The Urban Development Institute of Australia (UDIA) NSW has labelled Lake Macquarie council's $44 million internal loan scheme as "unacceptable".
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However, Lake Macquarie mayor Kay Fraser has defended the borrowings, describing them as "clever".
In a letter sent to Planning Minister Rob Stokes, UDIA NSW chief executive Steve Mann expresses concerns about the scheme, which involved using money collected for community infrastructure to fund various programs.
"There are reports that a number of councils have approached Lake Macquarie about this scheme and to implement it, this is gravely concerning, as section 7.11 contributions are paid by the development industry and homebuyers for community infrastructure that has a clear nexus with development," Mr Mann wrote.
"It is unacceptable that these are allocated to another purpose, particularly as the Lake Macquarie council annual report shows only 30 per cent of the funds collected were spent on infrastructure."
Mr Mann wrote a "full and thorough investigation" into the process was "necessary to ensure that local infrastructure contributions are spent on local infrastructure".
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However at Monday night's ordinary council meeting, majority of councillors stood by the internal borrowings.
Although they unanimously supported a motion to be provided with a staff briefing about the loans and for a report to be made public to inform ratepayers.
Mayor Kay Fraser said media reports of the loans had "questioned the integrity" of the council, its chief executive officer, herself and other councillors. She rebuked criticism of the loans.
"This community has not missed out, we have been very clever with our finances and invested back into our community," she said.
"This council has done the right thing. This is not new.
"This is nothing dishonest. We should not be questioned on this."
The meeting heard councillors had been made aware or discussed the internal loans 16 times since 2016.
Council CEO Morven Cameron said no projects due to be funded from developer contributions had been delayed as a result of the loans.
Chief financial officer Dwight Graham said the council would save about $7 million in interest by using the internal loans rather than external borrowings.
He said about $1.7 million had already been saved over the past four years.
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