16 – ‘Council rates capped from mid-2016’, The Age, 21 January 2015

‘Council rates will be capped next year with the state government forcing councils to justify any increases above the rate of inflation. Councils must now send their budgets to the Essential Services Commission for permission to raise rates above inflation. Inflation – as measured through the consumer price index [CPI] – is currently running at 2.3 per cent. Last financial year rates increased by an average of 4.23 per cent.’

Some people will be thinking it is about time that municipal rate rises are curbed. Nobody likes paying more taxes. But is it a smart move?

Rate capping has been in place in NSW for more than 30 years. In 2013 the NSW Treasury Corporation reported that a quarter of the state’s 152 councils had a ”weak” or ”very weak” financial sustainability rating. If not corrected, half would be ”very weak” financially within three years. In 2014 the number of councils requesting rate increases above the 2.3% cap set by the Independent Pricing and Regulatory Tribunal almost doubled. The requested increases ranged from 5.5% to 11%. The increases reflect the financial realities confronting local government and ‘catch up’ increases to cover lack of revenue

NSW councils have responded to the rate capping in different ways. Ryde Council has created an RSA-type animation that neatly explains to residents the choices that need to be made.  It illustrates the implications of the demands for growth in services and infrastructure when revenue is declining.  New works are less possible and maintenance and cleaning standards have to be reduced with long term impacts on infrastructure.  Ryde is having to define ‘core’ services, i.e. what is essential versus what is nice to have, and balance reducing service levels with increasing rates.  It is a simple and effectively told story (https://www.youtube.com/watch?v=iR_BJKAo0dA).

The overall effect of rate capping seems to have been a reduced ability to provide services to the community, accumulated backlogs in infrastructure renewal or replacement, and increased reliance user charges for revenue. According to Brian Dollery and Albert Wijeweera the increase in rates in NSW since 1995 has been about half the increase that has occurred in Victoria and council rates per capita are lower that every other state and only higher that the Northern Territory.

Councils in Victoria experienced enforced rate cuts and capping for a period of time in the 1990’s. The Kennett Liberal/National coalition government capped rates in 1995 and imposed a cap of one percentage point below inflation. The cap was lifted in 1997 to allow increases of up to 3 per cent – with Ministerial approval. In 1999 the Bracks Labor government scrapped the cap altogether. The councils unable to draw on financial reserves or liquidate assets were profoundly affected and the impacts, similar to those now evident in NSW, were enduring.

The arguments in favour of rate capping are worth some discussion. They revolve around preventing councils from abusing monopoly powers in delivery of services; stopping expenditure on services or infrastructure that the State government regards as ‘non-core’; reducing the risks of poor governance; and limiting the ability of councils to provide services that are better provided by the private sector. Essentially, it reflects a lack of trust by the State government – councils won’t make sensible decisions without supervision.

In practical terms, what is it likely to mean for Victorian councils from day to day?

For a start, some councils are talking about entering into shared services to reduce costs. This has been a popular idea with CEO’s for a while that has failed to take effect. But will shared services really help? The evidence suggests that the savings are seldom as great as people think and there are initial costs involved in making those savings. John Seddon writes eloquently on the shortcomings of shared services. More in a future post.

What else can councils do? Reducing expenditure on capital works to enable funds to be used for recurrent operational expenditure is one likely response. In the short term this is fine if there are not pressing asset renewal demands or community demands for new assets. Cutting back expenditure on new assets will be easier for developed municipalities. It will not be as easy for developing municipalities where population growth is creating demand for new assets to meet community needs. In all municipalities, reduced expenditure on asset renewal will ultimately result in reduced fitness for purpose and increased future costs.

What about cutting recurrent operational expenditure? This is much more difficult because the community is likely to immediately lose services. There will be opposition from those who no longer receive the benefits of a service that is cut. The typical council operational budget is about 60-70% salaries and wages, 10-30% contractors and materials, and 5-10% plant and equipment. There will need to be a reduction in staff numbers for the cuts to be meaningful. This is likely to result in industrial disputes. If staff numbers are not reduced, there will need to be big cuts to expenditure on contractors and materials and/or plant and equipment, which impacts directly on the ability of staff to be productive.

Reducing expenditure on contractors is probably the easiest cut to make, especially if it doesn’t directly impact on delivery of services to the community. For many councils, this type of cut will impact on major maintenance/minor renewal of assets, which often sits outside the capital budget because the amount is below the threshold for capitalisation or the works do not increase asset life and cannot be capitalised. In the 1990’s it was cuts to this type that had long-term impacts when assets failed and needed premature renewal because of inadequate maintenance.

Rate capping has been shown to reduce the ability for councils to respond to community demand for services and to adequately care for physical infrastructure. It takes away the potential for local communities to determine the amount of funding they want to provide for council activities. It might drive administrative efficiencies, but at what cost? More than anything, it says that the State government knows more about meeting local needs. In every respect, it is just wrong.

Colin Weatherby

Dollery, Brian and Wijeweera, Albert 2010. An assessment of rate-pegging in New South Wales local government, in Commonwealth Journal of Local Governance, Issue 6: July (http://epress.lib.uts.edu.au/journals/index.php/cjlg/article/view/1619)

Seddon, John 2014. The Whitehall Effect.

The Age. http://www.theage.com.au/victoria/council-rates-capped-from-mid2016-20150120-12tz7k.html