Municipal Association of Victoria
Local Government
Rates and Revaluations
11 May 2016
Session 1. Financial Management
1. Financial Reporting Statutory Obligations
2. Financial Principles
3. Council Plan/Strategic Resource Plan/Annual Budget/Annual Report
4. Identifying important financial indicators including:
– Surplus/deficit
– Cash
– Debt / debt reduction
– Capital works
– Depreciation
Financial Reporting Statutory Obligations
•
LGA - Part 7, Division 1, Sections 136 to 150
– Principles of sound financial management
– Budgeting and reporting framework
– Borrowings and investment
•
LGA - Part 6, Sections 125 to135
– Council Plan, Strategic Resource Plan, budget, annual report,
Performance statement
•
LG (Finance & Planning) Regulations 2014
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Budget
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Audited Annual Report
•
Quarterly Financial Statements
Financial Management
•
Council Plan
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–
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Strategic Resource Plan
–
–
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Is included as part of a Council Plan
Sets out the financial and human resources required to achieve objectives in Council
Plan
Council Budget
–
–
–
•
Identifies the needs and issues to be dealt with in the municipality
Must be prepared by 30 June
Estimates revenue to be collected from government funding and loans to determine
amount needed in rates
Draft budget open for comment for 28 days
Must be submitted to the government by 30 June
Annual Report
–
–
Reviews a council’s performance against Council Plan
Must be submitted to the government by 30 September
Identifying Important Financial Indicators
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Is there an underlying surplus? - Long term survival
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Is Working Capital positive?
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Is there enough cash? - Short term survival
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Is debt in control?
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Is depreciation increasing due to lack of maintenance?
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Are capital works on time and at their budgeted cost?
•
What are the contingencies and commitments?
Council Budgets: points to remember
•
Recurrent deficits
•
Operating and capital
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Asset maintenance and renewal
– Understand good and bad debt (intergenerational equity)
•
Physical services - capital works, costing, plant acquisitions &
disposals, and maintenance.
•
Human services – grant funding and relationships to other tiers of
government
Session 2: Funding of local government
1. Where funding comes from
2. Cost Pressures
3. Intergovernmental funding
– Cost shifting
– State levies collected by councils
– Rate cap 2.5 per cent
– Asset management: renewal gap
LG Funding Sources 2014-15
Victorian local government recurrent revenue was $8.7 billion:
• 56.2% or $4.9 billion in rates (at the extremes 29% and 75%)
• 16.0%or $1.4 billion in fees, fines and charges
• 9.4% or $816 million in specific purpose revenue grants
• 11.1% or $967 million in general purpose revenue payments*
• 7.3% or $636 million from other (E.g. interest, contributions)
*Includes 50 per cent payment of general purpose grants for 2015-16 brought forward by the Commonwealth Government
Local government collects 3.6 cents of every $1 raised in Australian
taxes. The Commonwealth collects 79.9% (including GST) and the States
16.5% of total taxation revenue.
Intergovernmental Funding
•
GST implemented in 1999 - Australian Parliament rejected that states should fund local
government through GST
– responsibility remains at the Federal level
•
Federal Financial Assistance Grants to local government have declined from 1.2 per
cent in 1993-94 to 0.53 per cent of Commonwealth revenue in 2016-17
– Funding indexed by CPI & population (not real costs growth)
– Budget cut indexation from 2014-15; Grants will stay the same in dollar terms and
will decline per head and in inflation adjusted terms
Cost shifting
•
Cost shifting is a constant funding pressure faced by councils and
occurs when Commonwealth and State programs transfer service
responsibilities to local government with insufficient funding, or grants
which don't keep pace with delivery costs.
•
Services include kindergartens, libraries, school crossings and home
and community care.
•
Shortfall is either paid for by ratepayers, service cuts and/or reduced
asset maintenance/renewal spending
Cost shifting examples
State Levies collected by councils
• The State Government requires councils to collect state levies, usually
included in rates notices, to fund State agencies and programs
– Landfill levies are being progressively increased from 2010
– Landfill levies are budgeted at $200 million in 2016-17, or 4.1% of
rates
– State introduction of a property-based fire levy in 2013 which is
budgeted to raise $674 million through rates.
– In 2015-16, the Fire Services Property Levy increased by 12.6 per
cent
Rate Capping
•
•
•
•
•
The State Government’s rate capping framework will come into effect in the
2016/17 financial year
Average rates will be capped at the Consumer Price Index (CPI) or 2.5 per cent,
with any rate increases above CPI requiring approval by the Essential Services
Commission (ESC)
Nine councils of 79 have applied to the ESC for a rate cap variation
Rate capping leaves councils with two main choices, reduce services relied on
by communities or reduce capital spending to maintain assets
Rates are currently capped in NSW and national studies continue to show the
quality of NSW local infrastructure is lower than other states, primarily as a
consequence of years of rate capping
Asset Renewal Gap
•
Local government is capital intensive: $79 billion in assets
– level of government that spends the highest proportion of its revenue
on infrastructure
•
Councils explicitly recognise deterioration of their assets for the first time in
mid 1990s, but rate capping and rate cuts led to councils spending less on
ageing infrastructure
•
2013: MAV Step Asset Program identified an annual underspend of $225.3
million, confirmed by the Auditor General
Further investment is still needed by councils
– Deferred spending = higher costs for future ratepayers
•
Session 3: Council Rates
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What are council rates
•
Prescribed rate process
•
Why your rates bill won’t be 2.5% higher
•
Comparing council rates
What are Council Rates?
•
•
•
•
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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’
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
Note: there is NO connection between the amount of rates paid on a property
and the services received
Why your rates bill won’t be 2.5% higher
•
•
•
•
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The State Government’s ‘Fair Go Rates’ is a catchy slogan for a complex policy.
The 2.5% cap applies to the council’s average of all rateable properties, and does not
include the garbage charge, or fire services property levy, both of which create revenue for
the State Government
The amount of rates paid by a ratepayer is determined by the value of their property
2016 is a revaluation year (will be discussed in depth later in presentation) which means the
amount paid by many will be higher or lower than the cap, depending on whether the value
of their property has increased or decreased.
Councils don’t collect more money when property values increase
Comparing Local Government Rates
•
79 councils
– 31 metropolitan (including 10 Interface councils)
– 48 rural and regional (including 10 regional cities)
•
Difficult to generalise about local government
– Each council varies in size, rate base, needs, infrastructure
•
Municipal populations range from 3,000 to more than 292,000
•
Manage significantly different budgets (2013-2014)
– Rural council budgets average $62 million (smallest $11.4 m)
– Metro council budgets average $184 million (largest $629 m)
•
Rating comparisons are problematic – especially a reliance on averages or
levels paid by properties of the same value in different municipalities
Rating Comparison Example
Outer metro
Inner metro
Rural shire
$155m
$120m
$21m
170,000
100,000
8,000
$350,000
$1,000,000
$250,000
4 bedroom, large
block
5 bedroom on
2 bedroom apartment acreage
Total council revenue:
Population:
Median property value:
$500,000 property:
Session 4: Property Valuations
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Valuation Process
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Facts and Myths
•
Case Study: Valuation, Revaluation and Rates Increase
Valuation Process
•
Expert valuers appointed by councils review property values every two
years
– Last valued on 1 January 2016
•
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 2016)
– 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
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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 total revenue to be raised
will be shared by each ratepayer
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
Revaluation Example
• 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 $5,638 (increase of 2.5%)
Revaluation Example (Cont)
2015-16
Rates
2016-17
Rates
(before rate
increase)
2016-17
Rates
(with rate
increase)
Change Due
to
Revaluation
Total
Change
House 1
$1241
$1300
$1332
4.8%
7.4%
House 2
$852
$1014
$1040
19.1%
22.1%
Unit
$685
$745
$764
8.7%
11.4%
Farm
$1481
$1331
$1365
-10.1%
-7.9%
Business
$1241
$1110
$1137
-10.6%
-8.3%
Total
$5,500
$5,500
$5,638
0%
2.5%