A new funding agency which could save the District Council up to $500,000 a year in interest costs on its borrowing is almost ready to to go.
So far 19 local authorities have signed up to become principal shareholders in the Local Government Funding Agency (LGFA) and together they account for about 73% of the country’s local government sector debt.
Being a member of the LGFA will allow Council to borrow money at a lower rate than is currently available. If our future debt is, say, $150m over the next 10 years (currently it’s around $135m) and 80% of that was funded through the LGFA at an interest rate 0.3% lower than what we would normally pay then Council would save around $360,000 a year.
A credit rating due in the next few months could also lead to the availability of lower rates and if that achieved just an overall 0.4% saving on interest rates it would save the council $500,000 a year.
Joining the scheme will require Council to buy a shareholding in the LGFA for $1m, but we will be receiving interest on that as well as qualifying for the lower cost borrowing.
A couple of possible downsides have been identified with the main one being the consequences of a local authority member being unable top meet its debt repayments.
The chances of a default however are rated as very low because of the local authortity’s (usually unpopular) right to raise rate levels to cover any shortfalls.
One of the welcome effects of being a LGFA member is the requirement to be credit rated.
The LGFA itself is expected to be rated equivalent to the Crown while the District Council’s rating may settle a few arguments about just how wise and effective our borrowing and spending decisions really are.
That credit assessment will be conducted by an independent agency, is due in the next month and will provide an independent critique of how Whangarei District Council is performing financially and what its financial outlook is - same, worse or improving.
Overall belonging to the LGFA should be good for the District Council and the required credit rating, provided it is regularly updated, will provide an honest and accurate assessment of how we are doing and where we are going.