Finance, funding & rates Owen Harvey-Beavis Manager Research & Strategy, Municipal Association of Victoria

1. Finance, funding & rates • Owen Harvey-Beavis • Manager Research & Strategy, Municipal Association of Victoria

2. Overview • Council revenue sources • Valuations and rates • Financial pressures • Financial management • Audit committees

3. Council revenue Victorian local government recurrent revenue in 2010-11 was $6.6 billion: • $3.71 billion or 56 per cent in rates • $1.14 billion or 17 per cent in fees, fines and charges • $591 million or 9 per cent in specific purpose grants • $489 million or 7 per cent in general purpose grants • $681 million or 10 per cent from other sources Local government collects 3.5 cents of every $1 raised in Australian taxes. The Commonwealth collects 80.3% (including GST 14%) and the States 16.2% of total taxation revenue.

4. What are council rates? • A property tax that uses property values as the basis for calculating how much each property owner pays • Can comprise up to three components: • Municipal charge (not more than 20% of total rate revenue) • Waste management (garbage) charge • General rate based on the ‘rate in the dollar’ • Councils can strike differential rates • Exemptions apply to crown land, charitable land, land used for religious purposes, land used exclusively for mining or forestry • Primary reason for rates is to raise revenue to fund local government services and infrastructure for public benefit • All property owners pay a share of rates regardless of their choice to use/not use council services, programs, infrastructure

5. Rating process • Draft budget: • Sets priorities to meet Council Plan objectives • Identify asset maintenance and service funding needs • Estimate revenue to be collected from other sources • Identify amount of rates needed to meet financial responsibilities for coming year • Advertise and open for public comment for at least 14 days • Setting rates: • Determine any municipal and waste charges • Determine rate in the dollar (balance of required revenue by the total value of all properties in the municipality) • Individual property rates: multiply rate in the dollar by the value of a property, add any municipal and waste charges

6. Rates example • Total income identified in Council Budget: $70 million • Other revenue (funding, grants, fees, fines): $30 million • Rate revenue needed: $40 million • $40 million  $12 billion (value of all rateable properties in the municipality) = $0.0033 (rate in the dollar) • $ Value of property x $ rate in the dollar = $ rates payable • Eg. $550,000 x 0.0033 = $1,815

7. Valuation process • 2.5 million properties in Victoria valued at more than $1 trillion • Council valuers review property values every two years • Last valued on 1 January 2012 • Total value of all properties in a municipality is used to strike the ‘rate in the dollar’ • Up-to-date revaluations are critical to ensure property owners pay a fair and equitable share of rates • Ratepayers have a right under the Valuation of Land Act 1960 to object to a valuation

8. Valuation process cont. • Only qualified valuers can perform municipal valuations • Amount a property would sell for on a set date (1 Jan 2012) • Assess market movements and recent sales/rental trends • Highest and best use of the property • Build profile of value levels for different areas/property types • Physical inspection of a sample of properties • Complex statistical models apply information to individual properties • Valuer general certifies council valuations met required standards • Minister declares the valuations suitable to be adopted and used • The same valuations are used for State land tax

9. Facts and myths MYTH • Increased (or decreased) property values increase (or decrease) how much a council collects – NO (but YES for State land taxes) • Valuations change the total rates collected – NO FACT • Valuations are “revenue neutral” • Council budget is set first and determines total amount of rates to be collected • Valuations are used to apportion how the burden (the total revenue to be raised) will be shared by each ratepayer • Rate in the dollar x property value = rates payable

10. Property revaluations Size of the pie = Council revenue to be collected (determined by budget) Slice of pie = amount each ratepayer will pay (based on value of their property) A change in property values can change the slice (amount you pay), but not the size of the pie (overall amount council collects)

11. Revaluation example House 1-$650,000 House 1-$620,000 House 2 -$460,000 House 2 -$460,000 Unit-$370,000 Unit-$360,000 Farm-$800,000 Farm-$820,000 Business-$670,000 Business-$770,000 Property Value - $3,030,000 Rates required - $5,500 Rates required - $5,500 Rate in the Dollar Rate in the Dollar 2012 2011 Property Value - $2,950,000

12. 2011-12 Rates: House 1: $1212 House 2: $858 Unit: $690 Farm: $1492 Business: $1249 Total: $5,500 2012-13 Rates: House 1: $1,125 (-7.1%) House 2: $835 (-2.6%) Unit: $653 (-5.3%) Farm: $1,488 (-0.2%) Business: $1,398 (11.9%) Total $5,500 (0%) Revaluation example cont. • But, what happens when councils also increase the amount of rates they collect? • Suppose the council increased the amount of rates from $5,500 to $5,800 (increase of 5.5%)

13. Revaluation example House 1-$650,000 House 1-$620,000 House 2 -$460,000 House 2 -$460,000 Unit-$370,000 Unit-$360,000 Farm-$800,000 Farm-$820,000 Business-$670,000 Business-$770,000 Property Value - $3,030,000 Rates required - $5,500 Rates required - $5,800 Rate in the Dollar Rate in the Dollar 2011 2012 Property Value - $2,950,000

14. Revaluation example cont.

15. LG cost pressures • Intergovernmental funding – declining • Councils’ growth in costs – LG Cost Index, not CPI • Asset management – funding the infrastructure renewal gap • Defined benefit superannuation

16. Intergovernmental funding • GST was implemented in 1999 - Australian Parliament rejected that states should fund local government through GST • Responsibility remains at the federal level • Financial Assistance Grants to local government have declined from 1.2 per cent in 1993-94 to 0.62 per cent of Commonwealth revenue in 2011-12 • Funding indexed by CPI & population (not real costs growth) • Gap in state and federal funding for home and community care, kindergartens, school crossings, public library services • Shortfall is either paid for by ratepayers, service cuts and/or reduced asset maintenance/renewal spending

17. LG Cost Index • Consumer Price Index (CPI) measures household goods & services • LG Cost Index measures costs to deliver council goods & services • Staff costs are the main driver as most services are delivered by people to the community • Second largest expense is asset maintenance and construction inc. staff/contractors and materials • LG Cost Index is determined using: • Average Weekly Earnings (AWE) Index • Engineering Construction Index • LG Cost Index has averaged 4% over the 5 years to 2011-12 and was estimated at 3.9% for 2012-13.

18. Asset management – structural adjustment • Local government is capital intensive • $60 billion in assets - level of government that spends the highest proportion of its revenue on infrastructure • Adoption of accrual accounting (mid 90s) - councils explicitly recognise deteriorationof their assets for the first time • At the same time, rate capping and rate cuts led to councils spending less on ageing infrastructure • Rate increases in excess of the LG Cost Index help to close the ‘asset renewal gap’ – that is, assets declining faster than councils can fund their renewal costs

19. Asset renewal gap challenges • 2002: Auditor General says renewal backlog is $1.5 - $2.7 billion • 2007: MAV Step Asset Program identified an annual underspend of $280 million • Equivalent to annual av. 12% rate rise for next five years • 2010: councils reduced their annual infrastructure renewal shortfall to $100 million • Achieved through better data collection; increased funding (rates and borrowings); and asset rationalisation • Further investment still needed by councils to continue reducing the asset renewal gap • Deferred spending = higher costs for future ratepayers

20. Defined Benefit Superannuation • $400 million call due 1 July 2013 • Established an MAV Taskforce which will make recommendations in early 2013 • Recommendations likely to include: • Access to borrowings • Changes to information and advice provided by Vision Super to employers • Potential options to reduce the risk of future calls

21. Financial management • Council plan • Identifies the needs and issues to be dealt with in the municipality • Must be prepared by 30 June • Strategic resource plan • Is included as part of a Council Plan • Sets out the financial and human resources required to achieve objectives in Council Plan • Council budget • Estimates revenue to be collected from government funding and loans to determine amount needed in rates • Draft budget open for comment for 14 days • Must be submitted to the Government by 31 August • Annual report • Reviews a council’s performance against Council Plan • Must be submitted to the Government by end of September

22. Identifying important financial indicators • Is there an underlying surplus? - Long term survival • Is Working Capital positive? • Is there enough cash? - Short term survival • Is debt in control? • Is depreciation increasing due to lack of maintenance? • Are Capital Works on time and at their budgeted cost? • What are the contingencies and commitments?

23. Audit committee • S.139 of the Local Government Act requires councils to have an audit committee • The state has published (non-binding) guidelines on audit committees that emphasise: • The importance of an independent audit committee • The separation between the executive and the committee • The advisory nature of the committee • An audit committee can: • Identify and advise on organisational risks • Interrogate key controls and compliance systems • Liaises between internal and external auditors

24. Conclusion • Councillors will be required to establish the overarching council plan, from which annual budgets will be established and the financial performance will be monitored. • While individual councils vary considerably in their revenue sources, the sector has a strong reliance on own-source revenue. • Nevertheless, councils will face key challenges in finance related to government grants escalating below the cost of service and the need to appropriately manage assets and infrastructure. • The MAV will be providing further training opportunities on financial management and identifying the key financial.