Municipal Association of Victoria

Local Government Finances Media Workshop

April 2012

Workshop Overview

Session 1: Council Finances and Budgets

Session 2: How Councils are Funded

Session 3: Council Rates Explained

Session 4: Property Revaluations Explained

Session 1. Financial Management

1. Financial Reporting Statutory Obligations

2. Financial Principles - cash and accrual

3. Council Plan/Strategic Resource Plan/Annual Budget/Annual Report

4. Identifying important financial indicators including:– Surplus/deficit– Cash– Debt / debt reduction– Capital works– Depreciation

Financial Reporting Statutory Obligations

• LGA - Part 7, Division 1, Sections 136 to 150– Principles of sound financial management– Budgeting and reporting framework– Borrowings and investment

• LGA - Part 6, Sections 125 to135 – Council Plan, Strategic Resource Plan, budget, annual report,

Performance statement

• LG (Finance & Reporting) Regulations 2004

• Budget

• Audited Annual Report

• Quarterly Financial Statements

Financial Management

• Council Plan– Identifies the needs and issues to be dealt within the municipality– Must be prepared by 30 June

• Strategic Resource Plan– Is included as part of a Council Plan– Sets out the financial and human resources required to achieve objectives

in Council Plan

• Council Budget– Estimates revenue to be collected from government funding and loans to

determine amount needed in rates– Draft budget open for comment for 14 days– Must be submitted to the Government by 31 August

• Annual Report– Reviews a council’s performance against Council Plan– Must be submitted to the Government by end of September

Identifying Important Financial Indicators

• Is there an underlying surplus? - Long term survival

• Is Working Capital positive?

• Is there enough cash? - Short term survival

• Is debt in control?

• Is depreciation increasing due to lack of maintenance?

• Are Capital Works on time and at their budgeted cost?

• What are the contingencies and commitments?

Income Statement

• Is there an underlying surplus? – Long term survival

Income Statement

• Is there an underlying surplus? – Long term survival

Balance Sheet

• Is Working Capital positive?

Solvency = current assets – current liabilities

Notes to Financial Report – “Provisions”

• Is there enough cash? Short term survival• Must hold Long Service Leave provision in cash

Balance Sheet

• Is debt in control?

Standard Income Statement

• Is depreciation increasing due to lack of maintenance?

Standard Statement of Capital Works

• Are Capital Works on time and at their budgeted cost?

Notes to Financial Report – “Contingencies”

• What are the contingencies and commitments?

Council Budgets: Points to Remember

• Recurrent Deficits

• Operating and Capital

• Asset maintenance and renewal– Understand good and bad debt (intergenerational equity)

• Physical Services - capital works, costing, plant acquisitions & disposals and maintenance.

• Human Services – grant funding and relationships to other tiers of government

Session 2: Local Government Funding

1. Local government – facts and stats

2. Where funding comes from

3. Cost Pressures– Intergovernmental funding– State Levies collected by councils– Local Government Cost Index– Asset Management – funding the renewal gap

Introduction: Local Government Facts

• 79 councils

• Governed by 620 democratically elected councillors

• Employs 42 544 people

• Annual recurrent revenue of $6.4 billion

• Responsible for $60 billion in community assets

• Provide more than 100 services to Victorian communities

What Councils Do Each Year

• Service 129,735 kms of roads (85% of the state’s road network)• Maintain more than 1000 grassed sports surfaces• Collect 1.9 million tonnes of kerbside garbage • Collect 608 000 tonnes of recyclable materials • Collect 270 000 tonnes of green organic waste • Spend $50 million on public street lighting • Loan 52.8 million items from 316 libraries to 2.6 million users• Provide free internet access for 3.4 million bookings • Decide over 51 100 planning permit applications• Provide 614 426 maternal and child health consultations• Provide 306,600 immunisations to preschool & secondary children• Deliver 3.8 million meals to home care recipients• Register more than 45 000 food businesses

LG Funding Sources 2009-10

Victorian local government recurrent venue was $6.4 billion:

• 56.3% or $3.45 billion in rates (at the extremes 25% and 70%)• 17.1% or $1.05 billion in fees, fines and charges• 9.2% or $560 million in specific purpose revenue grants• 7.4% or $450 million in general purpose revenue payments• 10.0% or $610 million from other (Eg interest, asset sales)

Local government collects 3.5 cents of every $1 raised in Australian taxes. The Commonwealth collects 80.2% (including GST 14%) and the States 16.4% of total taxation revenue.

LG Cost Pressures

1. Intergovernmental funding – declining

2. State Levies collected by councils

3. Councils’ growth in costs – LG Cost Index

4. Asset management – funding the infrastructure renewal gap

Intergovernmental Funding

• GST was implemented in 1999 - Australian Parliament rejected that states should fund local government through GST– responsibility remains at the federal level

• Financial Assistance Grants to local government have declined from 1.2 per cent in 1993-94 to 0.62 per cent of Commonwealth revenue in 2011-12– Funding indexed by CPI & population (not real costs growth)

• Gap in state and federal funding for home and community care, kindergartens, school crossings, public library services– Shortfall is either paid for by ratepayers, service cuts and/or

reduced asset maintenance/renewal spending

State Levies Collected by Councils

• The State Government requires councils to collect state levies, usually included in rates notices, to fund State agencies and programs

– Landfill levies are being progressively increased from 2010– This imposes an additional $71.6 million on ratepayers over

four years, with Victorian councils to collect and pass on an estimated $160 million to the State Government

– Councils collected $63 million in State fire services and landfill levies in 2011 (1.8% of total rates)

– State introduction of a property-based fire levy (from 2013) could add an average 19 per cent increase to council rates.

LG Cost Index

• Consumer Price Index (CPI) measures household goods & services

• LG Cost Index measures costs to deliver council goods & services– Staff costs are the main driver as most services are delivered

by people to the community– Second largest expense is asset maintenance and construction

inc. staff/contractors and materials

• LG Cost Index is determined using:– Average Weekly Earnings (AWE) Index– Engineering Construction Index

• LG Cost Index has averaged 4% over the 5 years to 2011-12 and was estimated at 3.6% for 2011-12. CPI for both was approx 3.1%

Asset Renewal Gap

• Local government is capital intensive: $60 billion in assets – level of government that spends the highest proportion of its revenue

on infrastructure

• Councils explicitly recognise deterioration of their assets for the first time in mid 1990s, but rate capping and rate cuts led to councils spending less on ageing infrastructure

• 2002: Auditor General says renewal backlog is $1.5 - $2.7 billion

• 2007: MAV Step Asset Program identified an annual underspend of $280 million - equivalent to av. 12% rate rise for next five yrs

• Further investment is still needed by councils – Deferred spending = higher costs for future ratepayers

Session 3: Council Rates

1. What are council rates

2. Rate Process

4. Comparing council rates

What are Council Rates?

• A property tax that uses property values as the basis for calculating how much each property owner pays

• Can comprise up to three components:– Municipal charge (not more than 20% of total rate revenue)– Waste management (garbage) charge– General rate based on the ‘rate in the dollar’

• Exemptions apply to crown land, charitable land, land used for religious purposes, land used exclusively for mining or forestry

• Primary reason for rates is to raise revenue to fund local government services and infrastructure for public benefit

• All property owners pay a share of rates regardless of their choice to use/not use council services, programs, infrastructure

Rating Process

• Draft Budget:– Sets priorities to meet Council Plan objectives – Identify asset maintenance and service funding needs– Estimate revenue to be collected from other sources– Identify amount of rates needed to meet financial

responsibilities for coming year– Advertise and open for public comment for at least 14 days

• Setting Rates:– Determine any municipal and waste charges– Determine rate in the dollar (balance of required revenue

by the total value of all properties in the municipality)– Individual property rates: multiply rate in the dollar by the

value of a property, add any municipal and waste charges

Rates Example

• Total income identified in Council Budget: $70 million– Other revenue (funding, grants, fees, fines): $30 million– Rate revenue needed: $40 million

• $40 million $12 billion (value of all rateable properties in the municipality) = $0.0033 (rate in the dollar)

• $ Value of property x $ rate in the dollar = $ rates payable– Eg. $550,000 x 0.0033 = $1,815

Note: there is NO connection between the amount of rates paid on a property and the services received

Comparing Local Government Rates

• 79 councils – 31 metropolitan (including 8 Interface councils)– 48 rural and regional (including 10 regional cities)

• Difficult to generalise about local government– Each council varies in size, rate base, needs, infrastructure

• Municipal populations range from 3 200 to more than 253 000

• Manage significantly different budgets– Rural council budgets average $48 million (smallest $8 m)– Metro council budgets average $152 million (largest $360 m)

• Rating comparisons are problematic – especially a reliance on averages or levels paid by properties of the same value in different municipalities

Outer metro Inner metro Rural shire

Total council revenue: $155m $120m $21m

Population: 170,000

100,000

8,000

Median property value: $350,000 $1,000,000 $250,000

$500,000 property:4 bedroom, large block

2 bedroom apartment

5 bedroom on acreage

Rating Comparison Example

Session 4: Property Valuations

1. Valuation Process

3. Facts and Myths

4. Case Study: Valuation, Revaluation and Rates Increase

Valuation Process

• 2.5 million properties in Victoria valued at more than $1 trillion

• Council valuers review property values every two years – Last valued on 1 January 2012

• Total value of all properties in a municipality is used to strike the ‘rate in the dollar’

• Up-to-date revaluations are critical to ensure property owners pay a fair and equitable share of rates

• Ratepayers have a right under the Valuation of Land Act 1960 to object to a valuation

Valuation Process cont…

• Only qualified valuers can perform municipal valuations

• Amount a property would sell for on a set date (1 Jan 2012)– Assess market movements and recent sales/rental trends– Highest and best use of the property– Build profile of value levels for different areas/property types– Physical inspection of a sample of properties– Complex statistical models apply information to individual

properties

• Valuer General certifies council valuations met required standards

• Minister declares the valuations suitable to be adopted and used

• The same valuations are used for State land tax

Facts and Myths

MYTH• Increased (or decreased) property values increase (or decrease)

how much a council collects – NO (but YES for State land taxes)• Valuations change the total rates collected – NO

FACT• Valuations are “revenue neutral”• Council budget is set first and determines total amount of rates

to be collected• Valuations are used to apportion how the burden (the total

revenue to be raised) will be shared by each ratepayer Rate in the dollar x property value = rates payable

Property Revaluations

Size of the pie = Council revenue to be collected (determined by budget)

Slice of pie = amount each ratepayer will pay (based on value of their property)

A change in property values can change the slice (amount you pay), but not the size of the pie (overall amount council collects)

Revaluation Example

Property Value - $2,950,000

House 1-$650,000

House 2 -$460,000Unit-$370,000

Farm-$800,000Business-$670,000

Rates required - $5,500

Rate in the Dollar

$2,950,000

$5,500 0.1864%

Property Value - $3,030,000

House 1-$620,000

House 2 -$460,000Unit-$360,000

Farm-$820,000Business-$770,000

Rates required - $5,500

Rate in the Dollar

$3,030,000

$5,500 0.1815%

2011 2012

Revaluation Example (Cont)

2011-12 Rates:– House 1: $1212– House 2: $858– Unit: $690– Farm: $1492– Business: $1249– Total: $5,500

2012-13 Rates:– House 1: $1,125 (-

7.1%)– House 2: $835 (-

2.6%)– Unit: $653 (-5.3%)– Farm: $1,488 (-0.2%)– Business: $1,398

(11.9%)– Total $5,500 (0%)• But, what happens when councils also increase the amount of

rates they collect?

• Suppose the council increased the amount of rates from $5,500 to $5,800 (increase of 5.5%)

Revaluation Example

Property Value - $2,950,000

House 1-$650,000

House 2 -$460,000Unit-$370,000

Farm-$800,000Business-$670,000

Rates required - $5,500

Rate in the Dollar

$2,950,000

$5,500 0.1864%

Property Value - $3,030,000

House 1-$620,000

House 2 -$460,000Unit-$360,000

Farm-$820,000Business-$770,000

Rates required - $5,800

Rate in the Dollar

$3,030,000

$5,800 0.1914%

2011 2012

Revaluation Example (Cont)

2011-12 Rates

2012-13 Rates (before rate increase)

2012-13 Rates(with rate increase)

Change Due to Revaluation

Total Change

House 1 $1212 $1125 $1187 -7.1% -2.1%

House 2 $858 $835 $881 -2.6% 2.7%

Unit $690 $653 $689 -5.3% -0.1%

Farm $1492 $1488 $1570 -0.2% 5.2%

Business $1249 $1398 $1474 11.9% 18.0%

Total $5,500 $5,500 $5,800 0% 5.5%