Lender tender for Vic councils superannuation funding gap

By Paul Hemsley

Going to the bank for a loan doesn’t ordinarily require the extra screening of a tender process, but the Municipal Association of Victoria (MAV) is doing just that to get financial help to fund a Defined Benefit Plan that is troubling councils which urgently need to top-up their employees’ superannuation shortfall.

MAV President Bill McArthur has confirmed that the local government peak body has been assembling a scheme on behalf of its member councils to tender for a bank that will lend the amount that will cover the shortfall that councils have to pay.

The nagging debt has crept over from the Defined Benefit Plan for council employees that operated compulsorily from 1982 but was closed to new members in 1993.

The funding liability is a big problem for Victorian councils because if they can’t find a way to pay for the combined total $396.9 million by 1st July, 2013, they face being charged with a 7.5 per cent interest rate and will have to pay the owing amounts over time – a scenario that makes it more palatable to borrow funds at lower interest rates rather than cutting services.

It has been reported that potential borrowings of around $280 which could be later converted into a bond by councils is one option on the table.

The MAV’s Defined Benefit Superannuation Taskforce recommended in December 2012 that the MAV should consider the funding options of borrowing, reducing  operational or capital expenditure and redirect this towards payment of the shortfall, accessing cash holdings or creating a payment plan through industry fund Vision Super.

Reducing council costs is an unpopular and unlikely option for many councils to choose in isolation of other options because of the the risk of exacerbating infrastructure backlogs and other far-reaching consequences.

Instead, MAV has taken the Taskforce’s first recommendation of borrowing the money to cover for the shortfall in a decision that was influenced by the state government’s refusal to give councils access to loans below commercial rates through Treasury Corporation Victoria (TCV).

Mr McArthur said the state government will not allow it because it will affect their AAA credit rating if they take on the risk of local government and the overall debt because councils would have to guarantee the debt.

“This is ground breaking stuff because a lot of other states have got access to their treasury borrowing rate whereas in Victoria, the state government won’t entertain that,” Mr McArthur said.

According to Mr McArthur, the MAV has gone to a tender process to get the bank loan because it ensures a competitive process and “all the cards are on the table”.

“It’s not just one provider that you may go to and ask them, they might not give you the best deal if there’s no competition,” he said.

He said if the MAV can put together a package of borrowings for local government in Victoria, smaller councils will benefit particularly because there could be one-and-a-half to two-and-a-half basis points on borrowing rates.

He said local government is a solid sector so the risk is not that great and MAV will be able to work out a risk level for each and every council.

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