Cost pressures

Around 20 per cent of the total income for Victorian councils is provided by the State and Federal Government in the form of grants.

These grants are used for infrastructure or to provide a specific service on behalf of, or in partnership with, another level of government.

This reliance on other levels of government for funding support causes uncertainty for communities and significant financial pressures for councils, including:

  1. Cost shifting: where responsibilities are passed on to local government by the Victorian or Commonwealth Governments without adequate funding.
    For example: libraries, kindergartens
  2. Declining government grants: when funding from other levels of government is stopped, reduces over time or doesn’t keep pace with council costs to deliver a specific community service.

Other cost pressures that are placing a strain on council budgets include:

  1. Rate capping: The Victorian Labor Government introduced a rate cap in 2016 which limits the amount of revenue councils can raise to fund their infrastructure programs and delivery of local community services
  2. Asset management: local roads, and council buildings and facilities are ageing and many councils cannot fund the required maintenance and renewal costs to extend their useful life
  3. Defined benefit superannuation shortfall: Top-up requirements imposed on councils by other governments to fully fund defined benefit superannuation schemes that were closed to new members in 1993
  4. Red tape: Cost of complying with extensive state and federal government regulations and reporting obligations.

Cost shifting

Cost shifting occurs when Commonwealth and state governments transfer program or service responsibilities to local government with insufficient funding, or provide grants that don’t keep pace with the actual delivery costs incurred by councils.

  • Rates revenue is commonly used by councils to cover funding shortfalls and meet increasing service demands, new government policy, rising costs and community expectations
  • For example: In 1975, public libraries were funded 50:50 by State and local government. Victorian Government funding has since declined to just 17 per cent of public library operating costs, with councils now contributing 83 per cent of the total cost. This is equal to $73 million paid annually by councils to cover the State’s funding shortfall.

Declining government grants

Local government nationally collects 3.6 per cent of the $464 billion total taxes raised by all three levels of government in Australia.

Core financial assistance grants provided to councils by the main tax collection agency – the Commonwealth Government – have declined from 1.2 per cent of Commonwealth revenue in 1993-94 to 0.61 per cent in 2015-16, while GST revenue has continued to rise.

Indexation of core financial assistance grants from the Commonwealth was frozen by the Federal Treasurer for three years from 2014, resulting in a $200 million black hole in Victorian council budgets.

  • Financial assistance grants are worth more than $220 million to rural councils each year, providing up to 31 per cent of their total funding
  • While indexation was restored to the grants in the 2017 Federal Budget, the three-year freeze permanently reduced the base level of grants to councils by 12 per cent
  • Government grants are usually indexed to CPI or less, while council costs rise in line with construction and material costs, and wage costs. This means that grants are lower than actual costs incurred by councils to deliver many services, leaving councils to fund the gap from rates revenue.

Rate capping

The State imposed a rate cap on Victorian councils, commencing in 2016 (2.5 per cent) and based on forecast movements of the Consumer Price Index (CPI).

However, council costs are generally affected by growth in construction, material and wage costs, rather than changes in common household goods and services as measured by CPI. The main council costs are staff to deliver human-based services; and staff and materials to construct, maintain and upgrade roads and other assets.

A rate cap linked to CPI rather than councils’ actual input costs makes it more difficult to provide the same level and mix of services to communities each year.

Three years of rate capping imposed on councils in Victoria in the 1990s resulted in councils deferring spending on capital programs - such as roads maintenance and renewal - so they could continue to provide community services and programs.

This led to faster deterioration of roads and other assets, and has consequently imposed higher costs on future generations of ratepayers to renew and upgrade under-maintained community infrastructure.

With the introduction of a rate cap in 2016, many councils implemented efficiency reforms to save costs including organisation restructures, asset sales, collaborative purchasing, reviews of discretionary services and fleet vehicle reductions. However, evidence is also emerging of an under-investment in capital infrastructure by financially-constrained smaller rural councils.

Over time, the under-investment in roads maintenance and infrastructure renewal by councils will have long-term devastating impacts on the quality and safety of local roads, and the availability of community facilities across Victoria.

  • In 2016, the Victorian Auditor General raised concerns about lower rate revenue for rural shires due to rate capping
  • Strong evidence from numerous independent and Government studies about rate capping imposed in NSW and the Northern Territory confirms caps led to a reduction in spending on community infrastructure
  • Following a three-year Northern Territory rate cap from 2008, a review by the NT Government found that it made councils overly reliant on grant funding
  • In NSW, where rate pegging was introduced in 1977, the NSW Treasury Corporation found that councils faced an infrastructure funding shortfall of $7.2 billion in 2012.

Asset management

Victorian councils are responsible for local roads and community infrastructure worth $91.2 billion. This includes roads, bridges, public libraries, sporting grounds and kindergartens.

This infrastructure is ageing, with much of it reaching the end of its useful life. If roads and other infrastructure are not adequately maintained, the replacement costs will be much higher for future ratepayers.

  • When assets deteriorate faster than a cou​ncil can fund maintenance and renewal works, this is known as an ‘infrastructure renewal gap’
  • A 2013 report by the Victorian Auditor General confirmed that the annual underspend on infrastructure by councils is $225 million, which is predicted to grow to $2.6 billion by 2026
  • Councils have a limited capacity to raise this additional revenue, particularly under the State Government rate cap. This defers the problem of maintaining assets to future generations of ratepayers, when assets will become more costly to replace.

Superannuation shortfall

In 2013, Victorian councils were required to pay a $396.9 million shortfall to the closed Local Authorities Superannuation Fund Defined Benefit Plan following an actuary review by the scheme’s trustee, Vision Super.

The former Defined Benefit Plan for local government employees was a compulsory scheme set up by the Victorian Government in 1982 and was closed in 1993.

It must be fully funded to pay the benefits owed to members now and into the future, unlike state and federal public sector super funds which aren’t required to be fully funded to meet their payout obligations to fund members.

Councils have a legal obligation to fund these compulsory contributions, often using cash reserves, borrowing money, selling surplus assets or through rates.

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