Posted by Colin Weatherby                                                                         800 words

The pressure is on. The Essential Services Commission has released its draft report on the proposed rate capping for councils in Victoria. It has a number of interesting elements and some significant implications for local government. The report sets out which revenues are proposed to be capped, how the rate cap could be calculated, the current forecast for rate increases to 2018/19 under the proposed system (see below), and the impact of the application of an ‘efficiency factor’ to provide an incentive to pursue efficiencies.

The article in The Age describes the major impacts.

“Victoria’s 79 councils had an average rate increase of 3.8 per cent this year. Several councils increased their rates by more than 6 per cent.

The draft report includes indicative forecasts for an annual rate cap of 3.05 per cent in 2016-17, dropping to 2.85 per cent in 2017-18 and 2.8 per cent in 2018-19.

In addition to the cap, the review calls for a new “efficiency” deduction to be introduced from 2017-18 where councils would need to reduce their rates bill by 0.05 per cent because of efficiencies (increasing by 0.05 percentage points each year). Jason Dowling, The Age, 31 July 2015.

So, what are the likely implications for councils?

There have been some previous posts on this topic (see  ‘Council rates capped from mid-2016’, The Age, 21 January 2015 and ‘Labor’s rate cap to hurt services and infrastructure, ratings agency warns’, The Age, 27 February 2015.). That thinking still stands. Councils will have to say ‘no’ louder and more often. Difficult choices will need to be made about what services to offer or not offer, and what the levels of service will be. Some people will no longer be eligible for services as councils start to distinguish more strongly between those who are or are not customers. Expect much more customer segmentation for services delivery. All of this will be difficult for our politicians who succeed by pleasing their constituents.

In many ways this is the easy bit – just share the cake out differently to reflect actual community needs. If the cake stayed the same size this would be a significant challenge for councils. Making the cake smaller by keeping increases below the actual base movement of costs and then requiring an ‘efficiency’ reduction will force councils to work much harder.

Source: A Blueprint for Change – local government rates capping & variation framework review. Draft Report – Volume 1, Essential Service Commission, July 2015.

Table 2.3 shows the forecasts of rate increases under the proposed model to 2018/19. The CPI used is from the Department of Treasury and Finance, as is the WPI (Wage Price Index). In effect, it is proposed that CPI will be applied to 60% of costs and the WPI to the other 40% of costs. This is based on the estimate of the average proportion of labour costs. The efficiency factor is then deducted.

Every 1% reduction in the rate increase equals a reduction in revenue of between $500,000 and $1,000,000 for a council, depending on the size of the council. This might not seem like a lot when budgets are $100 million to $300 million. However, councils seldom run at a surplus (they might budget for one) and the reality is that reduced revenue will mean that cost reductions will have to be made – immediately. I have written about how this has happened in the past.

It is clear that the capping is intended to force councils to bargain much harder with their employees to reduce labour costs. The discussion of the ‘efficiency factor’ (p. 13 and 14) squarely aims at council’s ability to manage labour costs. This is an interesting approach for a Labor State government and possibly reflects the approach they will be taking in their own wage negotiations with police, nurses and teachers. If not, they will be seen to be hypocritical and the rate capping will be undermined by unions forcing councils into unsustainable wage increases.

What are councils doing in response?

Local government is still maintaining that the use of the Consumer Price Index (CPI) is incorrect because it doesn’t include the actual costs that drive rate increases. Councils are also complaining about ‘cost shifting’ by the State government at the same time that they limit council revenues (i.e. the transfer of State service delivery responsibilities to councils without providing any funding). Some councils are starting to collect the data they believe will be necessary to successfully gain approval to increase rates above the level of the cap.

It is part of the avoidance culture prevalent in local government to complain and blame others or criticise their decisions. At some point though, councils will simply comply. They may try to seek increases above the cap but this will be a public process and they will be seen to be not coping unless every council is seeking the same increase.

This will not be in the best interests of ratepayers and residents if incremental cuts are made year after year and works are deferred and hard decisions dodged. Services and infrastructure will just be run down year after year unless genuine efforts are made to innovate and deliver the same value with less revenue.

Dowling, Jason 2015. Muzzle on council rates, The Age, 31 July.

Essential Service Commission, 2015. A Blueprint for Change – local government rates capping & variation framework review. Draft Report – Volume 1, July.