Bernard is an economics columnist for the NZ Herald

Bernard Hickey: Who foots the bill when a council goes berserk?

Mangawhai is anything but peaceful and sunny right now for its ratepayers. Photo / Janna Dixon
Mangawhai is anything but peaceful and sunny right now for its ratepayers. Photo / Janna Dixon

I have fond memories of holidays on the sunny beaches of Mangawhai. But Mangawhai is anything but peaceful and sunny right now for its ratepayers, who are rebelling at what they see as the illegal and wasteful activities of their Kaipara District Council.

Although the dramas on the dunes of the North initially seemed irrelevant to me, they became interesting after the appointment of commissioners by the Government two weeks ago. But even then it seemed more of a sideshow involving a wastewater scheme cost blowout that inflated the council's debt to $82.9 million. It seemed the usual story of a bunch of councillors and property developers with dollar signs in their eyes who bet the council's future on unending coastal property expansion.

Then I saw this startling press release from the council on the same day commissioners were appointed: "Council seeks cheap loans. Kaipara District Council will join the Local Government Funding Agency (LGFA) in order to get access to cheaper loans.

The decision was made by council and adopted as part of the 10-year plan signed off on August 29."

Does this mean that every ratepayer in the country is on the hook for Mangawhai's mad debt-driven expansion? Is Mangawhai the Athens to Auckland's Berlin? Luckily for the rest of us, not yet.

The LGFA is a centralised body that allows councils to borrow together in a single pool. Previously they had to borrow directly from banks or bond markets at much higher cost.

This agency has the same AA+ credit rating as the central Government and although the Government does not guarantee the debt, investors are betting that councils across the nation will always pay because they have the power to levy rates to pay the interest bill.

Councils can reduce their borrowing costs by piggybacking on the stronger financial profiles of the biggest councils.

But what happens when a council goes berserk with the national council credit card? It all sounds very Eurozone-ish.

For years Portugal, Ireland, Greece and Spain were able to borrow on low German interest rates. But if Germany had been able to exclude Greece in 2000 it would have done so.

In New Zealand, the LGFA has been lucky enough not to have all councils in the club from the start. Chief executive Philip Combes said this week that Kaipara may want to be in the club, but its admittance was no sure thing.

So how often will the rest of New Zealand have to bail out a council? Or force it to undergo a Greek-style austerity programme?

The commissioners for Kaipara could learn a few lessons from the "troika" overseeing the Greek austerity programme. One thing they do have in common is sun and beaches.

- Herald on Sunday

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Bernard is an economics columnist for the NZ Herald

Bernard Hickey is the publisher of Hive News, a Wellington-based political and economic subscription news email service. He also writes for and appears regularly on Radio New Zealand, Radio Live, TVNZ and TV3. He has been a financial journalist for 25 years, having worked for Reuters, the Financial Times Group and Fairfax Media.

Read more by Bernard Hickey

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