February 2021 - Local Government Funding Agency
Should Council join the Local Government Funding Agency?
Southland District Council is proposing to join the Local Government Funding Agency (LGFA). The LGFA offers local authorities lower interest rates for borrowing than are otherwise available.
With Council needing to borrow externally, this would mean Council could access lower interest rates and save costs; however there is a level of risk.
There are different ways Council can join the LGFA and it is proposing it joins as a guaranteeing local authority. This would mean Council would agree to guarantee the financial obligations of the LGFA and pay 0.1% to 0.3% less in interest than standard LGFA rates.
Overall, Council would save an estimated 1% in interest charges, or $10,000 per $1million of borrowing. The 2018-2028 Long Term Plan indicated Council would need to borrow approximately $16million externally. Joining the LGFA would enable Council to save $160,000 in interest costs.
Council is potentially looking to move existing internal loans to external loans, so borrowing - and savings in interest - could be higher. This sits outside of the decision on whether to join the LGFA or not, and more information can be found in the Statement of Proposal.
However, if a call was made on Council and the LGFA was to default, Council could be asked to contribute 0.73% of its borrowing in cash to the LGFA ($116,800 based on $16million of borrowing) and its borrowing notes (1.6% of the total amount borrowed) could be converted into shares in the LGFA.
Options
There are four options available to Council.
Option 1. Join the LGFA as a guaranteeing local authority:
Council would agree to guarantee the financial obligations of the LGFA. Council would pay 0.1% to 0.3% less than standard LGFA rates.
Option 2. Join the LGFA as a non-guaranteeing local authority:
Council would not guarantee the financial obligations of the LGFA. It would pay standard LGFA rates and could only borrow up to $20million.
Option 3. Join the LGFA as a principal shareholding local authority:
(Only possible if another PSLA wishes to sell some shares to Council). Council would become a shareholder in the LGFA and be part of its decision making. Council would need to invest additional capital to purchase shares and recognise an element of uncalled capital. There would be a return on investment, unless the LGFA was in financial difficulty. Council would also become a guaranteeing local authority.
Option 4: Do not join the LGFA:
Council would not be involved with the LGFA. It would pay higher interest rates than councils within the LGFA.
Find out more
Statement of Proposal and supporting information
Local Government Funding Agency website
Consultation
Consultation has now closed.
Submissions will be presented to Council for it to consider in a public meeting.