In the last two of this series of articles about rates, I wrote about the different types of rates, the calculation methodology and the effect of property valuations. This article focuses on why rates generally continuously go up.
A disturbing fact that councils often refer to is, that of all the tax collected in this country 90% of it ends up with central government and only 10% ends up with local government. Over decades, central government’s tax take has increased by significantly larger amounts and percentages than that of local government, leaving councils to become more cash-strapped but with higher workloads.
There are many reasons why councils need more rates revenue each year but a few stand out, starting with inflation. Just like every individual, every household and every business, councils are heavily impacted by the rampant inflation that we have endured over the last few years. The household Consumer Price Index (CPI) measures inflation on consumer items like food prices, while some don’t affect councils to any significant degree, other common costs like electricity prices, fuel prices and telecommunication costs certainly have an impact.
For councils, costs are often more aligned with the construction index where the cost of concrete, bitumen, steel and other materials have pushed up infrastructure maintenance and replacement costs significantly. Then add in the huge increases in audit fees, insurance premiums and IT maintenance or software, and the cumulative effect soon results in council cost increases that typically are much more than the CPI.
To put this in context, for the Stratford District Council every $160K in additional cost needs either a 1% rate increase to pay for it or savings need to be found.
Another key factor is interest costs. Generally speaking, councils are borrowing junkies and it is common practice to use debt and loans as a way to fund larger, long-term, capital-intensive projects. The Stratford council is relatively small, it has what I consider to be a fairly conservative borrowing policy and can borrow at very favourable rates, but interest rate increases still hurt. When even moderate increases are applied to our nett borrowing of around $20 million, the interest increases soon mount up.
But the factor that contributes a lot to council cost increases and the one that makes me most grumpy, is what are known as unfunded mandates. Unfunded mandates are areas where central government determines policy, which is then delegated to local government (or other institutions) to implement, and there is no provision for finance for this implementation, or finance does not follow function.
A recent report from the Productivity Commission found that the increasing tasks and responsibilities being placed on local government have now reached a point where the cumulative burden is difficult for many local authorities to manage. A risk is that some councils, particularly small ones, may be unable to continue to comply with all the new responsibilities passed to them.
In 2012 LGNZ raised the concern and made a distinction between cost shifting, where costs are shifted to local government including by reducing central government funding, and policies that raise the bar by requiring councils to deliver services at a level greater than local residents support or regulatory creep, where the number and complexity of regulations is increasing. It is still happening.
Successive central government policy mandates are having an impact on work programmes and budgets, and this can be at the cost of delivering business as usual. The central government policy mandates are often based on a single, metropolitan model of delivery that doesn’t take into account the practicalities of implementing this across all locations and whether it fits with local, especially rural, needs. For example, I think the kerbside recycling model looks like a metropolitan model of provision where there is more likely to be processing capacity for multiple collections.
A further gripe of mine is that even when funding mechanisms are allowed for, revenue shortcomings still exist and councils can’t always set fees or fines adequately to ensure cost recovery. An example of this is the licensing fees under the Sale and Supply of Alcohol Act 2012, which haven’t been adjusted since 2013. This means ratepayers in some places are subsidising the alcohol industry because full cost recovery is not possible.
Furthermore, the Act allows councils to adopt a Local Alcohol Policy (LAP) with the objective of allowing communities to determine their preferences around the sale of alcohol in their localities. The cost of developing and implementing a LAP has recently been estimated at about $75,000 and it is unfunded, becoming a ratepayer cost.
If you haven’t already got the feeling we are aboard a sinking ship then great, but with community expectations continuing to rise, along with service demands and growth provisions, it is a given that rates will continue to rise. The only question is, by how much? Overall the funding model that is heavily reliant on rates as the main source of income is unsustainable, and through a central and local government partnership, a new way forward is urgently needed.
