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, state and federal regulations, and reporting obligations.
Cost shifting occurs when Australian and Victorian Government programs transfer responsibilities to local government with insufficient funding or with grants that don’t keep pace with service delivery costs. Council rates are commonly used to cover funding shortfalls.
Infrastructure renewal gap
Victorian councils are responsible for ageing community infrastructure worth $60 billion. Councils have significantly increased capital works budgets. The annual shortfall in spending needed to maintain infrastructure was $280 million in 2007. It is now $100 million per year.
Victorian councils will be required to pay a $396.9 million shortfall to the Local Authorities Superannuation Fund Defined Benefit Scheme in 2013.
Key factors contributing to increased liabilities for defined benefit super funds include deteriorating investment performance in global markets, changed actuarial standards, increased longevity of individuals receiving pensions under the Defined Benefit Plan, and a reduction in the expected earning rate. Many of these factors are beyond the control of the Trustee or individual municipalities.
Other levels of government are not required to fully fund their defined benefit scheme liabilities. Unfunded superannuation liabilities for the Victorian Government currently exceed $29 billion, while estimates of the unfunded Commonwealth defined benefits liability (excluding the Future Fund) are around $61 billion.
A Members Brief and fact sheet under ‘related documents’ on this page provide further information on the Defined Benefit Scheme and shortfall.
Declining government grants
Nationally, local government collects 3.5 per cent of the $358.7 billion total taxes raised by all tiers of government. Core financial assistance through federal tax distribution to local government has declined from 1.2 per cent of Australian Government revenue in 1993 – 1994 to 0.62 per cent in 2011 – 12.
Australian and Victorian Government grants to local government are usually indexed to CPI or less. Therefore, grants are lower each year than council cost movements to deliver the service. Councils must fund the gap from rates revenue.
Local government must collect state levies from ratepayers and pass them on in full to the Victorian Government. This includes the fire services levy and landfill levy, which are funded through property taxes.
The fire services levy contribution required from 25 metropolitan councils in the MFB area will be at least $39.3 million in 2012 – 13. This equals 1.5 to 2 per cent of total annual rates revenue for those municipalities.
A phased increase in state landfill levies commenced in 2010.
Municipal levies for Melbourne and major regional cities will rise from $9 per tonne in 2009 to $53.20 per tonne by 2014.
Rural levies will rise from $7 per tonne in 2009 to $26.60 per tonne by 2014. These levies are collected from ratepayers through garbage charges for kerbside collection and gate fees at transfer stations. Over four years from 2012, Victorian councils must collect an estimated $200 million in state landfill levies.
State and federal regulations and reporting obligations
New regulations placing additional costs onto councils without any state funding include, compliance with the 2010 electric line clearance regulations and incoming regulations reducing staff-to-child ratios in child care centres.
An investigation by the Essential Services Commission has confirmed there are more than 100 reporting requirements for Victorian councils to at least 17 different state agencies. Many requirements provide little or no direct benefit to ratepayers, but result in increased council costs and a diversion of council resources.
A proposed new performance reporting framework could cost councils an additional $3.1 million to $7.1 million, with rural municipalities to bear a disproportionately higher cost burden.