The rickety and antiquated finances of local government are to be properly reviewed and, with any luck, overhauled.

The Productivity Commission inquiry the Government has initiated, which was part of the coalition agreement, will look into what is driving councils' increasing costs and spending, and into options for new funding and financing tools.

Any reforms flowing from it cannot come soon enough for hard-pressed ratepayers.


This week's inflation data show that, yet again, rates have grown faster than the cost of living: 3.1 per cent nationwide over the past year while the consumers price index rose 1.5 per cent.

Over the past 10 years, the "property rates and related services" component of the CPI (the "related services" are mostly water and rubbish collection charges) have risen 57 per cent, outstripping growth in both the CPI (17.3 per cent) and the population (14.4 per cent).

Yet again, rates have grown faster than the cost of living: 3.1 per cent nationwide over the past year while the consumers price index rose 1.5 per cent.

Indeed, officials' briefing to the incoming Minister of Local Government, Nanaia Mahuta, pointed out that the compound growth in rates over the past 10 years, per capita, has also outstripped growth in per capita GDP, average weekly earnings and an index of local government costs.

Despite that brisk growth in rates, which provide 59 per cent of their operating income on average nationwide, councils are struggling to cover their costs.

Auckland is notoriously failing to cope with rapid population growth. On the other hand, Local Government New Zealand estimates that 32 territorial local authorities will see their populations shrink by 2031, often combined with an ageing profile for those who remain.

The Auditor-General has raised a red flag over the fact that the depreciation of infrastructure assets the councils claim is half as large again as the amount they spend renewing them — never mind dealing with population growth or the mounting risks from climate change.

The Shand Inquiry 10 years ago recommended that reliance on rates be reduced to 50 per cent of councils' operating funding. It hasn't happened but it remains good advice.

Property values are a pretty rough proxy for ability to pay. Nor do they align well with the benefits households receive from local government.


As a base for a wealth tax, property value leaves a lot to be desired. It ignores other asset classes and offsetting mortgage debt.

And crucially, it is hard on people who are asset-rich but income-poor, including many pensioners and farmers.

So what are the alternatives?

One group the Productivity Commission will no doubt hear from is the Local Government Business Forum, whose members include Business New Zealand, Federated Farmers, the Chambers of Commerce, the Electricity Networks Association and that champion of localism, the New Zealand Initiative.

A paper the group released in April outlines several new sources of funding it either recommends or thinks might work and are worth looking into.

Like Local Government NZ, it sees some scope to increase user charges. The normal argument for user pays is that it allows consumers to decide what they want to buy and gives information to suppliers about what is wanted and what is not.


The downside is that it can be regressive and at least some of the things councils do are things the community is willing to subsidise or which benefit everyone.

For some councils, the forum sees scope to increase debt, so long as it is incurred to provide long-lived assets. Only Auckland City and the Wellington Regional Council have a debt-to-assets ratio of more than 20 per cent. Ultimately, though, servicing and repaying that debt is a charge on whatever funding sources the council has.

In that context a value capture tax is worth a look. It would recover some of the infrastructure costs councils incur from properties whose value rises as a direct result of that investment.

"Arguments against it include the difficulty in identifying properties that would benefit, the inability to make a certain link between the capital gain and the council action and difficulty in quantifying the value," the forum says.

Auckland mayor Phil Goff has floated the idea of central government remitting to the councils the GST it collects on rates — a tax on a tax. Given that in the 2017 financial year councils' rates income was $5.5 billion, Goff's suggestion would leave a conspicuous hole in the Government's finances.

But the councils do have a case for recompense for what the Americans call "unfunded mandates", where policies adopted by central government, often with little consultation, impose administrative and other costs on councils, like it or not.


One possible way of offsetting that would be to abolish the rates exemption on Crown land, which the Local Government Business Forum reckons is worth around $220 million a year, or 4 per cent of the rates take.

More generally, though, it argues that transfers from central government should be contestable and linked to specific projects, like the Tourism Infrastructure Fund, which "seems to be working well on a small scale".

It approves of replacing Auckland's $114 annual transport levy with a regional fuel tax, despite its drawbacks — notably the leakage when trucks and other users fill up outside the super city's boundary. But it sees it as only an OK alternative until the technology for proper road user charging and congestion charging is available.

Also in the "might work" basket are infrastructure bonds to finance specific projects, where both the debt and the funding earmarked to service it are quarantined from the rest of a council's finances.

The Productivity Commission expects to start work on this inquiry in September. It promises plenty of public consultation.

Its recommendations, says Finance Minister Grant Robertson, will not be ignored.