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).
50 Comments
PDK
There is
- Good borrowing (for investment) by good borrowers (decision makers)
- Good borrowing (for investment) by bad borrowers (decision makers)
- Bad borrowing (for investment) by good borrowers (decision makers)
- Bad borrowing (for investment) by bad borrowers (decision makers)
Bernard
You know, and you have known for a long time, that Local Councils (rate gatherers) regard their constituents, across all jurisdictions, as lemmings, who are captive (non-mobile). There is no need for accountability. Local bodies have no imperative to be frugal or wise. There are no market restraints on them. They have the holy grail in their hands. If every resident and ratepayer of the Kaipara region folded their tent and departed for more agreeable locales, the council can continue to levy rates regardless. Eventually, if rates are unpaid, the council can confiscate and sell the properties to recover outstanding rates. When the council owns the entire region, with a bloated balance sheet, will it come to the attention of central government. Then, when the golden goose has stopped laying, the local council has to capitulate and deleverage, unloading un-loved, abandoned properties on to the market.
Here an explanation from a report on PPPs from the A-Gs office;
In the early 1990s, the Mangawhai EcoCare Wastewater Treatment Scheme Project began when the water quality in the Mangawhai estuary, north of Auckland, became noticeably degraded because of the cumulative effect of sewage disposal, geographic features, the number of people in the area during peak seasonal periods, and the use of septic tanks and long drops.
After the 1998 local government elections, Kaipara District Council engaged project managers who had Australian expertise in PPPs. The initial plan envisioned a "Build Own Operate Transfer" PPP model, with the assets being transferred to the Council in 25 years.
However, the initial plan was changed when the Local Government Act 2002 came into effect. In late 2005, from a short list of three companies, tenderer Earthtech Engineering Limited (now Water Infrastructure Group) won the contract to provide wastewater services to Mangawhai for up to 15 years, including providing a wastewater collection, treatment, and disposal system.
In January 2007, work on the $65 million EcoCare Scheme began. In July 2009, the first house was connected. The scheme includes 21 kilometres of sewers, 15 pumping stations, six kilometres of rising mains, a small water-reclamation plant, an 11-kilometre reclaimed-water transfer pipeline and a 180 megalitre reclaimed-water storage facility and irrigation system. Today, more than 2000 properties are connected to the scheme, which has the capacity to service 4500 properties.
The Council sought innovation from the market, long-term certainty in wastewater treatment, affordability, and improved water quality in the Mangawhai estuary. A major achievement of the project was the ability to change the scope of the works during the project development and construction stages.
Some of the lessons learned from the project include:
- there is a clear need for expertise and experience with PPP projects to ensure success;
- flexibility is important, particularly where changes in demand are expected;
- frequent and effective communication with the community and other stakeholders is essential; and
- a PPP education programme throughout the Council's organisation was needed.
The project has attracted much local comment. The last two lessons could have helped mitigate some public concerns that the Council faces.
http://oag.govt.nz/2011/public-private-partnerships
Hahaha - written in 2011 - I think perhaps they understated the lessons to be learned! Indeed seems odd that no 'big red flag' was highlighted here in the report. Almost worded in a manner which suggests the PPP as a model for implementation had nothing to do with the botch ups and overruns.
@ Kate. The real irony is that the self same Auditor General is now doing a detailed inquiry into the whole scheme, the costs, the decision process, the consultation process (didn't happen!), the question "is the scheme fit for purpose?", and what role did their own organization, Audit NZ play in not spotting it was out of control!!
One really wonders how it is expected that the same organisation can be trusted to report accurately and fairly, when they are compromised by this 2011 report which is 'make-believe' stuff, and the failure of the Audit process over all the critical years.
What hope do ratepayers have of ensuring that a Council (elected and salaried officers) comply with the Local Government Act when this sort of conflict takes place?
It's a bit like the Police Complaints Authority - sort of.
The Office of the Controller and Auditor General has two business units: Audit New Zealand and the Office of the Auditor General (OAG).
So the latter is doing the investigation of the former.
But the point is - submitters to annual plan processes could see the train wreck coming - so why can't a trained auditor?
In answer to your question .. ratepayers have (so far) had no hope whatsoever of the audit process making one iota of difference.
Why is debt of NZ$4,436 per capita that much of a problem? (I'd be interested in the number for debt / rate income or debt / GV).
That debt number means that a typical 4 person household owes around $19k on the "mortgage" for the public infrastructure they use. That compares to a mortgage on their house of maybe $200k. I don't see that as any sort of unsustainable debt.
rdr - then you want to do some homework.
It's been unsustainable/unrepayable for some time (at least, in terms of relative purchasing power - the Steve Keen / Weimar Republic might see it gone but the spinoff will be drastically reduced $ spending power).
http://www.zerohedge.com/news/chris-martenson-trouble-money
read it twice, blinkers off.
It always pays to do some basic arithmetic when looking at public sector numbers. Thank you for your cut at this. Not sure how you have calculated the numbers of households but the standard in NZ is 2.4 person households. It's also really important to amortise over the life of the scheme as this debt could legitimately be around that long. Think 100 years.
The cost of these Ministry of Health mandated water and sewer schemes is truly horrific. I guess KDC would never have built this scheme if they had not been made to. If you really want accountability get MoH to conduct a cost-benefit analysis and show us how much public health has improved as a return on the massive investment in water and sewer schemes that they have foisted on ratepayers over the last decade or so.
And get Eric Crampton to review their methodology.
If I recall correctly, it was you who did an excellent detailed expose on "government dictat" requiring or enabling all government instrumentalities to keep revaluing their assets and then to price their services based on an amortisation of the revised valuations (due to inflation) which is an in-built artifice to keep hiking rates. It will be most revealing if the global economy goes into reversion back to the mean-trend and asset values deflate. Do you think councils will ever revalue downwards?
Will councils revalue assets down? Good question.
My first instinct is to say, of course, they have no choice. But when I think about it there's also not a lot of incentive to do so. OK this bit's technical but bear with me.
If depreciation for each asset had its own jam jar and councils only dipped in to pay for capital works on the named asset that might be different. But they don't. There are some big jam jars - there will be one for the Mangawhai Sewer. But depreciation for all the pumps, pipes, ponds etc all goes into one pot for that scheme to pay for today's capital works on that scheme. This arrangement makes much more sense over large complex schemes like all the roads in a district.
This is a bit like 'free money' for staff and councillors for projects in the short-term. It's all 100% kosher accounting compying with international standards. It just removes the old-fashioned fun we used to have around the Council table. Anyway, in theory if you had to revalue downwards it's because costs have gone down so it shouldn't affect the works programme but no asset manager is going to like the prospect of downward pressure on their budget.
Well, Kaipara has started a trend it seems, they have had the Mangawhai scheme revalued and it comes in at $38 Million, but they have spent well over $60M and perhaps even more.
That is a rate of depreciation approaching a new car over 12-24 months, not what you would expect for a scheme with a 50+ year life expectation.
So, we should be getting lower not higher rates!!!
You can tell peoples political affiliations by the words they use. In Garry Moore's case it is "growth is good" and recently (on THe Panel with Jim Moira) "we need to find ways to attract more people to live in Christchurch".
Pardon me Gary Moore but as a lifelong resident, I used to think that it was the spacious gardens that made Christchurch special and it's moderate population.
Christchurch Airport used to be so nice, now you need a can opener to get into it..
What made Christchurch special was it's assets per head of population: Hagley Park, The Takehe, Sign of the Bellbird, gardens of Merivale and Fendalto, tussocked backdrop of the Port Hills, Sumner, Brighton; Sumner, Mount Pleasant etc, has been subdiveded to hell. Has some great industry opened up beyond "service center for the farmlands of the Canterbury Plains? Was it the terrible monocultural nature of Cantabrians that needed changing?
PDK . how you earn an income these days. how do pay for hiring boats, fuel to drive and the odd thing you have to buy...
I know you are doing great at all the energy things and saying that money is bad etc but how do you pay for things now? what is your advice for others who want to follow in your footsteps.
4 million views for an old codger giving a lecture about arithmetic?? What's going on? You'll just have to watch to see what's so damn amazing about what he (Albert Bartlett) has to say.
I introduce this video to my students as "Perhaps the most boring video you'll ever see, and definitely the most important." But then again, after watching it most said that if you followed along with what the presenter (a professor emeritus of Physics at Univ of Colorado-Boulder) is saying, it's quite easy to pay attention, because it is so damn compelling.
For the unbeliever, a must see.
A perfect presentation of PDK's exponential. My apologies for not fully understanding.
One of the best arguments against central banks targetting (allowing) an inflation band of 1-3% and preventing (disallowing) a corresponding period of deflation. The market, left to it's own devices would correct every now and then. It would be more palatable to target 0% inflation over 10 years, up one year down the next, all done in moderation.
The problem is moderation and the market left to its own devices wont do that. Funny thing about fundies/fanatics of course, point out its impossible and its simply ignored or in this case twisted to suit their outlook. Congrats you make your outlook crystal clear to me, now I know you are a voodoo wonkie.
NB 1 to 3% is a safety margin to stop un-controllable deflation. What we would see is the Govn having to spend into a recession to stop that (say) -1% becoming -5% or worse....Of course we would also see hardship and probably higher un-employemnt and cliams on WINZ. All these factors would put up tax. As a fundie of course you wont want that, but then there is no humanity in fundies so suffering of others doesnt matter to you does it.
However you are right in one way. Its clear the maths is simple so when the likes of Gordon Brown with a 1st? in economics says no recessions then he is ignoring fundimental maths. So he's a liar, not alone of course. Then the business ppl would be using the opportunities of govn spend to make advantages for themselves...moral hazard and all that.
Conclusion is really its not moderatable...and markets left to themselves certainly wont do it.
regards
Jack -Jill (by the way, UPhill for water? What were you really doing?)
Mostly by not buying anything.
We live on about half a single wage. No investments, no savings, no debt.
I build my own pretty much everything, recycle everything, and think laterally. I also wait until something comes along, rather than instant gratification. If you want something instantly, it costs a lot more. Almost everything comes along for next-to-nothing, if you wait.
Live/eat off your land, seasonally, or preserve. (or share someone else's land).
I don't hire boats. When we did our year away (2 kids 2 adults 1 year, $12,500 all-up) I bought a boat in Aus, sold it for the same $ a year later. Tenanted the house while gone, mortgaged for the boat, cleared it at the end.
Don't eat out, don't drink out, don't buy ready-made, don't HP. Don't care about 'labels', don't worry about 'peer-group approval' (real people appreciate real people, not their clothes, cars, status symbols - and real people are the only ones worth having as friends), don't buy new.
Use something else cheap/free to do the job of something expensive ($2 Gentle Annie motor powering our house, coolstore panelling as a housing material, single-skin (ply- no stopping/painting) internal walls, toilet cistern (the float lifts the plug each time it's full, controlled by the in-tap) as a glass-house doser, 12 volt house gives you 'derro' car switches/lights/fuses, etc. Haunt the recycle-yards. Leave them your number, and a list. We use a bath as a solar dehydrator, another as a wheelbarrow, use over 50 for gardening, all from there.
It can take longer, sometimes as long as working for the item but mostly not, but it's a ton more fun.
Advice? Be confident enough not to worry whether others will disapprove. Mostly those folk are confidence-lacking anyway.
PDK, are you aware of this NZ based "think tank" http://mcguinnessinstitute.org/
One of their reports into the future of NZ http://mcguinnessinstitute.org/Site/Publications/Project_Reports.aspx
Check out Report 6 - Four Possible Futures for New Zealand in 2058 (updated April 2009)
report 6 was a fun read.....uh not...
Their ideas on population and energy are way off the mark but food for thought.....If I get idle time I might just write my own. Their comments on NZ being a protectorate etc are un-fortunately all too probable....the kicker on water exporting though is lack of energy to do so.....thats the elephant in thier room...
thanks
regards
Not really a defence for the Kaipara council but at least their massive debt is related to cost overruns on a project within the council's core duties - sewerage treatment. Unlike some other councils who have gone far beyond the 'drains, roads and libraries mandate' and built things like an enormous white elephant stadium based on a completely bogus business plan. I'm looking at you Dunedin...
Thankfully my local council (not Dunedin) is staying out of the LGFA so far.
Dunedin Council was told, very clearly.
The newspaper readers wouldn't know, though. Total brick wall.
But enough word got around - we dumped the then Mayor and the most obvious side-kick. More to follow. Problem is that their legacy turns up in our rates demand, will for years, and can't be repaid. Meantime, the stuff we should have been doing can't be done; lack of funds.
Sorry Conrad, sports facitlities have always been part of the mandate of local government.
Somewhere in Bernard's Inbox is a list I provided of all the standard functions of a territorial authority (City/District Councils). At the end I conclude:
Yes, councils are exactly what they look like: the kitchen drawer where you put all the odd bits and pieces that don’t go anywhere else. You wouldn’t design an organisation like this but that is how they have ended up. And none of it is new: this list would have been almost identical twenty years ago.
Whether DCC should have built on that scale is a different story but I cheerfully played basketball all through my high school years at the Caledonian Gym (thereby staying out of the rain and mud) which was (I am pretty sure) a Council facility.
You're right of course Kumbel, councils should provide sports facilities on the level of open sports fields (ala Logan Park) or basic gyms. Despite being a rugby fan I find it odious that the rugby unions manage to persuade councils to foot the bill for lavish stadiums devoted almost entirely to rugby. As for concerts, the Mission Concert in Hawke's Bay is successfully held in a paddock at a vineyard - no multi-million dollar stadium required!
OBHS, I was a year behind Mora, Corbett, et al. 68-71.
I was no brick in the wall...... :)
Went to a Gareth Morgan talk there recently - pointed out McChesneys door ("I got caned in there - 'till I said I wasn't accepting it any more"). That was an interesting exchange: "You can't do that" said he. "I just have", said I.
Didn't get accredited, but.......... :)
It was staying out of debt was the problem. I used to deliver drugs all over for Camerons Chemist(s) after school on my trusty 3-speed. To little hospitals, rest homes, private folk. Imagine that now? Hurtling along with bottles of who-knows-what in your back pocket......
Anyway, detentions were inconveniently timed to clash with my working hours. And if you didn't do them, you got more. And if you didn't do the more, you got caned.
I chose the income stream, and eventually refured to bend over. You have to forgive them, eventually. Like the economic optimists here, they were a product of their times, and all times change.
Oooooh - note you changed the title of the piece as well.
I wish the citizens of the Kaipara all the best of luck in their rates revolt. They are providing the model for many going forward, me thinks.
Massive re-think needs to be done to make LG sustainable going forward.
You're assuming a level of competence and oversight on the part of the council that just wasn't there. The Council has been sacked and will be replacved by commissioners, as happened in Canterbury.
Here's a recounting of the basic facts (admittedly from a vehemently anti-council source).
http://www.kaiparaconcerns.co.nz/294669/html/page.html
The initial scheme, approved in 2006 after public consultation was for a sewerage reticulation and treatment system servicing 3,300 connections for $35.6 million. All changes after that were approved in private council sessions. The partially completed scheme (currently with 1,300 connections) is estimated to cost somewhere between $62 and $80 million.
Audit NZ, the internal subsidary of the Office of the Auditor General!!
They gave clean audits to Kaipara over the years of 2006/07/08/09/10 and then when the citizens started to get some traction with their questions, Audit NZ has had to make very significant retrospective accounting corrections in the 2010/2011 Annual Report; many $millions involved and some of it for such basic issues as improper recognition of operating costs being atributed to capital expenditure.
What an incompetent Auditor!!
They get away with it because
(i) residents/ratepayers don't concern themselves with their local council until something goes wrong and it's too late
(ii) they are no longer properly scrutinised by the MSM (variation on (i) above)
Fortunately there are places like this where people with the knowledge of what's going on are sharing it widely. Good on you Kate and others.
I have a lifestyle block not far from Mangawhai - fortunately it went to the Auckland Supercity (never thought I'd hear myself say that) instead of Kaipara. I watched with interest through the last decade as Kaipara thought it could turn sleepy little Mangawhai and the heads into another Albany.
FAIL!
And now they have a fantastically expensive sewerage scheme ready to deal with the effluent from the hordes of subdivisions that are slowy reverting to back to farmland because... apart from an OK beach there really isn't anything else out there, and it's quite a wee trek off SH1.
And this is what happens when you let council-type people have a dab at planning...
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