What to do about local government funding and financing?

The Productivity Commission has released its draft report on local government funding and financing. The report sets out the Commission’s draft findings and recommendations on the changes required to local government funding and financing, to ensure they are suitable for local authorities to meet current and future cost pressures. The Commission invites submissions on these by 29 August 2019.  Submissions will be taken into account in preparing the final report to the Government by 30 November 2019.

This inquiry is well overdue, with councils under pressure from increasing expenditure required on existing assets and demand for new capital expenditure, while the failure or delay in providing this infrastructure is having a significant impact on economic growth, housing affordability, and essential services.

However, the Commission has not recommended wholesale changes, and considers that funding should continue to be based on the present system (with property rates as the main taxing power of local government remaining fit for purpose), but with some significant new tools to help fund new cost pressures and provide better incentives for improved council performance.

The key areas identified with funding and financing gaps are the provision of infrastructure to support rapid urban growth, adapting to climate change; coping with the growth of tourism, and addressing the accumulation of responsibilities placed on local government by central government.  The Commission has suggested a range of new tools to help plug these gaps, largely based on variations of a “beneficiary pays” philosophy, including where a key beneficiary is central government alongside local ratepayers, or where key benefits take the form of a windfall gain in property value.

We address some of the recommendations under two of these heads further below.  The Commission is seeking feedback on the advantages and disadvantages of these tools, how they could be designed, and whether they will be effective.

New funding and financing for growth-supporting infrastructure

The Commission has recommended several new tools to enable ‘growth to pay for growth’:

  • Value capture and volumetric charging. The Commission supports both a) value capture funding tools where property owners that receive windfall gains in property value as a result of nearby infrastructure investment pay a portion of this gain to the council; and b) councils to have the power to levy volumetric water and road congestion charges.

  • Special Purpose Vehicles to help councils nearing their debt limits. Investigations on how to expand the use of SPVs (such as that used for Milldale), and the legislation required, so that debt does not sit on the council balance sheet.

  • Central government payment for new building work. The Commission recommends a new funding regime from central government to local authorities based on new building work undertaken within the district.  These payments should act as an incentive for council development.

  • Vacant Land Tax. A tax on vacant residential land is being considered to avoid ‘land banking’ and improve the supply of housing.

Costs of adapting to climate change

The Commission has identified that councils need help to adapt to climate change, by:

  • Central government leadership. Central government should take the lead on providing high-quality and consistent science and data to assist decision making.  This would be more cost effective and consistent at a central government level than individual councils undertaking this exercise.

  • Assistance for local land-transport infrastructure. The role of the New Zealand Transport Agency should be extended to include assistance and co-funding for local roads and bridges at risk.

  • Creation of a local government resilience fund. The Commission recommends that the Government creates a climate-resilience agency and associated fund to assist councils redesign, relocate and rebuild wastewater, stormwater and flood-protection infrastructure threatened by climate change.

The draft report also makes a number of recommendations to improve the quality and transparency of councils’ decision making and performance.  Under this head, and of interest to commercial ratepayers, the Commission has recommended that the ability to set differentials and uniform annual general charges should be removed, along with the current 30% cap on uniform charges, while retaining the ability for councils to use targeted rates.

Key questions already being raised by stakeholders include whether the recommendations go far enough to address the current and foreseeable issues facing councils, and whether the proposed changes will support economic growth.

Please contact us if you wish to discuss the draft report, or would like assistance in preparing a submission by 29 August 2019.

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