ZORAN RAKOVIC: Sovereignty for Sale: How Councils Made You a Guarantor Without You Even Knowing

Your council is quietly guaranteeing other councils' debts. Discover how local governments are gambling with your rates—and your sovereignty.

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Opinion: If you wanted to invent a financial arrangement capable of mimicking the perils of subprime mortgages, municipal corruption, and Soviet-style mutual collapse—all in one—New Zealand has quietly succeeded. It’s called the Local Government Funding Agency (LGFA). Never heard of it? That’s precisely the point.

Like all good financial illusions, the LGFA begins with a story that makes sense: councils need to borrow to build roads, pipes, libraries. Individually, their credit ratings are middling, their economies of scale too small. Band together, pool your borrowing, and voilà—you get cheaper access to capital. What could go wrong?

The devil is not in the technicalities. The devil is the structure. The LGFA allows local councils to borrow collectively, but with a poison pill disguised as solidarity: if one council defaults, the others pay. This is not a metaphor. It is legal obligation. A joint and several guarantee binds participating councils into a financial suicide pact. One council stumbles, all fall.

This is not some vague cooperative gesture. The law enshrines it. Every council that joins the LGFA and borrows over a modest threshold is required to act as guarantor for all the debt the agency issues. Every dollar borrowed by another council becomes a potential claim on your community’s future. Ratepayers in one region, without consent or knowledge, are underwriting the liabilities of elected officials hundreds of kilometres away—officials they did not elect, cannot remove, and do not monitor.

There is a term for this: tail risk without skin in the game.

The LGFA is a creature of Parliament, yes, but it is the creation of financial engineers inside Wellington and local government bureaucracies who would rather optimize spreadsheets than reflect on ethics or political philosophy. What they have produced is a kind of municipal derivative—an obligation where the risk is neither visible nor owned, and where gains are privatized to councils that overborrow and spend extravagantly, while the costs, in the event of failure, are socialized across the entire system.

The deeper problem is not in the instruments themselves but in what they do to local sovereignty. Councils were designed to be independent, localist institutions. They exist to serve their communities. The Local Government Act 2002 makes this explicit: every council must act in the best interests of its own citizens and manage finances prudently. But the LGFA compels councils to dilute that responsibility. By becoming financial backers of one another’s debts, they have blurred the boundary between democratic obligation and bureaucratic cartelism. They have exchanged sovereignty for convenience.

Consider what happens when a council defaults—not just delays, but truly fails to meet its repayment obligations. Under the joint guarantee, the LGFA does not first ask Treasury, or the defaulting council, or the market to solve it. It turns to the other councils. The creditors have legal right to demand payment from anyone in the pool, and in full. Your district—small, frugal, conservative—can be held liable for the folly of a city that spent like a Roman emperor, on vanity stadiums, land speculation, or untested climate adaptation experiments.

This is the most dangerous kind of fragility: an illusion of resilience based on a misunderstood interdependence. The councils believe they are safer because they are together. But this is not diversification. It is concentration. It is not cooperation. It is entrapment. The LGFA has created a network where the weakest member determines the liability of the strongest. It is like tying the fates of marathon runners to those of toddlers on tricycles and calling it teamwork.

Nowhere in the enabling legislation is there a mandate that requires public approval for these guarantees. Councils may consult on long-term plans, but they rarely spell out the magnitude of the risk. They talk about savings in interest rates—basis points shaved here or there—while omitting the unquantified exposure to tail events. Even less do they discuss how enforcement of the guarantee would work. Would rates double? Would services be cut? Would assets be sold? The public is lulled into thinking these questions are academic.

They are not.

No default has happened yet. But as with all latent fragilities, the absence of catastrophe is not proof of safety. It is merely the buildup of untested pressure. A recession, a natural disaster, or a political miscalculation in a single council could trigger a cascade. The guarantee only functions because it hasn’t been called. If it is ever activated, the illusion will shatter.

The moral hazard is enormous. A reckless council knows it is protected by the others. This is no different from the pre-2008 housing market in the USA, when mortgage originators knew they could pass on their risk to securitization pools. In that case, Wall Street packaged garbage loans into AAA-rated tranches. Here, the LGFA packages mediocre councils into a façade of collective strength. The bond ratings are high. So were Lehman’s—until they weren’t.

This is not to say every council is reckless. Most are probably cautious. But the structure invites abuse. It incentivizes councils to load debt for long-term projects that may never pay off. It creates opacity, because the agency itself is a company, not subject to New Zealand’s Official Information Act. It fosters moral hazard, because there is no meaningful discipline on a council that exploits the joint guarantee but has no internal capacity to repay. And worst of all, it does this under the guise of financial innovation.

Ask yourself: if a councillor’s duty is to their constituents, how can they in good conscience vote to guarantee someone else’s debt? How can they allow their rates base—comprising thousands of working people—to be used as a financial backstop for decisions made in chambers they have never seen?

The answer is: they do it because they do not understand the structure, or they do not wish to explain it. It is politically convenient to have access to cheaper debt without acknowledging the cost of risk. It is easier to promise parks and swimming pools than to warn about contingent liabilities. The path of least resistance is paved in deferred exposure.

Some argue that this is manageable because of covenants, capital buffers, and government oversight. But the problem with systemic risk is not management—it is mismeasurement. The true exposure cannot be measured in spreadsheets. It must be understood in terms of asymmetric incentives and the sociology of decision-making under uncertainty. When everyone benefits from more borrowing, but no one owns the risk of loss, the system is doomed to fragility.

If you are a ratepayer, understand this: you are not just funding your own council’s activities. You are now silently underwriting a national credit scheme. You are a reinsurer without a premium, a bondholder without voting rights, a participant in a financial network that you did not design and cannot exit. Your council can unilaterally commit you to this structure, and there is no referendum, no veto, no clause that exempts you from the consequences if another council fails.

This is not democracy. It is financial serfdom by contract.

The justification for all of this is that the LGFA has worked so far. That interest rates are low. That councils are stable. That nothing has gone wrong. This is the same argument used by engineers before every bridge collapse. It stood yesterday. It stands today. It must be strong. But strength is not absence of failure. The strength is tested under stress. And LGFA, as a structure, has never been tested in stress. No major default. No cascade. No political litigation over who pays.

Yet.

Sovereignty, in its true sense, means responsibility aligned with authority. Councils have both the power and the duty to govern in the interest of their local ratepayers. The LGFA undermines this by shifting consequences beyond those boundaries. It creates a meta-council of obligations, enforced not by vote or representation, but by legal deed. It turns elected officials into participants in a game whose rules they did not write and cannot revise.

What should be done?

Exit the joint guarantee. End the legal structure that binds councils together in this Faustian bargain with the devil. Let each council stand on its own credit, or at most, guarantee only its pro-rata share of LGFA obligations. Introduce mandatory transparency. Subject the LGFA to the Official Information Act. Require councillors to declare LGFA-related conflicts of interest. Reassert the foundational principle: no community should be held liable for another without direct consent and reciprocal benefit.

Because when the music stops and everyone runs for a chair, it will not be the bureaucrats who pay. It will be the ratepayer, the pensioner, the shopkeeper, the renter—the one who never read the LGFA’s Statement of Intent, who never voted on the guarantee, who never signed a loan document, but whose name is on the cheque all the same.

In ancient times, rulers who built bridges had to sleep beneath them the night before they opened. Today’s councillors guarantee bridges built elsewhere, with funds they don’t control, to carry people they don’t represent—and no one sleeps under anything but the illusion of safety.

Remove the illusion. Bring back skin in the game.

Zoran Rakovic is a structural engineer with nearly 30 years of experience, who has helped design and strengthen buildings across New Zealand. He is also standing as an ACT candidate in the Selwyn District local government elections later this year. His substack is HERE.