1000 words (11 minutes reading time) by Colin Weatherby

The Victorian state government’s Legislative Council Economy and Infrastructure Committee has started an enquiry in to the funding and service delivery of local government in the state, which will look at:

• The effects of cost shifting from the state and federal governments to local councils in an examination of vertical and horizontal fiscal imbalances.
• Whether local councils are adequately delivering on their core service delivery objectives.
• The overall revenue structure of local government.
• Whether the existing revenue structure is sustainable and appropriate or if alternative models of funding would be more sustainable and appropriate.
• Any other related matters.

This is a timely review and comes at the same time that the national government is also holding an enquiry into the financial sustainability of local government. It seems that the other levels of government have become concerned about whether councils are able to meet community needs and expectations now and in the future.

Unsurprisingly, the Local Government Finance Professionals (FinPro) have made a submission to the Victorian enquiry . They make a number of interesting points in their submission.

Deteriorating local government finances

To begin, FinPro contest the classification of local government finances as being ‘sound’ or ‘good’, as has been determined by Local Government Victoria (LGV), the Essential Services Commission (ESC), and the Victorian Auditor General’s Office (VAGO). Instead, FinPro says local government finances are ‘less than sound’ and deteriorating. This is an important point of contention for the Committee in considering local government’s capacity to deliver on core service objectives and whether its revenue is sufficient.

Either local government is already in financial difficulty or it is not?

It seems that those working in the sector have taken a different view from the various Victorian government agencies commenting on local government, who seem to have taken a far more optimistic view. Part of it is potentially to do with their view of council balance sheets as being strong because they have high asset values (e.g. roads) and low liabilities (e.g. debt), even though the assets cannot be sold and converted to cash. They also see councils as holding large amounts of cash, even though most of the cash is restricted and held for pre-determined purposes.

Underlying council deficits

In contrast, FinPro say that the majority of councils have adjusted underlying deficits, which have been deteriorating since 2016 when the rate cap was introduced. Even though the total cash held by councils has increased, there has been a deterioration in unrestricted cash across all councils (i.e. the cash is for specified purposes and not available for any other purposes). In addition, investment in renewing assets has been insufficient.

I find it surprising that there can be a fundamental disagreement of this nature about financial statements that have been prepared in accordance with accounting standards and externally audited. Nonetheless, it is an important contention to resolve.

FinPro go on to discuss local government finances more generally, noting that the underlying deficits being experienced by councils makes debt an unlikely solution to their financial problems because it will only make their financial position deteriorate further. The vertical fiscal imbalance that is a feature of government funding in Australia (i.e. the national government gets the lion’s share of taxation revenue and then distributes some of it back to state and local government) is an ongoing problem for councils who have seen the Financial Assistance Grants from the national government decline from 0.76% of national taxation to 0.57% since 2011.

Reducing living standards

FinPro say local government is becoming a handbrake on living standards in Victoria because their revenue doesn’t increase with economic and population growth, unlike the national and state governments. Further, the concern regarding the capacity of community members to pay increased taxes to local government is accommodated through differential rates and hardship provisions, which is a more effective and individualised approach than a blanket cap on rates across the sector.

Recommendations to the Legislative Council enquiry

FinPro make five recommendations for the state government to implement in collaboration with local government:

1. That LGV develop a risk-based assessment framework for financial sustainability in local government. Hopefully, this will resolve the difference of opinion regarding the state of council finances!
2. That a Local Government Cost Index be developed and used by the ESC when advising the Minister for Local Government on the annual rate cap. This would include the actual costs incurred by councils, rather than the basket of consumer goods used to determine the Consumer Price Index (CPI) that is currently used.
3. That the ESC take into account prior rate caps that have provided insufficient revenue to councils when they are setting the rate cap. This is an opportunity to catch up for when inflation exceeds CPI forecasts.
4. That LGV establish a more detailed asset report (similar to the Report on Infrastructure Assets prepared in NSW). Hopefully, this will ensure that assets expenditure is adequate to replace assets consumed through use.
5. That the State-Local Government Agreement established in 2014 be re-established to ‘enable consultation, co-design, and a fair balance of cost apportioning to achieve the best outcomes across policy domains’. This agreement has broken down in recent years.

I sympathise with FinPro and understand the reasoning behind their recommendations. I can’t help thinking that they are ignoring the political and economic reality of Victoria today. The rate cap will be almost impossible for any government to remove. Even if it was removed, I can’t see councils putting rates up by more than CPI anyway in the current inflationary environment with growing cost of living pressures. Improving the rate cap will provide relief but it is not the solution.

Integrative negotiation

Councils need to work out new ways to live within their means. They have to work out how to do more with less. This is going to require a renegotiation of the role of councils with every community. There are examples of this happening, for example ‘The Deal’ that Wigan Council reached with its community in 2012 in response to the austerity measures introduced by the central government in the UK . It has its basis in ideas like Asset Based Community Development (ABCD), which started in the US in the 1980s.

A colleague is heading to Harvard University soon for a short course in public sector management and they sent me some of the pre-reading. One of the papers was on integrative negotiating – i.e. rather than treating the pie as fixed and fighting for your share, you work with the other parties to make the pie bigger so that everyone gets a bigger slice than they set out to get. That is what I think Wigan have managed to do in making their deal. By drawing on community assets and building relationships with service partners, they have managed to maintain services while having to cut their budgets by 40% over 10 years.

A new way of thinking is needed, or perhaps, it is as easy as ABCD…

Further reading and listening

The Wigan Deal

What is Asset Based Community Development?

The new era for Wigan Council – built on kindness and compassion