Tiny council's debt at $100m

Bruce Rogan is leading the rates revolt over the sewage system. Photo / Steven McNicholl

A small council on the verge of bankruptcy now faces a potential debt of about $100 million - equal to more than $7000 for every ratepayer.

The Kaipara District Council is preparing for the possibility it will have to pay back about $19 million of illegally set rates, on top of the $79 million debt it has run up in the past four years.

Elected councillors resigned in August to make way for Government-appointed commissioners, who are trying to keep the Northland council financially afloat and stop the spread of a rates strike which affects much of the district.

The strikers' main grievance is that the council secretly agreed to double the cost of an unpopular sewage treatment scheme in Mangawhai, which has created most of the debt.

Commissioners chairman John Robertson said the council was unlikely to have to pay back the $19 million and he expected more people would start paying rates as the commissioners got the district on track.

However the council's latest financial records show:

*It expects to lose about $2.2 million, equivalent to 12 per cent of last year's rates revenue, from the rates strike.

*It had to borrow $4.5 million on its overdraft to pay the bills in the past few months as it waited for more rates payments.

*The cost of the controversial sew- age system has climbed from $58 million to $62 million, as interest has added to the bill.

The council's annual report says it is highly likely that $17.3 million of rates would be invalidated if ratepayers took their case to the High Court, as Mangawhai Ratepayers and Residents Association chairman Bruce Rogan has indicated.

The report estimates the council would have to pay out $19 million, allowing for likely court costs, which "would have an impact on the council's financial position".

It says if the council has to borrow the extra money, that will push its debt to 232 per cent of annual revenue, close to its self-imposed 250 per cent limit. (The council's current 180 per cent debt-to-revenue ratio has already been compared unfavourably to Greece's 160 per cent.)

Mr Robertson said he thought a legal challenge was unlikely and stressed the report only listed the payout as a contingent liability, which might not happen. If a challenge did succeed he believed the council would have to reset the invalid rates, which it had the power to do without asking the Government.

He said it was not unusual for councils to use overdraft facilities to pay expenses if they did not have enough cash from rates or other revenue. However the council was moving away from borrowing to pay for everyday services and was reducing the amount of interest capitalised on to the cost of the sewage scheme.

"The reaction I get in the community is very clear - they're pleased the commissioners have been appointed and they just want us to fix the council up. There are a few people that are not of that mind but by far the majority are paying rates."

Local government finance and policy commentator Larry Mitchell said the council's decision to include the $19 million payout risk could have been influenced by Audit New Zealand, which highlights the risk in its report on the council's financial statements. The auditor's report also draws attention to an Auditor-General's inquiry into the sewerage scheme and that the council depends mainly on its bankers to continue operating.

Mr Mitchell, who produces a rating guide to council performance, disagreed with Mr Robertson's view that the council could restrike the rates if it lost a legal challenge.

"If they lost a judicial review, the implications are that they couldn't do that ... They'd be better off from the council's perspective to go straight to special legislation without running the risk. If the courts found the rates illegal, it would be pushing it uphill to expect parliamentarians to correct the legality."

Mr Mitchell also disagreed that it was normal council practice to borrow large sums of money to cover shortfalls in revenue."It's an accounting and financial management no-no to be borrowing to pay for the housekeeping."

Kaipara council

$100m potential debt

$7184 for every ratepayer

1100 ratepayers on strike

$2.2 million shortfall expected