This posting explores the intentions of Parliament when it passed into law changes to the Local Government Act in 1996 which are being relied on today, by the banks, and by councils, when councils borrow money. The key piece of legislation is the wonderfully numbered Section 122ZG:
All looks pretty open and shut and draconian doesn't it. But things are never as they seem. It seems.
122ZG Effects of breach on third parties[Repealed](1) In this section, protected transaction means—
- (a) Any deed, agreement, right or obligation constituting, relating to, or for the purpose of, any borrowing or incidental arrangement; and
- (b) Includes—
- (i) Any charge, guarantee, or security for the payment of any amount (including any loan) payable in relation to or for the purpose of any borrowing or incidental arrangement; and
- (ii) Any conveyance or transfer of any property, in relation to, or for the purpose of, any borrowing or incidental arrangement.(2) Every protected transaction entered into or purportedly entered into by or on behalf of a local authority shall be valid and enforceable despite—
- (a) The local authority failing to comply with any provision of this Act in any respect; or
- (b) The protected transaction, or the entry into or performance of the protected transaction, being contrary to any provision of this Act; or
- (c) The entry into or performance of the protected transaction being outside the capacity, rights, or powers of the local authority, or being for a purpose not authorised by this Act or any other Act; or
- (d) A person held out by the local authority as being a member, employee, agent, or attorney of the local authority—
- (i) Not having been validly appointed as such; or
- (ii) Not having the authority to exercise any power or to do anything either which the person is held out as having or which a person appointed to such a position would customarily have; or
- (e) A document issued, or purporting to be issued, on behalf of the local authority by a person with actual or customary authority, or held out as having such authority, to issue the document, not being valid or not being genuine.(3) A certificate signed, or purporting to be signed, by the principal administrative officer of the local authority to the effect that the local authority has complied with this Act in connection with a protected transaction shall be conclusive proof for all purposes that the local authority has so complied.(4) Subsections (2) and (3) of this section shall apply even though a person of the kind referred to in paragraph (d) or paragraph (e) of subsection (2) of this section or in subsection (3) of this section acts fraudulently or forges a document that appears to have been signed on behalf of the local authority, unless the person dealing with the local authority or a person who had acquired property, rights, or interests from the local authority acts in bad faith.
Section 122ZG was part of a large set of changes that were made to the 1974 Local Government Act by Parliament between 1996 and 1998. These changes were all collectively called Part 7B. This new part of the Local Government Act came into force on the 1st day of July 1998. Part 7B (which comprised sections 122Y to 122ZT) was inserted, as from 1 July 1998, by section 3 Local Government Amendment Act (No 3) 1996 (1996 No 83).
That might all sound a bit boring, and it is, but what's interesting is what various MPs (Cabinet Ministers and other Government Ministers) told Parliament as these changes worked their way through Parliament. (This is important because the Section 122ZG provisions were retained in the Local Government Act 2002 - which applied to Kaipara District Council when it did what it did to Mangawhai.)
Hansard - Stage: REPORT OF SELECT COMMITTEE - 19 DEC 1995
LOCAL GOVERNMENT AMENDMENT BILL (No. 5) : Report of Internal Affairs and Local Government Committee
Main speaker - Hon. GRAEME LEE
This Bill is about the new financial management provisions, whichbuild on the existing accountability regime to which localauthorities are presently subject under the Local Government Act.There is also an important balance in terms of the greater borrowingflexibility proposed in new Part VIIB in clause 3. The predominantobjective is to require local authorities to identify explicitly thereasons for their funding proposals. In turn, this will engenderpublic consultation, and will promote funding decisions that are moreclearly representative of the wishes and the values of localcommunities. Funding decisions will be the responsibility of thelocal authority, but the basis of those decisions will betransparent.....
New Part VIIB in clause 3, which deals with borrowing andsecurity, gives local authorities more flexible borrowing powers, andaccess to a wider range of financial instruments than those currentlyprescribed in the Local Authorities Loans Act. Reform of borrowingpowers was seen as the most urgent and most widely accepted elementof local government finance during the 1987-90 local governmentreform exercise. The provisions in the Bill have been developed fromproposals initiated at that time, and have been subject to extensiveconsultation with local authorities.Section 122ZD in new Part VIIB prohibits local authorities fromborrowing in foreign currency, to protect ratepayers from the risksinvolved in exchange rate fluctuations, and to protect the creditreputation of the New Zealand Government in overseas markets, whichmay not appreciate the distinction between national and localgovernment in this country. This matter was very strongly contestedby local government, but that is the decision of the committee.
In view of the requirement for local authorities to adoptcomprehensive borrowing management policies, which will be publishedin the annual plan---on which the public, of course, is able to makesubmissions---the committee, in discussing the question of loanpolls, has unanimously agreed to omit the loan poll provisions fromthe Bill. This will be well received by local government.
You will see here mention of the idea of a loan poll. This was intended to be a bit like what they have in US local government. If a council wants to borrow money for a project or activity, it has to go to the public with a poll or bond issue poll, where ratepayaers vote yes or no to the project and the loan. You will see that the Minister told Parliament that - in view of the requirement that borrowing policies be published in the annual plan - there was no need for a loan poll.....
And later, when Parliament further considered the matter, we see what the then Minister of Local Government (John Banks) told Parliament....
Hansard - Stage: SECOND READING - 27 MAR 1996
LOCAL GOVERNMENT AMENDMENT BILL (No. 5) : Second Reading
Main speaker - Hon. JOHN BANKS
Hon. JOHN BANKS (Minister of Local Government): I move, That theLocal Government Amendment Bill (No. 5) be now read a second time.The debate on the policies and the objectives of this Bill is veryimportant. It is important to clarify the intentions and purposes ofthe Government in this legislation. It is important for the localauthority members and officers who will have responsibility forimplementing it. It is of even greater importance for the residents,ratepayers, and other stakeholders in the local government area forwhose benefit this legislation is being enacted.There are two components of this Bill: a new financial managementregime for local government and a new borrowing power to replace theoutdated Local Authorities Loans Act. I will first discuss the newfinancial management provisions. Under this Bill local authoritieswill be required to prepare a framework for financial managementstrategies and policies to govern all financial decisions, not justborrowing proposals. That framework will be subject to extensiveconsultation requirements and will provide a clear basis upon whichspecific expenditure, investment, rating, and borrowing proposals canbe understood.These new financial management provisions have a clear and simpleobjective: enhanced transparency and accountability---enhancedtransparency and accountability in local authority financialdecisions. They are designed to provide greater flexibility andautonomy to local authorities while, at the same time, ensuring thatthe policies and priorities adopted by those councils reflect thoseof the community they serve.
While these concepts are new to local government legislation,there is nothing in them that is not based on existing best practicein the local government sector. Long-term strategic planning is acase in point. New section 122K will require each council to preparea long-term financial strategy covering a period of at least 10years. The strategy must outline the proposed activities andprogrammes of the local authority over this period, the reasons forthem, and how the financial requirements and consequences of them areto be managed.The long-term financial strategies must go through the specialconsultative procedures at least every 3 years. This will be asignificant opportunity for public participation in establishinglong-term plans and priorities for the local authority.The local authority will also be required to adopt an investmentpolicy and a borrowing management policy. These are more technicalfinancial management documents that will set the overall parametersfor managing financial assets and debt and should avoid the dangersof short-term, ad hoc decisions.....
The public will be in a much better position to make submissionssupporting or opposing those proposals. Better focused submissionsshould lead to decisions that more accurately reflect the values andpriorities of residents and ratepayers. That is what local governmentis all about---meeting the needs, the wishes, and the interests oflocal communities....
Another change made by the select committee is the removal fromthe Bill of the loan poll provision. When I introduced the Bill Iinvited submissions on this issue. I recognised on the one hand thatthe concept of a loan poll was inconsistent with a modern andflexible approach to borrowing, but I was also aware that many peoplecontinued to feel it was an important check against irresponsible andextravagant expenditure proposals by local authorities. Afterconsidering submissions for and against, the select committee hasrecommended---and I agree---the abolition of loan polls, and I, forone, think that this was one of the great decisions taken by thisselect committee of Parliament....
And for the avoidance of doubt about Parliament's intent about the relationship between consultation and borrowing I include a couple more bits of Hansard....
Hansard - Stage: IN COMMITTEE - 18 JUL 1996
LOCAL GOVERNMENT AMENDMENT BILL (No. 5) : In Committee
Main speaker - Hon. GRAEME LEE
.....But an issue is unanswered, and I want to answer it for thebenefit of the Committee. Steve Maharey and Judith Tizard raised thequestion of borrowing. Let me answer that question. First, theabolition of loan polls was agreed upon by everyone. It was a thingof the past and a growing anachronism. In due time local governmentwill not be hindered by that poll requirement, which has caused agreat deal of local government progress to be stymied.The reason that overseas borrowing is not supportable is thatlocal government has had no difficulties in raising major capital. Iam aware of some major capital projects in the near future, but I amnot aware that any territorial authority views its ability to raisemoney in the manner of the past as being a problem in the future.Territorial authorities---probably the smaller councils---couldpotentially find themselves in some difficulty in terms of overseasborrowing mechanisms, and that would be unfortunate and unnecessary.Overseas lenders who were dealing with local government, in turn,might expect central government to backstop these issues. It wouldnot be an unreasonable expectation but it would be a totally wrongexpectation, and it could lead to complications that we do not need.
Hansard - Stage: IN COMMITTEE - 18 JUL 1996
LOCAL GOVERNMENT AMENDMENT BILL (No. 5) : In Committee
Main speaker - RICHARD NORTHEY
RICHARD NORTHEY (Onehunga): We note in the particular schedulesthe following points. First of all, it is proposed to delete thefirst schedule. That was recommended by the select committee. Thefirst schedule contains the detailed procedures for loan polls.Labour members, Government members, and members of the other partieswere happy to see the abolition of loan polls on the basis that theconsultation and forward planning provisions for revenue raising andborrowing, in particular, that are provided in this Bill provide afairer accountability and a level playing field in terms of revenueraising for local government. So we are happy to suggest, and theGovernment readily agreed to, the deletion of the first schedule,which enables loan polls to occur.
So there you have it. In black and white - and yellow highlighting.
Parliament intended for bank borrowings to be protected transactions all right - but ONLY after the public consultation had occurred.
There has been no change in Parliament's intent from when these laws were passed, and when they were in place during the time of Kaipara District Council's appalling track-record of decisions. The problem was - and is - that the Audit Office did not do the simple and decent thing and CHECK that the Council had indeed consulted before going ahead and doing the borrowings.
Between the years 2005 and 2007 KDC made decisions and borrowed money. Because ratepayers were not consulted no-one knew how big these loans were. In fact between the years 2007 and 2011 the KDC issued no rate demands relating to the loans. It appears that any interest that was owed, was paid, capitalised, and simply added back to the loans which did not appear on Council accounts, but would have been visible to the Audit Office had it done its job. The loans finally went public in 2012. KDC proposed a Long Term Plan (2012-2022) with huge rate increases to make loan payments. This resulted in widespread protest action and to Government intervention last year - when commissioners were appointed (to fix up the mess).....
Government failed Mangawhai - not Parliament.
Man oh man.