The Newcastle Herald has obtained documents which reveal that in June last year council was sitting on a $111 million developer contribution fund that had a gaping black hole because council used almost half of it to "prop up" its general expenditure.

According to documents obtained under Government Information Public Access (GIPA), the council went against advice from a senior Department of Planning bureaucrat when it decided to loan itself $44 million over 20 years from the fund, rather than borrow externally.

Developer contributions are collected to fund community infrastructure required as a result of new developments.

The first loan of $19.282 million was approved by Lake council in June 2016 and, according to the documents, used to help demonstrate that the council was financially "Fit for the Future".

At the time the loan scheme was first mooted in 2015, Lake council was desperately fighting a proposed merger with City of Newcastle as part of sweeping local government reforms designed for efficiency gains.

As debate rages over what many believe is a backlog in infrastructure spending and a lack of public amenities on the fast-growing western side of Lake Macquarie, community members and developers are demanding to know why millions have been channelled from the fund.

Planning and Public Spaces Minister Rob Stokes, who oversees the planning legislation that allows councils to collect development contributions, said on Wednesday that he was in the dark about the $44 million loan scheme.

"If these claims are true, this is an unacceptable breach of the public's trust and a misuse of public funds earmarked for important public infrastructure," Mr Stokes said.

It's unclear if the internal loan scheme is widespread across NSW, but a spokeswoman for Lake council confirmed it had "received enquiries from other councils who were [or] are considering implementing this approach". Defending the scheme, she said council received independent legal advice that the loans were permitted and did not require ministerial approval.

Johnson Property Group (JPG) chairman Keith Johnson called on Premier Gladys Berejiklian to investigate. Mr Johnson accused the council of "stifling development" and said the "last thing" the community wants is growth without infrastructure.

"I'm calling on the Premier and the minister to step in and do something about this," Mr Johnson said.

"Council has collected the funds for one thing and used it for something completely different, the misuse of these funds is clearly against the community's interests."

JPG is locked in a protracted dispute with council over a voluntary planning agreement that sets out its commitment to invest in infrastructure - including the long-anticipated upgrade of a notorious intersection at Alton and Central roads and Freemans Drive, near Avondale Shopping Village, Cooranbong - due to its development of Watagan Park, Lake Macquarie's largest new residential subdivision.

Mr Johnson said developer contributions were designed to ensure landowners and developers - who stand to profit from development - give back to the community, not "prop up" council's budget due to "poor performance". He said Watagan Park accounted for about a 25 per cent increase in population in the Morisset development contributions area, but was required to deliver about 55 per cent of the infrastructure in the catchment.

"Development occurred before Watagan Park, we want to know where that money is and what it's been spent on, the community has a right to know," he said.

Internal council documents reveal the amounts and dates of three loans from the developer fund taken annually from 2016 to 2018, were $19.282 million, $13.365 million and $11.664 million.

An email dated April 2015 from council's development contribution coordinator Deborah Scott, to finance manager Ross Gilshenan and general counsel Sean Lucy, details a conversation with a senior staffer from the Department of Planning about a proposal for the first loan of $19.282 million.

"The dept does not and would not provide advice of this nature," Ms Scott wrote.

"They suggested we seek legal advice. In the opinion of the officer providing advice (Terry Natt Director of Infrastructure Planning) he was not supportive of the idea. He questioned whether council was serious about the expenditure of the funds given our balance [$74 million at the time]."

Council's financial accountant Nicole Spencer also expressed concern about the plan in the months before the first loan was approved.

"The only thing I am unsure of is that we are considering other reserves, eg Section 94 [developer contributions] which in the first instance cannot be used, but which may be able to be used (on a loan basis only) with specific ministerial approval," she wrote to a council business analyst in April 2015.

Despite the reservations of its own staff and Mr Natt, council pushed ahead with the plan spending the first $19.282 million on a range of programs including furniture for its administration building, plant replacement, kerb and guttering, drainage, traffic facilities, Hunter Sports Centre, art gallery extension plans and beach facilities.

More than $8 million was spent on the Lake Macquarie Transport Interchange and $1.5 million on footpaths and cycleways.

Documents show council staff were instructed to investigate pulling money from a range of sources to fund the internal loan scheme, before settling on "reserves" from the developer fund that would "not be required" in the "short to medium term".

According to an email from council's director of city strategy, Tony Farrell, in April 2015, headed "internal financing of loan needs", the scheme was designed for "cost saving and cash management".

Council came up with the idea around the same time as it was under the microscope by the Independent Pricing and Regulatory Tribunal (IPART) regarding a possible merger with City of Newcastle.

In July 2015, council's general manager Brian Bell wrote to the then Local Government Minister Paul Toole informing him of an internal loan proposal to borrow $10 million.

"As part of our assessment of this opportunity, council has received legal advice that this action is permissible," Mr Bell wrote. "I am advising you of this activity as further demonstration of the innovation local government is capable of in becoming fit for the future."

Mr Toole wrote back in September informing council that he had referred the letter to Planning Minister Mr Stokes, but there was no further correspondence with either ministers' office. A few weeks later it was revealed that IPART found Lake council "not fit for the future" and recommended it merge with City of Newcastle, a decision that was later overturned.

It was estimated the first internal loan would significantly improve council's debt service ratio due to a lower interest rate and smaller repayments, compared to borrowing funds externally.

"The financial advantage in doing this arises because the rate at which council can borrow is higher than the rate at which council can invest," a budget committee paper from May 2016 states.

More than $39 million is still owed to the fund and council has paid $1.856 million in interest since June 2016. "To date the savings are approximately $1.7 million," the spokeswoman said. "Over the life of the three loans council expects to save approximately $7.2 million."

She said the money would be spent on the works it was collected for and the internal loans would not impact council's ability to deliver projects listed in developer contribution plans.

"The timing of the delivery of works listed in the plans was a key consideration when assessing internal borrowing options," she said. "The development contributions funds are monitored and forecast forward regularly to ensure sufficient funds are available for the foreseeable future.

If the timing of any of the works in the plan is moved forward and internally borrowed funds are required, council is obliged to repay the internal borrowing."

Retired developer Francois Shamley questioned why council was sitting on $111 million in developer contributions in the first place.

"If you look in the Morisset area, the sporting fields are in shocking condition, traffic is a nightmare, the library was meant to be knocked down 20 years ago and they're still talking about it all," he said.

"Developers have paid contributions, we want the money spent. Council can't sit on it forever and decide to spend the money one day. Thousands of people have moved into this area and there is no infrastructure, it's an absolute farce."

Sunshine Progress Association president John Quinlan agreed west ward was too often overlooked. "They've spent a lot of money on artworks at Warners Bay when we're lacking basic infrastructure," he said.

A Department of Planning, Industry and Environment spokesman said councils were meant to collect development contributions to provide local infrastructure.

"Collected funds should only be used to provide the infrastructure identified in a contributions plan," he said. "The department has not been made formally aware of any loan proposal being suggested by Lake Macquarie City Council."

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