LOCAL BODY LOANS.

Auckland Star, Volume LXIV, Issue 113, 16 May 1933, Page 6

LOCAL BODY LOANS.

Since the conversion of the State's internal debt, the Government has been awaiting a move by local bodies to reduce their interest charges, and an important reminder is now given by the Loans Board that the time is ripe for action. It is not sufficient for local bodies to rest on the benefits of the 20 per cent reduction made recently by law in thenloan liability, for that provision was intended only to meet the needs of the moment. The basis of the Government's scheme was a 4 per cent rate of interest, and to reach this lower level.it was necessary that the yield on local body' securities should be reduced at the same time. To-day there are more than 400 local body securities, of varying rates and without any uniformity of conditions, thus bewildering the average investor. Conversion under the guidance of the Loans Board would make it possible to substitute for the network of variable rates a general level of 4.1 per cent, even in the case of the high-rated issues, for the law provides for repayment of part of the loan to offset the effect of any reduction which would exceed 20 per cent. To local bodies the advantages of simplicity attained in this way are obvious. Not only would their securities become more easily'saleable and, therefore, more acceptable to the public, but also the work of accounting; would be simpler. There is, too, the still more important benefit of extending the maturity dates on loans which have not long to run, and of easing the burden of sinking fund charges. As the Loans Board points out, the sinking funds in many instances .would be insufficient to pay off the loans without some extension, whereas a postponement for even a comparatively short term would suffice. Between 1934 to 1938 over £8,350,000 of local body loans fall due, and in the succeeding four years the maturities increase by more than 40 per cent above this figure, suggesting that a large sum would have to be found in the ordinary course by local bodies for refinancing. If the sinking funds now accumulated are allowed to remain for an extended time at compound interest their val*e will be greatly increased, and this gain the Loans Board has strongly in mind when it advises municipalities and others to take prompt measures to convert. From the viewpoint of the investor there should be no reluctance to consent to a> extension of his loan, for he will have a sounder security upon which he can realise more easily in the market. During the past 15 years the tendency has been in New Zealand to make the terms of loans for some purposes unduly short, and, therefore, to throw an exceptionally heavy burden on the ratepayer. A safe principle of local finance is to limit the loan to the life of the asset, and it can bo seen that a considerable extension could be made in loans for concrete roading, for instance, without violating this principle. Also, there is to be considered the question of realising on the sinking funds, and here, too, there are substantial benefits to be derived by conversion to later maturity dates. In every respect the Loans Board is entitled to ask the local authorities to act without delay to bring their rates of interest into line with Slate securities.