Audit and Risk Committee

Open Attachments Under Separate Cover

 

Meeting Date:

Friday 12 June 2020

Time:

1pm

Venue:

Large Exhibition Hall

Napier War Memorial Centre

Marine Parade

Napier

 

TABLE OF CONTENTS

 

Item 1                         Wastewater Outfall Report

Attachment a               Beca Ltd "Napier City Council - Wastewater Outfall - Issues and Options" 15 May 2020................................................................................................... 2

Item 4                         Draft Annual Plan 2020/21

Attachment a               Draft Annual Plan 20/21 - financial information.................................. 87

Attachment b               Capital Plan for Remaining Years of 2018-28 LTP.......................... 122

Attachment d              Rates Remission policy................................................................... 136

Attachment e               Rates Postponement policy............................................................ 142

Attachment f               Statement of Proposal to join LGFA................................................ 147   


Audit and Risk Committee - 12 June 2020 - Attachments

 

Item 1

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Audit and Risk Committee - 12 June 2020 - Attachments

 

Item 4

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Audit and Risk Committee - 12 June 2020 - Attachments

 

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Audit and Risk Committee - 12 June 2020 - Attachments

 

Item 4

Attachments d

 

 

Rates Remission Policy

Approved by

Pending Approval by Council

Department

Finance

Original Approval Date

30 June 2019

Review Approval Date

June 2020

Next Review Deadline

June 2023

Document ID

 

Relevant Legislation

Local Government Act 2002, Local Government (Rating) Act 2002

NCC Documents Referenced

Published in the Long Term Plan 2018-2028 which was reviewed between March/Apr 2018 and adopted on 29-06-18

Reviewed and amended as part of 2019/20 Annual Plan

Reviewed and amended as part of 2020/21 Annual Plan

Purpose

To enable Council to remit all or part of the rates on a rating unit under Section 85 of the Local Government (Rating) Act 2002 where a Rates Remission Policy has been adopted and the conditions and criteria in the policy are met.

Policy

1.  Remission of Penalties

Objective

The objective of this part of the Rates Remission Policy is to enable Council to act fairly and reasonably in its consideration of rates which have not been received by the Council by the penalty date due to circumstances outside the ratepayer’s control.

Conditions and Criteria

Penalties incurred will be automatically remitted where Council has made an error which results in a penalty being applied.

Remission of one penalty will be considered in any one rating year where payment has been late due to significant family disruption. This will apply in the case of death, illness, or accident of a family member, at about the times rates are due.

Remission of the penalty will be considered if the ratepayer forgets to make payment, claims a rates invoice was not received, is able to provide evidence that their payment has gone astray in the post, or the late payment has otherwise resulted from matters outside their control. Each application will be considered on its merits and remission will be granted where it is considered just and equitable to do so

Remission of a penalty will be considered where sale has taken place very close to due date, resulting in confusion over liability, and the notice of sale has been promptly filed, or where the solicitor who acted in the sale for the owner acted promptly but made a mistake (e.g. inadvertently provided the wrong name and address) and the owner cannot be contacted. Each case shall be treated on its merits.

Penalties will also be remitted based on the application, by officers, of Council criteria established after Council has identified that Significant Extraordinary Circumstances have occurred that warrants further leniency in relation to the enforcement of penalties that would otherwise have been payable. The criteria to be applied will be set out in a council resolution that will be linked to the specific Significant Extraordinary Circumstances that have been identified by Council.

Penalties will also be remitted where Council’s Chief Financial Officer considers a remission of the penalty, on the most recent instalment, is appropriate as part of an arrangement to collect outstanding rates from a ratepayer.

2.  Remission for Residential Land in Commercial or Industrial Areas

Objective

To ensure that owners of rating units situated in commercial or industrial areas are not unduly penalised by the zoning decisions of this Council and previous local authorities.

Conditions and Criteria

To qualify for remission under this part of the policy the rating unit must:

·    Be situated within an area of land that has been zoned for commercial or industrial use. Ratepayers can determine where their property has been zoned by inspecting the City of Napier District Plan, copies of which are available from the Council office.

·    Be listed as a ‘residential’ property for differential rating purposes. Ratepayers wishing to ascertain whether their property is treated as a residential property may inspect the Council’s rating information database at the Council office.

Rates will be automatically remitted annually for those properties which had Special Rateable Values applied under Section 24 of the Rating Valuations Act 1998 up to 30 June 2003, and for which evidence from Council’s Valuation Service Provider indicates that, with effect from the 2002 revaluation of Napier City, the land value has been penalised by its zoning. The amount remitted will be the difference between the rates calculated on the equivalent special rateable value provided by the Valuation Service Provider and the rates payable on the Rateable Value.

Other ratepayers wishing to claim remission under this part of the policy must make an application in writing addressed to the Chief Financial Officer.

The application for rates remission must be made to the Council prior to the commencement of the rating year. Applications received during a rating year will be applicable from the commencement of the following rating year. Applications will not be backdated.

Where an application is approved, the Council will direct its Valuation Service Provider to inspect the rating unit and prepare a valuation that will treat the rating unit as if it were a comparable rating unit elsewhere in the district. The ratepayer may be asked to contribute to the cost of this valuation. Ratepayers should note that the Valuation Service Provider’s decision is final as there are no statutory right of objection or appeal for values done in this way.

3.  Remission for Land Subject to Special Preservation Conditions

Objective

To preserve and encourage the protection of land and improvements which are the subject of special preservation conditions.

Conditions and Criteria

Rates remission under this Section of the policy relates to land that is subject to:

·       A heritage covenant under the Historic Places Act 1993; or

·       A heritage order under the Resource Management Act 1991; or

·       An open space covenant under the Queen Elizabeth the Second National Trust Act 1977; or

·       A protected private land agreement or conservation covenant under the Reserves Act 1977; or

·       Any other covenant or agreement entered into by the owner of the land with a public body for the preservation of existing features of land, or of buildings, where the conditions of the covenant or agreement are registered against the title to the land and are binding on subsequent owners of land.

Ratepayers who own Rating Units meeting this criteria may qualify for remission under this part of the policy.

Rates will automatically be remitted annually for those properties which had Special Rateable Values applied under Section 27 of the Rating Valuations Act up to 30 June 2003, and which meet the above criteria. The amount remitted will be the difference between the rates calculated on the equivalent special rateable value provided by the Valuation Service Provider and the rates payable on the Rateable Value.

Other ratepayers wishing to claim remission under this part of the policy must apply in writing to the Council office, and must provide supporting documentary evidence of the special preservation conditions, e.g. copy of the Covenant, Order or other legal mechanism.

The application for rates remission must be made to the Council prior to the commencement of the rating year. Applications received during a rating year will be applicable from the commencement of the following rating year.

Applications for remission under this part of the policy will be approved by the Council. The Council may specify certain conditions before remission will be granted. Applicants will be required to agree in writing to these conditions and to pay any remitted rates if the conditions are violated.

Where an application is approved, the Council will direct its Valuation Service Provider to inspect the Rating Unit and provide a special valuation. The ratepayer may be asked to contribute to the cost of this valuation. Ratepayers should note that the Valuation Service Provider’s decision is final as there is no statutory right of objection or appeal for values done in this way.

The equivalent special rateable value will be determined by the Valuation Service Provider on the assumption that:

·       The actual use to which the land is being put at the date of valuation will be continued; and

·       Any improvements on the land will be continued and maintained or replaced in order to enable the land to continue to be so used.

It will be assessed taking into account any restriction on the use that may be made of the land imposed by the mandatory preservation of any existing tenements, hereditaments, trees, buildings, other improvements, and features.

4.  Remission of Uniform Annual General Charges (UAGC) and Targeted Rates of a Fixed Amount on Rating Units Owned by the Same Owner

Objective

To provide for relief from UAGC and Targeted Rates of a fixed amount per Rating Unit or Separately Used or Inhabited Parts of a Rating Unit, where two or more Rating Units are owned by the same person or persons, and are:

·       part of a subdivision plan which has been deposited for separate lots, or separate legal titles exist; or

·       but the Rating Units may not necessarily be used jointly as a single unit, and each Rating Unit does not benefit separately from the services related to the UAGC and Targeted Rates.

Conditions and Criteria

Remission of UAGC and Targeted Rates of a fixed amount applies in the following situations:

·       Unsold subdivided land, where as a result of the High Court decision of 20 November 2000 ‘Neil Construction and others vs. North Shore City Council and others’, each separate lot or title is treated as a separate Rating Unit, and such land is implied to be not used as a single unit.

 

All remissions under this part of the policy will be approved by the Chief Financial Officer.

5.  Remission for Water Rates (by meter)

Objective

To provide ratepayers with a measure of relief by way of partial rates remission where, as a result of the existence of a water leak on the Rating Unit which they occupy the payment of fuller rates is inequitable, or where officers are convinced that there are errors in the data relating to water usage.

Conditions and Criteria

·    The existence of a significant leak on the occupied Rating Unit has been established and there is evidence that steps have been taken to repair the leak as soon as possible after the detection, or officers have reviewed the usage data and are convinced that the usage readings are so abnormal as to require adjustment.

·    The Council or its delegated officer(s) as determined from time to time and set out in the Council’s delegations register shall determine the extent of any remission based on the merits of each situation.

 

6.  Remission to smooth the effects of change in rates on individual or groups of properties

Objective

To enable Council to provide rates remission where, as a result of a change in Council policy or other change that results in a significant increase in rates, Council decides it is equitable to smooth or temporarily reduce the impacts of the change by reducing the amount payable.

Conditions and Criteria

·    Remission of part of the value based rates to enable the impact of a change in rates to be phased in over a period of no more than 3 years.

To continue with any existing rates adjustment where, due to change in process, policy or legislation Council considers it equitable to do so subject to a maximum limit of 3 years to a remission made under this clause in the policy.

7.  Remission for Special Circumstances

Objective

To enable Council to provide rates remission for special and unforeseen circumstances, where it considers relief by way of rates remission is justified in the circumstances.

Conditions and Criteria

Applications for rates remission must be made in writing by the ratepayer or their authorised agent.

Each circumstance will be considered by Council on a case by case basis. Where necessary, Council consideration and decision will be made in the Public Excluded part of a Council meeting.

The terms and conditions of remission will be decided by Council on a case by case basis. The applicant will be advised in writing of the outcome of the application.

8.  Remission of Rates in Response to Significant Extraordinary Circumstances being identified by Council.

Objective

To enable Council to provide rates remission to assist ratepayers in response to Significant Extraordinary Circumstances impacting Napier’s ratepayers.

Definitions

Financial Hardship: for the purpose of this provision is defined as the inability of a person, after seeking recourse from Government benefits or applicable relief packages, to reasonably meet the cost of goods, services and financial obligations that are considered necessary according to New Zealand standards. In the case of a ratepayer who is not a natural person, it is the inability, after seeking recourse from Government benefits or applicable relief packages, to reasonably meet the cost of goods, services and financial obligations that are considered essential to the functioning of that entity according to New Zealand standards.

Conditions and Criteria

For this policy to apply Council must first have identified that there have been Significant Extraordinary Circumstances affecting the ratepayers of Napier, that Council wishes to respond to.

Once Significant Extraordinary Circumstances have been identified by Council, the criteria and application process (including an application form, if applicable), will be made available.

For a Rating Unit to receive a remission under this policy it needs to be an “Affected Rating Unit” based on an assessment performed by officers, following guidance provided through a resolution of Council.

Council resolution will include:

1.   That the resolution applies under the Rates Remission Policy; and

2.   Identification of the Significant Extraordinary Circumstances triggering the policy (including both natural and man-made events); and

3.   How the Significant Extraordinary Circumstances are expected to impact the community (e.g. financial hardship); and

4.   The type of Rating Unit the remission will apply to; and

5.   Whether individual applications are required or a broad based remission will be applied to all affected Rating Units or large groups of affected Rating Units; and

6.   What rates instalment/s the remission will apply to; and

7.   Whether the remission amount is either a fixed amount, percentage, and/or maximum amount to be remitted for each qualifying Rating Unit.

Explanation

The specific response and criteria will be set out by Council resolution linking the response to specific Significant Extraordinary Circumstances. The criteria may apply a remission broadly to all Rating Units or to specific groups or to Rating Units that meet specific criteria such as proven Financial Hardship, a percentage of income lost or some other criteria as determined by council and incorporated in a council resolution.

Council will indicate a budget to cover the value of remissions to be granted under this policy in any specific financial year.

The types of remission that may be applied under this policy include:

·     The remission of a fixed amount per Rating Unit either across the board or targeted to specific groups such as:

A fixed amount per residential Rating Unit

A fixed amount per commercial Rating Unit

 

Policy Review

This policy will be reviewed at least once every three years.

Document History

Version

Reviewer

Change Detail

Date

2.0.0

Caroline Thomson

Updated and approved by Council with LTP

29 June 2018

3.0.0

Caroline Thomson

Updated in conjunction with 2019-20 Annual Plan

4 June 2019

4.0.0

 

Updated in conjunction with 2020-21 Annual Plan

 

 


Audit and Risk Committee - 12 June 2020 - Attachments

 

Item 4

Attachments e

 

 

 

Rates Postponement Policy

Approved By

Pending Approval by Council

Department

Finance

Original Approval Date

29 June 2018

Review Approval Date

Pending

Next Review Deadline

June 2023

Document ID

346038

Relevant Legislation

Local Government (Rating) Act 2002

Local Government Act 2002

Income Tax Act 2007

NCC Documents Referenced

Published in the Long Term Plan 2018-2028 which was reviewed between March/April 2018 and adopted on 29-06-18

Reviewed and amended in response to COVID-19

Rating – Delegations under Local Government (Rating) Act 2002

Purpose

Section 1:     To enable Council to postpone the requirement to pay all or part of the rates on a Rating Unit under Section 87 of the Local Government (Rating) Act 2002 where a rates postponement policy has been adopted and the conditions and criteria in the policy are met.

Policy

Postponement for Farmland

Objective

Section 2:     To support the District Plan by encouraging owners of farmland around urban areas to refrain from subdividing their land for residential purposes.

Conditions and Criteria

Section 3:     To initially qualify, or continue qualifying, for postponement of rates under this policy the Rating Unit must be classified, or continue to be classified, as farmland for differential purposes (ratepayers wishing to ascertain their classification are welcome to inspect the Council’s rating information database at the Council office).

Section 4:     Rates postponement will continue to apply on those properties that were subject at 30 June 2003 to postponement under Section 22 of the Rating Valuations Act 1998. Other rural ratepayers wishing to take advantage of this part of the policy must make application in writing, addressed to the Director Corporate Services. The application for postponement must be made to the Council prior to the commencement of the rating year. Applications received during a rating year will be applicable from the commencement of the following rating year. Applications will not be backdated.

Section 5:     For properties currently subject to rates postponement and for new applications approved, Council will postpone the difference between rates payable on the equivalent Rates Postponement Value advised by its Valuation Service Provider and rates payable on the Rateable Value of the land each year.

Section 6:     The Council may charge an annual fee on postponed rates for the period between the due date and the date they are paid. This fee is designed to cover the Council’s administrative and financial costs and may vary from year to year. The amount of the fee is included in Council’s Schedule of Fees and Charges.

Section 7:     If the Rating Unit is subdivided then postponed rates and any accumulated fees will be payable. The ratepayer will be required to sign an agreement acknowledging this. Postponed rates will be registered as a charge against the land (i.e. in the event that the property is sold the Council has first call against any of the proceeds of that sale). Again, the ratepayer will be required to sign an agreement acknowledging this.

Section 8:     Authority to approve applications will be delegated by Council to the Director of Corporate Services, Chief Financial Officer and Investment and Funding Manager.

Postponement for Older Persons

Objective

Section 9:     The objective of this part of the policy is to assist ratepayers who are Older Persons with a fixed level of income to meet rates particularly, but not exclusively, resulting from increasing levels of rates.

Definition

Section 10:  Older Persons are those who are old enough to qualify to receive NZ Superannuation.

Section 11:  For the purpose of this provision, Financial Hardship is defined as the inability of a person, to reasonably meet the cost of goods, services and financial obligations that are considered necessary according to New Zealand standards.

Conditions and Criteria

Section 12:  Postponement will only apply to Older Persons on a fixed income.

Section 13:  Only Rating Units used solely for residential purposes will be eligible for consideration for rates postponement under this policy.

Section 14:  Only the person entered as the ratepayer, or their authorised agent, may make an application for rates postponement for Financial Hardship. The ratepayer must be the occupant and current owner of, and have owned for not less than five years, the Rating Unit which is the subject of the application. The person entered on the Council’s rating information database as the ‘ratepayer’ must not own any other Rating Units or investment properties (whether in the district or elsewhere).

Section 15:  The ratepayer (or authorised agent) must make an application to Council on the prescribed form (copies can be obtained from the Council Office).

Section 16:  The Council will consider, on a case by case basis, all applications received that meet the criteria outlined under this section. The following factors will be considered – age, income source and level, annual rates payable, period of postponement, equity in the property owned, and the amount of rates postponed.

Section 17:  Authority to approve applications will be delegated by Council to the Director of Corporate Services, Chief Financial Officer and Investment and Funding Manager.

Section 18:  Applicants seeking rates postponement will be encouraged to seek independent advice before formally accepting any offer for postponement made by the Council.

Section 19:  As a general rule postponement will not apply to the first $500 per annum of the rate account after any rates rebate has been deducted.

Section 20:  Where the Council decides to postpone rates the ratepayer must first make acceptable arrangements (e.g. by setting up a system to meet agreed minimum regular payments) for payments required under the terms of the postponement approval for the current rating year, and future payment years.

Section 21:  Postponement will only apply on properties on which houses have been insured. Annual proof may be required that insurance has been maintained.

Section 22:  Where rates postponement is approved for a property with an outstanding mortgage, the mortgagee will be advised by Council that rates postponement has been granted by the Council.

Section 23:  Any postponed rates will be postponed until:

Section 24:  The death of the ratepayer(s); or

·     Until the ratepayer(s) ceases to be either the owner or occupier of the Rating Unit; or

·     Until a date specified by the Council.

Section 25:  The Council will charge an annual postponement fee. The annual postponement fee will cover Council’s administrative costs including finance costs. The finance cost will be charged at the average return on investments rate for Council for that year.

Section 26:  All postponement fees payable (including finance costs) will be added to the amount of postponed rates annually and be paid at the time postponed rates are paid.

Section 27:  The policy will apply from the beginning of the rating year in which the application is made although the Council may consider backdating past the rating year in which the application is made depending on the circumstances.

Section 28:  The postponed rates, inclusive of any accumulated postponement fees, or any part thereof may be paid at any time. The applicant may elect to postpone the payment of a lesser sum than that which they would be entitled to have postponed pursuant to this policy.

Section 29:  Postponed rates will be registered as a statutory land charge on the Rating Unit title. This means that the Council will have first call on the proceeds of any revenue from the sale or lease of the Rating Unit. In addition to the annual fee and interest, Council will charge any other costs or one-off fees incurred in relation to registration of the postponement as part of the postponement.

Section 30:  This policy will not affect any rates postponement provisions approved prior to 1 July 2009, which will continue to apply in accordance with the conditions related to each case.

Section 31:  This policy does not apply to non-elderly ratepayers experiencing financial hardship.

Section 32:  Council will assist in the referral of any other ratepayer on a fixed income facing long term financial hardship to the appropriate agency.

Postponement for Significant Extraordinary Circumstances

Objective

Section 33:  To provide a rates postponement to ratepayers experiencing financial hardship directly resulting from Significant Extraordinary Circumstances that affects their ability to pay rates.

Section 34:  For the purpose of this policy the following definitions will apply:

·     Significant Extraordinary Circumstances: as defined by Council resolution. Significant Extraordinary Circumstances may be natural or economic in nature, and will identify the type and location of properties affected.

·     Financial Hardship: for the purpose of this provision is defined as the inability of a person, after seeking recourse from Government benefits or applicable relief packages, to reasonably meet the cost of goods, services and financial obligations that are considered necessary according to New Zealand standards. In the case of a ratepayer who is not a natural person, it is the inability, after seeking recourse from Government benefits or applicable relief packages, to reasonably meet the cost of goods, services and financial obligations that are considered essential to the functioning of that entity according to New Zealand standards.

·     Small Business: a business operated by a small business person, small partnership or close company as defined in section YA 1 of the Income Tax Act 2007.

Conditions and Criteria

Section 35:  This part of the policy will only apply to Rating Units used for residential purposes or by Small Businesses.

Section 36:  Once Significant Extraordinary Circumstances have been identified by Council, the criteria and application process (including an application form, if applicable), will be made available. Council may set a timeframe for the event. Council may review the criteria and/or timeframe of Significant Extraordinary Circumstances through subsequent resolutions.

Section 37:  Council resolution will include:

a.   that the resolution applies under the Rates Postponement Policy; and

b.   the Significant Extraordinary Circumstances triggering the policy (e.g. including, but not limited to, flood, pandemic, earthquake); and

c.   how the Significant Extraordinary Circumstances are expected to impact the community (e.g. hardship); and

d.   the types or location of properties effected by the Significant Extraordinary Circumstances; and

e.   timeframe for postponement in relation to the Significant Extraordinary Circumstances.

Section 38:  No application for postponement can be made under this policy unless Significant Extraordinary Circumstances have been identified by Council.

Section 39:  Any requests for rates postponement for Rating Units with a land value greater than $1.5m will be decided upon at the discretion of Council and requests for rate postponement for Rating Units with a land value less than $1.5m will be delegated to Council officers.

Section 40:  The ratepayer must demonstrate, to the Council’s satisfaction, that paying the rates would result in Financial Hardship.

Section 41:  The applicant must demonstrate to Council’s satisfaction that the ratepayer has taken all necessary steps to claim any central government benefits or allowances the ratepayer is properly entitled to receive that would assist the ratepayer to meet their financial commitments. Evidence such as official correspondence must be provided with the application.

Section 42:  Council will consider applications where the same ratepayer is liable for rates for multiple Rating Units. In such instances, Council will look at the collective impact to the ratepayer.

Section 43:  Only the person/s entered as the ratepayer (in the case of a close company every director must sign the application form), or their authorised agent, may make an application for rates postponement for Significant Extraordinary Circumstances that resulted in Financial Hardship. However, where the ratepayer is not the owner of the Rating Unit, the owner must also provide written approval of the application.

Section 44:  The ratepayer must be the current ratepayer for the Rating Unit at the time Significant Extraordinary Circumstances are identified by Council.

Section 45:  Where the Council decides to postpone rates the ratepayer must make acceptable arrangements for payment of rates, for example by setting up a system for regular payments. Such arrangements will be based on the circumstances of each case.

Section 46:  Council may charge a fee on postponed rates for the period between the due date and the date they are paid. This fee is designed to cover Council’s administrative and financial costs. The fees will be set as part of the Council resolution identifying Significant Extraordinary Circumstances.

Section 47:  Postponed rates will remain postponed until the earlier of:

a.   The ratepayer/s ceases to be the owner or occupier of the Rating Unit; or

b.   A date specified by Council in the Council resolution identifying Significant Extraordinary Circumstances.

Postponement for Special Circumstances

Objective

Section 48:  To enable Council to provide rates postponement for special and unforeseen circumstances, where it considers relief by way of rates postponement is justified in the circumstances.

Conditions and Criteria

Section 49:  Application for rates postponement must be made in writing by the ratepayer or their authorised agent.

Section 50:  Each circumstance will be considered by Council on a case by case basis. Where necessary, Council consideration and decision will be made in the Public Excluded part of a Council meeting.

Section 51:  The terms and conditions of postponement including any application of an annual fee will be decided by Council on a case by case basis.

Section 52:  The applicant will be advised in writing of the outcome of the application.

Policy Review

Section 53:  This policy will be reviewed at least once every three years.

Document History

Section 54:  Version

Section 55:  Reviewer

Section 56:  Change Detail

Section 57:  Date

Section 58:  2.0.0

Section 59:  Caroline Thompson

Section 60:  Updated and approved by Council

Section 61:  29 June 2018

Section 62:  3.0.0

Section 63:   

Section 64:  Updated and approved by Council

Section 65:   

 


Audit and Risk Committee - 12 June 2020 - Attachments

 

Item 4

Attachments f

 

Statement of Proposal

Local Government Funding Agency


 

Key Dates

Consultation opens

Xxxxxx

 

Consultation closes

Xxxxxxxxxx

 

Hearings

Xxxxxxxx

 

Deliberations

Xxxxxxxx

 

Adoption

Xxxxxxxx

 

Please Note: If hearings are not required, deliberations and adoption (if adopted) may take place at an earlier date.

 

 

Where can I get more information?

·     Visit Council’s website www.napier.govt.nz

·     Contact one of your elected representatives

 


 

Application to join the Local Government Funding Agency

 

Introduction

Napier City Council is considering participating as an “Unrated Guaranteeing Borrower” in the

New Zealand Local Government Funding Agency Limited (LGFA) scheme.

The LGFA scheme was set-up in 2011 by a group of local authorities and the Crown to enable local authorities to borrow at lower interest margins than would otherwise be available. The LGFA scheme is recognised in legislation, which modifies the effect of some statutory provisions and allows the scheme to provide lower cost lending than would otherwise be the case. Currently 54 of the 78 local authorities in NZ participate in the LGFA scheme.

 

Under the scheme, all participating local authorities are able to borrow from the LGFA, but different benefits apply depending on the level of participation. Napier City Council intends to participate as an Unrated Guaranteeing Borrower.

 

Being a member of the LGFA, Napier City Council has the option to borrow, but is not bound to use the LGFA to do so.

 

An Information Memorandum, describing the arrangement in detail, is attached as Appendix A, and forms part of this proposal. A number of terms that are used in this proposal are defined in that Information Memorandum.

 

Statutory Considerations

Section 56 of the Local Government Act 2002 (LGA 2002) requires that a local authority must carry out a consultation process before acquiring shares in a Council-Controlled Organisation (CCO). The LGFA is a CCO and there are circumstances in which, under the LGFA scheme, shares in the LGFA may be issued to participants in the scheme.

Consequently, it is prudent for a local authority to carry out a consultation process before joining the scheme.

 

Analysis of Reasonably Practicable Options

Part C of the Information Memorandum sets out an analysis of the costs and benefits of participating in the LGFA Scheme. A summary of those costs and benefits and a brief rationale based on consideration of the Council’s specific circumstances is set out below.

 

Options – LGFA

Additional Spend

Impact on Rates

Impact on Debt

1) No change. Not join the LGFA. No other institutions are approached for lending.

$0

Rates will need to be increased to fund revenue lost due to the pandemic.

No debt

2) Not join the LGFA. Borrowing sourced from an approved lending institution.

Between $3,500 and $5,000 per $1m per annum to ensure facility is available. Approximately 1.7%pa for any utilised facility.

No impact on rates

Debt will increase by the amount borrowed (estimated at $33m total).

3) Join the LGFA as a non-guaranteeing local authority. This allows NCC to borrow up to $20m through the LGFA.

Associated legal fees. Ongoing trustee fees.

Potential reduced rates due to savings in facility and interest rate costs.

Debt will increase by the amount borrowed (up to $20m with LGFA and any balance sourced from an approved lending institution).

4) Join the LGFA as an unrated guaranteeing local authority. This allows NCC to borrow more than $20m, but with higher risk.

Associated legal fees. Ongoing trustee fees.

Potential reduced rates due to savings in facility and interest rate costs.

Debt will increase by the amount borrowed (estimated at $33m total).

5) Join the LGFA as a principal shareholding local authority. This allows NCC to both borrow more than $20m and invest in LGFA shares, but with higher risk than option 4.

Associated legal fees. Ongoing trustee fees.

The cost of any shares purchased.

Potential reduced rates due to savings in facility and interest rate costs.

A modest return may be received from shares held in the LGFA. It is likely that any share purchase would be debt-funded.

Debt will increase by the amount borrowed (estimated at $33m total) plus the cost of any shares purchased.

 

Our preferred option is Option 4 – join the LGFA as an unrated guaranteeing local authority.

 

Rationale

To date Napier has been in the fortunate position of not needing to borrow. However, ongoing demand from operational and capital costs combined with the impact of the COVID-19 pandemic has led to Council budgeting a $33 million shortfall over the next 12 months.

 

The benefits of lower interest margins are significant.

 

Based on a comparison of borrowing available from approved lending institutions, Council anticipates interest savings of approximately $7,900 or 0.79% for every $1 million of debt[1]. At an anticipated peak debt level of $33 million this equates to approximately $260,700 per annum.

 

If Council was to join as a non-Guaranteeing Local Authority (option 3 on page 3) there would be a $20m limit in its total borrowing capacity.

There are one-off up-front legal costs associated with joining the LGFA of approximately $26,000 and annual ongoing trustee fees of approximately $8,000. There are no LGFA fees (either up front or ongoing). Council believes that the benefit of these savings outweigh the costs referred to in the cost/benefit analysis in Part C of the Information Memorandum. There is a low risk to Council by joining LGFA as a guarantor. This is discussed in the Information Memorandum, Appendix, Part A paragraphs 24 to 32.

 

As a Guaranteeing Local Authority, Napier City Council would be guaranteeing LGFA’s obligations to its creditors and not the obligations of individual councils. There has never been a default by a New Zealand local authority and there is strong oversight of the sector. The LGFA is also well-capitalised. The lending undertaken by LGFA to local authorities is with a security charge over rates.

 

Should the Council participate in the LGFA Scheme as a Guaranteeing Local Authority?

Council is proposing to join the LGFA Scheme as a Guaranteeing Local Authority, which

• will cost Council an estimated $26,000 in legal fees and an estimated $8,000 per year ongoing trustee fees,

• will save Council $7,900 in interest for every $1m of debt (potentially $260,700 per annum),

• does not restrict borrowing to $20m.

 

 


 

How do I have my say?

Online: xxxxx

 

By email: xxxxx@napier.govt.nz

 

By post:     LGFA Application

Napier City Council

Private Bag 6010

Napier 4142

 

 

Feedback will need to get back to us by xxxxxxxxx.


 

Information Memorandum

 

PART A – INTRODUCTION AND PURPOSE

 

Purpose of Information Memorandum

 

1.       This Information Memorandum provides a description of a funding structure for local authorities (LGFA Scheme), which was designed to enable participating local authorities (Participating Local Authorities) to borrow at lower interest margins than they would otherwise pay.

 

2.       The purpose of this Information Memorandum is to provide information to supplement any consultation materials prepared by local authorities consulting on whether to participate in the LGFA Scheme.

 

3.       This Information Memorandum is divided into three parts:

 

a)      This Part A (Introduction and Purpose), which sets out the purpose of the Information Memorandum and provides some background on the purpose of, and rationale for, the LGFA Scheme.

 

b)      Part B (How the LGFA Scheme Works), which sets out the characteristics of the LGFA Scheme, and the transactions that Participating Local Authorities will be entering into as part of their participation in the LGFA Scheme.

 

c)      Part C (Local Authority Costs and Benefits), which sets out the costs and benefits to individual local authorities of participating in the LGFA Scheme.

 

Origin of the LGFA Scheme

 

4.       There are a number of LGFA style schemes around the world, with the oldest in Denmark (KommuneKredit founded in 1898). Global LGFA style schemes all utilise a cross-guarantee structure by member councils similar to the structure of LGFA. There has never been a call under the guarantee in any of these countries.

 

5.       Local Government Funding Agencies are vehicles that allow local governments to source capital for operational purposes or capital projects. LGFAs typically operate as a co-operative between members. The scheme allows members to source capital more cheaply than if they sourced it alone.

 

6.       Several attempts to create a borrowing collective were made in the 1980s and 1990s in New Zealand. Prompted by the Global Financial Crisis, a proposal made in 2009 received strong support. The LGFA Scheme was incorporated by a group of New Zealand local authorities and the Crown on 1 December 2011. At the time, Standard and Poor’s and Fitch both assigned LGFA a preliminary domestic credit rating of AA+ (the same as the New Zealand government).

 

7.       The development of the LGFA involved:

 

a)      undertaking a detailed review and analysis of:

 

i)        the then current borrowing environment in which New Zealand local authorities borrow; and

 

ii)       centralised local authority debt vehicle structures that have been developed offshore to successfully lower the cost of local authority borrowing;

b)      using this review and analysis to develop a funding structure (the LGFA Scheme), which was anticipated to deliver significant benefits to New Zealand local authorities;

 

c)      confirming with rating agencies that the proposed LGFA Scheme could achieve a high enough credit rating to deliver the anticipated benefits;

 

d)      obtaining formal central government support to facilitate establishment of the LGFA Scheme.

 

8.       Currently there are 67 participating Council’s and at 23 April 2020 the LGFA has lent $10.8 billion to the local authority sector.

 

Rationale for LGFA Scheme

 

New Zealand Local Authority debt market

8.       At the time the LGFA Scheme was developed, New Zealand local authorities faced a number of debt related issues.

 

9.       First, local authorities had significant existing and forecast debt requirements. Councils 2009-2019 long-term plans indicated that local authority debt would double over the next five years to over $9 billion.

 

10.     Secondly, pricing, length of funding term and other terms and conditions varied considerably across the sector and were less than optimal. This was due to:

 

a)      Limited debt sources Local authorities’ debt funding options were limited to the banks, private placements and wholesale bonds (issuance to wholesale investors), and, to a lesser extent, retail bonds. Increasing local authority sector funding requirements and domestic funding capacity constraints were likely to further negatively impact pricing, terms and conditions and flexibility of local authority sector debt.

 

b)      Fragmented sector – There were 78 local authorities. Individually, a significant proportion of these local authorities lacked scale – the 10 largest accounted for ~68% of total sector borrowings. The remaining 68 councils had 32% of sector borrowings.

 

c)      Regulatory restrictions – Offshore (foreign currency) capital markets were closed to local authorities with the exception of Auckland Council and the compliance process for local authority retail bond issuance was burdensome and generally restricted issuance to a six month window.

 

Addressing the local authority debt issues

 

11.     Each of these issues needed to be addressed to rectify this situation. This was not likely to happen without an intervention like the LGFA Scheme for the following reasons:

 

a)      The New Zealand debt markets (at least in the foreseeable future) were likely to maintain the status quo.

 

b)      Individually, local authorities were not be able to attain significant scale.

 

c)      At a sector level it might have been possible to address the issue regarding regulation, but regulators were likely to remain reluctant to significantly ease restrictions on financial management across the sector without gaining significant comfort as to the sophistication of the financial management of all local authorities. Even if this issue was addressed by regulators, this change alone would have been insufficient to provide a major step change.

 

12.     The LGFA Scheme was developed because of the homogenous nature of local authorities; the large sector borrowing requirements and the high credit quality / strong security position (i.e. charge over rates) of local authorities. This created the opportunity for a centralised local authority debt vehicle to generate significant benefits.

 

13.     There were numerous precedents globally of successful vehicles that pooled local authority debt and funded themselves through issuing their own financial instruments to investors. Such vehicles achieved success through:

 

a)      “Credit rating arbitrage” Attaining a credit rating higher than that of the individual underlying assets (local authority borrowers) and therefore being able to borrow at lower margins.

 

b)      “Economies of scale” By pooling debt the vehicles could access a wider range of debt sources and spread fixed operating costs, thereby reducing the dollar cost per dollar of debt raised.

 

c)      “Regulatory arbitrage” – The vehicles could receive different regulatory treatment than the underlying local authorities, improving their ability to efficiently raise debt, e.g. through access to offshore foreign currency debt markets.

 

14.     The offshore precedents were typically owned by the local authorities in the relevant jurisdiction (often with central government involvement), and that is what was proposed here through the LGFA Scheme.

 

15.     The LGFA Scheme has now been successfully operating for eight years. It has exceeded the original lending and profit targets that were forecast in 2011.

 

PART B – HOW THE LGFA SCHEME WORKS

 

Basic structure of the LGFA Scheme

 

16.     The basic structure of the LGFA Scheme is that a company has been established that borrows funds and lends them on to local authorities at lower interest margins than those local authorities would pay to other lenders.

 

New Zealand Local Government Funding Agency Limited

 

17.     The company that lends to local authorities under the LGFA Scheme is called the New Zealand Local Government Funding Agency Limited (LGFA). It is a limited liability company, and its shares are held entirely by the Crown and by local authorities.

 

18.     20% of the shares in the LGFA are held by the Crown and the remaining 80% by 30 individual local authorities. Thus the LGFA is a Council Controlled Trading Organisation (CCTO).

 

19.     The LGFA was established solely for the purposes of the LGFA Scheme, and its activities are limited to performing its function under the LGFA Scheme.

 

20.     30 local authorities (Principal Shareholding Local Authorities) hold those shares that are not held by the Crown. The Principal Shareholding Local Authorities contributed capital and, as compensation for their capital contribution, receive a predetermined return on this capital. However, the over-arching objective is that the benefits of the LGFA Scheme are passed to local authorities as lower borrowing margins, rather than being passed to shareholders as maximised profits.

 

Design to minimise default risk

 

21.     One of the features that is critical to the LGFA Scheme delivering its benefit to the sector is the achievement of a high credit rating for the LGFA. Currently it is rated ‘AA+’ long term from Standard and Poor’s, which enables it to achieve the credit rating arbitrage referred to in paragraph 13(a). Consequently there are a number of features of the LGFA Scheme that are included to provide the protections for creditors that rating agencies require before agreeing to a high credit rating. These features are described in paragraphs 23 to 53 below.

 

22.     Before agreeing to a high credit rating, rating agencies will consider the risks of both short term and long term default. Short term default is where a payment obligation is not met on time. Long term default is where a payment obligation is never met. In many cases short term default will inevitably translate into long term default, but this is not always the case – a short term default may be caused by a temporary shortage of readily available cash.

 

Features of the LGFA Scheme designed to reduce short term default risk

 

23.     When a local authority borrows, the risk of short term default, although low, is probably significantly higher than its risk of long term default. In the long term it can assess and collect sufficient rates revenue to cover almost any shortfall, but such revenue cannot be collected quickly. Consequently, there is a risk that inadequate liability and revenue management could lead to temporary liquidity problems and short term default.

 

24.     The principal asset of the LGFA will be loans to participating local authorities, so such temporary liquidity risks are effectively passed on to the LGFA. Consequently, the rating agencies look for safeguards to ensure that liquidity problems of a Participating Local Authority will not lead to a default by the LGFA.

 

25.     There are two principal safeguards that the LGFA has in place to manage short term default (liquidity) risk:

 

a)      It holds cash and other liquid investments (investments which can be quickly turned into cash). As at 23 April 2020 LGFA held $872 million of cash and liquid investments.

 

b)      It currently holds a $1 billion borrowing facility with central government that allows it to borrow funds from central government if required.

 

26.     It is expected that these safeguards will sufficiently reduce any short term default risk.

 

Features of the LGFA Scheme designed to reduce long term default risk

 

27.     There are a number of safeguards that the LGFA has in place to manage long term default risk, the most important of which are set out below:

 

a)      The LGFA requires all local authorities that borrow from it to secure that borrowing with a charge over that local authority’s rates and rates revenue (Rate Charge).

 

b)      The LGFA maintains a minimum capital adequacy ratio.

 

c)      The Principal Shareholding Local Authorities have subscribed for $20 million of uncalled capital in an equal proportions to their paid up equity contribution.

 

d)      As at 23 April 2020, 54 Participating Local Authorities (Guaranteeing Local Authorities) guarantee the obligations of the LGFA.

 

e)      Guaranteeing Local Authorities commit to contributing additional equity to the LGFA if there is an imminent risk that the LGFA will default.

 

f)       The LGFA hedges any exposure to interest rate and foreign currently fluctuations to ensure that such fluctuations do not significantly affect its ability to meet its payment obligations.

 

g)      The LGFA puts in place risk management policies in relation to its borrowing and lending designed to minimise its risk. For example, it imposes limits on the percentage of lending that is made to any one local authority to ensure that its credit risk is suitably diversified.

 

h)      The LGFA ensures that its operations are run in a way that minimises operational risk.

 

i)        Additional detail in relation to the features referred to in paragraphs 27(a) to 27(e) is set out below.

 

Rates Charge

 

28.     All local authorities borrowing from the LGFA are required to secure that borrowing with a Rates Charge.

 

29.     This is a powerful form of security for the LGFA, because it means that, if the relevant local authority defaults, a receiver appointed by the LGFA can assess and collect sufficient rates in the relevant district or region to recover the defaulted payments. Consequently, it significantly reduces the risk of long term default by a local authority borrower.

 

30.     From a local authority’s point of view it is also advantageous, because, so long as the local authority adheres to LGFA’s financial covenants, it is entitled to conduct its affairs without any interference or restriction. This contrasts with most security arrangements, which involve restrictions being imposed on a borrower’s use of its own assets by the relevant lender.

 

Minimum capital

 

31.     One important factor in LGFA obtaining its high credit rating (AA+ from S&P and Fitch) is the LGFA having a minimum capital adequacy ratio (a ratio that measures the relative amounts of equity and debt-based assets that an entity has). A strong credit rating is important, because it provides an indication of the ability of the LGFA to ultimately repay all of its debts.

 

32.     The minimum capital adequacy ratio requirement is an amount equal to at least 1.6% of its total assets. As at December 2019 the actual ratio was 2.2%.

 

Sources of equity for capital adequacy purposes

 

33.     The equity held by the LGFA to ensure that it meets its minimum capital adequacy ratio requirement comes from two sources. First, the Crown and the Principal Shareholding Local Authorities contributed $25 million of initial equity as the issue price of their initial shareholdings. Retained earnings have seen the value of this equity rise to $79.1 million as at 30 December 2019. Secondly, each Participating Local Authority must, at the time that it borrows from the LGFA, contribute some of that borrowing back as equity. This source of equity is called borrower notes.

 

34.     The way the borrower notes works is that, whenever a Participating Local Authority borrows, it does not receive the full amount of the borrowing in cash. Instead, a small percentage of the borrowed amount is invested by the local authority into borrower notes. LGFA pay interest on borrower notes. That percentage is 1.6% of the amount borrowed.

 

35.     Borrower notes are repaid when the borrowing is repaid, so, in effect, the amount that must be repaid equals the cash amount actually advanced.

 

36.     Borrower notes are convertible in some circumstances into shares in the LGFA.

 

37.     To illustrate with an example, if a local authority borrowed $1,000,000 for five years from the LGFA, it would receive $984,000 in cash and $16,000 of Borrower Notes. At the end of the five years, it would repay $1,000,000, but would simultaneously redeem its Borrower Notes of $16,000, meaning its net repayment was equal to the $984,000 it initially received in cash.

 

38.     A return is paid on the Borrower Notes, However, while it is anticipated that this return will be paid, it is paid at the discretion of the LGFA.

 

39.     There is some additional risk to Participating Local Authorities from this arrangement, because redemption of the Borrower Notes will only occur if the LGFA is able to pay its other debts. For example, if at the end of five years, the LGFA was insolvent, the local authority would have to repay $1,000,000, but would not receive its $16,000 back for redeeming its Borrower Notes. To date, LGFA have fully repaid all borrower notes that have matured.

 

Guarantee

 

40.     Most Participating Local Authorities entered into a guarantee when they join the LGFA Scheme (Guarantee). Under the Guarantee the Guaranteeing Local Authorities guarantee the payment obligations of the LGFA.

 

41.     The purpose of the Guarantee is to provide additional comfort to lenders (and therefore credit rating agencies) that there will be no long term default, though it may also be used to cover a short term default if there is a default that cannot be covered using the protections described in paragraphs 23 to 25 above, but which will ultimately be fully covered using the rates charge described in paragraphs 28 to 30. The Guarantee allows the LGFA to draw upon the resource of all guaranteeing Local Authorities to avoid defaults.

 

LGFA Guarantee

 

42.     The Guarantee will only ever be called if the LGFA defaults. Consequently, a call on the Guarantee will only occur if the numerous safeguards put in place to prevent an LGFA default fail. This is highly unlikely to happen.

 

43.     To provide some perspective on default, based on Standard & Poor’s research on 39 years of global data (1981-2018), a AA+ rated bond is expected to have a cumulative default risk of 0.32% over 5 years.

 

44.     If any such default did occur, and the Guaranteeing Local Authorities were called on under the Guarantee they could potentially be called on to cover any payment obligation of the LGFA. Such payment obligations may (without limitation) include obligations under the following transactions:

 

a)      A failure by the LGFA to pay its principal lenders.

 

b)      A failure by the LGFA to repay drawings under the liquidity facility with central government.

 

c)      A failure by the LGFA to make payments under the hedging transactions referred to in paragraph 27(f).

 

Guarantee risk shared

 

45.     There is a mechanism in the LGFA Scheme to ensure that payments made under the Guarantee are shared between all Guaranteeing Local Authorities. The proportion of any payments borne by a single Guaranteeing Local Authority is based on the annual rates revenue in its district or region.

 

Rates Charge

 

45.     All participating Local Authorities must provide a Rates Charge to secure their obligations under the Guarantee.

 

Benefits of being a Guaranteeing Local Authority

 

46.     Participating Local Authorities that are not Guaranteeing Local Authorities may only borrow up to $20,000,000 and pay a higher interest margin for their borrowing.

 

47.     Therefore, Guaranteeing Local Authorities have the benefit of not having this low limit on borrowing, and paying lower funding costs.

 

Additional equity commitment

 

48.     In addition to the equity contributions made in conjunction with borrowing, all Guaranteeing Local Authorities are required to commit to contributing equity if required under certain circumstances. It is expected that calls on any such commitments will be limited to situations in which there is a risk of imminent default by the LGFA.

 

49.     A call for additional equity contributions will only be made if calls on the uncalled Capital and on the Guarantee will not be sufficient to eliminate the risk of imminent default by the LGFA. Consequently, the factors that limit the risk in relation to the Cross Guarantee also apply here.

 

50.     All participating Local Authorities are required to provide a Rates Charge to secure their obligations to contribute additional equity.

 

Characteristics designed to make the LGFA Scheme fair for all Participating Local Authorities

 

51.     The principal risk involved with the LGFA Scheme is that Participating Local Authorities will default on their payment obligations. The greater this risk is, the less attractive participation in the LGFA Scheme is for all Participating Local Authorities.

 

52.     The Participating Local Authorities do not create this risk in equal amounts. There are some that carry a greater default risk than others, and therefore contribute disproportionately to the overall risk in the LGFA Scheme. Those local authorities are also the local authorities that would be likely to pay the highest interest margins if they borrowed outside the LGFA Scheme, and so potentially benefit the most from the LGFA Scheme.

 

53.     To avoid, or at least minimise, what is effectively cross subsidisation of the higher risk local authorities by the lower risk local authorities, different interest margins are paid by different local authorities when they borrow from the LGFA, with margins based on if a local authority has an external credit rating and what the actual external credit rating is. For example a “AA” rated local authority will pay a slightly lower interest margin than a “AA-“ rated local authority. An unrated local authority will pay a slightly higher margin than a rated local authority.

 

Summary of transactions a Local Authority will enter into if it joins the LGFA Scheme

 

54.     If a Local Authority joins the LGFA Scheme as a Guaranteeing Local Authority, it will:

 

a)      subscribe for Borrower Notes (refer to paragraphs 33 to 39);

 

b)      enter into the Guarantee (refer to paragraphs 40 to 47);

 

c)      commit to providing additional equity to the LGFA under certain circumstances (see paragraphs 48 to 50); and

 

d)      provide a Rates Charge to secure its obligations under the LGFA Scheme (see discussion in paragraphs 28 to 30, and 45).

 

PART C – LOCAL AUTHORITY COSTS AND BENEFITS

 

Benefits to local authorities that borrow through the LGFA Scheme

 

55.     It is anticipated that the LGFA will be able to borrow at a low enough rate for the LGFA Scheme to be attractive because of the three key advantages the LGFA will have over a local authority borrower described in paragraph 13. That is – exploiting a credit rating arbitrage, economies of scale and a regulatory arbitrage.

 

56.     In addition, the LGFA will provide local authorities with increase certainty of access to funding and terms and conditions (including the potential access to longer funding terms. LGFA currently offers borrowing terms out to 15 years.

 

57.     The potential savings for a local authority in terms of funding costs will depend on the difference between the funding cost to that local authority when it borrows from the LGFA and the funding cost to the local authority when it borrows from alternative sources. This difference will vary between local authorities.

 

58.     As at 23/04/2020 Napier City Council is expected to save approximately $7,900 per $1 million dollars borrowed by using LGFA (versus approved borrowing institution facilities).

 

59.     The funding costs each local authority pays when it borrows from the LGFA will be affected by the following factors, some of which are specific to the local authority:

 

e)      the borrowing margin of the LGFA;

 

f)       the operating costs of the LGFA;

 

g)      whether a local authority has an external credit rating

 

Costs to local authorities that borrow through the LGFA Scheme

 

60.     The costs to Participating Local Authorities as a result of their borrowing through the LGFA Scheme take two forms:

 

a)      First, there are some risks that they will have to assume to participate in the scheme, which create contingent liabilities (i.e. costs that will only materialise in certain circumstances).

 

b)      Secondly, there is a minor cost associated with the Borrower Notes.

 

Risks

 

61.     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.

 

62.     These risks are that:

 

a)      in the case of Guaranteeing Local Authorities, a call is made under the Guarantee (refer to paragraphs 42 to 44);

 

b)      in the case of Guaranteeing Local Authorities, a call is made for a contribution of additional equity to the LGFA (refer to paragraphs 48 to 50); and

 

c)      in the case of all Participating Local Authorities, the LGFA is not able to redeem their Borrower Notes (refer to paragraphs 35 to 39).

 

63.     Each of these risks is discussed in some detail in the paragraphs indicated next to the relevant risk. For the reasons set out in those discussions, it is anticipated that each of the risks is low.

 

Cost of Borrower Notes

 

64.     As discussed in paragraphs 33 to 39, all Participating Local Authorities are required to invest in Borrower Notes when they borrow from the LGFA. This carries a small cost, because the investment in Borrower Notes is funded by borrowing from the LGFA, and the cost of this funding will be slightly higher than the return paid on the Borrower Notes.

 

65.     As noted in paragraph 38, while it is the intention for the LGFA to always pay interest on the Borrower Notes, such payments are at the LGFA’s discretion so, in some situations, those payments may not be made.



[1] Bank rate of 1.7% is based on collated average for 12 month floating rate across several providers. LGFA rate of 0.91% is for 12 month borrowing yield for unrated councils as at 23/04/20). Comparison does not include bank commitment fee of up to $165,000 per annum.