Opening Remarks ESC Chair Inquiry into Local Government Funding and Services

On 8 October 2024, the Essential Services Commission was asked to appear before the Victorian Legislative Council Economy and Infrastructure Committee Inquiry into Local Government funding and services. Below are the opening remarks made by the commission’s chairperson.

Essential Services Commission – Opening Remarks by Gerard Brody 

I acknowledge the Traditional Custodians of this land and pay our respects to Elders past and present – for they hold the song lines, the stories, the traditions, the culture and the hopes of First Nations Australia. I also extend that respect to any Aboriginal or Torres Strait Islander people here today.

Thank you very much for the opportunity and invitation to present to the committee today. We would like to give an overview of the role of the Essential Services Commission has in relation to local government. Following this, we will be happy to take any questions you may have. 

The commission’s roles in relation to local government include:

• Advising the Minister for Local Government for setting the average rate cap and maximum interest that councils may charge for unpaid rates and charges;
• Assessing applications from individual councils who wish to be subject to higher caps than those set by the Minister.
• Monitoring and reporting annually on councils’ compliance with the rate caps.
• Identifying trends and reporting every two years on outcomes in the sector under the fair go rates system. Our next outcomes report will be released next year. 

In support of these functions, we also provide guidance to the sector and undertake research as required.

More recently we have been given the responsibility of providing advice to the Minister in the development of hardship guidelines. We provided the Minister for Local Government with advice on a guideline for ratepayers experiencing difficulties in paying their rates in 2023. We drew on our experience in the water and energy sectors to recommend how a more modern approach could be adopted by councils.

We also provided the minister with advice on an appropriate interest rate for councils to charge for unpaid rates and charges in April 2024. The Minister has yet to make any change to the maximum interest rate.

The rate cap 

The rate cap limits how much councils can increase their average general rates and municipal charges each year. It is not a cap on individual rates, or on the total amount of revenue a council can collect. Councils are able to collect and keep any additional revenue that comes from changes in property numbers. 

The importance of general rate revenue varies across councils, ranging from around 60 per cent from the metropolitan group to 43 per cent for the small shire group. 

This is because councils have other sources of revenue including grants, contributions from developers and user fees and charges. These sources of revenue also vary in importance across councils.  

The increase for individual ratepayers will depend on changes in property values and classifications, and the differential rates applied by councils depending on geographical area.

On average since rate capping began, around 40 per cent of ratepayers have experienced a decrease in their rates, 16 per cent have seen increases below or equal to the cap and 44 per cent have seen increases above the cap.

Other service rates and charges such as waste are not capped and have increased by more than the rate cap in recent years. For example, in 2023-24 councils budgeted to increase their waste rates and charges per property by an average of 16.5 per cent compared to the rate cap of 3.5 per cent. 

The costs to councils to deliver waste services have increased due to a combination of factors including, the number of service providers, which has reduced in recent years, the introduction of new services such as food and garden organics and increases in the waste levy. 

All councils now have some form of waste rate, or charge to partially or fully recover the costs of delivering waste services. The nature of services provided also varies with each council offering some combination of general waste, general recycling, food organic and garden organic, glass recycling and hard rubbish collections. 

Under Section 185D of the Local Government Act 1989, the Minister for Local government is required to request our advice for the following year’s rate cap. This typically occurs in October. 

The average rate cap is the forecast Melbourne CPI as published in the budget update issued by DTF in December each year plus or minus any adjustments. The Minister seeks our advice on what those adjustments should be. Our consideration of necessary adjustments includes considering RBA inflation forecasts, wage cost index forecasts, council specific cost index, and factors affecting cost.

We provide our advice before the end of November and the Minister typically announces the rate cap by 31 December each year.

The Minister has set a rate cap for all councils equal to the forecast CPI without adjustment, in each of the first 9 years of rate capping – with the exception of 2023–24. In 2023-24, the rate cap was set 0.5 per cent lower than DTF’s forecast and our recommended level.

Applying for a higher cap 

If the average rate cap appears insufficient for the needs of any council, the council can apply to the commission for a higher cap (for up to four years). In making an application, the council needs to explain the reasons for the higher cap and why they think it is necessary. 

We also ask councils to provide relevant documents that support their application including annual reports, budgets, council plans, long-term financial plans, asset management plans and engagement strategies. Following the 2020 amendments to the Local Government Act, councils are required to have a range of plans, policies and strategies in place. 

If successful, councils can increase their average rates by the approved higher cap. 

However, we have not received any applications for a higher rate cap in the past 5 years, and there have been no approved higher caps in place since the 2020-21 rating year.

Over the 9 years of rate capping, we have assessed 17 applications – approving 10 of these in full and a further 3 in part. Additional revenue has typically been sought to address long-term financial sustainability or asset renewal needs, or to maintain service delivery.

In our experience the higher cap application process provides sufficient flexibility in the rate capping system to deal with councils’ unique circumstances. The process allows for the vastly different circumstances of individual councils and their communities to be considered, and provides councils with the opportunity to demonstrate to their communities and the commission that a higher rate increase is justified. 

Council compliance with rate cap

Each year we assess council compliance with the average rate cap, or any approved higher caps. Councils provide us with information about their rate revenue and property numbers so that we can determine whether they are compliant. 

All councils were complaint in 2023-24 and we will be releasing our 24-25 compliance report in November. 

Broader findings about the sector as a whole

Every 2 years we prepare an outcomes report and will be releasing our fourth report in May next year. 

There are two main components of our outcomes reports:

• A report on the sector as a whole, including some comparisons between the 5 different council groups (metropolitan, interface, regional cities, large shires and small shires); and
• Interactive dashboards on our website, broken down by region for individual councils and council groups, which are also available as accessible fact sheets 

The key findings of our last report published in May 2023 (covering 4 years 2018-19 to 2021-22) included:

• rate capping has kept rate increases below historical levels.
• for the sector as a whole, revenue per person increased – driven by contributions and grants, despite a sharp drop in user fees and fines.
• Other than in 2020-21, overall capital works expenditure continued to grow, with increased investment in asset renewal and new infrastructure.
• the sector as a whole had a positive operating position and the ability to meet both short-term and long-term liabilities.

We also found that:

• On average, all council groups, except small shires, had enough revenue to fund activities
• 27 out of the 79 councils had a negative average adjusted underlying result (4 year average). This compares to 18 councils over the 4 years covered by our previous report.
• In 2021-22, for the first time in six years of rate capping, two councils reported a working capital ratio below 100 per cent (85 per cent and 59 per cent).
• In each of the 6 years of rate capping, the sector as a whole reported an indebtedness ratio of 20 per cent or lower. On average over this period, 7 councils reported an average indebtedness ratio above 40 per cent. 

While our biennial outcomes reports show the financial position of some councils has deteriorated since rate capping was introduced, this is not necessarily due to rate capping. Council revenue (and expenditure) has been impacted by the COVID pandemic and associated lockdowns, and many councils have felt the impacts of natural disasters.

We have seen many councils increase their rates by less than the annual rate caps because they have considered cost of living pressures and their communities’ ability to pay. A key part of the rate capping framework, and also the legislative changes that were made in 2020, is for councils to engage with their communities and work out their willingness to pay and service preferences. 

We are happy to take any questions you might have.