlled trading organisation (CCTO), meaning local authorities can guarantee the obligations of the LGFA, or lend money to it on favourable terms. Any transaction it enters into would continue, even if the LGFA's ownership structure changed and it ceased to be a CCTO, Hide says, giving potential investors comfort that key transactions such as guarantees, won't be overturned if it ceases to be a CCTO.

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30 Comments

by andyh | 14th Sep 11, 5:27pm 1315978072

Anything that encourages local government to borrow more (which no doubt this is designed to do) is a VERY BAD THING.

by Gertraud T. | 14th Sep 11, 5:57pm 1315979871

It is not only a VERY BAD THING, it is outragious! Who is the council???

We the rate payers are put on the hooks and put into even more debt. Is this Democracy? We have not been asked if we are able and willing to pay for investments they think to be "necessary" and so we the rate payers are supposed to pay the interest.

A rate payers revolt shoud be organized.

To use Farages words in the EU Parliament now towards the council: "Who do you think you are?!"

by Colin Riden | 14th Sep 11, 6:33pm 1315981990

Councils are being 'encouraged' into further spending by central government. Why not take the revolt up one level and make it a taxpayer one.

by We Are Stuffed | 15th Sep 11, 9:44am 1316036642

Give it time...it will happen.

by Colin Riden | 14th Sep 11, 6:10pm 1315980629

It certainly removes all doubt that Rodney Hide is anything other than a dangerous fool.

by Gummy Bear Hero | 14th Sep 11, 6:17pm 1315981024

Oi ! . .Take it easy .. Rodney Hide is my cousin ! ... and I can vouch for the fact that he is not " dangerous " ...

by Colin Riden | 14th Sep 11, 6:28pm 1315981694

So, we agree on the fool bit, but check with the Act Party (dangerous to survival), or his dancing partner (dangerous to safety) on the other part.

by Gummy Bear Hero | 14th Sep 11, 7:03pm 1315983800

It was foolish of ACT to have allowed Rodney to oust Richard Prebble .

... Mad Dog was focused on the business at hand , he was not distracted by being a " Dancing with the Stars " contestant . .

by LloydM1 | 14th Sep 11, 7:32pm 1315985571

Join the dots, Hide was backed to take over, used for the Super City consolodation which was always going to end him. Perk buster now out the way too (joke), then have Brash as new leader, job done , political take over almost complete. Execution over brain dead public , a doodle. Len Brown put a spanner in the works but no worries , Banks will be ruling us in some capacity again soon enough. Expect Len to be screwed hard at every turn, seeing as he has little control or influence in real terms.
No I'm not a Labour voter ! Nz , awesome !

by Colin Riden | 14th Sep 11, 7:43pm 1315986225

All political parties eventually reach a point where they become focused on the pre-eminance of their parliamentary arms over their membership, and have accumulated so much baggage that they are corrupted and effectively disfunctional, that you need to start again from scratch.

ACT got there in a shorter period of time than any other new political party I can remember. Labour and National have taken longer, but started much earlier, and today the outcome is little different from ACT.

by Patricia | 14th Sep 11, 5:36pm 1315978595

Instead of borrowing money why can't the Reserve Bank lend the money at a very low interest rate as it did in the 1930s

by Patricia | 14th Sep 11, 5:38pm 1315978727

What I meant to say
"Instead of borrowing money from overseas why can't the Reserve Bank lend the money at a very low interest rate as it did in the 1930s"

by Gummy Bear Hero | 14th Sep 11, 6:12pm 1315980777

In his book " Freefall " , Joseph Stiglitz promotes this as a policy to staunch the USA housing mortgage debt defaults . He argues that the US government could directly offer 2 % mortgage rates to homeowners , similiar to low interest loans to students .

Stiglitz says that this would punish the banks , by-passing their " bread & butter " business . And it would assist the financial recovery , by a " trickle up " , from the citizens at ground zero . As opposed to the " trickle down " theory so beloved of politicians worldwide .

...... sadly , Barack Obama took the alternative tack , and propped up the " too-big-too-fail " financial institutions . And those banks chose to charge struggling mortgage holders 6 % interest . ........ ummm , yeah , and the bank exec's got their bonuses too . In fact , at least 5000 bank employees in the USA have received bonuses in excess of $US 1 million each , in the time since their firms were bailed out by the US government .

by Ralph | 14th Sep 11, 6:09pm 1315980577

Well it depends how old you are. It will probably take councils quite a few years to dig themselves a disaster from which they can't escape.

by Colin Riden | 14th Sep 11, 6:16pm 1315980971

Some councils are already a disaster from which they are going to have difficulty escaping without high and compounding growth.

Maybe you are correct for those already over 90 years of age.

by LloydM1 | 14th Sep 11, 7:15pm 1315984535

"even if the LGFA's ownership structure changed" what like to a privately owned debt issuance office ?

Something really feels very wrong about this to me. Must admit ive not heard about it before, so will need to dig into.

Oh I see Cameron Partners are involved , now the consolidation is makin sense. Watch the debt at local level explode , then the infrastructure have to the sold off!

Democracy in Nz , what a bad joke it's become, this is going to bankrupt Auckland without any doubt in my mind!

by Wolly | 14th Sep 11, 7:11pm 1315984289

"This pooled approach will help local authorities borrow money at lower interest rates than they currently can, says Hide, noting industry body Local Government New Zealand estimates the LGFA will save councils about NZ$25 million annually"

Sadly we can expect the fools to see this as an opportunity to borrow more, to come up with make work splurging activities in the name of whatever region they are in. There will be bridges to nowhere...high rise parking buildings!...stadiums bigger than the neighbours...pools deeper and our bus service is superior to yours.

The idea of lowering the cost of the credit will only serve to remove the already seriously lack of concern about building mountains of debt dumped on the rate payers.

It is well intended but destined to be an utter fecken disaster.

by Wolly | 15th Sep 11, 7:15am 1316027724

Bernard....."""""BERNARD"""""

"Not only can the local council increase someone's rates, effectively tax homeowners, they can take possession of the house if the worst comes to the worst and increase someone's mortgage." herald

Hah...please explain...this is news to me...!

Is this a typo in the herald...or are we being told a council pointy head can raise the debt level of our mortgage and be paid any fatter rate demand by the bank acting as an agent for the council......is this the true state of serfdom in NZ....if so then anybody taking out or holding a mortgage ought to be very very worried....take one out!....not bloody likely.

by laurence | 15th Sep 11, 11:04am 1316041467

Fully agree Wolly, this is scary. A lot of questions need answering for those of us in debt laden Auckland with plans to unleash a lot more.

If I don’t have a mortgage can the council impose one? Is the debt in the name of the council or all ratepayers?

Could be a good time to move to a council with low/no debt or join Happy Renter.

by laurence | 15th Sep 11, 11:10am 1316041832

Further to this should not the debt be against all residents – a Poll tax? This assumes all residents benefit from the debt (I doubt anyone benefits).

by Gareth Vaughan | 15th Sep 11, 3:44pm 1316058278

I asked Local Government New Zealand for some clarification around this. Here's what they told me:

"The provisions you are referring to are covered in the Local Government (rating) Act 2002 , the detailed processes councils must go through are outlined in sections 59 to 77. They are long standing powers and we have no information on the number of times a council might have used them. I think the reference was probably to Section 62(1)c which allows the council, after having gone through the appropriate processes, to recover unpaid rates as a debt from the first mortgagee of a rating unit. Clause 2 of this section then allows the person who pays the unpaid rates (the bank for example) to recover that amount as a debt."

And here's a link to the Local Govt Rating Act if anyone wants to wade through it - http://www.legislation.govt.nz/act/public/2002/0006/latest/DLM131394.ht…

by Gareth Vaughan | 15th Sep 11, 8:49am 1316033357

Here's Rodney Hide in Parliament yesterday:

Mr Speaker, I move that the Local Government Borrowing Bill and Local Government (Auckland Council) Act 2009 Amendment Bill be now read a third time.

The purpose of the Local Government Borrowing Bill is to assist local authorities to borrow funds at lower interest rates than they can currently achieve. The Bill will achieve this by facilitating the establishment and operation of the New Zealand Local Government Funding Agency.

Local Government New Zealand has estimated that the Funding Agency will save local government in the order of $25 million each year. The operation of the Agency will also strengthen New Zealand’s capital markets by providing a new high-quality investment option. The scheme is a win-win for local government and for investors.

Unsurprisingly, the Bill has a high level of support across the local government sector. I have been advised that around 50 local authorities have indicated that they will participate in the scheme.

The Bill has also enjoyed a high level of support in the House. No significant amendments have been proposed. Technical amendments, recommended by the Local Government and Environment Committee, have been agreed to clarify two clauses of the Bill.

The Local Government (Auckland Council) Act 2009 Amendment Bill authorises Auckland Council to borrow in foreign currencies. To achieve and maintain a high credit rating, the Funding Agency will not be able to lend disproportionately to one council. Therefore, because of its size and significant borrowing requirements, Auckland Council will need to continue some borrowing outside the Agency.

This Bill addresses that issue. It effectively gives Auckland Council the same access to foreign currency markets as other councils will be able to achieve indirectly through the Funding Agency.

Like the Funding Agency, Auckland Council will carry out its foreign currency borrowing on a fully hedged basis, avoiding any risk associated with currency movement.

It is encouraging to see central and local government working together to achieve cost savings that will ultimately benefit ratepayers. I would like to take this opportunity to thank Local Government New Zealand and the Funding Agency Steering Group for all their hard work on the scheme.

I understand the Funding Agency will be up and running either late this year or early next year, so the benefits of this Bill to ratepayers will quickly become evident.

Thank you.

by andyh | 15th Sep 11, 9:03am 1316034214

(Thickasarhino) Hide said:

'' It is encouraging to see central and local government working together to achieve cost savings that will ultimately benefit ratepayers''.

I will just translate that Orwellian doublespeak:

'It is encouraging to see central and local government working together to expedite the accrual of ever increasing debt by local government which will ultimately be shouldered by the ratepayer'.

by andyh | 15th Sep 11, 9:09am 1316034594

By the way did anyone else note this comment in the Herald:

''Local authority bonds were currently rated anywhere between AA for the good ones down to unrated but the new agency's bonds were expected to end up with a AAA rating''.

Errrr........havent we recently encountered that sort of financial sleight of hand in a big country over to the far North East of us and didnt it all end rather badly????

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=107…

by alex | 15th Sep 11, 9:41am 1316036486

We have a number of bloggers here blaming this proposed legislation on Rodney Hide.Far

be it from me to defend him,but this bill can only become law because National wants it,just

like the amalgamated "greater Auck"legislation.The listening to the people part of National is

going with Simon Power,and we`re left with a government that governs for the few.

by Gibber | 15th Sep 11, 10:11am 1316038292

Isn't that why its called the NACT party?

by andyh | 15th Sep 11, 10:12am 1316038349

Oh I am not blaming Hide per se - he is in effect only the front man. From what I can gather the Bill passed with all party support (according to the Herald) - if you wanted a better illustration of how badly we are represented in Parliament it is there, writ large.

The politicians seem blissfully unaware of the law of unintended consequences - but given the events of the past 3 years the fact that no-one seem to realise that if you make it easier and cheaper for any entity to borrow, said entity will simply take it as a green light to rack up more debt (particularly given the fact that the debt ultimately lies on others) is astonishing.

Given that (according to the Herald) said debt will somehow then be transmogrified from near junk (in some cases) to AAA when it is sold to the public one then gets the strong feeling that absolutely NOTHING has been learned.

by laurence | 15th Sep 11, 10:57am 1316041031

Council mortgaging your house?

I refer to the article ‘Bond Bank aimed at Mum and Dad’ NZ Herald Thursday 15^thSeptember. AMP’s Grant Hassell is quoted as ‘...[local council] can take possession of your house … and increase someone’s mortgage’.

Is this true? With the Auckland Councils grand spatial plan unleashing a tsunami of debt is the council effectively mortgaging your house?

I for one do not want this debt and risk. A lot of the debt will be exposed to overseas lenders and the associated risks.

We observe government and council debt problems around the world - Greece, California et al. Not a sane time for the council to be mortgaging your house.

by Mike B | 16th Sep 11, 1:20am 1316092804

The government want's to sell council assets but this is unpopular. So, pass a law making it nice and easy for councils to get into debt and then have an excuse to sell the assets. As simple as that.

by LloydM1 | 16th Sep 11, 3:22am 1316100170

Is it possible to get accounts for the position if the council as it stands before this law takes hold. I assume it is possible for a council?

This is going to end up badly for the entire super city, and having the records to refer back to prior to this legislation really getting going, would be something useful I expect!