Did Parliament intentionally Bankrupt Mangawhai?

This is the question now being asked by those in the know, and those of us wanting to get more in the know, as the judicial review triggered by Mangawhai Ratepayers gets closer to being heard in court. (On this, by the way, looks like a hearing has been obtained in the Whangarei High Court for August 16th 2013).

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:

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[Repealed]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.

 All looks pretty open and shut and draconian doesn't it. But things are never as they seem. It seems.

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, which

build on the existing accountability regime to which local

authorities are presently subject under the Local Government Act.

There is also an important balance in terms of the greater borrowing

flexibility proposed in new Part VIIB in clause 3. The predominant

objective is to require local authorities to identify explicitly the

reasons for their funding proposals. In turn, this will engender

public consultation, and will promote funding decisions that are more

clearly representative of the wishes and the values of local

communities. Funding decisions will be the responsibility of the

local authority, but the basis of those decisions will be

transparent..... 

New Part VIIB in clause 3, which deals with borrowing and

security, gives local authorities more flexible borrowing powers, and

access to a wider range of financial instruments than those currently

prescribed in the Local Authorities Loans Act. Reform of borrowing

powers was seen as the most urgent and most widely accepted element

of local government finance during the 1987-90 local government

reform exercise. The provisions in the Bill have been developed from

proposals initiated at that time, and have been subject to extensive

consultation with local authorities.

Section 122ZD in new Part VIIB prohibits local authorities from

borrowing in foreign currency, to protect ratepayers from the risks

involved in exchange rate fluctuations, and to protect the credit

reputation of the New Zealand Government in overseas markets, which

may not appreciate the distinction between national and local 

government in this country. This matter was very strongly contested

by local government, but that is the decision of the committee.

In view of the requirement for local authorities to adopt

comprehensive borrowing management policies, which will be published

in the annual plan---on which the public, of course, is able to make

submissions---the committee, in discussing the question of loan

polls, has unanimously agreed to omit the loan poll provisions from

the 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 the

Local Government Amendment Bill (No. 5) be now read a second time.

The debate on the policies and the objectives of this Bill is very

important. It is important to clarify the intentions and purposes of

the Government in this legislation. It is important for the local

authority members and officers who will have responsibility for

implementing it. It is of even greater importance for the residents,

ratepayers, and other stakeholders in the local government area for

whose benefit this legislation is being enacted.

   There are two components of this Bill: a new financial management

regime for local government and a new borrowing power to replace the

outdated Local Authorities Loans Act. I will first discuss the new

financial management provisions. Under this Bill local authorities

will be required to prepare a framework for financial management

strategies and policies to govern all financial decisions, not just

borrowing proposals. That framework will be subject to extensive

consultation requirements and will provide a clear basis upon which

specific expenditure, investment, rating, and borrowing proposals can

be understood.

   These new financial management provisions have a clear and simple

objective: enhanced transparency and accountability---enhanced

transparency and accountability in local authority financial

decisions. They are designed to provide greater flexibility and

autonomy to local authorities while, at the same time, ensuring that

the policies and priorities adopted by those councils reflect those

of 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 practice

in the local government sector. Long-term strategic planning is a

case in point. New section 122K will require each council to prepare

a long-term financial strategy covering a period of at least 10

years. The strategy must outline the proposed activities and

programmes of the local authority over this period, the reasons for

them, and how the financial requirements and consequences of them are

to be managed.

   The long-term financial strategies must go through the special

consultative procedures at least every 3 years. This will be a

significant opportunity for public participation in establishing

long-term plans and priorities for the local authority.

   The local authority will also be required to adopt an investment

policy and a borrowing management policy. These are more technical

financial management documents that will set the overall parameters

for managing financial assets and debt and should avoid the dangers

of short-term, ad hoc decisions.....

The public will be in a much better position to make submissions

supporting or opposing those proposals. Better focused submissions

should lead to decisions that more accurately reflect the values and

priorities of residents and ratepayers. That is what local government

is all about---meeting the needs, the wishes, and the interests of

local communities....

Another change made by the select committee is the removal from

the Bill of the loan poll provision. When I introduced the Bill I

invited submissions on this issue. I recognised on the one hand that

the concept of a loan poll was inconsistent with a modern and

flexible approach to borrowing, but I was also aware that many people

continued to feel it was an important check against irresponsible and

extravagant expenditure proposals by local authorities. After

considering submissions for and against, the select committee has

recommended---and I agree---the abolition of loan polls, and I, for

one, think that this was one of the great decisions taken by this

select 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 the

benefit of the Committee. Steve Maharey and Judith Tizard raised the

question of borrowing. Let me answer that question. First, the

abolition of loan polls was agreed upon by everyone. It was a thing

of the past and a growing anachronism. In due time local government

will not be hindered by that poll requirement, which has caused a

great deal of local government progress to be stymied.

   The reason that overseas borrowing is not supportable is that

local government has had no difficulties in raising major capital. I

am aware of some major capital projects in the near future, but I am

not aware that any territorial authority views its ability to raise

money in the manner of the past as being a problem in the future.

Territorial authorities---probably the smaller councils---could

potentially find themselves in some difficulty in terms of overseas

borrowing 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 would

not be an unreasonable expectation but it would be a totally wrong

expectation, 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 schedules

the following points. First of all, it is proposed to delete the

first schedule. That was recommended by the select committee. The

first schedule contains the detailed procedures for loan polls.

Labour members, Government members, and members of the other parties

were happy to see the abolition of loan polls on the basis that the

consultation and forward planning provisions for revenue raising and

borrowing, in particular, that are provided in this Bill provide a

fairer accountability and a level playing field in terms of revenue

raising for local government. So we are happy to suggest, and the

Government 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.