Transcript Councillor induction day 15 November slides

Finance, funding & rates
Owen Harvey-Beavis
Manager Research & Strategy, Municipal Association of Victoria
Overview
1. Council revenue sources
2. Valuations and rates
3. Financial pressures
4. Financial management
5. Audit committees
Council revenue
Victorian local government recurrent revenue in 201011 was $6.6 billion:
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$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.
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
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
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
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
Valuation process cont.
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Only qualified valuers can perform municipal valuations
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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
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Valuer general certifies council valuations met required standards
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Minister declares the valuations suitable to be adopted and used
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The same valuations are used for State land tax
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
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)
Revaluation example
2011
House 1-$650,000
House 2 -$460,000
Unit-$370,000
Farm-$800,000
Business-$670,000
2012
House 1-$620,000
House 2 -$460,000
Unit-$360,000
Farm-$820,000
Business-$770,000
Property Value - $2,950,000
Property Value - $3,030,000
Rates required - $5,500
Rates required - $5,500
Rate in the Dollar

$5,500
$2,950,000
 0.1864%
Rate in the Dollar
$5,500
 0.1815%

$3,030,000
Revaluation example cont.
2011-12 Rates:
– House 1: $1212
– House 2: $858
– Unit:
$690
– Farm:
$1492
– Business: $1249
– Total:
$5,500
2012-13 Rates:
– House 1:
– House 2:
– Unit:
– Farm:
– Business:
– Total
$1,125
$835
$653
$1,488
$1,398
$5,500
(-7.1%)
(-2.6%)
(-5.3%)
(-0.2%)
(11.9%)
(0%)
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But, what happens when councils also increase the amount of rates
they collect?
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Suppose the council increased the amount of rates from $5,500 to
$5,800 (increase of 5.5%)
Revaluation example
2011
2012
House 1-$650,000
House 2 -$460,000
Unit-$370,000
Farm-$800,000
Business-$670,000
House 1-$620,000
House 2 -$460,000
Unit-$360,000
Farm-$820,000
Business-$770,000
Property Value - $2,950,000
Property Value - $3,030,000
Rates required - $5,500
Rates required - $5,800
Rate in the Dollar

$5,500
$2,950,000
 0.1864%
Rate in the Dollar

$5,800
$3,030,000
 0.1914%
Revaluation example cont.
2011-12
Rates
2012-13
Rates
(before rate
increase)
2012-13
Rates
(with rate
increase)
Change Due
to
Revaluation
Total
Change
House 1
$1212
$1125
$1187
-7.1%
-2.1%
House 2
$858
$835
$881
-2.6%
2.7%
Unit
$690
$653
$689
-5.3%
-0.1%
Farm
$1492
$1488
$1570
-0.2%
5.2%
Business
$1249
$1398
$1474
11.9%
18.0%
Total
$5,500
$5,500
$5,800
0%
5.5%
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
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
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.
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 deterioration of 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
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
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
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
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?
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
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 ownsource 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.