Council borrowing fees hiked 600 per cent

Perth councils are demanding the State Government justify a 600 per cent hike in borrowing charges on local government loans at a time when interest rates are at historic lows and falling.

WA Local Government Association president Troy Pickard has written to Treasurer Mike Nahan seeking an explanation for an “unexpected and substantial increase” in the fee charged on council loans by the WA Treasury Corporation, which is expected to net the Government an extra $4.3 million in 2015-16.

Mr Pickard warned the extra costs could be passed onto ratepayers.

Many councils learned of the hike through an email from the WATC, which said the decision to increase the loan guarantee fee from 0.1 per cent to 0.7 per cent from July 1 came from the Treasurer.

In a letter to Mr Nahan, a copy of which was obtained by The West Australian, Mr Pickard said the decision was “contradictory” to the Reserve Bank’s interest rate cuts, which were aimed at reducing the cost of finance as a means of stimulating the economy.

“WALGA is currently sourcing detailed information from each local government regarding the specific budgetary impacts of this initiative but early estimates indicate a sector-wide cost in excess of $4m will be incurred, which is leading us to consider alternative financing mechanisms for local governments outside of what might be available through the WATC,” Mr Pickard wrote.

“It would greatly assist local governments in understanding the State Government’s actions if you could provide an explanation of why the fee has been increased, how the revenue generated by the increase will be applied and how this policy compliments other State and Federal policy settings.”

The fee works as a guarantee similar to mortgage insurance for homebuyers.

Mr Pickard said local governments were given no warning of the increase. Because many councils are in the middle of preparing their budgets he said they would likely have to lift rates to cover the additional charges.

He said the sector would consider alternative financing sources.

Mr Nahan said the fee had been increased to reflect the same rate charged to other entities, such as government trading enterprises.

“This will help ensure the benefit of the State Government’s guarantee is more appropriately reflected in the costs of borrowing,” he said.

“A 0.7 per cent rate was determined as it adequately compensated the State for guaranteeing borrowings held with the WATC, while also exposing entities that borrow from WATC to some of the risk related cost of debt they would face if they were to borrow funds at the market interest rates.

“Local governments are not restricted to borrowing from the WATC and are free to seek alternative borrowing arrangements. WATC borrowing costs… still remain one of the most highly competitive finance options for local governments."