The NZ Productivity Commission’s final report on local government funding and financing ran to 343 pages; 20 pages of which outlined the commission’s findings and recommendations. Anne Gray highlights key points of this massive work.
At the crux of the report are a number of changes that “support councils in dealing with some large and growing pressures”.
The report found that the current funding and financing framework for local government has many strengths and commission chair, Murray Sherwin, says, “the current rates-based system remains appropriate for New Zealand”.
He says local government has access to a range of funding tools, “and a lot of autonomy in how they use them.
“Councils also have the flexibility to respond to local needs and preferences.
“This autonomy, and the accountability that goes with it, are strengths of our system, and should be preserved.”
But it is also acknowledged councils are struggling to deal with some big challenges; including rapid population growth and central government loading councils with more responsibilities and higher environmental standards, and increasing tourism pressures.
“The costs of dealing with the impacts of climate change is also a major and growing pressure on some councils.
“Rising sea levels and more frequent and extreme weather events threaten many communities, and a lot of local infrastructure. These pressures are significant, rising and not evenly distributed around the country,” Sherwin says.
Small, rural councils serving low-income communities are also under strain because of limited resources.
The commission says that to help councils deal with these pressures, it has focused on targeted solutions “that do not compromise councils’ autonomy or accountability”.
It says that payments from central to local government are justified in some circumstances, and that co-funding will be needed to help some councils deal effectively with the challenges they face.
It recommends central government co-funding to help councils redesign, and possibly relocate, infrastructure at-risk from climate change, as well as to assist small, rural and low-income councils upgrade their three waters infrastructure.
But, many councils can make better use of their existing funding tools.
“Improvements to organisational performance, transparency and decision making can also help to relieve cost pressures.
“Spatial planning would also help to coordinate council efforts as they plan and respond to the various stresses, both regionally and with central government.”
Playing it too safe?
While the Productivity Commission’s final report has been welcomed by groups such as Business New Zealand – the Local Government New Zealand (LGNZ) association lamented “the lack of courage shown” in the report.
“While it makes many worthy recommendations, its play-it-safe-approach relegates the report to a mere repeat of the nine rates reviews that have preceded it since 1945,” says LGNZ.
“The report underscores the well-understood point that property rates are an efficient mechanism for charging and collecting local government taxes,” says LGNZ president Dave Cull.
“We don’t disagree, especially where councils are operating in a stable environment, but we’re not in a stable environment.
“In 2004, Stats NZ predicted our population would hit five million people by 2050, but we’re on track to hit that number in 2020.
“That’s 30 years ahead of schedule and our critical local infrastructure hasn’t kept up with this growth.”
Cull says a major reason for this is because rates confronted local communities with the costs of paying for growth infrastructure upfront, “whereas the short-term tax benefits of population growth wash up exclusively in central government’s coffers in the form of GST, salary and profit taxes.”
LGNZ has long argued that local government’s revenue tools need to be broadened and linked to the economic cycle, either through a share of GST, local capital grants, resource rents, or tourist taxes.
On the other hand it welcomes many of the suggestions put forward on how councils can lift their performance, noting that much of it was already in train through its own work programme.
What is less certain, LGNZ says, is the Government’s willingness to accept the recommendations that relate to central government, particularly on the need for it to tally up the invisible costs it imposes on ratepayers through the legislative process.
BusinessNZ says the commission has listened to business concerns and agrees with the finding that rates on business should be equal to services received.
The organisation also agrees with the commission’s recommendations that councils should be allowed to charge for water by volume and implement road congestion charges – but not to impose accommodation levies – and that central government should help pay for more local infrastructure.
Lifting local government performance
The commission believes significant scope exists for councils to make better use of the current funding tools and decision making to relieve funding pressures.
On lifting of council performance and transparency the report points to a new regulatory regime for the three waters sector; mandatory audit and risk committees; a fundamental review of performance reporting regime; mandatory performance measures published by a central agency; and itemised rates bills.
On affordability for households the commission says the Rates Rebate Scheme is poorly targeted and unfair – replace it with a national rates postponement scheme or at least shift it to online; remove the 30 percent cap on uniform charges.
On the question of taxing vacant land, it says that such a tax would suffer definitional problems, have high administration costs and be ineffective in improving the supply of available housing.
More central government funding
On the subject of councils facing significant funding pressure, which are highly uneven in scale across councils, the commission says a national legal framework for climate change adaptation is urgently required, and there is a need for central government co-funding for at-risk council infrastructure.
“The costs of doing so are difficult to estimate, but by far the largest item will be support for council infrastructure at risk from climate change (in the order of $150 million a year over 20 years).”
On meeting the demand for growth infrastructure the commission points to volumetric charging for wastewater; road-congestion pricing and legal clarity around targeted rates for value capture.
As to unfunded mandates it says the Crown should pay its way – cover costs of council services to Crown property and pay development contributions on its developments. It recommends a “Partners in Regulation” protocol to avoid future unfunded mandates.
On coping with tourism growth it says the funding gap is small, so new tools are unlikely to provide net benefit to councils that should, instead, make better use of available tools, including rates.
As international tourists provide revenue at least equal to their costs, but not directly to councils, “central government tourism funding for councils is justified but should be better targeted.”