5.1 Overview of the Local Authorities (Members’ Interests) Act 1968

Local government: Results of the 2005/06 audits.

The Local Authorities (Members’ Interests) Act 1968 (the Members’ Interests Act) governs the pecuniary (financial) interests of members of local authorities. It:

  • controls the making of contracts worth more than $25,000 in a financial year between members and the local authority; and
  • prevents members from discussing and voting on matters before the authority in which they have a pecuniary interest, other than an interest in common with the public.

The Office of the Auditor-General carries out the primary statutory functions under the Members’ Interests Act.

Our general guidance about the Members’ Interests Act is contained in Guidance for members of local authorities about the law on conflicts of interest,1 which we published recently.

Each year we report on matters arising about the Members’ Interests Act. In this article, we discuss:

  • our approach to applying the exception for “interests in common with the public”;
  • our view about whether the Members’ Interests Act raises issues for members’ attendance at conferences;
  • a recent High Court decision that considered pecuniary interests; and
  • the application of the Members’ Interests Act to civil union and de facto partners.

We also provide an update about reform of the Members’ Interests Act, which is a matter we reported on in 2006.

Interests in common with the public

Section 6(1) of the Members’ Interests Act prohibits a member of a local authority or its committees from discussing or voting on a matter before the authority in which the member has a pecuniary interest “other than an interest in common with the public”.

It is sometimes difficult to determine whether or not a pecuniary interest can be said to be “in common with the public”, particularly for wide-ranging matters such as Long-term Council Community Plans or development contributions policies. If the interest is in common with the public, the member will not be caught by the statutory prohibition on discussing and voting on the matter.

Our general guidance about interests in common with the public is on pages 17 and 18 (in Part 3) of our 2007 guidance publication. In assessing whether an interest is in common with the public, a member should consider whether their interest is:

  • of a different nature or kind to that of other people; or
  • significantly different in size.

In other words, the member should consider whether the matter affects the member in a different way or to a materially greater degree than most other people.

Members must always remain aware of the possibility of a pecuniary interest in cases where their particular interest is substantial and/or is shared by only a relatively small group of people. They need to consider whether many other members of the local community are likely to have a similar interest in the particular matter, or whether the personal significance of any particular matter to them is greater than it is likely to be to the general public.

We accept that some tolerance is necessary so as to apply the “interest in common with the public” exception in a realistic and practical way. Therefore, to rely on the exception:

  • The member does not need to be affected to exactly the same extent as other members of the public. For instance, all ratepayers are affected slightly differently by the adoption of an overall rate. Nevertheless, we consider that this can safely be treated as an example of an interest that is in common with the public.
  • The interest does not need to be shared by all members of the public in the district – it is enough that the member is part of a large group of people affected in a similar way. The question of whether a group of people should be treated as “the public” is often a matter of degree. We acknowledge that it can be difficult to draw a clear line.

Individual members ought to be best placed to judge their own position. Each individual member will usually have the fullest information about the nature and extent of their own activities and interests, and whether and how they may be particularly affected by a particular matter before the local authority.

Property developers and development contributions policies

In particular, members who are also property developers may sometimes have interests that are different in kind to that of most other residents or “ordinary” property owners. A common example is preparing and adopting a development contributions policy.

A development contributions policy will ordinarily:

  • summarise the capital expenditure required to meet increased demand for community facilities resulting from growth;
  • determine what proportion of that will be funded by development contributions, financial contributions required under the Resource Management Act 1991, and other sources; and
  • list the activities for which such contributions will be required.

In other words, such a policy will play a significant role in determining how much of a local authority’s future infrastructure costs will be levied directly on property developers. Accordingly, the policy will affect the costs of land development.

Most people will usually have the same type of interest in a development contributions policy, so any interest they have in the policy will often be an interest in common with the public. However, property developers may be in a different position. Such a policy has the potential to affect large-scale or professional property developers to a different degree to the general public. This means those people’s interests are different in kind (and often in size). A member who is in this position will sometimes have an interest that will prevent them from participating in discussions and voting on the matter.

In our view, a disqualifying interest in the consideration of a new development contributions policy is likely to exist when:

  • a member currently owns, or is in the process of acquiring, property that is capable of subdivision or other development under the existing District Plan;
  • any such subdivision or development could be significantly greater than what an ordinary member of the public could expect to achieve with a reasonably average personal property holding; and
  • the local authority’s decisions on the form, content, or application of the policy have the potential to influence significantly the costs of the subdivision or development.

In paragraphs 5.118-5.119, we apply these principles to two contrasting hypothetical scenarios.

We consider that a member who has a significant property development interest in the area – as a current or intending developer, or as an owner of substantial landholdings with a reasonable likelihood of development – is likely to be affected in a different way and to a much greater extent by the development contributions policy than people who are simply residents or “ordinary” property owners in the district. We consider that a member in this position will have a disqualifying pecuniary interest.

However, many people in a district are likely to own properties that are theoretically capable of subdivision into several lots or that are capable of holding additional household units. We consider that a member who owns one or two above-average-sized residential properties that could potentially be subdivided in this way can quite reasonably consider their interest to be “in common with the public”.

Similar issues may arise with matters concerning a local authority’s capital projects that may be funded from development contributions. Where a particular decision relates to how such a project is funded, a similar pecuniary interest may arise for a member who is a property developer. But other decisions about the project, such as issues of design or location or operation, or questions about whether the project should go ahead at all, may not raise any pecuniary interest difficulties.

Targeted rates

Rating is another example of the application of the concept of interests “in common with the public”.

Most rating decisions, including general decisions about commercial and residential differential rates, will involve interests that are in common with the public. However, sometimes a particular decision about a targeted rate or differential applying to a very small class of properties might involve interests that are not in common with the public.

For example, in a small to medium-sized semi-rural district, we considered a proposed uniform annual charge worth $300-$600 to be levied on separately used or occupied parts of rating units. The proposal would have imposed extra charges on around 550 properties that had previously been treated as single rating units. That situation was finely balanced, and we took the view that the members of the local authority who were in the group of 550 (assuming that they were not affected to a significantly greater degree than other ratepayers in that group) had an interest that could reasonably be said to be in common with the public. In other words, the group was a large enough section of the public to be treated as “the public” in that case. We would have taken a different view if the size of the group was, say, 100 ratepayers.

By way of contrast, we advised a local authority (a provincial city that has a population of more than 60,000) that we thought a member with an interest in a matter concerning a targeted rate for a water scheme affecting 280 properties had a pecuniary interest that was not in common with the public. The size of the group was too small. We considered that situation to be factually similar to the case of Loveridge & Henry v Eltham County Council (1985) 5 NZAR 257, where the High Court indicated (without deciding) that members in this position had an interest greater than that of the public at large.

Members’ attendance at conferences

We are sometimes asked about whether a member of a local authority has a pecuniary interest in a decision about whether they should attend a conference, on behalf of the authority, in another city or country.

In general, we do not consider that a member has a personal pecuniary interest in such a decision. Conference representation is a matter of official local authority business, and the local authority should select who is best qualified to represent it. Any incidental personal benefit for a conference representative (such as an opportunity to receive hospitality from conference hosts, to gain personal experience of visiting another city or country, or to have the cost of attendance paid by the authority) would not in our view amount to a personal financial interest. Provided there is a sound business case for the authority to be represented at a conference, we consider it important not to regard such representation, on its own, as a “junket” or a privilege of holding public office.

Accordingly, in our view, the Members’ Interests Act does not have any general application to local authority discussions about conference attendance.

However, the Members’ Interests Act could apply to a situation where a member might expect or intend to derive some identifiable financial benefit from conference representation. For example, if the member expected or intended to use the conference as an opportunity to take a holiday or to visit family and friends, the availability of travel to and from the conference venue at public expense may be seen as an expectation of a gain of money for the member.

There appears to be nothing wrong in principle with a member extending an itinerary in this way. Were such a situation to arise at a local authority meeting, it would be up to the individual member to identify and declare a personal financial interest when nominating themselves to represent the authority at the conference. It also needs to be acknowledged that an expectation of personal gain (such as a holiday before or after the conference) might not be in the mind of the member at the time of putting their name forward to attend. That would be for the member to explain after the event, should the matter become the subject of a complaint. The fact of the benefit being taken would be evidence that the member would need to rebut.

Expenditure on travel is a matter of sensitive expenditure, and so needs to be handled carefully. Further guidance about this is available in our recent publication Controlling sensitive expenditure: Guidelines for public entities.2

Recent case law about pecuniary interests

The Members’ Interests Act does not define the term “pecuniary interest”. Its meaning is considered by the courts from time to time.3 The test we use is: … whether, if the matter were dealt with in a particular way, discussing or voting on that matter could reasonably give rise to an expectation of a gain or loss of money for the member concerned.4

The High Court’s decision in Collinge v Kyd [2005] 1 NZLR 847 is an interesting recent case, even though it does not involve a local authority. The case was about the law of trusts, but the Court was prepared to consider several public law cases, by way of analogy, in determining what constituted an “interest”. It is a useful illustration of the potentially broad scope of indirect pecuniary interests.

The case involved two trustees of the Auckland Energy Consumer Trust. The Trust owns all the shares in Vector Limited, an energy company. A project had been proposed by Vector that required the Trust’s approval, as shareholder.

Mr Collinge, a trustee, had connections with 200,000 bonds issued by Vector (a holding that would place the holder within the top 1.1% of bondholders). If Vector’s proposal went ahead, the bonds would have been affected in two ways: the interest rate payable on them would decrease, and bondholders would have preferential rights in Vector’s first public issue of shares.

The issue was whether Mr Collinge had a material interest in the proposal that precluded him from participating in the Trust’s decision. Mr Kyd, the chairman of the Trust, had ruled that Mr Collinge had a material interest and must not participate.

The High Court agreed with the chairman, even though Mr Collinge was neither the legal nor the beneficial owner of any of the bonds.

The judge held that the amount of the investment was relevant to whether a material interest existed, but that it was not necessary to attempt to assess the benefits or detriments of the proposal to bondholders. It was enough that a bondholder had a pecuniary stake or right in the proposal. (It was not clear whether the overall effects of the proposal would be positive or negative for bondholders.)

In this case:

  • 75,000 bonds were owned by Mr Collinge’s wife; and
  • 125,000 bonds were owned by a family trust.

The judge concluded that it was difficult to see the value of the bonds as insignificant. However, the more critical question was whether Mr Collinge actually had an interest in them.

Mr Collinge’s wife’s bonds had been purchased by her, before they were married, out of her own separate funds. Nevertheless, the judge accepted that an interest held by one spouse is capable of creating an interest for the other spouse, and that it did so in this case.

The family trust’s bonds were owned for the benefit of Mr Collinge’s wife and two of his children. Mr Collinge was not a beneficiary, but until recently had been one of the two trustees. The Court held that it was immaterial whether the conflicting interest belonged to him beneficially or as a trustee for others. Mr Collinge in fact resigned as a trustee shortly before the court case, but the Court held that a last-minute divestment did not necessarily cure a conflict of interest. The Court also considered it relevant that Mr Collinge was settlor of the trust, and as settlor he retained the power to appoint new trustees. In addition, Mr Collinge had signed the application forms for both sets of bonds, he had provided his own bank account for interest payments from the family trust’s bonds, and in other contexts he had previously declared an interest in one or both sets of bonds.

Therefore, despite Mr Collinge having neither legal nor beneficial ownership of the bonds at the time of the decision, the Court was prepared to give greater weight to the surrounding circumstances, which suggested that Mr Collinge in fact had a fair measure of influence over the administration of the family trust.

This case shows how indirect connections can still sometimes give rise to a pecuniary interest.

Application of the Members’ Interests Act to civil union and de facto partners

The Members’ Interests Act provides that, if a member’s spouse has a pecuniary interest in a matter, the member is deemed to have the same interest.5

Those deeming provisions are about to be extended, so that they also include the pecuniary interests of a member’s civil union or de facto partner.6

This amendment comes into force on 13 October 2007 (that is, at the date of the next local government elections).7

Reform of the Members’ Interests Act

In 2005, we published a discussion paper about options for reforming the Members’ Interests Act.8 We consider that the Members’ Interests Act is in need of an overhaul, and that a modern restatement of the law is desirable.

We discussed this in an article in our corresponding report in 2006, and noted that the Department of Internal Affairs had included the topic on its policy work programme for 2005/06.9

Disappointingly, little progress has been made on that policy work. We understand that the Department has deferred its work on the Members’ Interests Act because of other priorities. We urge the Department to return to this area as soon as it reasonably can.

1: ISBN 0-478-18180-9.

2: ISBN 0-478-18171-X – also available on our website at www.oag.govt.nz/2007/sensitive-expenditure/.

3: See, for example, Auckland Casino Ltd v Casino Control Authority [1995] 1 NZLR 142 and Calvert & Co v Dunedin City Council [1993] 2 NZLR 460.

4: This is adapted from Downward v Babington [1975] VR 872.

5: Sections 3(2), 3(2A), 6(2), and 6(2A).

6: See section 4 of the Relationships (Statutory References) Act 2005.

7: Ibid, section 4(3).

8: The Local Authorities (Members’ Interests) Act 1968: Issues and options for reform, ISBN 0-478-18138-8 – also available on our website at www.oag.govt.nz/2005/members/.

9: Local government: Results of the 2004-05 audits, parliamentary paper B.29[06b], part 5 – also available on our website at www.oag.govt.nz/local-govt/2004-05/part5.htm.

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