Rate capping regime ‘onerous’ for local governments

By David Donaldson

Wednesday June 8, 2016

Rate capping and cost shifting are making it difficult for local government to plan and function effectively, a Victorian parliamentary inquiry has found.

A combination of increasing costs, the rate capping policy enacted by the current government and unclear advice may lead to more councils taking on debt, according to the second report of the inquiry into rate capping, released Tuesday.

Uncertainty around how the rate increase cap will continue be calculated “makes it difficult for councils to develop long term financial plans, or enter into negotiations” such as enterprise bargaining, says the report.

The Environment and Planning Committee made seven recommendations following submissions from and hearings with a range of local government representatives.

Council representatives complain they face rising costs and constraints on where they can cut. They told the committee that many of the services they provide are required by law — Darebin City Council estimated 21% of its costs fell into this category — reducing the range of operations in which they could find savings.

The state government has been pushing more of the cost of jointly-funded services onto councils in recent years, councils claim, increasing costs. One witness told the committee:

” … You have also got the other bits about the lollipop ladies. It used to be a 50-50 deal. The state government said, ‘Oh, no. Now we’ll only give you 30 per cent’. So now it is 70-30. We have got the libraries: it used to be 50-50; it is now 80-20. You cannot keep imposing things like rate capping on us and not be doing it yourselves. You guys are throwing these things at us. You are saying, ‘Here is rate capping. By the way, you also need to be paying 70 per cent of the lollipop ladies. You need to be paying 80 per cent of the libraries’. It just does not balance.”

It is “absolutely not rational to cap rates and yet allow cost shifting to local government without corresponding funding”, argued one submission.

This may cause local governments to fund services through loans. Some councils claimed they were encouraged by the Essential Services Commission to take on debt, something the ESC denied. The inquiry recommended the commission should clarify its advice on councils assuming debt.

Under the policy, councils may apply to vary the cap if they can demonstrate a need to. But the committee noted the process is “cumbersome” and there is significant evidence it “is not working satisfactorily.” It’s expensive, especially for smaller rural councils:

“The timeframe to apply for a variation has proved challenging and, in some cases, financially costly for local government. One council put the cost of preparing and submitting their application for a rate cap variation at $250,000. The committee finds in this report that where councils have a reasonable case for seeking a rate increase above the cap they should not be prevented from doing so simply because the ESC has a costly and overly onerous administrative regime.”

Another problem lies with which formula is used to calculate the maximum rate increase — there is debate about whether it should be based on consumer price index estimates by the Victorian Department of Treasury and Finance or historical data issued by the Australian Bureau of Statistics. This matters because, apart from determining how much money councils can take, they must wait until December to find out. This timing is proving highly inconvenient for councils:

“The administrative arrangements for this policy are inconvenient and unnecessarily onerous for local government. Setting the cap annually in December presents challenges for local government. In 2015 the cap was announced three days before Christmas, and the notification to apply for a variation was required to be lodged by 31 January. This was at a time when most local governments did not have any meetings scheduled.”

The report also raises concerns around the “complex” funding arrangements for the State Emergency Service, which is partly funded by local government. It points out rate capping may lead councils to reduce payments to the SES, which would in turn have to be picked up by the state government or risk weakening Victoria’s emergency response system.

Among its recommendations, the committee has called for:

  • The minister to announce the rate cap earlier than December and publish the reasons for setting the cap at a particular rate.
  • The essential services commissioner to refine the guidelines for rate cap variation applications based on feedback from local councils.
  • Support for smaller rural councils that wish to apply for a rate cap variation but lack the resources or staff to make an application.
  • The essential services commissioner to investigate the most effective and simple way for rate cap variation applications to be submitted.

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