Where does the money come from?

OPINION: Hamilton City Council's 142-page 10-Year Plan is available on the council's website. It is very nicely presented and well written in accessible language with clear charts. Staff have done a good job on this and I thank them. It should be compulsory reading for all citizens, but really, who has the time?

We rely on elected councillors to represent our interests so we don't have to worry how the city's soon-to-be $800 million debt can be repaid. But there are a couple of good reasons why you should be worried. Fortunately, I have summarised those reasons here, and what's more, I have a solution - so you can relax again.

First, you need to know where the money comes from.

Most of the debt is owed to the Local Government Funding Agency Ltd (LGFA). This may sound like a government department, but it is actually a private company. The ownership is mainly (80%) a group of 30 councils (around half of all councils in New Zealand), with the balance held by the government. Hamilton City Council has an 8% shareholding. It was set up in 2011 by special legislation to borrow money to lend to its member councils.

The reason it exists is to borrow that money at a lower interest rate than bank mortgages. It does this by Issuing bonds to investors, usually large institutions, and it saves around 0.3% as a result. This is a good thing.

While that saving might seem small margin, the LGFA has borrowed $8 billion so we are talking $24 million per year in lower interest payments. 

But there is only one reason why the investors are prepared to take less money for LGFA bonds, and that is because councils have used ratepayers to guarantee the loans. This is not a good thing.

Why should you be worried?

Not only do you guarantee Hamilton’s debt, the LGFA uses you as a guarantor for Auckland’s debt, and every other member council, for the full $8 billion. If Auckland goes bankrupt, we pay. Is that possible? Detroit, the big car-making city in the United States, went bust in 2013 with US$20 billion in debt

Not a ratepayer? You should still be concerned. Your rent would be affected. Your employer either pays rates or rents, so their ability to pay your wages could be affected. The costs of everything you buy in Hamilton could go up.

Is this just scaremongering? Probably. A debt default may not be imminent, but the five main centres are planning rates rises of up to 59% over the next decade to finance their borrowing. The risk of ratepayers buckling under the strain is increasing, and if one council runs into problems, the domino effect could begin.

So what are the risks?

The 10-Year Plan discusses these. Natural disasters are not budgeted for because they are simply unpredictable. That does not give me confidence. There is consideration for economic problems. Each 1% rise in interest rates (starting from a period of historic lows as a result of the Global Financial Crisis) or inflation could drive up costs by around $6 million per year. The LGFA bonds are fixed interest, so the risk over the next decade is small, but refinancing the debt after that could be expensive.  Remember the 1980s when rates topped 20%?

A recession that slows the growth of Hamilton will have an impact. Much of the borrowing is for new houses because we need new ratepayers at the bottom of the pyramid. If the growth rate is 15% less than the plan predicts, the city’s repayment plans start to run into problems with the debt cap being breached.

Here’s hoping that between now and 2028, Trump holds America together, Brexit goes smoothly, Greece repays Europe, China stays out of a trade war, terrorists make peace, international bankers don’t get greedy, NZ First doesn’t slash immigration, Labour doesn’t raise taxes, the Alpine Fault doesn’t take out Wellington, the weather settles, and the business cycle continues its already-unusually long bull run

That’s a lot of worries. But there is a solution. Most of Hamilton City Council’s spending is in the next three years. So long as we are the first to go bankrupt, the LGFA debt becomes somebody else’s problem.


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