New Zealand: Local government seeks new funding sources – again

Brief Counsel

Local Government New Zealand (LGNZ) has released a discussion paper seeking new funding sources to reduce its reliance on general rates.

It has made the argument many times over the years but says the need for change is becoming more urgent given the dual impact of an ageing population and galloping infrastructure costs.

Submissions are due by 27 March 2015. They should be sent to fundingreview@lgnz.co.nz

A heavy duty effort

LGNZ assembled a heavy duty working group chaired by Auckland Councillor and former Rodney Mayor, Penny Webster, to guide the preparation of the discussion paper.

Other members were: Michael Barnett (Auckland Regional Chamber of Commerce), Peter Bodeker (Otago Regional Council), Mark Butcher (New Zealand Government Funding Agency), Rob Cameron (Cameron Partners Ltd), Nick Clark (Federated Farmers), Adam Feeley (former SFO head, now on the Queenstown Lakes District Council), Dr Oliver Hartwich (The New Zealand Initiative), Raf Manji (Christchurch City Council), Chris Ryan (Waitomo District Council), Professor Claudia Scott (Victoria University), Stephen Selwood (NZ Council for Infrastructure Development) and Phil Wilson (Auckland Council).

A big battalion was needed as this is a battle local government has fought many times, as the paper acknowledges, saying:

"Ever since its establishment in 1842, the funding of local government has been a problematic issue. It has become a matter of such concern that a considerable number of funding reviews have been undertaken over the past 65 years, with all reviews highlighting the need for councils to have additional funding sources to complement rates".

LGNZ President Lawrence Yule reinforced this point at the launch of the report, stating that councils account for about 10.5% of all public expenditure but raise only 8.3% of public revenue.

However the response from the Government, delivered by the Prime Minister at his regular post-Cabinet press conference last week, was not encouraging. He said, while they were "happy to discuss" the paper with LGNZ, they were "very cognisant of putting more cost on taxpayers and ratepayers".

Proposed reform directions

Four reform "themes" are identified:

  • the need for an effective "principles-based" partnership between central and local government to allow joint decision-making and an opportunity to move away from "a regime that sees frequent tweaking of local government policy settings"
  • the need, before pursuing new funding mechanisms, for local government to assure the public that it is open to innovation in service delivery
  • the need to recognise the diverse nature of New Zealand communities, and the different challenges that diversity generates for local government (e.g. 32 of the 78 territorial authorities expect a decline in their populations by 2031, while Auckland will experience strong growth), and
  • a funding mix that includes greater use of tools already available, in particular the use of price signals (user charges) where appropriate, and a prudent use of debt (especially for assets which will confer an inter-generational benefit).

Current funding mix

The average composition of funding across all councils is shown in the table below.

Funding source % total council revenue            
Rates 49   
User fees and charges ?15
Current grants (mostly NZTA operational contribution to
transport)
11
Capital grants (mostly NZTA capital contribution to
transport)
8
Vested assets 7
Regulatory income, petrol tax 5
Interest and dividends 4
Development and financial contributions 2

But the mix varies significantly from council to council. For example, the Far North collects $2 in user charges for every $10 collected in rates, while the figures for Napier, Auckland and Hurunui are $5, $6 and $9 respectively.

A partnership approach

This envisages arriving at an agreement under which central government, when making decisions which will have cost impacts on local government, will:

  • consult local government and include in any cost benefit analysis the costs and benefits for local government, and
  • share the administration costs where a policy is intended to generate national as well as local benefits (or only a national benefit).

The paper asks why central government accepts the co-funding principle for transport but not for the implementation of the new National Bottom Lines under the NPS for Freshwater Management although these also confer a national benefit and will require many city and district councils to upgrade their three waters infrastructure (particularly waste and storm water networks).

Improving the current rating system

LGNZ argues that many of the current statutory exemptions from rates should be abolished. In particular, it suggests that:

  • central government should take responsibility for the full cost of providing conservation, health and education services rather than requiring a "back door" contribution through the rates exemption from local government
  • there is no reason why commercial entities such as airports, ports and railways should not pay rates just as other businesses do, and
  • communities should have autonomy to decide if they wish to subsidise religious and charitable groups.

Options for change

A range of possibilities are canvassed but some more seriously than others. For instance, while the possibility of councils being able to levy income taxes is discussed, LGNZ seems to accept that this is not a starter in New Zealand.

The idea of revenue sharing by central government to recognise the costs and the profit opportunities created by local government is explored in more detail. Examples where this might be applied include:

  • on the income tax revenue derived by developers from the profits on land sales where the land has been rezoned by the local council (the rationale being that much of the increase in the land value was made possible by local authority infrastructure investment), and
  • on the royalties from mining.

Local expenditure taxes: these could include regional sales taxes, hotel room taxes, or – more novel in a New Zealand context – a portion of GST revenues being paid by central government to local government to recognise local government support for regional economic activity.

A mechanism similar to this exists in Australia between the Federal and State governments. In New Zealand, however, the policy trend has been in the opposite direction. For example, the ability for councils to request that central government allow them to institute a regional fuel tax was removed in 2013 so would now require specific legislation.

The paper argues that selective taxes can be justified where there is a close relationship between the expenditure being taxed and the activity being funded by the tax e.g. water right charges, the motorway charge being proposed by Auckland Council to fund its transport programme, regional fuel taxes and property development contributions.

Conclusion

The paper makes interesting reading and makes a number of strong points, at least some of which will have to be seriously considered by central government at some stage. However that time may be a long while coming because the politics will always be problematic from the central government's perspective.

The information in this article is for informative purposes only and should not be relied on as legal advice. Please contact Chapman Tripp for advice tailored to your situation.

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