Councils and the local government funding agency (LGFA) answer this question with a “no” and factually they are correct.
In practice however, the situation is very different, this article will explain how the system of debt works between councils and LGFA.
LGFA
Incorporation of the Local government Funding Agency occurred on the 1st December 2011. LGFA is a council-controlled organisation (CCO), central government is a 20% shareholder, and the other 80% shareholding is made up of 77 councils out of 78 (Chattem Islands is not currently a member as of 3 June 2024), these councils are Borrowers, lenders and Guarantors (except central government).
How councils determine rates
The Act relating to rates is the “Local Government (Rating) Act 2002”, this Act is used to provide fair transparent property rates thus enabling councils to fulfil their duties through a steady income stream, local government (Councils) uses standard rating valuations governed by the Rating Valuation Act 1998 and audited by the Office of the Valuer-General.
Council collects a fixed number of rates each year, as specified in the current Annual Plan or Long-term Plan. Increases in the capital value of properties does not mean that Council collects more rates revenue. Property values are a mechanism to determine how to allocate everyone’s share of rates they need to pay each year.
Debt created for councils by LGFA
LGFA creates the debt requested by a council by writing/issuing bonds which is then sold on the NZ stock exchange to investors, this debt is secured against the rates collected by councils as stipulated within the local government rating act 2002, this means that if your council borrows $20million NZD then your council becomes a shareholder, debtor and guarantor for LGFA, Councils must also be guarantors for their CCO’s debt, the only way to exit this scheme is to pay all debts and guarantees in full at the time of withdrawal from the scheme.
Risk management
LGFA has effectively become a bank that lends to councils, it has safe guards in place to protect against both short and long term defaults, where short term defaults are normally due to a short-fall of cash, LGFA has ensured that it has cash on hand to make up these shortfalls and can borrow from central government if required, thus ensuring that a short term default does not become a long term default where the debt is never repaid.
long term default risk is managed by:
(a) Access to council rates Charges.
(b) Maintaining a minimum capital adequacy ratio.
(c) Local Authorities are required to subscribe for uncalled capital in an equal amount to their paid-up equity contribution.
(d) The LGFA require most, or possibly all, Participating Local Authorities to guarantee the obligations of all other Guaranteeing Local Authorities and the obligations of the LGFA.
(e) The Guaranteeing Local Authorities will commit to contributing additional equity to the LGFA if there is an imminent risk that the LGFA will default.
(f) The LGFA hedge any exposure to interest rate and foreign currency fluctuations to ensure that such fluctuations do not significantly affect its ability to meet its payment obligations.
(g) LGFA will impose limits on the percentage of lending which is made to any one local authority to ensure that its credit risk is suitably diversified.
(h) The LGFA ensure that its operations are run in a way that minimises operational risk
Finalising the agreement
LGFA’s lawyers then work with council’s lawyers to check eligibility to join LGFA and the councillor’s then sign all documents and the loan is given less the 1.6% ($16,000 per million borrowed) held by LGFA as an equity payment.
In closing
Directly, you are not responsible for your council’s debt, but you are responsible for the payment of this debt.
Failure to, or late payment will result in fees (depending on your council) 10% per annum is normal.
Failure to, or late payment will result in fees (depending on your council) 10% per annum is normal.
When the amount owed to council gets too large then your house will be foreclosed on by either council or the bank you have a mortgage with.
There is an example in Picton where the bank foreclosed on an individual who refused to pay their rates due to disputing the amount.
When selling your house, the annual rating must be paid in full at settlement.
Moving forward, local governments must be profitable in some areas to pay for other services required by ratepayers and legislated by central government, Napoleon Bonaparte did not believe in using debt and his fiscal policies are still used in France today.