Municipal Association of Victoria

1. Municipal Association of Victoria Local Government Finances Media Workshop April 2012

2. Workshop Overview Session 1: Council Finances and Budgets Session 2: How Councils are Funded Session 3: Council Rates Explained Session 4: Property Revaluations Explained

3. Session 1. Financial Management • Financial Reporting Statutory Obligations • Financial Principles - cash and accrual • Council Plan/Strategic Resource Plan/Annual Budget/Annual Report • Identifying important financial indicators including: • Surplus/deficit • Cash • Debt / debt reduction • Capital works • Depreciation

4. 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

5. 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

6. 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?

7. Income Statement • Is there an underlying surplus? – Long term survival

8. Income Statement • Is there an underlying surplus? – Long term survival

9. Balance Sheet • Is Working Capital positive? Solvency = current assets – current liabilities

10. Notes to Financial Report – “Provisions” • Is there enough cash? Short term survival • Must hold Long Service Leave provision in cash

11. Balance Sheet • Is debt in control?

12. Standard Income Statement • Is depreciation increasing due to lack of maintenance?

13. Standard Statement of Capital Works • Are Capital Works on time and at their budgeted cost?

14. Notes to Financial Report – “Contingencies” • What are the contingencies and commitments?

15. 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

17. Session 2: Local Government Funding • Local government – facts and stats • Where funding comes from • Cost Pressures • Intergovernmental funding • State Levies collected by councils • Local Government Cost Index • Asset Management – funding the renewal gap

18. Introduction: Local Government Facts • 79 councils • Governed by 620 democratically elected councillors • Employs 42 544people • Annual recurrent revenue of $6.4 billion • Responsible for $60 billion in community assets • Provide more than 100 services to Victorian communities

19. 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

20. 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.

21. LG Cost Pressures • Intergovernmental funding – declining • State Levies collected by councils • Councils’ growth in costs – LG Cost Index • Asset management – funding the infrastructure renewal gap

22. 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

23. 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.

24. 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%

25. 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 deteriorationof 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

27. Session 3: Council Rates • What are council rates • Rate Process 4. Comparing council rates

28. 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

29. 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

30. 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

31. 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

32. Rating Comparison Example

34. Session 4: Property Valuations 1. Valuation Process 3. Facts and Myths • Case Study: Valuation, Revaluation and Rates Increase

35. 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

36. 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

37. 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

38. 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)

39. House 1-$650,000 House 1-$620,000 House 2 -$460,000 House 2 -$460,000 Unit-$370,000 Unit-$360,000 Farm-$800,000 Farm-$820,000 Business-$770,000 Business-$670,000 Property Value - $3,030,000 Rates required - $5,500 Rates required - $5,500 Rate in the Dollar Rate in the Dollar Revaluation Example 2011 2012 Property Value - $2,950,000

40. 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%) Revaluation Example (Cont) • 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%)

41. House 1-$650,000 House 1-$620,000 House 2 -$460,000 House 2 -$460,000 Unit-$370,000 Unit-$360,000 Farm-$800,000 Farm-$820,000 Business-$770,000 Business-$670,000 Property Value - $3,030,000 Rates required - $5,500 Rates required - $5,800 Rate in the Dollar Rate in the Dollar Revaluation Example 2011 2012 Property Value - $2,950,000

42. Revaluation Example (Cont)