Financial woes pegged to simple steps

Here’s a question for all NSW readers: how are your finances looking this week? From homebuyers who can’t afford to enter the property market to families overwhelmed by daily costs such as parking, to local councils unable to maintain their own infrastructure, it seems everyone in NSW is struggling.

As it happens, one major policy decision could address many of these issues.

The solution? Abolish rate pegging for local government.

Directly or indirectly, rate pegging has led to significant increases in state and local government charges, which have pushed up the price of land, housing, development and small business costs to an unsustainable level.

Many state and local government politicians privately agree that rate pegging is a major issue. However, they inevitably continue, the community would not accept its removal. What they really mean is they might lose votes.

It’s about time that we, the community and constituents of these elected people, accept the facts.

There is no denying that basic costs such as house prices, rents, parking costs, council charges and developer contributions have increased substantially over the past years. Who pays for these increases? We do, because councils need the money.

The majority of councils in NSW are cash-strapped, and continually searching for ways to generate more income to sustain the vital services they deliver, including infrastructure renewal programs. Many of them are turning to the federal or state governments for grants.

Why don’t they just borrow the money like most businesses? Because they can’t pay it back, as their rates income is capped.

NSW is the only Australian state or territory to cap council rates. Rate capping was legislated by the Wran government back in 1977 because a few irresponsible councils increased their rates by extraordinary amounts and failed to use the money for important infrastructure maintenance and renewal programs.

The actions of a small minority led to the majority being penalised.

The solution is to abolish rate pegging and reinstate a more affordable economy.

Most councils in NSW are larger than most small to medium businesses. The majority of them want to be seen as well-run enterprises, able to manage their financial and social needs without imposing unreasonable charges on the community.

A corporate structure could be created that would outline specific processes to be undertaken before rates can be increased. Currently, the Independent Pricing and Regulatory Tribunal (IPART) provides a conduit for councils to request a rate increase above the capped level. However, that process does not go far enough.

The real issue is to replace oppressive costs and charges with a financial plan based upon the user-pays principles.

Research has shown that communities will respond favourably to increases in rates if they are consulted and shown that the increase will bring real benefits.

For example, a major infrastructure project - such as a light rail, sporting complex or shopping centre - will have a positive effect on property values. A major expenditure on drainage renewal or parkland improvements will also provide a community wide benefit. A rate rise of a few extra cents in the dollar will be accepted as a reasonable price to pay.

The biggest benefit of doing away with the rate cap, however, is that Council will be able to borrow the necessary funds, at its preferred rate, and repay the loan through extra rate revenue.

Another unnecessary cost that is actually decreasing affordability is developer contributions. Councils collect a percentage of the value of any project from the developer. These funds are supposed to be used for community purposes within the precinct of the development. In some cases, however, although the developer has paid the funds, councils have not used the money as intended.

The developer, of course, adds the cost of the contributions to the project costs. In this way, the cost is passed on to the buyer, adding to the price of housing and further exacerbating the affordability issue.

Further, the “capacity to pay” impost by many local governments discriminates against the major retail and commercial property owners.

These exorbitant rate increases are passed on through building outgoings to the retail shop, and they pass it on to the consumer.

The planning process is a major issue, one that deserves a more detailed examination than space permits here. Suffice to say that there is a real need to engage with all parties to discuss orderly council amalgamations.

Currently, the total exposure to borrowings for local government in NSW represents around 4 percent of revenue.

Independent assessments have demonstrated that councils could borrow up to 20 percent of their revenue without affecting their capacity to repay. Until rate capping is abolished, however, this is not an option.

A new system that would combine financial flexibility for councils with transparency and accountability measures would require the following changes:

  1. Allow councils the flexibility to operate as a business, with all the appropriate governance and financial controls.
  2. Create a uniform business plan template to assist councils in the structure of their individual business plan. This would be approved by an Independent Review Panel (IRP).
  3. Councils to report every six months on the budgetary progress of their projects to an independent quantity surveyor.
  4. Councils to report annually to the IRP on the status of their business plan.
  5. Councils that do not comply would be penalised with a return to capped rates.

It’s time for our state and local government representatives to stand up and be counted. It is no longer acceptable to say the abolition of rate pegging would not be in the community’s interest. The community is smarter than that. It knows when it is getting value for money and when it is being played.

John Elvy heads up the Government Advisory Services Team at International Property Group, is the NSW Vice President of the Property Council and Chair of its Local Government Reform Taskforce.