PM says funding review not on the agenda after local government body calls for rethink.

Prime Minister John Key has sprayed cold water on calls for a comprehensive rethink of how local government spending is funded.

Local Government New Zealand (LGNZ) yesterday released a discussion paper traversing options for funding their operations in the medium and longer term, in light of demographic changes and a looming infrastructure deficit.

But Key told the post-Cabinet press conference that "across-the-board reform of their funding is not something we have on the agenda".

Councils had been funding infrastructure for a long time, he said.

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"They don't seem to have excessive debt and they do have assets they own."

LGNZ president Lawrence Yule said there was a significant shortfall between revenue and spending, with councils accounting for about 10.5 per cent of all public expenditure while raising only 8.3 per cent of public revenue. The status quo, which relies heavily on property taxes (rates) supplemented by user pays and borrowing, is increasingly challenged by the twin demographic trends of dwindling or static populations in many rural centres and an increasing concentration of home ownership among older age groups with limited income growth.

Councils complain that central government imposes regulatory tasks on them without any contribution to the cost or any recognition of the wide diversity in communities' capacity to pay.

"It tends to be one-size-fits-all," said Auckland councillor Penny Webster who chaired the funding review working group.

It was not jumping to any conclusions about what a new funding model should look like, she said.

One of the options the group has put up for consideration and public feedback is that the co-funding model used for local roading between central and local government be extended to water infrastructure, which is expected to be a major driver of a widening deficit in councils' finances down the track.

The New Zealand Transport Agency uses a formula which adjusts for the economic size of a region (as proxied by its capital value), its population (the number of rating units) and an index of deprivation.

A similar approach for the cost of renewing and upgrading water and waste water infrastructure, LGNZ suggests, would mean communities with greater need and fewer resources to meet that need would be eligible for higher rates of government funding.

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It cannot yet quantify the likely shortfall in funding the sector faces, as it is still trying to get a handle on the size of water-related spending ahead.

But the Auditor-General has highlighted a widening gap between depreciation of existing infrastructure and the capital expenditure on renewal councils have budgeted for in their long-term plans - a gap forecast to be between $6 billion and $7 billion by 2022.

The review emphasises local authorities need to look at whether they are making the best use of funding options they already have under existing legislation, including user pays charges and debt when spending is incurred to fund infrastructure which will benefit future residents. But it also calls for consideration of new taxes such as a local income tax, regional fuel taxes, a local expenditure tax or some formula for allocating a share of national tax revenue to local governments. At this stage it is not advocating any of these in particular.

It points out that some local spending has national economic benefits but that apart from roading, councils are on their own when it comes to funding them.

"The goal is not to increase the overall tax burden for New Zealand," Yule said, "But rather to determine whether a different mix of funding options for local government might deliver better outcomes for the country."

LGNZ chief executive Malcolm Alexander said a population-based share of national tax revenue would shift the incentives on councils with respect to encouraging population growth, in that it would increase their revenues and not just their costs.

Business New Zealand chief executive Phil O'Reilly said any organisation faced with a funding shortfall must address its spending as well as its funding.

Taxpayers' Union executive director Jordan William said the average rates bill had doubled in the past 20 years, twice the rate of inflation.

But LGNZ says its costs rise about 2 percentage points a year faster than the CPI.

"We buy bitumen not Weet-Bix," Alexander said.

Submissions on the discussion paper close on March 27.