Councils face several pressures which create financial viability risks and increase the amount of revenue required through rates.
The main causes of the financial pressures are cost shifting, superannuation shortfall, declining government grants, state levies and an infrastructure renewal gap
Declining government grants
Local government nationally collects 3.6 per cent of the $445.9 billion total taxes raised by all three levels of government. Indexation of core financial assistance grants from the Commonwealth to local government has been frozen at CPI until 2017/18, resulting in a $134 million black hole in council budgets. These grants can make up to 31 per cent of a council’s budget. Core financial assistance has declined from 1.2 per cent of Commonwealth revenue in 1993-94 to 0.61 per cent in 2015-16. Government grants are usually indexed to CPI or less, meaning that grants are lower than actual cost movements to deliver the service, leaving councils to fund the gap from rates revenue.
Infrastructure renewal gap
Victorian councils are responsible for community infrastructure worth $79 billion but if infrastructure is not adequately maintained, replacement costs will be much higher for future ratepayers. When assets deteriorate faster than councils can fund their maintenance and renewal there is an infrastructure renewal gap. A 2013 Auditor General report confirmed an annual underspend of $225 million. As councils have a limited capacity to raise this additional revenue, they often use a range of funding options such as rate rises, lower service levels, asset rationalisation and borrowings.
Local government cost increases
It will cost councils 3-4 per cent more this year to deliver the same level and range of services as 2015. This is due to council services being affected by growth in construction, material and wage costs, rather than changes in common household goods and services as measured by CPI. The main council costs are staff to deliver human-based services; and staff and materials to construct, maintain and upgrade roads and assets.
Cost shifting occurs when Commonwealth and State programs transfer responsibilities to local government with insufficient funding or grants which don’t keep pace with delivery costs. Rates revenue is commonly used to cover funding shortfalls to meet increasing service demands, new government policy, rising costs and community expectations. Cost shifting continues to confront councils in the key community service areas of home and community care, public libraries, school crossing supervisors and emergency management.
By 1 July 2013, councils were required to pay a $396.9 million shortfall to the closed Local Authorities Superannuation Fund Defined Benefit Plan following an actuary review by the scheme’s trustee Vision Super. The former Defined Benefit Plan for local government employees was a compulsory scheme set up by the Victorian Government in 1982 and was closed in 1993. It must be fully funded to pay the benefits owed to members now and into the future, unlike state and federal public sector super funds which remain unfunded by $22.9 billion and $72 billion respectively. Councils have a legal obligation to fund these compulsory contributions, often using cash reserves, borrowing money, selling surplus assets or through rates.
Government levies and fees
The Victorian Government requires councils to collect State levies, including landfill levies and the fire services property levy, which are paid by ratepayers but must be passed on in full to the Government. While most State fees rise by 2.5 per cent on 1 July each year, State-set planning fees have been frozen since 2009, with ratepayers contributing millions more to cover the revenue shortfall facing councils.