Local Government Association Response to the
Economic and Finance Committee Inquiry into Rate
Capping
SUBMISSION
July 2015
We are not hearing from our community that the rates are too high, they actually want more
services. During our recent strategic planning consultation with over 1000 responses, we
only had 21 response in regards to rate levels and not all were stating they were too high on
the contrary we had 211 requesting road upgrades, 185 increased levels of sport and
recreational facilities and 164 wanting more alternative transport (footpaths and cycleways).
Rate capping would cripple and stagnate our growing community and stop our community
having the service levels it wants.
– District Council of Copper Coast
Economic and Finance Committee Inquiry into Rate Capping
Local Government Association of South Australia – Submission – July 2015
Table of contents
Introduction ................................................................................................................. - 3 Background ............................................................................................................. - 4 What is Rate Capping? ............................................................................................ - 6 Rates Capping in other Jurisdictions ........................................................................... - 6 New South Wales .................................................................................................... - 6 Victoria..................................................................................................................... - 7 The South Australian Context ..................................................................................... - 8 Local Democracy ..................................................................................................... - 8 Council Planning into the Future .............................................................................. - 9 Financial Sustainability in the Context of Rate Capping ............................................ - 12 Maintaining Financial Sustainability ....................................................................... - 13 Understanding Movements in Council Rates and the CPI ...................................... - 14 External Cost Pressures ........................................................................................ - 16 Conclusion ................................................................................................................ - 17 Bibliography .............................................................................................................. - 18 -
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Economic and Finance Committee Inquiry into Rate Capping
Local Government Association of South Australia – Submission – July 2015
Economic and Finance Committee Inquiry into Rate Capping
Introduction
Local Government Association of SA (LGA)
The LGA is a membership organisation for all Councils in South Australia and is the voice of
Local Government in this State. The LGA is created by Councils and endorsed by the South
Australian Parliament through the Local Government Act 1999 (the Act) and 29 other South
Australian Acts.
All 68 Councils are members of the Association, as is Anangu Pitjantjatjara Yankunytjatjara.
The LGA provides representation, quality service and leadership relevant to the needs of
member Councils. The LGA also operates specific units/entities providing:
 all public liability and professional indemnity cover for all SA Councils;
 all workers’ compensation cover for all SA Council employees and associated
Local Government bodies;
 asset cover for SA Councils; and
 extensive education and training; industrial relations; procurement; online
services and a research and development scheme.
The LGA is involved in the operation of (and establishment of):
 the Local Government Finance Authority;
 StatewideSuper – Trust the Local; and
 Public Library Services.
The LGA has a formal State/Local Government Relations Agreement with the Premier of the
State, and is a constituent member of the Australian Local Government Association.
Local Government in South Australia
Local Government in South Australia (SA) comprises 68 Councils of which 19 are
metropolitan Councils and 49 are rural or regional Councils. A large land area of the State is
not incorporated under the Local Government Act but for the purposes of the
Commonwealth Local Government (Financial Assistance) Act comprises five Aboriginal
communities and the Outback Communities Authority.
The Constitution Act 1934 (SA), the Local Government Act 1999 (SA), the Local
Government (Elections) Act 1999 (SA) and the City of Adelaide Act 1997 (SA), create the
primary legal framework within which Local Government operates and the four-yearly
election process which underpins the representative nature of Councils in this State.
The Local Government system in SA is integral to the democratic system of government in
Australia which provides vital economic, social and environmental support for communities.
SA Councils manage approximately $21 billion of infrastructure and operating expenditures
of about $1.9 billion a year (2012-13 figures). Councils receive significant Commonwealth
and State funding and work in partnership at the local level for communities.
Local Government in SA is typified by:
 high standards of operational competence and accountability;
 sharing resources, working consultatively and cooperatively with other Councils
and other spheres of government;
 low net debt and conservative management of finances; and
 expanding roles and increases in standards of service to respond to community
demands, other governments and service gaps.
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Economic and Finance Committee Inquiry into Rate Capping
Local Government Association of South Australia – Submission – July 2015
Background
The LGA welcomes the opportunity to provide comment to the Economic and Finance
Committee (EFC) on their inquiry into rate capping. Local Government, as a sector, believes
that it must retain autonomy and flexibility in determining locally raised taxation revenue. We
are comfortable in having a discussion on rates capping as it provides an opportunity for the
community to understand why Council rates, as only 3% of tax taken, gains more interest
than the remaining 97% taken by the State and Federal Governments. This Inquiry also
provides the opportunity to provide clarity on what the implications may be on Councils and
communities, should rate capping be imposed.
$500
$450
$400
$350
Billions
$300
$250
Local Government
$200
State Government
Commonwealth
$150
$100
$50
$0
2008-09 2009-10 2010-11 2011-12 2012-13 2013-14
Financial Year
Graph 1 – Total national taxation revenue per sphere of government (Australian Bureau of
Statisticsb, 2015).
This inquiry also provides the opportunity to discuss the balance between perceived short
term gains from minimisation of rates and the potential for an inter-generational transfer of
burden.
The Local Government sector provides a broad range of services to South Australian
communities and contributes very markedly to the quality of life enjoyed by all.




Collectively, South Australian Councils have responsibility for $21 billion worth of
community infrastructure and other assets with an annual revenue of $1.9 billion.
Local Government employs 8,702 FTE people across the state while approximately
10,000 people find meaningful volunteering opportunities through their Council.
As at 30 June 2013 South Australian Councils had net financial liabilities of $536
million and an operating deficit across the entire sector of only $1 million.
Councils across South Australia are characterised by a diverse mix of population
demographics, environment, geographical location and revenue raising capacities.
While many of the services provided by South Australian Councils are legislatively
mandated, there are also distinct differences in services reflecting the needs and
preferences of local communities. The types and levels of services Councils provide vary
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Economic and Finance Committee Inquiry into Rate Capping
Local Government Association of South Australia – Submission – July 2015
depending on for example demographic factors and the geography of the region they serve,
the individual Council’s financial circumstances, and the community’s ability and willingness
to pay.
Graph 2. Average Council spending by function using Local Government Grants
Commission data 2012-13.
SA
63%
NSW
18%
34%
VIC
46%
TAS
47%
36%
10% 7%
19%
18%
28%
8%
7%
Taxation revenue
Sales of goods and services
WA
22%
42%
QLD
30%
NT
28%
0%
20%
23%
23%
22%
33%
26%
40%
11%
31%
16%
60%
7%
4%
Interest income
Other revenue
Current grants and subsidies
28%
80%
100%
Graph 3 – Share of total Local Government Revenue
The table above highlights that South Australian Councils are more dependent on rate
revenue than is typically the case elsewhere. In other jurisdictions Councils often receive
higher levels of grants from other spheres of government and have access to greater levels
of other revenue, e.g. developer contributions for new works.
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Economic and Finance Committee Inquiry into Rate Capping
Local Government Association of South Australia – Submission – July 2015
What is Rate Capping?
Rates capping is the imposition of an upper limit on the rates revenue able to be generated
by a Council in a period, for example expressed as a percentage increase over the amount
generated in the previous year.
New South Wales (NSW) is the only Australian jurisdiction where rate capping (referred to
as rate pegging) exists. However, Victoria is planning to introduce a form of rate capping
commencing in 2016-17.
In NSW, rates capping means that the overall rate revenue across the Council cannot
increase by more than a predetermined percentage (calculated to attempt to take into
account average movements in Local Government costs since the preceding period).
A cap on the aggregate amount of rate revenue a Council is able to generate should not be
confused with a cap a Council might itself apply to an increase payable by an individual
ratepayer in any year. This is what Councils in South Australia are already invited to do.
Section 153(3) of the South Australian Local Government Act 1999 states that:
A council must, in declaring a general rate under this section, determine whether it
will fix a maximum increase in the general rate to be charged on any rateable land
within its area that constitutes the principal place of residence of a principal ratepayer
(and a council is, by force of this subsection, authorised to fix such a maximum).
This form of rate capping is currently utilised in 32 of the 68 Councils within South Australia
as a result of their own policy decisions. It does not constrain total rate revenue generated.
As a result of annual movements in the relative assessed value of properties for rating
purposes and possible adjustments in the structure of the rating methodology applied by a
Council (e.g. minimum rates, fixed charges, differential rates etc.) the actual increase
payable by an individual ratepayer can vary markedly from the average.
For example, a Council’s rating decision might result in an increase in rates payable, on
average, of 3% but most ratepayers would notice a rates change either greater or lesser
than this. The decision to implement a cap and the percentage of a rate cap varies in each
Council based on local circumstances. Currently the rate cap, for those Councils that
choose to apply one, varies between 4% and 25% with the most common being 15%. Some
also apply a lower cap for concession card holders.
A Council’s power to implement a rate cap is already embedded in the Act. The possible
introduction of a new, externally imposed rate cap mechanism, on top of the current process
would create another layer of bureaucracy, red tape and impose added costs on all South
Australians.
Rates Capping in other Jurisdictions
New South Wales
Rate capping (pegging) in NSW was introduced in 1977 and has been refined over time. It is
important to note that arrangements do not prevent individual Councils applying for a rate
increase. Decisions regarding the cap limit and applications for increases beyond the cap
are made by the New South Wales Independent Pricing and Regulatory Tribunal (IPART).
The rate cap does not apply to stormwater, waste collection, water and sewerage charges
(Ipart.nsw.gov.au, 2015).
The rate cap is predominately based on the NSW Local Government Cost Index (LGCI),
which measures price changes over the past year for goods, materials and labour used by
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Local Government Association of South Australia – Submission – July 2015
an average Council. From this LGCI a productivity factor is deducted to strike a balance
between ensuring that Councils meet their increased costs of delivering services resulting
from price changes and ensuring that Council share productivity gains with ratepayers
(Ipart.nsw.gov.au, 2015).
In NSW rate capping comes at a significant cost to the Councils and involves unwarranted
complexity, costs and constraints at both Council and State level to administer (Independent
Local Government Review Panel, 2013. Page 42).
In March 2012 the then NSW Local Government Minister, the Hon Don Page MP, appointed
an Independent Local Government Review Panel. Tasked with looking at ways to strengthen
the effectiveness of Local Government in NSW, this Panel concluded the NSW rate capping
system has led to various unintended consequences including:




unrealistic community expectations that rates should be contained indefinitely;
excessive cuts in expenditure on infrastructure leading to mounting asset renewal
and maintenance backlogs;
despite the ability to apply to IPART for a special rates variation over and above the
rate cap, there is a reluctance amongst Councils to do so as it is seen as politically
risky and the process is too costly and complex – requiring a disproportionate effort
for an uncertain gain; and,
underutilisation of borrowing finances due in part to the uncertainty whether any
increases in rates, needed to repay loans, would be approved by IPART (Comrie,
2015).
In 2013, 23 of 152 Councils applied for a Special Rates Variation from IPART, enabling a
rates increase higher than the rates cap. Yet figures for the 2011-12 financial year show that
83 councils would have needed to increase rates and annual charges by more than 5% to
achieve a break-even operating result.
The Panel concluded that:
whilst there is certainly a case for improving efficiency and keeping rate increases to
affordable levels, the rate [capping] system in its present form impacts adversely on
sound financial management. It creates unwarranted political difficulties for councils
that really can and should raise rates above the peg to meet genuine expenditure
needs and ensure their long-term sustainability. The Panel can find no evidence from
experience in other states, or from the pattern and content of submissions for Special
Rate Variations, to suggest that councils would subject their ratepayers to grossly
excessive or unreasonable imposts if rate [capping] were relaxed (Independent Local
Government Review Panel, 2013. Page 42).
The Panel was of the view that rate capping is very costly relative to the benefits it delivers.
Millions of dollars are spent each year by Councils and state agencies on preparing,
reviewing and determining applications when the actual cost impact of the proposed rate
increases on households would often have been no more than $1 per week (Independent
Local Government Review Panel, 2013. Page 43). It concluded that as a result of rate
capping the financial sustainability of many Councils in NSW - and their capacity to deliver
the services that their communities need - had declined, and a significant number were near
crisis point (Independent Local Government Review Panel, 2013. Page 7).
Victoria
In January 2015, the Essential Services Commission of Victoria received terms of reference
to consider and report on the development of a state-wide capping and variation framework
for Council rates. The Commission is required to complete its final report by 31 October
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2015 with the intention that a rate capping system will take effect from the 2016-17 financial
year (Essential Services Commission, 2015. Page iii).
Victoria previously had a rate-capping system in place in the mid-1990s associated with the
introduction of wide-scale compulsory Council amalgamations and boundary changes.
Initially there was a rate reduction of 20% and rate increases were capped for 3 years. One
of the impacts was that Councils deferred capital spending on infrastructure. After the
following State election, the controls were released and Local Government rates rose in
excess of general price movements to generate the revenue required to undertake
warranted but previously postponed infrastructure renewal and upgrades.
The autonomy of Local Government is integral to the management of local communities and
the delivery and maintenance of key community infrastructure and services across South
Australia. The experience of New South Wales has shown that rate capping does not
improve Local Government or its communities. Rather, rate capping delays or prevents the
delivery, maintenance or improvement of services desired by the community, including
services delivered by infrastructure.
The South Australian Context
Local Democracy
A fundamental principle of any sphere of government is the ability of that government to
govern based on the needs of its community. Elected Members and Council staff, typically
living in the communities they serve, make decisions from a local perspective and are often
the closest point of contact between people and any sphere of government.
A system that will erode a Council’s ability to respond to its community is simply not
supportable.
Local Governments consult often with their communities to find local answers to local
problems. Through community groups, regular stakeholder engagement on various matters,
and genuine personal contact, Local Government is the most accessible and most
appropriate conduit for Australians to communicate with their leaders and decision-makers.
The major question that arises when discussing rate capping is the respect for a
democratically elected sphere of government versus an externally imposed mechanism that
would constrain a Council’s ability to raise needed revenue.
Each Local Government is accountable to its community for ensuring that its financial
governance practices are transparent. Furthermore each Local Government has a long-term
financial plan, covering a period of at least 10 years, to ensure that the provision of services
desired by the community are sustainable and affordable in the long-term, commensurate
with Councils’ legal responsibilities.
Councils have a legislative obligation when setting rates, to take into account the financial
effects of the decision on future generations (Local Government Act 1999, Section 150(c)).
This is as it should be. A community, through its Council, should not leave payment for
today’s services to future generations.
Furthermore, Councils are also responsible to ensure that it uses its resources in an
effective and efficient manner. Experience interstate shows that the introduction of rate
capping would either restrict service delivery to the community or, if services are maintained,
would postpone the financial burden of today’s services onto future generations.
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Economic and Finance Committee Inquiry into Rate Capping
Local Government Association of South Australia – Submission – July 2015
This includes the cost of services provided by Councils, through their maintenance of a vast
network of roads, footpaths, drains, culverts, bridges, and buildings which in the care of
Local Governments.
Revenue sources available to Local Government must ensure autonomy, financial stability,
sustainability and accountability of South Australian Councils, both collectively and
individually. The introduction of any rate capping mechanism would undermine the capacity
for Councils to control their own revenue-raising which is contrary to the fundamental
concept of a democratically elected government.
Council Planning into the Future
The setting of Council rates in one year is not done in isolation from longer-term
perspectives. Council rates are set each year, with regard not only to today’s ratepayers,
but also impact or legacy left for future ratepayers – ensuring both financial sustainability and
inter-generational equity. This planning is done through Long Term Financial Plans (LTFPs),
Asset Management Plans (AMPs) and Annual Business Plans (ABPs).
Long Term Financial Plans
Under current legislation, Councils prepare and adopt LTFPs which are reviewed at least
annually so that Councils can continually re-evaluate the impact of their decisions on current
and future ratepayers. These LTFPs are prepared using a number of stated assumptions
which reflect an assessment of the current economic climate and predictions on variables
which might impact on Councils’ operations. The process is repetitive and assumptions are
reviewed every 12 months using updated information and predictions on performance.
A LTFP, therefore, is a useful tool that enables a Council to understand the impact on its
rates and borrowings for the level of affordable services (including infrastructure renewal)
that its community expects.
One input into the LTFP is an AMP which is a requirement of the Act to ensure that a
Council is responsibly managing its portfolio of infrastructure and other assets, as a key
component of achieving and maintaining financial sustainability.
AMPs include plans for each major asset class,1 and foreshadow future funding
requirements for each asset, based on the expected useful life and condition of each asset
and the community’s desire for affordable service levels from these assets. This ensures
that assets can continue to provide efficient, effective and affordable services to the
community.
LTFP modelling undertaken by the City of Charles Sturt has indicated that, should rate
increases be capped to CPI, Council operations would not be sustainable. As a result,
Council would incur ongoing operating deficits over the longer term if services and
infrastructure were maintained to current levels. This modelling demonstrates that rate
capping would lead to unwelcome choices; either erosion of service levels (e.g. decay of
infrastructure) or an increase in operating deficits, either of which would impose burdens on
future ratepayers.
1
Roads, footpaths, drains, culverts, bridges, community wastewater management schemes recreation
facilities, etc
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Economic and Finance Committee Inquiry into Rate Capping
Local Government Association of South Australia – Submission – July 2015
Annual Business Plans
In setting rates, Councils are governed by the Act which provides flexibility for Councils to
determine revenue raising and expenditure decisions that best suit the circumstances and
preferences of their communities. As a result, the way one Council structures its rates
differs from another.
Before setting rates each year, Councils must develop an Annual Business Plan and budget.
Under section 123(2) of the Act, an Annual Business Plan must:
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


Include a summary of the Council’s long-term objectives as set out in its strategic
management plans;
Include an outline of the Councils objectives of the financial year, the activities that
the Council intends to undertake, and the measures (both financially and nonfinancially) that the Council intends to use to assess the performance of the Council
against those objectives;
Assess the financial requirements of the Council and set out a summary of proposed
operating expenditure, capital expenditure and sources of revenue;
Set out the rates structures and policies for the financial year while assessing the
impact of the rates structure and policies on the community based on modelling
undertaken or obtained by Council; and
Take into account the Council’s long-term financial plan and relevant issues relating
to the management and development of infrastructure and major assets by the
Council.
Unlike other governments, Councils are required under the Act to release draft Annual
Business Plans for community consultation, in accordance with their public consultation
policy, prior to finalising those plans and adopting a budget and setting rates. This public
consultation must, in the least include:


Publication in a newspaper circulating within the area of the Councils of a notice
informing the public of the preparation of the draft Annual Business Plan and inviting
the community to attend a public meeting (at least 21 days after the publication of the
notice) or a meeting of the Council for a period of a least 1 hour.
The opportunity for interested persons to make written submissions in relation to the
matter within a period stated in the notice.
The Council must contemplate and consider any submissions made either at its meeting or
written.
Councils follow a thorough and formal process to weigh up the range and level of services
that residents and ratepayers want and are willing to pay for. No one likes paying more than
necessary but Councils strive through transparent consultative processes to get the balance
right between services and revenue-raising. In addition, because Councils undertake their
activities at the local level, the efficiency and value of what they do is far more visible and
open to scrutiny and feedback. Their ratepayers (who are also their electors) ensure that
Councils are necessarily constantly vigilant to opportunities to improve productivity and
reduce costs and thus keep rates at levels no higher than necessary.
Although widely publicised, some Councils have indicated that feedback during the ABP
process remains relatively low. However, comments received are often to request additional
services or support current projects or service levels. This process enables the community
to have its input and oversight into a range of Council services provided.
Therefore, to remove the community input over the level and range of services and
associated rates required and to replace (or augment it) with a mechanism for rates capping
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via an external committee seems at odds with the democratic and transparent process
required through ABP consultation.
Setting Council Rates
To determine who pays how much, a Council (having determined its annual business plan
and budget) uses individual property values as the basis for distributing, between
ratepayers, the targeted level of revenue to be raised by rates. The total rates paid by the
community (plus any grants received from other spheres of Government, and any usercharges or other revenue) will equal the amount of expenditure set in the budget. As the
budget amount is determined annually through the ABP process, Councils do not gain
windfalls from any increases in the valuation of properties.
Example Calculations:2
Scenario 1:
Total Council property valuation - $3,500 million
Total revenue to be raised by rates - $11.25 million
$11.25 million = $0.003214 (cents)
$3,500 million
The rate in the dollar is $0.003214.
A property valued at $350,000 would have total rates payable of $1,125 (calculation:
$350,000 x $0.003214=$1,125).
Scenario 2:
A property boom has occurred resulting in a 10% increase in property values.
The valuations of all properties within the Council now total - $3,850 million
Total revenue to be raised by rates remains - $11.25 million
$11.25 million = $0.002922 (cents)
$3,850 million
The rate in the dollar now becomes is $0.002922.
The property value has increased by 10% to $385,000. Using the new rate in the dollar and
valuation, the total rates payable remain $1,125 (calculation: $385,000 x $0.002922 =
$1,125).
Scenario 3:
The housing market has hit a slump and property values have decreased by 7%.
Total Council property valuation - $3,271 million
Total revenue to be raised by rates remains - $11.25 million
$11.25 million = $0.003439 (cents)
$3,271 million
The rate in the dollar is $0.003439.
2
For purposes of simplicity the effect of the application of minimum rates or fixed charges is not shown in
these examples. Such mechanisms would impact to some extent on the calculated rate in the dollar but not on
overall revenue raised.
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The property value has decreased by 7% to $327,100. Using the new rate in the dollar and
valuation, the total rates payable remain $1,125 (calculation: $327,100 x $0.003439 =
$1,125).
Financial Sustainability in the Context of Rate Capping
In late 2005, the LGA established a Financial Sustainability Program (FSP) in response to
the findings and recommendations of an Independent Inquiry into the Financial Sustainability
of Local Government (the Inquiry) (Local Government Association of South Australiaa, 2015).
This inquiry found that many Councils had large annual shortfalls against the optimum level
of expenditure needed for maintaining and renewing existing infrastructure, to provide
desired service levels. In effect, 10 years ago, our communities were using infrastructure
which would, and was beginning to, fall apart – and which would have been left to the next
generation to fix up. The Inquiry noted the very high proportion of infrastructure that Local
Governments managed compared with other governments and the private sector.
Since 2005, the Local Government sector has turned around its financial performance. The
2014 SA Local Government Financial Indicators Report revealed that, taken as a whole, the
Local Government sector has achieved an approximately break-even operating result since
2007-08 (Local Government Association of South Australiab, 2015).
$10
$0
-$10
$ million
-$20
-$30
-$40
-$50
-$60
-$70
2012-13
2011-12
2010-11
2009-10
2008-09
2007-08
2006-07
2005-06
2004-05
2003-04
2002-03
2001-02
2000-01
-$80
Graph 4 – Local Government Sector – Operating Surplus/(Deficit)
The chart suggests that for many years until 2007-08, our communities were, on average,
living off their accumulated assets rather than paying their way. We were on a path of
wearing out vital infrastructure and putting off until the next generation the challenges of
renewal.
Since then Councils have increased their spending on warranted asset renewal,
replacement and upgrade as the chart below shows. Councils are required to prepare
infrastructure and asset management plans to guide their capital expenditure decisions and
these plans are developed with community consultation and take into account community
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Local Government Association of South Australia – Submission – July 2015
service level preferences and capacity and willingness to pay. Where Councils have
increased rates at levels above the CPI in recent years one of the major factors has been to
upgrade, renew and maintain assets at levels in line with community service level
preferences and to a schedule intended to maximise asset life, and minimise whole of life
asset costs.
700
600
$ million
500
400
Capital Expenditure on
New/Upgraded Assets
300
Renewal and Replacement
Capital Expenditure
200
Total Depreciation
100
2012-13
2011-12
2010-11
2009-10
2008-09
2007-08
2006-07
2005-06
0
Graph 5 – Local Government sector – Capital expenditure and depreciation
Maintaining Financial Sustainability
Maintaining financial sustainability requires an ongoing three-way balancing act. Each
Council must make annual decisions on how to achieve balance in:
1. Expenditure;
2. revenue; and
3. service levels.
Changing one of the three parameters identified above, will affect the other two. For
example, a Council may choose to:
1. Increase (or decrease) expenditure –
o to provide resourcing for more/better (or fewer/worse) services which would
o require increased (or decreased) revenue
2. Increase (or decrease) revenue –
o to fund increased (or decreased) expenditure, which would
o fund an increased (or decreased) range and/or quality of services,
3. Increase (or decrease) the quality or level or range of one or more services which
would require;
o more (or less) revenue; and
o more (or less) expenditure
Balancing decisions of this type are made by Elected Members in the context of:
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
The Council’s Strategic Management Plans (SMPs) covering a minimum four-year
period, which must include the Council’s LTFP and its long-term infrastructure and
asset management plan; and
The Council’s annual business plan, a draft of which is circulated for community
consultation.
The Council’s SMP requires the Council to think in the longer-term about the nature of
financial sustainability. The framework for a Council’s SMP ensures that the short-term
interest of current ratepayers is balanced against the longer-term interests of a Council’s
community, in ensuring financial sustainability:
A Council’s long-term financial performance and position is sustainable
where planned long-term service and infrastructure levels and standards
are met without unplanned increases in rates or disruptive cuts to services
(Local Government Association of South Australiac, 2015).
If a Council were to be subject to an arbitrary rate cap (a prohibition against raising rates by
more than a specified percentage) then it would be attempting to achieve and/or maintain
financial sustainability (and maintain services to its community) with constraints upon
one-third of its range of options.
Without access to sufficient revenue to meet long-term community preferences for services,
balance may still be achieved (i.e. financial sustainability might still be maintainable) but the
resultant short-term approach (i.e. enforced compromises on community-desired services)
would not be an optimal result.
Understanding Movements in Council Rates and the CPI
Often the media, public and Members of Parliament ask why rises in Council rates differ
from changes in the Consumer Price Index (CPI). The usual implication in these questions
is that Council rates should generally rise no more than the CPI. However, this comparison
represents a conceptual misunderstanding of the nature of CPI and its appropriate use.
In Australia, the CPI measures changes in the price of a fixed basket of goods and services,
acquired by household consumers who are resident in the eight State and Territory capital
cities (Australian Bureau of Statisticsa, 2015). The CPI is used for various purposes, but its
principal purposes are to measure general price inflation experienced by households,
changes in the purchasing power of household incomes and wares, and measure changes
in living standards (Australian Bureau of Statisticsc, 2015).
In 2014 the LGA commissioned an information report from the South Australian Centre for
Economic Studies (SACES) to provide a comparative understanding of Council Rates and
CPI movements. This report explains that the CPI is not a measure of price changes facing
non-household entities such as Local Government. Local Government faces significantly
different cost pressures, to cover its wide range of services, including services delivered by
infrastructure such as roads, footpaths, drains, bridges, culverts, recreation facilities,
community wastewater management systems, buildings, etc.
Local Government sets property rates in response to various factors including general price
information affecting Local Government, policy decisions regarding changes in the level of
services and community infrastructure provided to local communities, changes in demand for
particular services and changes in financial support provided by other spheres of
government.
In recognition that the CPI is a poor indicator for Local Government, the Local Government
Price Index (LGPI) is instead used by the sector and represents the movements in prices
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Economic and Finance Committee Inquiry into Rate Capping
Local Government Association of South Australia – Submission – July 2015
associated with the goods and services consumed by Local Government in South Australia
(South Australian Centre for Economic Studies, 2014).
The Australian Bureau of Statistics (ABS) was commissioned by the SA Local Government
Financial Management Group to develop the LGPI as an independent and reliable measure
of price movements faced by Local Government in South Australia. Since September 2009,
the South Australian Centre for Economic Studies has accepted responsibility for annual
revision of the LGPI.
The LGPI is a chained Laspeyres price index which represents an arithmetic average of the
pure price change of items based on expenditure patterns on the previous year. Annual
Council expenditure data provided by the Local Government Grants Commission (LGGC) is
used to produce expenditure weights. These weights are then combined with select ABS
price indices to determine the indices’ contribution to a total expenditure LGPI
(Adelaide.edu.au, 2015).
The LGPI addresses only changes in the costs of existing services. It does not address
issues such as the expansion or improvement of any existing services or reductions in grant
funding. Nor does it address any community wishes for wider, improved or expanded
services, nor any changes to standards or higher legislation compliance costs imposed by
other spheres of Government.
Equally, it does not address efficiency gains or cuts to services.
While the LGPI is a useful tool for Councils in preparing annual budgets and developing
LTFP, it does not represent a quasi-indication of how Council rates should change in any
given year. Ultimately, Council budgets and rates must be set in the context of a Council's
Strategic Management Plan, community consultation, and decisions about the level of
services and revenue required each year.
Table 1. Local Government Price Index in comparison to the Adelaide Consumer Price
Index, Annual Series (Adelaide.edu.au, 2015).
Year
2000/01
2001/02
2002/03
2003/04
2004/05
2005/06
2006/07
2007/08
2008/09
2009/10
2010/11
2011/12
2012/13
2013/14
Local Government Price Index
Index
% change from
previous year
100.0
n/a
102.9
2.9
107.0
4.0
111.6
4.3
115.1
3.1
119.1
3.5
123.7
3.9
128.5
3.8
134.3
4.5
138.1
2.8
142.9
3.5
148.2
3.7
152.3
2.8
155.8
2.3
Adelaide Consumer Price Index
Index
% change from
previous year
100.0
n/a
102.7
2.7
106.8
4.0
110.0
3.0
112.7
2.4
116.2
3.1
119.3
2.6
123.2
3.3
127.1
3.2
129.8
2.2
134.0
3.2
137.5
2.6
140.3
2.0
143.9
2.6
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Economic and Finance Committee Inquiry into Rate Capping
Local Government Association of South Australia – Submission – July 2015
160
150
Index
140
130
Local Government Price Index
120
Adelaide Consumer Price Index
110
2013/14
2012/13
2011/12
2010/11
2009/10
2008/09
2007/08
2006/07
2005/06
2004/05
2003/04
2002/03
2001/02
2000/01
100
Financial Year
Graph 6. A comparison of the increase in CPI versus LGPI from 2000-01 to 2013-14
financial years.
External Cost Pressures
As previously stated, the LGPI addresses only changes in the cost of existing services. It
does not take into consideration the increasing external cost pressures faced by Local
Government which are often outside of a Councils control.
These external pressures occur when utilities or other spheres of government move service
or program delivery to Councils without adequate funding, or unilaterally increase charges to
Councils. Should these services or charges be continued, Councils must fund the shortfall
through increasing rates or by reducing delivery of the services which have been requested
by the communities they represent.
In recent years external cost pressures which have contributed to the level of rate increases
include, but are not limited to:






A Federal budget decision in 2014 to pause indexation (annual increase in grants
based on population changes and increases in the CPI) of Financial Assistance
Grants for a period of three years commencing on 1 July 2014 with a reduction in real
terms of $12 million in SA, in the first year of the freeze alone;
Removal of Supplementary Road Funding for SA Councils ($18 million pa) in the
2014 Federal Budget. This was not reinstated in the 2015 budget.
Legislation granting mandatory 75% rates rebates for housing associations and
continued movement of housing stock from the State Government to housing
associations, pushing the rate burden onto other property owners who do not qualify
for this rebate;
Increases in the State Government solid waste levy from $5 (metropolitan) / $2.50
(regional) in 2002-03 to an anticipated $57 / $28.50 per tonne in 2015-16;
Increases in the Emergency Services Levy;
Licensing requirements under the Water Industry Act 2012 when operating a retail
water service including Community Waste Water Management Systems (CWMS);
and
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Economic and Finance Committee Inquiry into Rate Capping
Local Government Association of South Australia – Submission – July 2015

Increased requirements to perform building inspections without any capacity to
recover any costs.
Conclusion
Council rates are determined transparently through a robust consultation process. Councils
work hard to get an appropriate balance between expenditure, revenue and services. Any
externally imposed rate cap will reduce a Council’s capacity to get this balance right.
Local Government is comfortable in having a discussion on rates capping because it
provides an opportunity for the community to understand why Council rates (representing
only 3% of taxes paid) gains more interest than the remaining 97% tax take by the State and
Federal Governments.
Findings from New South Wales are that capping comes at a significant cost to Councils and
involves unwarranted complexity, costs and constraints to administer at both Council and
State level (Independent Local Government Review Panel, 2013. Page 42).
Local Government is experiencing increasing external cost pressures which are often
outside of a Council’s control and, without access to sufficient revenue to meet community
preferences for services, Councils would have to adopt enforced compromises on
community-desired services, including maintenance of infrastructure.
Local Government would welcome further discussion to explore enhanced community
engagement in the process of setting Local Government strategic priorities, annual business
plans, and rates.
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Economic and Finance Committee Inquiry into Rate Capping
Local Government Association of South Australia – Submission – July 2015
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Local Government Association of South Australia – Submission – July 2015
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