1. Municipal Association of Victoria
Local Government
Rates and Revaluations
11 May 2016

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

3. 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 & Planning) Regulations 2014
Budget
Audited Annual Report
Quarterly Financial Statements

4. Financial Management Council Plan Strategic Resource Plan
Identifies the needs and issues to be dealt with in 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 28 days
Must be submitted to the government by 30 June
Annual Report
Reviews a council’s performance against Council Plan
Must be submitted to the government by 30 September

5. 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?

6. 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

7. Session 2: Funding of local government
Where funding comes from
Cost Pressures
Intergovernmental funding
Cost shifting
State levies collected by councils
Rate cap 2.5 per cent
Asset management: renewal gap

8. LG Funding Sources
Victorian local government recurrent revenue was $8.7 billion:
56.2% or $4.9 billion in rates (at the extremes 29% and 75%)
16.0%or $1.4 billion in fees, fines and charges
9.4% or $816 million in specific purpose revenue grants
11.1% or $967 million in general purpose revenue payments*
7.3% or $636 million from other (E.g. interest, contributions)
*Includes 50 per cent payment of general purpose grants for brought forward by the Commonwealth Government
Local government collects 3.6 cents of every $1 raised in Australian taxes. The Commonwealth collects 79.9% (including GST) and the States 16.5% of total taxation revenue.

9. Intergovernmental Funding
GST implemented in Australian Parliament rejected that states should fund local government through GST
responsibility remains at the Federal level
Federal Financial Assistance Grants to local government have declined from 1.2 per cent in to 0.53 per cent of Commonwealth revenue in
Funding indexed by CPI & population (not real costs growth)
Budget cut indexation from ; Grants will stay the same in dollar terms and will decline per head and in inflation adjusted terms

10. Cost shifting
Cost shifting is a constant funding pressure faced by councils and occurs when Commonwealth and State programs transfer service responsibilities to local government with insufficient funding, or grants which don't keep pace with delivery costs.
Services include kindergartens, libraries, school crossings and home and community care.
Shortfall is either paid for by ratepayers, service cuts and/or reduced asset maintenance/renewal spending

11. Cost shifting examples

12. 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
Landfill levies are budgeted at $200 million in , or 4.1% of rates
State introduction of a property-based fire levy in 2013 which is budgeted to raise $674 million through rates.
In , the Fire Services Property Levy increased by 12.6 per cent

13. Rate Capping
The State Government’s rate capping framework will come into effect in the 2016/17 financial year
Average rates will be capped at the Consumer Price Index (CPI) or 2.5 per cent, with any rate increases above CPI requiring approval by the Essential Services Commission (ESC)
Nine councils of 79 have applied to the ESC for a rate cap variation
Rate capping leaves councils with two main choices, reduce services relied on by communities or reduce capital spending to maintain assets
Rates are currently capped in NSW and national studies continue to show the quality of NSW local infrastructure is lower than other states, primarily as a consequence of years of rate capping

14. Asset Renewal Gap
Local government is capital intensive: $79 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
2013: MAV Step Asset Program identified an annual underspend of $225.3 million, confirmed by the Auditor General
Further investment is still needed by councils
Deferred spending = higher costs for future ratepayers

15. Session 3: Council Rates
What are council rates
Prescribed rate process
Why your rates bill won’t be 2.5% higher
Comparing council rates

16. 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

17. 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

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

19. Why your rates bill won’t be 2.5% higher
The State Government’s ‘Fair Go Rates’ is a catchy slogan for a complex policy.
The 2.5% cap applies to the council’s average of all rateable properties, and does not include the garbage charge, or fire services property levy, both of which create revenue for the State Government
The amount of rates paid by a ratepayer is determined by the value of their property
2016 is a revaluation year (will be discussed in depth later in presentation) which means the amount paid by many will be higher or lower than the cap, depending on whether the value of their property has increased or decreased.
Councils don’t collect more money when property values increase

20. Comparing Local Government Rates
79 councils
31 metropolitan (including 10 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 3,000 to more than 292,000
Manage significantly different budgets ( )
Rural council budgets average $62 million (smallest $11.4 m)
Metro council budgets average $184 million (largest $629 m)
Rating comparisons are problematic – especially a reliance on averages or levels paid by properties of the same value in different municipalities

21. Rating Comparison Example
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

22. Session 4: Property Valuations
Valuation Process
Facts and Myths
Case Study: Valuation, Revaluation and Rates Increase

23. Valuation Process
Expert valuers appointed by councils review property values every two years
Last valued on 1 January 2016
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

24. Valuation Process cont…
Only qualified valuers can perform municipal valuations
Amount a property would sell for on a set date (1 Jan 2016)
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

25. 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 total revenue to be raised will be shared by each ratepayer

26. 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)

27. Revaluation example

28. Revaluation Example
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 $5,638 (increase of 2.5%)

29. Revaluation Example (Cont)
Rates
Rates (before rate increase)
Rates
(with rate increase)
Change Due to Revaluation
Total Change
House 1
$1241
$1300
$1332
4.8%
7.4%
House 2
$852
$1014
$1040
19.1%
22.1%
Unit
$685
$745
$764
8.7%
11.4%
Farm
$1481
$1331
$1365
-10.1%
-7.9%
Business
$1110
$1137
-10.6%
-8.3%
Total
$5,500
$5,638 0%
2.5%