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Statements on councils’ internal borrowing plain wrong

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Statements on councils’ internal borrowing plain wrong, says LGNZ

6 SEPTEMBER 2012

Statements carried on Radio New Zealand this morning about councils supposedly hiding the extent of their debt by internal borrowing are wrong and misleading, says Local Government New Zealand.
Local government analyst, Larry Mitchell, who was in Whangarei speaking to a ratepayers group, said councils used to have “sinking funds that they could not touch which were to be used to replace infrastructure.”

Mr Mitchell also claimed that since the rules had been changed to allow councils to use these reserves to finance their other needs, they had done so with “a vengeance.”

In addition to questioning the emotive language Mr Mitchell had used about “raiding reserves with a vengeance,” LGNZ President, Lawrence Yule, explained that councils had accrued money in accounts from asset depreciation and temporarily used this money to fund other projects to avoid borrowing externally. This was common practice and saved ratepayers money.

Mr Mitchell argued that councils should show their internal borrowings in their annual reports and plans. In fact they already do. This has been a legal requirement since 2010, said Mr Yule.

The sinking funds Mr Mitchell referred to had not been in common use since 1996, when council borrowing was deregulated.

Mr Mitchell also reportedly said that “council balance sheets around the country show debt ceilings have been reached and there is no capacity to borrow.”

This is far from true, Mr Yule said. An NZIER report published in July, using two internationally accepted key measures of the risk associated with debt, showed New Zealand councils controlled their debt very well overall.** It’s the ability to service debt that was key, not the total amount of debt.

“Debt and gearing is low, and interest costs are at a prudent level relative to incomes and quoted benchmarks,” the report stated. Additionally, the councils in New Zealand which had requested ratings from international credit ratings agency, Standards and Poor’s, had received very good ones, said Mr Yule.

“If communities want new bridges, parks and roads, the funding doesn’t come out of thin air. It’s unlikely communities will be able to pay for these things out of rates, or fees. Borrowing spreads the costs over years and provides another vital avenue through which community aspirations can be fulfilled. Put simply, future generations of people who will benefit from infrastructure pay a share too.”

“It is also important to remember that infrastructure councils buy is often mandated by central government. For example, water treatment plants. These need to be paid for.”

“Mr Mitchell’s comments are unhelpful and show that there is a strong need for public discussion about the reality of council borrowing, including its extent and what constitutes good, responsible borrowing, which is very much the norm in the local government sector. We need to talk based on facts and evidence,” he said.

**The measures are the gearing ratio and the debt servicing ratio; debt as a proportion of assets and debt servicing costs as a proportion of the associated revenue stream, respectively.

Notes for editors

• Unwise debt is bad news, but wisely acquired debt enables growth and opportunities. The Government has recently validated this position by removing limits on the New Zealand Transport Agency (NZTA) to allow it to borrow to fund future land transport projects.
• At the Jobs Summit in 2009, participants criticised councils for their lack of debt (terms such as “lazy balance sheets” were used) and gave councils an unambiguous message that they should increase their infrastructural investment to help communities through the recession.
• Since the Summit, the Government has become a shareholder in the Local Government Funding Agency, along with 18 councils. The LGFA provides councils access to cheaper credit sourced offshore.
• In the seminal 2007 report on local government funding – the Local Government Rates Inquiry (known as the Shand report), it was recommended that “local government look favourably on making more use of debt to finance long-term assets.”

ENDS

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