Mangawhai - Law is an Ass

Have you seen the recent TV ad run by labour provider Allied Work Force? Donkey knee deep in it and drowning, everyone to the rescue including a helicopter, and after the rescue the grateful owner says, “you really saved my ass…”

Not sure who’s coming to the rescue of Mangawhai Ratepayers though. They’re knee-deep in it, up to their necks in fact in Council debt, because of the mess that Kaipara District Council is in after building a very expensive local sewage system.

The local Mangawhai Ratepayers and Residents Association (MRRA) has been forced into legal action and have launched High Court Judicial Review proceedings against Kaipara District Council (KDC), which yesterday voted itself a budget of $500,000 to defend itself and hired the services of David Goddard QC.

The question is, will the law of the land come to anyone’s rescue here? This posting discusses various legal issues that arise in this fiasco.

The Mangawhai Ratepayers campaign was joined by hundreds of angry ratepayers this time last year, when Kaipara District Council issued a Draft Annual Plan proposing huge rate increases to pay its crippling debts.

Ratepayers reaction included a widely supported rate strike.

Central Government intervened, sacked the elected Councillors and Mayor, and appointed four Commissioners to run the Kaipara District Council from September last year. 

Commissioner Terms of Reference

Their terms of reference  require the commissioners to do many things including these:

• undertake actions to enforce the payment of 2012/13 rates and any unpaid rates from previous years;
• work with the Kaipara community and ratepayers and the Department of Internal Affairs to identify options for dealing with invalidly set rates and other legal compliance matters;
• identify the capacity of the Mangawhai Community Wastewater Scheme, whether it is fit for purpose, and the ideal funding model for the scheme for the future. This work is to have regard to the findings from the Auditor-General's Inquiry into the Mangawhai Community Wastewater Scheme

It would’ve been good for everybody to read the OAG’s inquiry. But it’s unfinished. And many consider that the Office’s audit arm – Audit New Zealand – which audited KDC’s plans and annual reports during the years KDC gradually went under – is part of the problem. That Government checks and balances looked the other way – rather than blowing the whistle and coming to the rescue in the public interest.

But I digress. How have the commissioners responded to their instructions from Government?

Well. They’ve certainly enforced the payment of rates. They’ve applied penalties on the unpaid rates of strikers and let it be known that properties cannot be sold while rates and penalties remain outstanding. Well that’s the law isn’t it. 

Validation Bill

Their recent action – a Validation Bill put before Parliament to fix previous Council decisions by making them legal  later - has also angered residents.

The Validation Bill has been useful because in it the Council admits to a host of illegal and unlawful actions in the past. Many of these relate to lack of consultation and non-compliance with the Local Government Act (LGA) in statements like these:

(78) It is desirable that the irregularities relating to the conduct of the special consultative procedure for the long-term plan 2012-2022 be validated;

(79) It is desirable that the irregularities relating to the late adoption of the annual report for the 2010/2011 financial year, and the late adoption of the long-term plan 2012-2022, be validated;

(80) It is desirable that the omissions in relation to the rates assessments for the 2006/2007, the 2007/2008, the 2008/2009, the 2009/2010, the 2010/2011, the 2011/12, and the 2012/2013 financial years be validated;

These statements are similar to the preamble found in Treaty of Waitangi grievance proceedings leading to settlement – Government admits to wrong-doings, apologises, and then agrees to specific settlement measures. Not so in the Commissioner’s Validation Bill. Lots of admissions of illegalities and irregularities, no apologies, and then a request for Parliament to rubber-stamp them all.

Thankfully the first draft of this Bill, a sort of one-stop-fix-all attempt by Commissioners, ran into official treacle and didn’t make it into Parliament. Officials would’ve been nervous about using this process – normally used for dotting the i’s and crossing the t’s left out by sloppy Councils – to restrospectively legalise a sequence of cynical Council decisions.

MRRA Statement of Claim

Another factor in thwarting the speedy path of the Commissioners’ Validation Bill into Parliament was the High Court legal action filed by MRRA, and served on KDC a few weeks ago. There is apparently a convention that Parliament will not deal with a matter that is before the courts. Though I’m not sure how real that convention is.

The Statement of Claim filed by MRRA seeks a Judicial Review of many KDC decisions and is divided into two parts. The first part challenges KDC decisions that led to the Mangawhai Sewage Scheme (MSS) being funded and developed. The second part challenges KDC decisions relating to Annual Plans, Long Term Plans, Rates and Penalties. Most of the KDC decisions whose legality is challenged in the second part of MRRA’s application, are the same as those itemised and admitted to by Commissioners in their draft Validation Bill.

Which is interesting in itself. The Commissioners appear to be hoist by their own petard. On the other hand, how might the Court view those matters? The Commissioners want Parliament to legitimise those past decisions. But MRRA wants a different sort of relief. For example, MRRA seeks the following from the High Court in its statement of claim:

50 (D) An order that all rates and penalties paid by ratepayers of the Kaipara district on the basis of rates invalidly set or assessed for the 1 July 2006 to 30 June 2013 are to be refunded.

The question arises - if the court was to make such an order on KDC, where would the money come from and who would pay it? The Council has no money (it has debts north of $80,000,000) and its sole source of income is its rating base. Presumably all of the rates and penalties monies referred to have been spent. Council would have to raise a loan to make that refund, and then rate its rating base to pay it back. Plus any interest that might have accrued on the new loan, plus any of the costs involved in identifying who deserved a refund, issuing the refunds, and arranging any loan.

Some might suggest to ratepayers supporting legal action: you are just suing yourself.

But how else are ratepayers to redress these accumulating grievances?

The first part of the Statement of Claim challenges the legality of KDC decisions relating to the funding and development of the Mangawhai Sewage System, including:

12.   On 24 August 2005 the respondent resolved to: (a) Accept an offer from EarthTech Consulting Ltd (EarthTech) to design, construct and operate EcoCare; (b) Accept an offer of a borrowing facility from ABN Amro New Zealand Ltd (ABN) to a maximum of $31,000,000 to fund the capital costs of development of EcoCare. 

13.    On 24 October 2005 the respondent resolved to confirm the direction of a draft statement of proposal for the purposes of s83(1)LGA for EcoCare.

14.    On 26 October 2005 the respondent executed a Project Deed agreement with EarthTech to design, construct and operate the EcoCare facilities….

15.    On 22 February 2006 the respondent resolved to adopt a statement of proposal for the purposes of s83(1)LGA for EcoCare and to notify if for consultation under that Act as part of the its proposed Long Term Council Plan 2006-2016…

16.    On a subsequent unknown date the respondent notified the statement of proposal for EcoCare and the LTCCP 06-16, in breach of section 84(3) and 97 LGA.

You don’t have to be rocket scientist to see the sequence of events here. KDC committed itself to particular actions, and then asked questions and consulted with its ratepayers later.

Later on in 2006 and 2007, KDC decided in secret to modify the Mangawhai Sewage Scheme by doubling its size. The Statement of Claim lists decisions made by KDC to change the contract terms with EarthTech, and extend the loan facility with ABN to $57,978,000.

As I understand it ratepayers were not informed about these changes until several years later – when they first got wind of enormous rate increases.

Here is where we get to the real meat of this posting. The MRRA Statement of Claim seeks a number of outcomes from this part of its Judicial Review, including:

A.   A declaration that the decisions to develop EcoCare by entering into the EcoCare Agreement, to adopt Modification 1 and to take on the EcoCare borrowings were illegal and invalid.

B.   An order setting aside the decisions to enter into the EcoCare Agreement, to adopt Modification 1 and to take on the EcoCare Borrowings.

C.   A declaration that ratepayers are not liable for any debts illegally and invalidly entered into by the respondent…

So. What’s the judge to make of all this? Mangawhai has an operating sewage system. It was designed, developed and according to the EarthTech agreement. It was paid for by the ABN loan which is the millstone around KDC’s neck, and which it is anxious to convert into a whole lot of millstones around ratepayers’ necks.

Council Draft Annual Plan 2013-2014

I’ll return to the Court action a few paragraphs down. But before that a little on KDC’s latest 2013-2014 Draft Annual Plan. This was notified for consultation several weeks ago and submissions closed on Friday 18^th April.

The biggest figure in the KDC Draft Annual Plan for 2013-2014 is the Ecocare debt of $57,978,000. The Council Draft Plan is that the debt should be paid for, as follows:

• $13.4 million by those existing Mangawhai households that have not paid the full connection fee already,
• $18.4 million by the whole of the Kaipara District, and
• $26.2 million by development levies from future Mangawhai property developments over the next 30 years.

In addition the Council plan is to charge existing Mangawhai ratepayers interest due on all loans taken by Council – including those whose lawfulness is being challenged in MRRA’s High Court action. 

The growth assumptions for Mangawhai are set out in the Draft Plan. These predict that in each year from 2012/2013 to 2015/2016 there will be about 34 new properties each year (1.6% growth rate), and that the capital contribution paid from each of these will be $17,590.  Then in the years 2016/2017 to 2021/2022 the growth rate will increase to an average of about 59 new properties each year (2.5% growth rate).

Both Deloittes (the new KDC auditors) and Council admit that if these growth projections are wrong (over-estimates) then Council’s ability to reduce debt will be impacted. I have questioned KDC what the growth rates have actually been over the past two years and for an audited account of the development contribution capital payments that have actually been made, and how those payments have actually been applied to reducing Ecocare debt over that period. Anecdotal evidence indicates KDC's growth estimates are unreasonably optimistic.

MRRA has circulated a submission form for use by ratepayers. Council has received a few hundred submissions. MRRA’s main concerns with the Draft Annual Plan are:

• existing Mangawhai ratepayers should NOT be paying ANY of the debt or interest on the additional debt for doubling the size of the EcoCare scheme.
• the Draft Plan growth projections for Mangawhai are unrealistic, and it is not responsible to rely on property development to pay off $26.2 million in debt
• MRRA does not have confidence that this Draft Plan will fix the financial mess that Mangawhai is in.
 

The Court Action

Getting back to the Court Action, and how to handle the enormous and unaffordable debt that the community is now saddled with. MRRA’s Statement of Claim challenges the validity of the borrowing taken out with ABN Amro Bank – on the basis that KDC didn’t follow the Local Government Act when arranging the loans.

Many of us are only now realizing that a cunning little provision went into the Local Government Act when it was made law ten years ago. It talks about “Protected Transactions”. These include borrowings from a bank. What the law says is this:

LGA 117.   Every protected transaction entered into by a local authority is valid and enforceable despite the local authority failing to comply with any provision of this Act in any respect;

No if’s but’s or maybe’s in this provision. Pretty much a get-out-of-jail-free card for any bank keen to loan money to a Council. I understand that banks wanted to get this provision into local government law because they didn’t want their loans at risk of being challenged when ratepayers got grumpy, and found that i’s and t’s had not been dotted giving them a technical excuse to challenge council borrowing in the High Court. 

The thing is that not even a moral outrage excuse – like what has happened at Mangawhai – appears to affect or trouble the banks.

It is unavoidable for ratepayers to take legal action against Kaipara District Council, just as it is unavoidable for Kaipara District Council to defend itself against that action. You only have to read the Commissioner Terms of Reference and the Local Government Act to understand that.

But what can that action actually achieve?

This mess has happened in part because a bank took on a loan that could never be repaid, without having to worry about any comeback due to process illegalities. Council was never able to meet any “going concern” tests. But no due diligence required on the part of the bank. We’ve got our get-out-of-jail-free card. Our loan is safe as houses. 

And it also happened because, despite numerous warnings from ratepayers, neither the Office of the Auditor General, nor its contracted-for-council-audit-services Audit Office gave the matter any more than a gentle look over. Didn’t take it seriously. 

The Law is an Ass 

The law that is the ass here, is the local government law that allows banks to sell loans to badly informed councils whose ratepayers appear to have no redress, and the light handed regulatory law that appears to allow government entities like the Office of the Auditor General and its agents to wash their hands of the consequences of their failures to protect the public interest.

Central Government needs to step up.

An earthquake has been allowed to happen in Mangawhai.

And the law, the enforcers of the law, and those who regulate and audit compliance with the law, permitted it to happen. 

(Joel Cayford is a member of the MRRA Executive Committee. These views are his own.)