Victorian councils must take steps to ensure an impending rate cap does not erode their levels of service, IPWEA VIC CEO David Hallett says.
Minister for Local Government Natalie Hutchins recently announced that the first rate cap under the newly introduced Fair Go Rates System will keep 2016/17 financial year rate increases capped at 2.5%, based on the Victorian Treasury’s forecast CPI increase.
Hallett says while the model comes as no surprise, the figure of 2.5% is less than anticipated. The Essential Services Commission (ESC) recommended a cap of 3.05%, based on 60% CPI and 40% Wage Price Index.
“The challenge now is for local government to deal with it,” Hallett says. “The significance of the 2.5% cap is brought into focus when you look at what the average rate increase across the 79 councils in Victoria has been for the last 10 years – it’s about 6%. 2.5% is obviously going to make an impact.”
“IPWEA VIC’s feeling is there are two ways to deal with a cash constraint,” Hallett continues. “One is to reduce your service provision to your local ratepayers and communities, and the other is to embrace the change and do what you can with lesser resources – to continue to provide your communities with what they expect.
“Obviously, the latter is our preferred alternative, although we recognise it’s not easy to keep doing the same amount, let alone more, with less money.”
Hallett believes the rapidly-growing municipalities in the peri-urban fringe surrounding Melbourne will be among the hardest hit by the rate cap.
“They have lots of new housing developments, which really puts pressure on council to develop road and drainage infrastructure, for instance,” he says.
It largely comes down to finding ways to generate greater efficiency, Hallett says.
“We would encourage new approaches to the service delivery by those councils that find themselves most affected,” he says.
What services do your community actually want?
On the surface, capped rates will seem like good news to many ratepayers. Hallett says the challenge for councils now is to communicate the impact the rate cap will have on the services it provides, glean what services the community does not consider essential, and review current asset management models.
“The model that is widely accepted as optimal is to consult with the community and find out what they actually do want, and, perhaps more importantly, what they don’t attach priority to,” Hallett says. “There’s no point spending scarce dollars on things the community doesn’t necessarily value highly.
“The only way you’re going to find that out is to go and talk to them. It’s a matter of being transparent with the ratepayers and saying, ‘Let’s talk about what services you value most highly, and ways in which we can continue to deliver those, perhaps not in the same way as we would historically, but in a way you’re still going to be happy with’.”
Hallett says discussion needs to be generated around how often services are provided.
“There’s any number of things councils do, many of which are invisible. Councils are going to have to think long and hard, first of all about whether all of these services can continue in their established form. Not many of council's services discretionary, so then the question then becomes, 'How often do we have to provide them?'.”
Joining forces with neighbouring councils is one way to maintain services, Hallett says.
“It’s around some neighbouring councils pooling resources and generating economy of scale into something like library service provision,” he says. Hallett cites the example of the Whitehorse Manningham Regional Library Corporation, a separate entity to the Whitehorse and Manningham councils whose residents it services.
“Instead of each of them operating several library outlets, they consolidated, rationalised, and now offer eight between the pair of them,” he says.
“Increasingly, councils are starting to consider letting road maintenance contracts, for example, to a single provider to service multiple municipalities, which is an interesting change, because historically most of council’s interests have extended only as far as their municipal boundaries.
“If you take a broader view, then you can start to see some possibilities across borders that enable you to keep providing the service your community wants, at perhaps a reduced cost, which is a win for everybody.”
Applying for a higher cap
Councils will be able to apply to the ESC for an exemption if they can prove community support, and justify the need, for more spending. Any council wishing to apply for a higher cap has until March 31 to apply.
"There is scope for a council to put a business case forward for a greater rate increase,” Hallett says. “That’s another thing that councils shouldn’t ignore, but it's got to be well-founded, and supported by a strong business case.”
Learning from other rate capping examples
The Municipal Association of Victoria President, Cr Bill McArthur points to other rate capping models implemented in Australia as a cautionary tale, particularly in NSW, where rate pegging was introduced in 1977. In 2012, the NSW Treasury Corporation found that councils faced an infrastructure funding shortfall of $7.2 billion.
“Many reviews have called for NSW rate caps to be scrapped due to the harmful unintended consequences of excessive cuts to infrastructure maintenance and renewal spending; plus councils’ reluctance to borrow more or apply for a rise above the cap where there’s a genuine need for spending to ensure long-term sustainability,” McArthur says.
“Victoria’s Kennett-era rate cap also led to cuts in infrastructure spending, and a 2012 Auditor General’s report confirmed Victorian councils’ $225 million asset renewal gap is projected to grow to $2.6 billion by 2026.”
Hallett says the potential for a widening renewal gap is a concern.
“The State Government doesn’t want to see that, local government doesn’t want to see that, and rate-payers don’t want to see that,” he says. “But, it’s going to require some proactive action to prevent it happening.”
Opportunities for improvement
“Our position is to encourage our members to accept the changes, think about things a little differently, involve your community, and look at ways of introducing greater efficiency into your operations, so you can continue to deliver the services the community wants,” Hallett says.
“There are some very well-run municipalities in Victoria, and some others that have a bit of catching up to do. If they think in terms of efficiency, and they start in terms of first principles around community engagement, longer-term service planning and operational efficiency, our hope is all of Victoria’s councils find ways to deliver the services their communities expect, within some constraints.”
These principles will be at the heart of the 2016 IPWEA VIC Public Works Conference titled Efficiency – the Key to Driving Your Dollar Further, to be held in Melbourne April 20 - 21. Minister Hutchins will address delegates at the conference.
For those unable to attend the IPWEA VIC Conference, IPWEA will be conducting a Levels of Service webinar, starting 14 February. The webinar will give participants the tools to become proficient in service level determination, measuring and reporting, and is aligned with NAMS.PLUS and IPWEA’s Practice Note 8: Levels of Service and Community Engagement.
By attending both the webinar and the conference, council’s management will be best placed to balance the competing needs between prioritised service delivery and affordability.