The LGFA is an organization that has largely gone unnoticed in the last decade or so that it has existed. Here’s some background information.
What does the LGFA do?
It acts as a finance “broker” for local councils. The LGFA is the dominant lender to New Zealand's local government sector. The benefit is that local authorities gain access to funding at a cheaper rate than would be the case if they were to raise funds individually.
Does central government have a role?
LGFA is 20% owned by the government, with the remaining 80% held by local councils. This government involvement is important.
In addition to the 20% shareholding, the central government has provided a $1.5 billion funding guarantee to secure LGFAs debt. This is the first line of security offered to lenders should the LGFA default on its loan obligations. Fitch ratings agency says, “We expect that LGFA's liabilities would be transferred to the government should it be dissolved.”
What security do councils give?
According to Fitch, 69 of New Zealand's 78 local councils have guaranteed LGFA's debt obligations on a joint and several basis. So if one council defaults on its payments to the LGFA, the other councils will be called upon to meet that council's debt obligations.
Every council that borrows from the LGFA must also provide debenture security over their rates revenue.
This is how the Kapiti Coast District Council explains it.
“The Council’s external borrowings…will generally be secured through a Debenture Trust Deed. Under a Debenture Trust Deed, the Council’s borrowing is secured by a floating charge over all Council rates… Such borrowers are now required to maintain their net debt / total revenue ratio as follows:
• for the financial year ending 30 June 2020 - no more than 250%;
• for the financial years ending 30 June 2021 and 2022 - no more than 300%; and
• for each of the next four financial years, a decrease of 5% year on year until reaching a limit of 280%, that will apply for the financial year ending 30 June 2026.” (page 395, https://www.kapiticoast.govt.nz/.../financial-strategy...)
It should be noted that the debenture security is over the rating revenue. That means the lender has a priority claim to a council’s rating income - they are first to be paid should the council default on its debt obligations.
[NOTE: The new water entities to be created by the Three Waters legislation do not have the same 280% debt cap. Debt for the water entities is projected to be greater than 600% of water revenues generated. By extending the debt cap[ in this manner, the water entities are able to fund infrastructure by debt instead of rates. This is how the government was able to show “savings” to ratepayers!]
Loyal NZ has made the comment: “No New Zealand local government agency or organization, city or regional council can borrow unless it borrows funds through the LOCAL GOVERNMENT FUNDING AGENCY (LGFA).” That is not true. A council is not compelled to borrow from the NZGA. Most, but not all, do so because it is the cheapest source of finance (because it has the backing of the central government).
Loyal NZ says, “Each borrower council must sign an [unscrupulous] GUARANTEE & INDEMNITY DOCUMENT putting all Ratepayers’ properties with their rates revenues up for security against the debt.” It is true that the rating revenue is given as security. This gives the LGFA priority to that revenue stream should the council default on its debt.
Loyal NZ says, “If any Local Government debt in the future becomes unsustainable, or if a council defaults on its debt, then the overseas bankers can extract what is owed, by way of extortionist rates rises from ALL ratepayers, and if they can’t pay, the bankers can sell or confiscate the ratepayers’ properties, homes, farms and anything else to recover the debt (which incidentally is growing enormously by the day and is completely out of control).”
The actual position is the LGFA is the lender, their security is a prior claim to the rating revenue. The effect is local councils would almost certainly increase rates to meet the debt obligations, and that could result in the council enforcing rate demands through debt collection which may include selling a ratepayer’s property. Without security, the interest rate would be appreciably higher than the rate offered by the LGFA.
See the latest LGFA annual report here >>>
As an aside, the Chief Financial Officer at the Whangarei District Council is one of the directors of LGFA, and receives a directors fee of $63,000 in that role. The question is, whether he receives that in addition to his council full-time salary from the WDC?
