Rates alone can't pay for local authorities' growing responsibilities, Productivity Commission says

Productivity Commission details a series of potential funding options for local government, citing growing pressures from infrastructure, climate change and tourism

4th Jul 19, 5:00am by Stephen Forbes

The Productivity Commission is calling for new funding options for the country’s councils to help them meet a growing range of costs.

The commission's draft report on the funding and financing of local government released on Thursday says the existing rates based funding model is fit-for-purpose and should remain. But it says rising cost pressures for infrastructure, climate change, tourism and growing responsibilities placed on local authorities by central government means councils can’t rely on rates alone to pay for them.

The report highlights the growing demands on local authorities in areas like Auckland.

“The failure of high-growth councils to supply enough infrastructure to meet demand is a serious social and economic problem. Councils’ failure to adequately accommodate growth has been a significant contributor to the undersupply of development capacity for housing in fast-growing urban areas. This in turn has been a major driver of rapid and harmful house price increases in New Zealand since around 2000.”

Funding options included in the commission paper include the introduction of special purpose vehicles (SPVs), regional fuel taxes, the establishment of a climate change agency and adaption fund, greater use of user pays and accommodation levies for tourism and central government funding for local authorities based on the level of new building work within their boundaries.

Windfall gains tax

Another proposal outlined in the report is what it terms “value capture” funding. A limited capital gains tax based on the return someone makes on their property because of public infrastructure. The report states:

“This tool would raise revenue because property owners who enjoy “windfall gains” in their property value as a result of nearby publicly-funded infrastructure investment would be required to pay a portion of this gain to the council.”

It says such funding tools, combined with congestion and volumetric wastewater charges, would help give councils the means to fund growth.

“Most councils have adequate balance-sheet capacity to finance their infrastructure development. However, a small number of high-growth councils face debt limits that may be impeding much needed investment in growth-supporting infrastructure.”

It says Special Purpose Vehicles (SPV), like those that have been used in Auckland, are another way to assist councils nearing their debt limits.

“To date, Auckland Council, together with Crown Infrastructure Partners, Treasury and developer Fulton Hogan, have established an SPV that has raised nearly $50 million in long-term finance that will not sit as a debt on the balance sheet of Auckland Council (or the Crown), and therefore not count towards the council’s debt limit.

“The finance is being used to fund five bulk roading and wastewater infrastructure projects to service a large new residential development in Milldale. The Government and officials are currently investigating how to expand the use of SPVs to finance large brownfield infrastructure investments that will benefit new and existing residents. The Commission supports this work and, if necessary, any enabling legislation to expand the use of SPVs.”

Need for Central Government support

Central funding support of local government based on the amount of development in a territorial authority’s boundaries is also recommended.

“To address the perception that growth does not pay for itself, the commission recommends considering a new funding stream from central government to local authorities, based on new building work put in place within an authority’s boundary.

“The direct link between new building work in a jurisdiction and council revenue would incentivise councils to facilitate development and construction – two activities over which they have a considerable influence through land-use planning and infrastructure investment. A scheme of central government grants to territorial authorities directly linked to new building can be justified under the benefit principle because of the strong national interest in an adequate supply of infrastructure-serviced land and new houses to meet demand."

And the increased pressures council's are facing due to the growth in tourism are also addressed in the report. It says New Zealand has experienced a large and rapid increase in international visitor numbers in recent years, along with a growing domestic tourism market.

“This has led to sharply increased pressure on several types of services and infrastructure in districts that are popular tourist destinations. The best options to directly recover the tourists’ share of the costs of mixed-use services are through greater use of user pays, and accommodation levies.”

Government response

Minister of Local Government Nanaia Mahuta says because the Productivity Commission is an autonomous body running an inquiry independent of the Government, it wouldn’t be appropriate to comment on the draft report.

But she says the Government wants a financing and funding system that can meet the challenges facing local government and the needs of its communities now and into the future.

“The Government welcomes the Productivity Commission’s draft report into local government costs and revenue and supports its call for submissions. There will be a range of views in response to the draft report and it is important that these are captured in submissions.”

The Productivity Commission is expected to present its final report to the Government in November.

The commission is also looking at the feasibility of a tax on vacant land. According to the report Finance Minister Grant Robertson wrote to the chair of the commission in April to ask for the inquiry’s Terms of Reference to be expanded to incorporate the recommendations of the 2019 Tax Working Group (TWG) relating to taxing vacant land.

But no more details on the proposed tax have been included in the commission’s draft report.

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21 Comments

by Glitzy | 4th Jul 19, 5:39am 1562175597

Well lets start with a significant bump in rates on empty property and all residential dwellings, not just those over a certain number of days, used for Airbnb lets.

After that lets see the councils reduce spending. The debt levels of Auckland Council are crazy ~ they simply spend money like water and are now suggesting selling assets to paper over the problems in their funding plans.

Surely the sensible option would be to centralise fiscal responsibility for all councils and limit their spending ability. Having local entities run by well meaning folks with no financial background is the worst possible outcome and one that needs a radical rethink.

by Makara | 4th Jul 19, 7:24am 1562181883

Spoken like a true neoliberal.

by Glitzy | 4th Jul 19, 10:20am 1562192445

Neo libs would advocate privatising the companies owned by the local government. My view is these assets need to be kept in public hands but managed like private businesses. If you look at the UK post Thatcherism pretty much every water company is in foreign hands and sucking the consumers dry (if you forgive the pun). This model doesn't work but not does leaving public assets in the hands of those who are financially illiterate.

I'd much prefer all council assets are transferred to a sovereign wealth fund ~ we could call it The Kiwi Fund and have them centrally managed. Dividends then distributed to the councils to spend. All debt also by the Kiwi Fund with strict borrowing limits.

We have the insane situation of local mayors and councils having the authority to sell off prime revenue generating assets whilst not investing in the future earning potential of those assets. Its madness.

At the rate they are going Auckland Council may be in serious financial trouble within a decade. Do we really want that to happen ?

by waymad | 4th Jul 19, 9:51am 1562190693

And now that the Four Well-beings are back (as from 14 May 2019) as the Purpose of LG, there's no human activity that cannot be accommodated under 'Social' or 'Cultural' well-being. As it was from 2002 till 2012, it's a recipe for increasing soft spend (festivals, events, you name it, it can clip in under these headings), all funded by You Know Who. So more soft spend simply crowds out the infinitely more important but politically much less glamorous Hard spend in roads, three waters, and the like.

There has also been a historic reluctance for TLA's to use the extensive rating powers they possess, in order to shape land uses. They can use Annual Value, Land Value, Capital value, differentials, special rating areas, and admixtures of all of these. But to do so needs clear intellectual understanding of what they are trying to achieve, the political cojones to explain it to their communities via LTP's and Annual Plans, the vertebrae to then implement it and wear the inevitable backlash from the recipients of the changes, and the long-term determination to stay the course - behavioural changes can take decades.

The required combinations - intellectual horsepower, cojones, vertebrae, and getting re-elected enough times to see it all through - are rare as rocking-horse poo, amongst the sorry parade of clown shoes who present themselves for election.

So unless there's some top-down Compulsion in the mix, none of the Productivity Commish's worthy pronouncements are gonna happen. Because one of the first casualties of actually facing up to the dreadful infrastructure deficit, is gonna be Soft Spend.......

by PocketAces | 4th Jul 19, 7:15am 1562181350

Why don't we stop importing people at the rate we are?

by JediNight | 4th Jul 19, 7:42am 1562182926

Because the black magicians who conflate debt with economic activity say No.

by Nzdan | 4th Jul 19, 7:46am 1562183204

Unless they front up with the costs of infrastructure improvements before they enter the country? Crude example:

A new wastewater treatment plant costs $70 million. Another Wastewater Trunk Main running from the pump station to feed a new subdivision, plus all the laterals and connections another I dunno $30 million? That $100 million spread across 1000 migrants = $100,000 each.

by powerdownkiwi | 4th Jul 19, 7:57am 1562183871

The Commission fails the prime test.

What they need, is future energy and resources, to do the proposed work. What they're proposing, is a collection of proxies - quite a different thing. And the proxies are for physical works - done by things like diggers. The oxymoron that is doing CC mitigation using FF, seems to be avoidable by hiding behind the proxy.

by Kate | 4th Jul 19, 11:44am 1562197481

I think you mean it is an oxymoron doing CC adaptation (i.e., building bigger/greater defenses) using FF? Mitigation is reducing atmospheric pollution by reducing FF use, offsetting FF use and hence, preventing further temperature rise/CC.

Now however, there seems to be an emerging scientific consensus that mitigation (i.e., even if we reduced FF use to net zero tomorrow) won't make a difference in the near/medium term (given the long lived gases), as we have already surpassed the atmospheric CO2 'tipping point' and hence, warming (and all that comes with it) is assured.

At least that's my take/interpretation of it.

So, to me, the best thing CG could immediately do is to put a significant export tariff on bottled water and ring-fence the proceeds as a CC adaptation fund. Either the bottlers agree to pay it (in which case we have a CC adaptation fund), or they don't (in which case our aquifers get a reprieve/recharged). Either way, it's a win for NZers. Water scarcity, and in particular drinking water scarcity, is the CC emergency much of the world over.

In a sense, it's an oil for drinking water scheme - sadly, that's where the world is headed.

by powerdownkiwi | 4th Jul 19, 12:38pm 1562200700

Correction accepted - I should have said 'adaption' rather than 'mitigation', was thinking of sea-wall construction and the like.

by Audaxes | 4th Jul 19, 8:31am 1562185890

Hmmmmm....

“The failure of high-growth councils to supply enough infrastructure to meet demand is a serious social and economic problem. Councils’ failure to adequately accommodate growth has been a significant contributor to the undersupply of development capacity for housing in fast-growing urban areas. This in turn has been a major driver of rapid and harmful house price increases in New Zealand since around 2000.”

So it wasn't cheap low deposit bank credit underwriting buying and selling existing housing stock at higher prices between greater fools? Nor the accommodation supplement tempting banks to ease loan conditions to investors?

It says Special Purpose Vehicles (SPV), like those that have been used in Auckland, are another way to assist councils nearing their debt limits

Deferring public disclosure of off balance sheet debt from the current generation of ratepayers does not diminish the repayment liability their children will inherit.

by Kate | 4th Jul 19, 11:46am 1562197584

I thought exactly the same thing. And we pay these people, sheesh.

by rastus1 | 4th Jul 19, 8:35am 1562186154

We have introduced an arrival tax of $35 for a visit.

Immigration should be based on the ability to pay...not fraudulent applications and false CV's.

$20k per head is a good deal..access to infrastructure, education, housing, stable govt/economy, welfare etc.

At 70,000 heads at an average of $20k (we could do family discounts maybe) = $1,400,000,000. That's every year.

There is no problem...

by RickStrauss | 4th Jul 19, 9:24am 1562189085

Requiring that to be paid toward infrastructure rather than to a Private Training Establishment visa-mill could certainly be a better overall deal for both the students and NZers, given that's already what many are having to pay while getting little in return.

by my2c | 4th Jul 19, 8:50am 1562187039

What a farce, so an "autonomous body running an inquiry independent of the Government" and then Mr Robertson says please expand on "Tax Work Groups" work.
So to sum up, we want some other creative ways to tax everyone under another name please. Oh and council debt levels are so high and will lose there ratings, please can we have another way to hide the debt in some other OFF the BOOKS way.....hmmmh whats a good name for that SPV.
Are they taking advice from Goldman sachs like Greece did ?

by RickStrauss | 4th Jul 19, 9:28am 1562189295

1. Rates: People who live there pay for their infrastructure. Ok, fair enough.
2. Special Purpose Vehicle: borrow more, but put it officially off the council books so it doesn't look bad. Someone else will have to pay for it eventually.
3. Windfall gains tax: Seems a fair concept.
4. Central government support: Make other New Zealanders pay for Auckland's infrastructure so ratepayers don't have to see rates rises.
5. Tourist / bed tax: Seems reasonable. So many other places have it, and as John Key notes, it won't make a blind bit of difference to tourist numbers.

by Ocelot | 4th Jul 19, 9:40am 1562190059

Simple. Restructure rates. Levy it against land only and increase it to pay for the city. Has all sorts of positive incentives with regard to efficient and productive use of land. Reduces land values which means more capital is left for spending on the property "improvements" expanding tenancy supply and reducing rents.

Stop borrowing money to pay for what the landholders benefit from. Charge the landholders through a rates LVT.

by RickStrauss | 4th Jul 19, 10:23am 1562192583

Likely the best route but it's hard to get past folk. There's a strange assumption held that because one was once able to afford to live on a certain block of land one should always be able to afford to, and it's the city's obligation to make sure of that.

by Ocelot | 4th Jul 19, 10:51am 1562194289

Everything's hard if it negatively affects the wealthy.

by GV 27 | 4th Jul 19, 12:14pm 1562199254

Yes, give councils the ability to both restrict the supply of land and restrict their revenue to taxes on land values. What could possibly go wrong? If you think the land shortage we have at the moment is bad, wait until the Council is entirely reliant on restricting access to it.

Meanwhile, Aucklanders who just want a back-yard for their kids to run around in, or heaven forbid, a pet, end up paying ten times for the land what the building sitting on it costs. All the while people pat them on the head, tell them it's for their own good, and to concentrate on 'well-being'.

Or, alternatively, people just end up having to leave the city just to do basic things like have a family and not work themselves into the ground to cover an obscene mortgage. But it's OK, because there's a dozen people lining up from around the world who haven't contributed to the city or grown up in it who will waltz in and take their place. And all of them will get let in.

by kiwi_overseas | 5th Jul 19, 9:41pm 1562319682

ABSURD.
I expect far better from the Productivity Commission - stop tinkering at the edges. NZ needs their technical leadership.

1) The simplest and proper way to provide additional funding is simply to allow local government to be allowed to charge rates on central government. The PC should have had the gumption to say so and make it a recommendation. Stupidly this was explicitly excluded from the PC scope. Just like the capital gains tax scope not allowing capital gains on the home.

2) No regional fuel taxes. Auckland, Wellington & perhaps Christchurch can have congestion tolls to manage travel demand & defer/delete expensive future infrastructure & provide funding. A flat nationwide fuel tax can cover the rest.

3) No bed taxes except places like Queenstown where the tourist numbers exceed the local population substantially. We already have the proposed tourist levy.

4) No value uplift tax - it piecemeal and difficult. The proper way to do it is to have a land tax - i.e. force councils to rate on land value only (or central government does) and local government taxes on the improvement value only. All the uplift value around stations is the land value (i.e. you could rebuild the same structure at the same construction cost).

5) Where is the recommendation to require local government to undertake proportionate business case & regulatory impact assessment analysis on all spending???

6) SPV's simply move debt off the books - it still exists. Its simply corrupt.

7) Furthermore the PC was barred from proposing changes that would affect boundary arrangements. Some of the fiscal problems councils are having is due to them being too small. The report is not worth the paper its written on when the scope prohibits the the most efficient and practical changes needed.