The Productivity Commission has concluded, in its draft report on local government funding & financing, that the present framework “is broadly sound”, but has suggested new tools for 4 key areas.
I haven’t read every page of this 306-page document, but I’ve gone through findings & recommendations.
My conclusion: It’s an utterly wasteful exercise.
Why? It amounts to a call for a little tidying here, sharpen your practices there.
It doesn’t get to grips with extreme, unannounced population influxes – particularly affecting Auckland following the 2003-04 immigration spike and the even higher arrival rates of the last 5 years.
It leaves rates, pretty much as they’re applied now, as the way to cover costs.
It discusses central/local government issues with additional costs not caused by ratepayers but applied to them, without delving adequately into those issues to produce better solutions. On this topic, I haven’t commented below on tourism & climate change issues discussed in the report, but hope to expand on this article over the weekend.
The commission gauge of the present system
“Despite the growing pressures on local government funding in the areas mentioned, the current suite of funding tools generally measures up well against the principles of a good system. Given that these tools have served local government & New Zealand well historically, they should not be lightly discarded.
“Providing satisfactory solutions exist to deal with the pressures, it will be preferable to retain a known & successful existing system to incurring the disruption & costs of transferring to another system that is not substantially superior. The commission’s view is that acceptable solutions are likely to exist for each of the areas under strain.”
The commission released its draft report yesterday, has invited submissions by Thursday 29 August and intends to release its final report by 30 November.
At the foot of this article you will find links to the commission’s report & related material, also links to the Shand Report of 2007, to a recent paper by David Shand and a commentary by Christine Rose.
The 4 areas the commission sees needing new tools:
- Supplying enough infrastructure to support rapid urban growth
- Adapting to climate change
- Coping with the growth of tourism, and
- The accumulation of responsibilities central government has placed on local government.
It added that councils had “significant scope” to make better use of existing funding tools and improve their organisational performance, productivity & decisionmaking.
The commission described its report as “the most in-depth look at local government funding & financing since the 2007 Shand report”.
Suitable? It’s OK
The Government asked the Productivity Commission to identify whether the existing funding & financing arrangements are suitable for enabling local authorities to meet current & future cost pressures.
Apart from the suggested new tools, the commission’s response was: “We found that the current funding & financing framework measures up well against the principles of a good system. The current system, based on rating properties, is simple & economically efficient, compared to alternatives. The current system should therefore remain as the foundation of a fit-for-purpose future funding & financing system for local government.”
But nobody sets up an inquiry just to establish that the status quo works fine. The Productivity Commission, in its draft report, has made 67 findings & 30 recommendations, and has asked 8 questions: “Testing the ideas & recommendations in this report is an important next step in our inquiry,” it says.
Combined opex exceeds income by $400 million
The commission found that, as at June 2016, councils owned $112 billion of fixed assets, employed over 25,000 full-time equivalent staff, and had annual operating expenditure of $9.3 billion & operating income of $8.9 billion.
“Local authority rates increases have outpaced increases in other indices measuring average costs & incomes. In particular, local authority rates & payments increases have significantly outpaced increases in the consumer price index & the independently prepared local government costs index.
“Local authorities are capital-intensive businesses. Expenditure on fixed assets has grown significantly in recent years and demand for ongoing capital expenditure is unabated or increasing due to the development, maintenance & replacement of the infrastructure required to support New Zealand’s rapidly growing population (including international visitors) and support economic growth.
“As a whole, local authority debt has grown steadily since 2006. Some high growth councils are experiencing constraints in their ability to finance further infrastructure investment because they are coming close to covenanted debt limits. At the same time, some local authorities take on very little debt at all.”
In April, Finance Minister Grant Robertson added 2 pointers to the commission’s inquiry resulting from the final report of the Tax Working Group:
- Whether a tax on vacant land would be a useful mechanism to improve the supply of available housing & discourage landbanking, and
- Addressing supply constraints in housing, including through reforms to infrastructure financing & the planning system.
The commission says, in its conclusion on priorities: “The 4 most important changes to the funding & financing system for local government are therefore:
- help for at-risk councils to adapt to the impacts of climate change
- new funding tools for growth-supporting infrastructure
- new funding tools for tourism hotspots, and
- reform to strengthen the interface between central & local government, to ensure that regulatory regimes are co-designed & jointly implemented.
“The commission also considers the 3-waters sector an important area for investigation. It presents a case study that makes proposals to improve sector outcomes and ease funding pressure.”
Among the commission’s findings & recommendations (Fs & Rs):
4.4: When central government passes new responsibilities to local government, without providing adequate funding, this creates cost pressure for councils. Unfunded mandates fall broadly into 4 categories:
- new or stronger standards that councils must meet – without commensurate funding
- new responsibilities, functions or processes that councils must undertake – without commensurate funding
- reduction, cessation or removal of central government funding, or of government-funded programmes & services within the community, and
- restrictions on the ability of councils to set cost-recovery fees for services or functions.
F4.6: Central government is sometimes passing new responsibilities to local government without adequate analysis, including consideration of the range of council circumstances. This can result in regulation that is “one size fits all”, making it unfit for purpose, or particularly costly to implement, in some localities.
F4.14: Rates of afforestation will increase as New Zealand transitions to a low-emissions economy. This increase in forested land will result in considerable new pressure on many local roads, particularly at harvest time. This will, in turn, lead to a need for more frequent maintenance & replacement of roads, resulting in increased costs. The cost pressure this creates for some councils may indicate a need to re-examine how funds from road user charges are distributed.
5.5: Successive legislative reforms aimed at increasing the transparency of council performance through prescriptive reporting requirements have been counterproductive. The local government performance reporting framework requires fundamental review, with a mind to significantly simplifying the required disclosures, and improving their overall coherence & fitness-for-purpose.
R5.1: The Department of Internal Affairs, Local Government NZ & the NZ Society of Local Government Managers should work together to improve basic governance, including financial governance, skills & knowledge across elected members.
F6.2: The rating tools of New Zealand local governments have low compliance & administration costs. The complexity of development contributions causes them to have higher administration & compliance costs.
F6.5: Development contribution (DC) policy & implementation are inherently complex. Good examples exist of council DC policies. Councils appear to have been refining & improving them over time. Yet the DC policies of some councils still fall considerably short of best practice. The good policies provide a transparent & reliable platform for setting DC charges in line with the purpose & principles of DCs in the Local Government Act.
F6.6: Councils have a portfolio of charging & rating tools to recover the costs of their growth-related infrastructure investments. Yet cost recovery may take many years, councils face investment risks (eg, over-investment or investing in the wrong location) and some councils face debt limits. Councils also face political pressure to not support growth. The result is that some councils in fast-growing cities are either not willing, or not able to, invest in growth-related infrastructure at levels that match demand.
F6.7: Giving councils powers to levy a value-capture rate, congestion charges & volumetric wastewater charges would give them additional means to recover the costs of growth without burdening existing residents. Yet some councils & their residents may still not be willing to accommodate growth to the extent needed for supply to match demand.
F6.8: Many councils & ratepayers still perceive that council revenue from local growth does not fully cover costs that councils incur from growth and that therefore growth is financially disadvantageous. This perception is exacerbated by the:
highly visible way that property owners are billed for & pay rates
much less visible way that most people pay income tax & gst, and
the automatic link between economic activity & revenue from income tax & gst which does not exist for rates.
F6.9: While local property taxes are in widespread use in other parts of the world such as the US, they are not a panacea for aligning the incentives of existing voters & property owners with socially desirable growth rates in dwellings. Given that property prices in New Zealand have been neither stable nor predictable, property tax revenues would not be either, and this would be undesirable. The highly transparent system of rating in New Zealand provides a fiscal discipline on councils and should be retained.
F6.10: None of the options of a local property tax, a local income or sales tax, or a portion of national gst or income tax is a fully satisfactory solution to the problem of councils & existing property owners & voters failing to embrace growth, because no direct & transparent link exists between growth & council revenue. Each option does not meet at least one important criterion for a good local tax. The revenue from local property tax would be neither stable nor predictable, local income & sales taxes would be complex and likely to have high administrative & compliance costs, and a portion of national gst or income tax would be likely to undermine local autonomy & accountability.
F6.11: A system of payments from central government to councils based on new building work in territorial local authorities could offer local government a practical additional funding source. The system would substantially preserve local autonomy and provide a direct link between council revenue & a council’s effectiveness in keeping land supply & infrastructure responsive to demand. This could be effective in incentivising councils & their existing ratepayers to support growth.
F6.13: Special purpose vehicles (SPVs) can be an effective way to reduce the barrier caused by council debt limits where these limits constrain a council’s ability to invest in infrastructure to serve new greenfield developments. The SPVs raise finance for infrastructure investment in a way that puts debt on the balance sheets of new property owners who benefit from the infrastructure, rather than on the balance sheet of their council or the Crown.
F6.14: The Government & officials are working on ways to expand the use of special purpose vehicles to finance large brownfield infrastructure investments that will benefit both new & existing residents. While more challenging to design, and requiring legislation, these expanded SPVs promise to deliver a further valuable means to reduce the barrier of debt limits for fast-growth councils.
R6.1: The Government, Local Government New Zealand and the New Zealand Society of Local Government Managers should work together to develop standardised templates both for the development contribution (DC) policies of councils and council assessments of DC charges for individual property developments. Councils should be required to use the standardised templates.
R6.4: The Government should consider implementing a system of payments to territorial authorities, based on new building work put in place in each territorial local authority, to incentivise councils to increase the supply of infrastructure-serviced land to match growth in demand.
R6.9: The benefit principle & maintaining the integrity of local government autonomy, responsibility & accountability should guide central government funding of local government activities. This implies that central government should generally limit its funding to where there are national benefits. Central government should not expect local government to act simply as its regulatory agent. Rather, the 2 levels of government should seek a regulatory partnership based on mutual respect & an agreed protocol.
R6.10: Central & local government should strive to achieve a more constructive relationship & effective interface through:
- central & local government providing input (formally or informally) into each other’s relevant policymaking processes, under an agreed set of principles or a protocol
- central government engaging in a meaningful dialogue with local government early in the process of developing relevant new regulations
- co-operative approaches to tackling problems with implementing relevant new legislation, regulations or environmental standards
- the creation of formal & informal feedback loops to identify problems with delegated regulations when they first appear, and
- the spread of information through the system and the sharing of expertise & knowledge.
F7.3: Differentials & the uniform annual general charge are not transparent in allocating the burden of rates to those who benefit from council services. Targeted rates provide a more direct connection between the funding & the beneficiaries of services, and therefore are a much more transparent way of giving effect to the benefit principle.
F7.4: The statutory 30% cap on uniform charges (covering uniform annual general charges & uniform targeted rates applying across the district, but excluding uniform water & wastewater rates) has no clear rationale and unnecessarily restricts the discretion of councils to use rates to reflect the benefit of services & amenities. Currently, few councils are close to the cap.
F7.5: There is little or no evidence that rates generally have become less affordable over time. Much concern focuses on affordability for low-income (particularly elderly) households who own their own homes. Yet such households generally have much lower housing costs than other low-income New Zealand households.
R7.1: The Local Government (Rating) Act 2002 should be amended to remove rates differentials & uniform annual general charges. Councils should have 5 years to implement their removal.
R7.2: Local government legislation should be amended to require councils to:
- match the burden of rates to the benefits of council services, as a first step in setting rates
- consider ability to pay as a second step
- set out the reasons for their rating decisions in each step in a clear & transparent manner, and
- (in applying the ability-to-pay principle) consider coherence & consistency with the income-redistribution policies of central government.
Councils should continue to have the power to determine, on reasonable grounds, the appropriate allocation of rates within their district or region.
R7.3: Local Government NZ & the NZ Society of Local Government Managers should develop advice for councils on how to apply the benefit principle (the burden of rates should reflect the benefits received) in their rating decisions.
R7.4: The Local Government (Rating) Act 2002 should be amended to remove the statutory cap on uniform charges. [At R7.2, the commission recommended removing uniform charges altogether.]
Shand on autonomy
Mr Shand, now an adjunct professor of public policy at AUT University in Auckland, wrote a briefing paper on this topic in March, in which he reached 5 conclusions. He noted that councils have considerable financial autonomy, said any changes to funding sources should retain & reinforce that autonomy and finished on this note: “Existing mechanisms are overly complex and reduce democratic control and need urgent reform.”
Mr Shand’s paper was in response to one last November by former Rodney district councillor & Auckland regional councillor Christine Rose, whose roles in 15 years as an elected local body member included being deputy mayor of Rodney, deputy chair of the Auckland Regional Council and chair of the transport & urban development committee.
Rose on concentration of power
Ms Rose wrote in her paper: “New Zealand has one of the most centralised political systems in the OECD (Organisation for Economic Co-operation & Development). Functions & finance are concentrated in the highest level of the 2-tier state system, central government, with local government roles allocated at the discretion of legislation determined by central government ideologies, perceptions & preferences.
“Because local government’s focus is strongly mandated by central government, it has ‘swung in pendulum fashion’ between a restricted ‘core service’ delivery role with a focus on efficiency & effectiveness, to one with community wellbeing in the centre, and back again depending on the inclinations of the party in power at the time.”
National Library, 2007 rates inquiry reports
Background to 2007 inquiry
David Shand, 12 March 2019: Local government role & autonomy
Christine Rose, AUT Briefing Papers, 27 November 2018: To enshrine & define local government once & for all
Christine Rose, The Daily Blog
25 July 2018: Council funding inquiry terms released, and Selwood questions their constraints
16 July 2018: Finance minister calls Productivity Commission in to examine local body funding
Attribution: Productivity Commission, David Shand, Christine Rose.