Rates are local taxes. Taxation is the art of plucking a live chicken with the least amount of squawking.
The Hawke's Bay Regional Council (HBRC) has proposed a 19 per cent rates increase in "Facing our Future - A Ten Year Plan to fix Our Environment" (FOF).
The 24 pages outline a number of proposals including "new borrowing of $71 million over 10 years".
On Page 5 of FOF is the statement "Joining this [LGFA] scheme has no impact on rates or debt ..." This statement is not correct. Joining has no "IMMEDIATE" impact, but long-term could asset-strip and/or bankrupt the regional council.
On Page 11 of FOF are three proposals concerning the Local Government Funding Agency (LGFA). Option 3 is the council's preferred option, which would have it join as an "unrated guaranteeing borrower". It goes on to state: "There is low risk to council by joining LGFA as a guarantor."
How it arrives at that startling conclusion is beyond me, considering the current list of participants in that scheme include: the Auckland Council (in the hole for $525m to the LGFA), a city situated like the rest of us on the Pacific Ring of Fire and resting on a number of (hopefully) dormant volcanoes; the Wellington City Council (well overdue for a major earthquake); and the Christchurch City Council (still recovering from one of the most expensive natural disasters in modern times). To suggest there is LOW RISK in going guarantor for the LGFA is clearly wide of the mark.
The scheme guarantees low risk to the investors (lenders) by transferring that risk to the guarantors (the councils) who effectively put up all their assets as security.
Budgeting rule 101 is: Get out of debt. Rule 101A is: Never go guarantor for anyone.
Additional material on the HBRC website titled "Proposed Local Government Funding Agency Scheme - Information Memorandum" reveals the following:
"Guarantee 37. ... Under the guarantee the guaranteeing local authorities guarantee the payment obligations of the LGFA.
"38. ... The guarantee allows the LGFA to draw upon the resource of all guaranteeing local authorities to avoid defaults."
What this memorandum does not point out as clearly as it might is:
"The liability to a guarantor is the same regardless if they are rated or unrated. If there ever was a call under the guarantee then a guarantor council would be liable to make payment. WHILE IT IS A JOINT AND SEVERAL GUARANTEE there is a side agreement amongst all guarantors that limits each guarantor to a pro rata share of the guarantee. This is in proportion to its rates income as a percentage of the total rates income of all guarantors.
"If you look at any of the current guaranteeing councils' annual reports you will see that in the notes to the financial statements there is a note on contingent liabilities and councils value the expected liability under the guarantee at nil." - Mark Butcher, CEO, NZ LGFA [Emphasis added]
"Several liability" means the HBRC could be called upon to pay ALL the outstanding debt of the LGFA, in the unfortunate event that the LGFA could not repay its debts. So for the HBRC to sign up as a guarantor to the scheme it is effectively PUTTING ALL THE ASSETS UNDER ITS STEWARDSHIP UP AS COLLATERAL, and hoping no major disasters prevent the 54 councils which are currently members of the LGFA scheme from repaying their debts.
This is fiscally reckless. Would you put your family home up as collateral for the loans of 54 people you did not know?
The memorandum goes on to state:
"Risks 57. The features of the LGFA scheme described above which are included to obtain a high credit rating are essentially steps that remove risk from lenders to make their residual risk low enough to justify the high credit rating. THESE FEATURES REMOVE RISK, IN PART, BY TRANSFERRING IT TO PARTICIPATING LOCAL AUTHORITIES." [Emphasis added]
And there you have it. Far from being low-risk (which it is for the investors) it is high risk to those going guarantor for the scheme.
The LGFA is made up of people of transparency and integrity. They have done what they needed to do to get low interest rates for participating councils.
However I urge the HBRC to vote for option 1 - the status quo - and not to go guarantor for the LGFA scheme.
*Fred Robinson is a Hawke's Bay resident with investigative skills, keen to enhance resilience and prosperity for all in the province.
*Views expressed here are the writer's and not the newspaper's. Email editor@hbtoday.co.nz
