Imagine a gold‐plated Rolls Royce for one million dollars. NZTA offers to give you $500,000 towards buying it, because it has a five‐star safety rating and your current car only has four stars.
That sounds like a fantastic deal, a free $500,000! Of course, you still have to pay the other half. And there is a catch. You can never sell the Rolls and you have to pay the insurance plus maintenance each year, which is $50,000. Is it really a good deal?
Your four‐star car is adequate. Or you can buy a five‐star Toyota for $40,000 as a one‐off cost, with insurance and maintenance at just $5,000 per year. It’s not a Rolls, but it still does the job and it is a whole lot cheaper.
The Rolls deal doesn’t sound so good: in fact it is going to cost you money in the long run, but how can you throw away a free $500,000? All you need to do is come up with the other half. Unfortunately, you don’t have a spare $500,000. You are at your credit limit* and your family business has been losing money for the last 20 years*. If you were a company director, you would have been jailed for trading while insolvent.
Every year, you borrow more money to pay the interest on your current debt*. You have also done future budgets and you cannot repay any debt for the next three years*. Assuming there are no problems, maybe sometime after that you might be able to start repayments. Of course, history tells us there are always problems!
You go to your bank and claim NZTA’s $500,000 as annual income, not a gift. Your bank is special, so doesn’t have to consider your annual expenses or ability to repay debt and doesn’t care what you spend it on, partly because you are a shareholder in the bank. You have a deal with this special bank that it will lend you $2.80 for every one dollar of income*.
Using the NZTA offer to buy the Rolls that you don’t actually need will give you access to a whopping $1.4m. You can use $500,000 to complete the deal and still have an extra $900,000 to spend on whatever you want.
It is a fantastic deal, in the sense that it is a fantasy that no bank would ever consider. Yet the Local Government Funding Agency (LGFA) is the special bank and this is exactly what it does. It is a fantastic deal – as long as you have no intention of ever repaying the debt*. You have a secret contract with the bank that your customers guarantee the debt.
You may not believe this is real, but if you are a council and you change the Rolls Royce to cycleway, speed bump, bus stop or bike shed, this is exactly how NZTA and councils work. The secret contract is the Local Government (Rating) Act and your customers are ratepayers. Now change the one million dollar cost to one billion dollars across all councils, every year, and you may start to think there is a significant problem with the current system.
*Actual figures for Hamilton City Council. HCC’s long‐term plan shows debt increasing every year.
Side note: If NZTA paid contractors directly as part of a joint contract with the council, rather than paying them indirectly through the council, then councils could not claim the subsidy as income and none of this would occur. You may wonder if they are deliberately gaming the LGFA to push projects that councils don’t actually need and the public doesn’t want.
