The council is between a rock and a hard place as it tries to meet government-imposed requirements to increase the amount of land available for housing development, say officials.
Councillors yesterday agreed to submit the loan request to the Government's Housing Infrastructure Fund, which aims to speed up housing infrastructure in fast-growing regions.
The loan would be used to help provide the infrastructure needed to build almost 50,000 new homes over a 50-year period and for other projects, including the Papamoa Eastern Interchange.
Although the loan would be interest-free and deferred for 10 years, officials and councillors warn that unless the Government changes the way it has structured the fund, the council will end up exceeding its debt to revenue ratios.
And that, in turn, could prevent it implementing parts of its Long Term Plan.
The council is working closely with other "growth" councils - Auckland, Hamilton and Queenstown - to find a way around the problem.
"The Housing Infrastructure Fund is not the silver bullet it might have first appeared," said deputy mayor Kelvin Clout.
"On the one hand it's welcome. But [the loan] will still show on our balance sheet as debt. And because we are growing so quickly as a city, that means we're going to exceed our debt to revenue ceiling. It would impact the interest rates we are charged and our credit rating."
The Government's National Policy Statement on Urban Development Capacity requires high-growth local councils to always have 10 years' zoned and three years' serviced land available for development.
"It's a directive," said Tauranga Mayor Greg Brownless.
"We need the money to do that. But there is a catch. Because it goes on our balance sheet, we could breach our debt ceiling."
Gail McIntosh, chairwoman of the council's audit, finance, risk and monitoring committee, said staff had been keeping councillors well-informed throughout the process.
"If we don't get this indicative bid in now, we can't tinker with it and make a compliant bid later on. But we're saying that we're not fully committed to taking up this money because it would cause us a big problem.
"If they really want us to meet the national policy statements and have all this excess land available, they have to come to the party. We can't afford to break our covenants. It is very complex."
At yesterday's meeting, councillor Steve Morris said he supported the bid because it was non-binding but the policy was "dangerous".
The proposal transferred the political risk to local councils and ratepayers which would be "financial suicide" for Tauranga, he said.
"The plan was not particularly thought through, you will provide for the growth, but increase your debt massively to do that."
Housing Infrastructure Fund bid
The $256.1 million bid submitted covers four major infrastructure projects:
•Waiari Water Treatment Plant ($114.6m) - city-wide
•Te Maunga Wastewater Treatment Plant upgrade ($55.9m) - city-wide
•Infrastructure for Te Tumu urban growth area ($39.8m) - Eastern Corridor
•Infrastructure for Tauriko West urban growth area ($45.8m) - Western Corridor
Working on a solution
Tauranga City Council has been working closely with fellow high-growth councils Auckland, Hamilton and Queenstown on creating a Crown-owned Special Purpose Vehicle (SPV) to solve the debt to revenue ratio problem, said Tauranga City Council chief executive Garry Poole.
When the Housing Infrastructure Fund was originally announced, it was as an off balance sheet fund to help councils manage debt for new infrastructure, which was why people engaged with it, he said.
But that approach changed, resulting in the potential risk of the new loans pushing debt to revenue ratios beyond prudent levels.
An SPV is a legal entity to hold debt and/or assets and could be an option to remove the new HIF loans from councils' balance sheets and pass it back to the Government.
However, there were a number of issues to be resolved, said Mr Poole.
"All the high-growth councils are working productively with government officials to find a solution."
