Interim Submission to the Commonwealth Grants Commission Review of Financial Assistance Grants March 2013
Contact: Paul Schollum Western Australian Local Government Association 15 Altona Street, West Perth, WA 6005 P.O. Box 1544, West Perth, WA 6872 T: (08) 9213 2096 E:
[email protected]
Interim WALGA submission to the FAGs review
Contents Executive Summary .............................................................................................................. 2 1.
Introduction ................................................................................................................ 4 1.1
2.
Background ................................................................................................................ 5 2.1
3.
4.
5.
Outline of the submission .................................................................................... 4 Summary of results from the WALGA FAGs survey ............................................ 7
Addressing the FAGs review terms of reference......................................................... 9 3.1
Validity and consistency of the GPG National Principles ..................................... 9
3.2
Untied and tied funding...................................................................................... 11
3.3
Impact of the Minimum Grants principle on intra-state distribution ..................... 12
3.4
The Relative need of Local Governments in each State and Territory ............... 14
Other issues ............................................................................................................. 19 4.1
The escalation methodology applied to the FAGs pool ...................................... 19
4.2
The quantum of FAGs funding........................................................................... 21
4.3
The interstate distribution of FAGs .................................................................... 22
Conclusions .............................................................................................................. 24
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Interim WALGA submission to the FAGs review
Executive Summary Financial Assistance Grants (FAGs) make a significant contribution to Local Governments’ financial sustainability. In 2010-11, FAGs accounted for 7.2% of total revenue for WA Local Governments. FAGs are particularly important to rural and remote Local Governments, which generally have a low capacity to raise their own revenue. However, while FAGs are an essential source of income, their contribution to Local Government revenue is decreasing over time. The Commonwealth Grants Commission’s (CGC) review of FAGs therefore represents a timely opportunity to identify reforms that would improve the effectiveness and financial capacity of Local Governments. The Western Australian Local Government Association (the Association) has taken the following positions on the review’s terms of reference: Validity and consistency of the General Purpose Grant (GPG) National Principles Improved service provision to indigenous communities could be more appropriately addressed through tied funding grants. This tied funding should be provided in addition to the current FAGs pool, so that no Local Government is disadvantaged by a potential reduction in their GPG if this National Principle is removed. Untied and tied funding FAGs should remain an untied source of funding for Local Governments. Untied funding is an effective way of addressing the vertical fiscal imbalance that results from Local Government’s limited fiscal capacity. This is because untied funding, such as FAGs, allows Local Governments to allocate expenditure according to the conditions and the preferences of their community. Furthermore, untied funding arrangements have lower administration costs for both Local Government and the Commonwealth Government. Impact of the Minimum Grants principle on intrastate distribution The Association is not in favour of removing the Minimum Grant principle, because of the significant negative impact on the Local Governments currently receiving the minimum grant. Adjusting the distribution of FAGs within the current quantum of funding can only achieve one group of Local Governments gaining at the expense of another group. The Association believes the key problem with FAGs is the inadequacy of the funding, not the distribution model. The relative need of Local Governments (particularly in regional and remote communities) A number of factors contribute to regional and remote Local Governments having greater relative need than their urban counterparts. In WA, these factors include:
high costs associated with remoteness; the costs associated with servicing a non-resident population; the need to provide additional services such as aged care and medical services; and low fiscal capacity, usually due to a small rates base.
Urban Local Governments in WA also faced a number of challenges to their financial sustainability. Outer Metropolitan Local Governments, in particular, experienced very high population growth and subsequently had difficulty with the timely delivery of infrastructure.
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Interim WALGA submission to the FAGs review
Other matters (outside the review’s terms of reference) The Association also believes there are further changes, albeit outside the current review’s terms of reference, that could be made to the FAGs arrangements to increase Local Governments’ effectiveness and financial capacity. A particularly important change would be to review the escalation methodology applied to the FAGs pool. The CPI component of FAGs does not adequately reflect the cost increases faced by Local Governments. A more appropriate approach would involve the development of a national Local Government Cost Index. Alternatively, if a simpler approach is preferred, the escalation methodology could use the national Wage Price Index. Increasing the quantum of FAGs would help to address their diminishing contribution to Local Government revenue. It would also recognise the increased demands that have been placed on Local Governments due to increased infrastructure requirements, increased community expectations and the need to provide a greater range of services. The current State per capita based distribution of GPGs should be retained, because it has the advantage of simplicity and low administration costs. The Identified Road Grants (IRGs) component of FAGs should be allocated on a needs based model, but only if a reliable distribution model can be implemented.
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Interim WALGA submission to the FAGs review
1. Introduction The Western Australian Local Government Association (WALGA) is the united voice of Local Government in Western Australia. The Association is an independent, membership-based group representing and supporting the work and interests of all 141 Local Governments in Western Australia. The Association provides an essential voice for 1,249 elected members and approximately 14,500 Local Government employees as well as over 2 million constituents of Local Governments in Western Australia. The Association also provides professional advice and offers services that provide financial benefits to the Local Governments and the communities they serve. The Association welcomes the review of Financial Assistance Grants (FAGs) and is grateful for the opportunity to provide a submission to the Commonwealth Grants Commission (CGC). The Association anticipates that this review will highlight a number opportunities to improve the effectiveness and equity of the current FAG arrangements. Due to meeting schedules, this submission has not yet been endorsed by WALGA’s State Council. The Commission will be informed of any changes to the Association’s submission following consideration by the State Council. 1.1 Outline of the submission Section 2 of this submission provides background information on the significance of FAGs to WA Local Governments. This section also presents the results of a survey the Association used to compile the views of its members. Section 3 addresses each aspect of the FAGs review terms of reference. Section 4 discusses aspects of FAGs, not contained in the CGC’s terms of reference, that the Association believes should also be considered. Section 5 presents the submission’s conclusions.
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Interim WALGA submission to the FAGs review
2. Background Local Governments generally do not have sufficient fiscal capacity to raise enough revenue to cover their expenditure. In contrast, the Commonwealth Government collects more taxation revenue than it spends. This situation is known as a ‘vertical fiscal imbalance’ and can be addressed though transfer payments from one level of government to another. FAGs are one example of such arrangements within the Australian public sector. Grants and subsidies, such as FAGs, are an important source of income for WA Local Governments. In 2010-11, grants and subsidies made up $385 million (11.5%) of WA Local Government revenue: Figure 2.1 WA Local Government operating revenue by source, 2010-11 Other 19.3%
Taxation revenue 42.3%
Interest income 3.9% Sales of goods and services 23.0% Current grants and subsidies 11.5%
Source: ABS, 5512.0
The total level of FAGs in 2010-11 was $243 million, which was comprised of $146 million in General Purpose Grants (GPGs) and $97 million in Identified Road Grants (IRGs). Table 2.1 below shows the contribution of FAGs to Local Government grants and subsidies and total revenue. Table 2.1 GPGs and IRGs in 2010-11 $ (million)
Proportion of grants and subsidies
Proportion of total LG revenue
FAGs GPGs
146
37.9%
4.4%
IRGs
97
25.2%
2.9%
Total FAGs
243
63.1%
7.2%
Other grants and subsidies
142
36.9%
4.2%
Total grants and subsidies
385
100.0%
11.5%
Source: ABS, 5512.0; WALGGC Annual Report 2010-11; author calculations.
The importance of FAGS as a source of revenue is particularly variable among the different types of Local Governments in WA. The following table shows FAGs as a proportion of total revenue by Australian Classification of Local Governments (ACLG). The FAGs proportion ranges from 0.4% in the Urban Capital City category to 36.7% in the Rural Remote Extra Small category.
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Interim WALGA submission to the FAGs review
Table 2.2 FAGs as a proportion of WA Local Government revenue by ACLG, 2010-11 ACLG description
ACLG code
Urban Capital City Urban Developed Small Urban Developed Medium Urban Developed Large Urban Developed Very Large Urban Regional Small Urban Regional Medium Urban Regional Large Urban Regional Very Large Urban Fringe Small Urban Fringe Medium Urban Fringe Large Urban Fringe Very Large Rural Significant Growth Rural Agricultural Small Rural Agricultural Medium Rural Agricultural Large Rural Agricultural Very Large Rural Remote Extra Small Rural Remote Small Rural Remote Medium Rural Remote Large All ACLG categories
UCC UDS UDM UDL UDV URS URM URL URV UFS UFM UFL UFV RSG RAS RAM RAL RAV RTX RTS RTM RTL -
FAGs as a proportion of total revenue (%) 0.4 2.1 2.6 3.1 3.6 5.8 4.6 n/a n/a n/a 4.2 2.4 2.4 9.1 21.0 13.3 12.3 12.5 36.7 22.3 25.5 19.6 7.2
Source: WALGGC 2010-11 data
Rural Local Governments are likely to remain dependent on FAGs and other grants for some time. In 2008, the Productivity Commission found that rural and remote Local Governments were already drawing heavily on their fiscal capacities and had little potential to increase their own-source revenue1.
1
Productivity Commission 2008, Assessing Local Government Revenue Raising Capacity.
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Interim WALGA submission to the FAGs review
2.1 Summary of results from the WALGA FAGs survey The Association recently conducted a survey to canvass the views of WA Local Governments on FAGs and to inform the content of this submission. The survey questions covered a number of topics including the minimum grant, tied and untied funding, and the adequacy of FAGs funding. Fifty-eight Local Governments responded to the survey, this represented a response rate of 41.1%. A key sequence of questions in the survey asked Local Governments what they thought should happen with the minimum grant that applies to GPGs. The results are presented in figure 2.2 below:
Figure 2.2 Reviewing the minimum grant Completely remove minimum grant 34.5%
Reduce minimum grant 12.1%
Increase minimum grant 15.5%
Retain minimum grant at current level 37.9%
The most common option, selected by 37.9% of Local Governments, was to retain the minimum grant at its current level. The next most common option (34.5%) was to completely remove the minimum grant arrangements. Local Governments’ perspectives on the minimum tended to vary according to whether or not they received the minimum grant. The next figure contrasts the responses of ‘minimum grant‘ recipients2 with the remainder of Local Governments. Figure 2.3 Reviewing the minimum grant (comparison) Completely remove minimum grant 6.3%
Increase minimum grant 43.8%
Retain minimum grant at current level 50.0%
Min grant LGs
2
Completely remove minimum grant 45.2%
Non min grant LGs
Increase minimum grant 4.8% Retain minimum grant at current level 33.3% Reduce minimum grant 16.7%
These were Local Governments that received the minimum grant in the 2012-13 financial year.
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Interim WALGA submission to the FAGs review
WA Local Governments were also asked if FAGs were adequate for the purpose of enabling Local Governments ‘to provide a level of service equivalent to the average level of service provided by Councils across the State’. The following table summarises the results for this question: Table 2.3 Adequacy of FAGs funding Response Not adequate Adequate More than adequate Did not respond Total
Minimum grant LGs (%) 68.8 25.0 0.0 6.3 100.0
Non minimum grant LGs (%) 85.7 14.3 0.0 0.0 100.0
All LGs (%) 81.0 17.2 0.0 1.7 100.0
The majority of Local Governments (81.0%) thought the current level of FAGs funding was inadequate. The table also shows that non-minimum grant Local Governments (85.7%) were more likely to suggest that FAGs funding was inadequate than minimum grant Local Governments (68.8%). The survey also asked a number of other FAGs related questions. These are relevant to specific aspects of the FAGs review and, as such, the results of these questions are presented in the relevant parts of this submission.
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Interim WALGA submission to the FAGs review
3. Addressing the FAGs review terms of reference The FAGs review’s terms of reference are as follows: Box 3.1 FAGs Review Terms of Reference The Commission should examine the impacts of FAGSs on local government bodies and its appropriateness by focusing on: a) examining in the intrastate context whether the National Principles that guide the allocation of the general purpose grants remain valid and are conceptually consistent with each other; b) evaluating the economic and financial benefits of untied vs tied funding for enhancing the effectiveness of local governments and their ability to ensure effective services for their residents; c) identifying the impact of the Minimum Grant principle on the intra-state distribution of FAGSs; and d) assessing the relative need of local governments in each State and Territory with a particular focus on those that service regional and remote communities.
The terms of reference are addressed below in sections 3.1, 3.2, 3.3 and 3.4 of the Association’s submission. 3.1 Validity and consistency of the GPG National Principles The National Principles are outlined in the Local Government (Financial Assistance) Act 1995 and are as follows: Box 3.2 National Principles 1. Horizontal equalisation General purpose grants will be allocated to local governing bodies, as far as practicable, on a full horizontal equalisation basis as defined by the Act. This is a basis that ensures each local governing body in the state or territory is able to function, by reasonable effort, at a standard not lower than the average standard of other local governing bodies in the state or territory. It takes account of differences in the expenditure required by those local governing bodies in the performance of their functions and in the capacity of those local governing bodies to raise revenue. 2. Effort neutrality An effort or policy neutral approach will be used in assessing the expenditure requirements and revenue-raising capacity of each local governing body. This means as far as practicable, that policies of individual local governing bodies in terms of expenditure and revenue effort will not affect grant determination. 3. Minimum grant The minimum general purpose grant allocation for a local governing body in a year will be not less than the amount to which the local governing body would be entitled if 30 per cent of the total amount of general purpose grants to which the state or territory is entitled under section 9 of the Act in respect of the year were allocated among local governing bodies in the state or territory on a per capita basis. 4. Other grant support Other relevant grant support provided to local governing bodies to meet any of the expenditure needs assessed should be taken into account using an inclusion approach. 5. Aboriginal peoples and Torres Strait Islanders
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Interim WALGA submission to the FAGs review
Financial assistance shall be allocated to councils in a way which recognises the needs of Aboriginal peoples and Torres Strait Islanders within their boundaries. 6. Council amalgamation Where two or more local governing bodies are amalgamated into a single body, the general purpose grant provided to the new body for each of the four years following amalgamation should be the total of the amounts that would have been provided to the former bodies in each of those years if they had remained separate entities.
National Principles 1 and 3 are conceptually inconsistent with each other. Full horizontal equalisation is not possible if there are Local Governments that receive the Minimum Grant (since the existence of a Minimum Grant reduces the pool of funds available for equalisation payments). Nonetheless, the inconsistency of these two principles is not an argument in itself that one of the principles should be removed. It simply means an appropriate balance must be found between the opposing aspects of the principles. Taxation provides an analogous example of a trade-off between potentially opposing principles. Designing a taxation system involves both the principles of efficiency and equity. A flat income tax rate for all tax payers would be efficient; however, it would not satisfy the equity principle because those with a greater capacity to pay would not have a greater share of the taxation burden. Instead, taxation usually involves a compromise between the two principles, with a small number of progressive tax rates applied at various income thresholds. Furthermore, the Minimum Grant principle could be considered valid because it improves ‘the certainty of funding for local governing bodies’ and ‘the efficiency and effectiveness of local governing bodies’ (objectives (c) and (d) of the Local Government (Financial Assistance) Act 1995). However, arguments could be made against the validity of the Minimum Grant principle on equity grounds – see section 3.3.2 of this submission. National Principle 5 is valid in that it is consistent with objective (e) of the Act: improving ‘the provision by local governing bodies of services to Aboriginal and Torres Strait Islander communities’. Most Local Government Grants Commissions (LGGCs) recognise this National Principle by including an assessment of a Local Government’s indigenous population in determining its GPG allocations. All else being equal, a Local Government with a higher indigenous population will receive a greater GPG. However, as with any factor assessed by the LGGCs, a Local Government will not necessarily spend the funding on an area related to the source of disadvantage. Objective (e), and its associated National Principle, could be considered invalid because they relate to a specific objective. Because GPGs are a source of general revenue for Local Governments, they are not effective at achieving specific policy outcomes. Instead, the Association believes that improved service provision to indigenous communities could be more appropriately addressed through tied funding grants. This tied funding should be provided in addition to the current FAGs pool, so that no Local Government is disadvantaged by a potential reduction in their GPG if this National Principle is removed. Overall, other than the concerns noted above, the Association is satisfied with the consistency and validity of the National Principles. However, the Association also believes there may be a case for greater consistency in the application of the principles by the State LGGCs. This could be achieved through greater clarification of the principles as well as guidance from the CGC on how they should be applied by the State LGGCs.
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Interim WALGA submission to the FAGs review
Clarifying the ‘full horizontal equalisation’ principle would be particularly important. Currently, the LGGCs each use different methodologies and consider different factors when allocating their State’s GPG pool. In theory, otherwise identical Local Governments in different States would experience different outcomes due to differences in LGGC methodologies. This inconsistent treatment is not a desirable feature of a system that should treat Local Governments equitably. Greater harmonisation of the LGGC’s methodologies would help address this inconsistency. The CGC could compare approaches across the States and identify leading practices to inform the development of a model methodology. 3.2 Untied and tied funding The Association’s position on FAGs is that they should remain untied, but it acknowledges that there are situations where tied funding is effective. Where the Commonwealth has a clear policy objective that needs to be achieved through Local Government, tied funding may be appropriate. The Commonwealth Treasury particularly supports this idea3: Payments to local government for specific purposes — either from the Australian government or State governments — are likely to have an ongoing role, as intergovernmental cooperation involving local government is often necessary to deliver reforms of national or State significance. Other levels of government can use these payments to purchase the delivery of goods and services from local government. Given the expertise that local governments have in the delivery of some goods and services, these payments can represent value for money for higher levels of government. If the Commonwealth Government wishes to make greater use of tied funding, the Association’s position is that this should not come at the expense of the current FAGs pool. Additionally, where tied funding is provided, acquittal arrangements should be relatively simple, as with the Roads to Recovery program. This would help to minimise administrative costs for Local Governments. Although tied funding has some advantages, untied funding is more appropriate for increasing the effectiveness of Local Governments. The Association would argue that Local Governments are in the best position to judge their expenditure needs due to their familiarity with local conditions and the preferences of their community. Deciding Local Government spending priorities at a higher level of government could lead to an inefficient allocation of resources. Tied funding grants also tend to have high administrative costs due to reporting and acquittal requirements. Conversely, untied funding arrangements, such as FAGs, have lower administration costs for both Local Government and the Commonwealth Government. The WALGA FAGs survey asked respondents whether they thought the Commonwealth should make greater use of tied funding in providing financial assistance to Local Governments. Most Local Governments (69%) were opposed to more funding being allocated under tied arrangements. FAGs should also remain untied because of their role in addressing the vertical fiscal imbalance among the levels of government in Australia. Local Governments, like State Governments, do not raise enough revenue to finance the expenditures for which they are responsible. In contrast the Commonwealth collects more revenue than it spends. Therefore, Treasury 2010, Australia’s Future Tax System: Report to the Treasurer, Part Two: Detailed Analysis, Vol. 2, , accessed 14 February 2013. 3
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Interim WALGA submission to the FAGs review
the primary purpose of FAGs is to address the vertical fiscal imbalance that results from Local Government’s relatively narrow revenue base. In this way, FAGs could be considered similar to the revenue raised by the Goods and Services Tax (GST), which the Commonwealth distributes to the States to address the shortfall in their taxation revenue. Local Governments generally have a great deal of autonomy in spending their own source revenue. Because FAGs are essentially a replacement for, or supplement to, own source revenue, the Association believes Local Governments should have the discretion to decide how this funding is used. That is, FAGs should remain an untied source of funding for Local Governments. 3.3 Impact of the Minimum Grants principle on intra-state distribution The Minimum Grant principle prevents ‘full’ horizontal fiscal equalisation from occurring (to the extent that full equalisation is possible within the limits of the current GPG pool). Additionally, the minimum grants principle ensures that the highest fiscal capacity Local Governments still receive some GPG funding. The graph below compares the impact of the minimum grant on WA and Australia: Figure 3.1 Comparison of WA and Australian Minimum Grant Local Governments WA 2000-01
WA 2010-11
Australia 2000-01
Australia 2010-11
Proportion of population in mimimum grant Councils
Minimum grants as a proportion of total grants
Proportion of Councils receiving the minimum grant
0
10
20
30
40
50
60
70
80
Source: Department of Regional Australia, Local Government National Reports
In 2010-11, the proportion of the population living in a Minimum Grant Council was greater in WA (75%) than in Australia (34%). Furthermore, the minimum grant proportion of the GPG was also higher in WA: 23%, compared to 11% for Australia. Therefore, it is important to note that any potential changes to the Minimum Grant principle will have a greater effect on WA Local Governments than those in other jurisdictions. The following sections discuss the arguments for and against retaining the Minimum Grant principle and the Association’s position. 3.3.1 Arguments for the Minimum Grant Principle The following arguments can be made in favour of retaining the Minimum Grant principle:
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Interim WALGA submission to the FAGs review
Accessing some GPG funding is important for all Local Governments due to the narrowness of the sector’s tax base. Local Governments have fewer sources of revenue than State and Commonwealth Governments. GPGs help address this situation by providing an additional source of revenue for Local Governments. Furthermore, in the case of minimum grant Councils, GPGs have the advantage of providing a stable and predictable source of revenue.
All taxpayers contribute to Commonwealth consolidated revenue through taxes such as income tax and GST. Therefore, the Local Government of every taxpayer should be entitled to a share of the GPG funding.
The State LGGCs have different methodologies for assessing fiscal capacity. Therefore, otherwise identical Local Governments in different states may experience different GPG outcomes. The minimum grant mitigates this effect by providing a ‘floor’ that ensures all Local Governments will receive at least some GPG funding, regardless of the LGGC’s assessment.
Minimum grant Local Governments comprise a substantial proportion of the population in WA (75.3% in 2010-11). Removing the minimum grant would cause a financial shortfall for these Local Governments that would have to be met by increased rates or reduced service levels.
3.3.2 Arguments against the Minimum Grant Principle The Minimum Grant principle appears to have been established so that all Local Governments receive a share of GPGs. However, this intention is not consistent with the idea that GPGs should be distributed according to need, i.e., on a full horizontal equalisation basis. Therefore, the Minimum Grant principle is essentially a compromise between a per capita (at the Local Government level) distribution and a fully needs based model. The continued existence and level of the minimum grant involve value judgements on the extent to which lower capacity Local Governments should be supported at the expense of higher capacity Local Governments. The following arguments suggest that the minimum grant should be removed:
FAGs are largely intended to address vertical fiscal imbalance so the funding should be used for this purpose to the greatest extent possible. If a Council is assessed by an LGGC as having sufficient own source revenue capacity that it does not need GPG funding, then it should not receive any.
A number of Commonwealth and State Government policies suggest Australia places a high value on rural communities. These include subsidised prices on essential services and funding programs such as ‘Investing in Australia’s Regions’ and ‘Royalties for Regions’. Removal of the minimum grant may be more consistent with these policies.
3.3.3 The Association’s position on the Minimum Grant principle The Association believes the key problem with FAGs is the inadequacy of the funding. Adjusting the distribution of FAGs within the current quantum of funding can only achieve one group of Local Governments gaining at the expense of another group. Removing the Minimum Grant principle would also worsen the financial sustainability of some Local Governments because it would remove a source of stable and predictable revenue.
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Interim WALGA submission to the FAGs review
Therefore, the Association is not in favour of removing the Minimum Grant principle, because of the significant negative impact on the Local Governments currently receiving the minimum grant. Furthermore, the Association’s FAGs survey indicated that only a minority of Councils (34.5%) felt the minimum grant should be removed completely. 3.4 The Relative need of Local Governments in each State and Territory In considering this aspect of the terms of reference, the CGC has asked for information and views on:
the services delivered by, the spending of, and the revenue raised by different groups of local governments in each State; the factors which affect the sustainability, effectiveness and ability to deliver services of local governments; how these factors differ across groups of local governments, including those in regional and remote areas, within a State; and how changes to the FAG arrangements and principles would affect differences in the sustainability, effectiveness and ability to deliver services of local governments
3.4.1 Services Delivered by Local Government Local Governments in WA are providing an increasing range of services to their communities. This includes services often regarded as outside the core functions of Local Government, such as: aged care, medical services, fire and emergency services, and environmental management. Figure 3.2 below compares expenditure by purpose between WA and Australian Local Governments. Figure 3.2 Proportion of Local Government expenditure by purpose WA 2010-11
Australia 2010-11
General public services Public order and safety Education Health Social security and welfare Housing and community amenities Recreation and culture Fuel and energy Agriculture, forestry and fishing Mining, manufacturing and construction Transport and communications Other economic affairs Public debt transactions Other 0%
5%
10%
15%
20%
25%
30%
Source: ABS, 5512.0
The above figure shows the WA Local Government sector has a higher than average proportion of expenditure directed to the following purposes: Public order and safety, Health, Recreation and culture, and Transport and communications. The greater proportion of expenditure on these purposes can be at least partly attributed to WA’s large and sparsely populated land mass. For human services such as Health and Public order and safety, rural 14
Interim WALGA submission to the FAGs review
Local Governments are often the service provider of last resort and must fill the gaps left by other levels of government. WA’s high Transport and communications expenditure is due to the costs of servicing a vast, and often very remote, local road network. Local Government’s regulatory role has also increased over time, as highlighted by a recent Productivity Commission (PC) report4. The PC found that Local Government’s workload was dominated by implementing and enforcing State laws, but there was not a commensurate level of support from State Governments. In many cases, State Governments have allocated extra regulatory responsibilities to Local Governments, without first ensuring the sector has the capability to administer them.
3.4.2 Factors Affecting Local Government Service Provision The WALGA FAGs survey identified a number of factors which affected Local Governments’ sustainability and ability to deliver services. Common factors identified by non-metropolitan Local Governments included:
costs of providing services to a large non-resident population (either due to tourism or the presence of a large fly-in, fly-out workforce) higher costs of service provision due to remoteness difficulties in attracting and retaining staff difficulty in supplying infrastructure due to high population growth (mainly an issue for regional centres and neighbouring Local Governments) increasing environmental responsibilities the costs of providing aged care and medical services costs for Local Governments with a large proportion of heritage buildings low capacity to raise rates revenue due to low population and high socio-economic disadvantage low capacity to raise rates revenue due to land owned by State Government or covered by State Agreement Acts
Common factors identified by metropolitan Local Governments included:
high population growth low capacity to raise rates revenue due to high socio-economic disadvantage increasing environmental responsibilities the provision of services that are funded by ratepayers but also used by other Local Governments’ residents
3.4.3 Variation in the Factors Affecting Service Provision Local Governments in remote areas are disadvantaged by the distances, and resulting transport costs, involved in service provision. In remote areas that are also experiencing the effects of the mining boom, these costs can also be compounded by the effects of high demand and labour shortages. For example, building costs in Broome and Derby can be 45%-50% higher than in Perth5.
4
Productivity Commission 2012, Performance Benchmarking of Australian Business Regulation: The Role of Local Government as Regulator. 5 Master Builders Association of Western Australia website, , accessed 15 February 2013.
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Interim WALGA submission to the FAGs review
In 2011, the WA Department of Regional Development and Lands produced a Regional Price Index (RPI). The RPI compared the cost of ‘a common basket of goods and services across a number of regional locations and Perth’6. The figure below shows the main results of the RPI: Figure 3.3 WA Regional Price Index, 2011 Peel
99.9
Perth
100.0
Great Southern
100.2
South West
100.2
Wheatbelt
101.0
Mid West
102.2
Goldfields-Esperance
105.1
Gascoyne
109.3
Kimberley
120.0
Pilbara
137.1 0
50
100
150
Regional Price Index (Perth = 100)
The RPI found that prices tended to be lower in the more densely populated and less isolated regions in the south-west of the State. Prices were highest in the Pilbara and Kimberley regions (37.1% and 20% higher than in Perth, respectively). Local Governments in remote areas also often have to contend with ‘service populations’ that are larger than their resident populations. It is difficult to have a definitive picture of service populations across Australia due to the lack of appropriate statistics. Nonetheless, comparing Census data on resident populations and ‘place of enumeration’7 provides some indication of the Local Governments that are most affected: Table 3.1 Top five WA LGAs by difference in POE count and RP (2011 Census) Local Government Area Perth (C) Broome (S) Roebourne (S) East Pilbara (S) Ashburton (S)
Place of enumeration count (POE) 24,670 22,350 29,968 17,148 15,057
Resident Population (RP) 16,715 14,998 22,899 11,950 10,001
Difference between POE and RP 7,955 7,352 7,069 5,198 5,056
Table 3.3 above suggests a number of WA Local Governments have a service population that greatly exceeds the resident population. In the mining areas of Roebourne, East Pilbara and Ashburton, this is due to the impact of the large fly-in, fly-out (FIFO) workforce. The recent Parliamentary Inquiry into the use of FIFO received a number of Local Government submissions regarding the economic impact of FIFO workers. Local Governments pointed 6
Department of Regional Development and Lands 2011, Regional Price Index 2011, , accessed 14 February 2013. 7 The Census place of enumeration count is based on where people are located on Census night. The resident population count is based on where people usually live.
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Interim WALGA submission to the FAGs review
out that infrastructure such as roads, airports, water and sewerage services, and community facilities were provided to the non-resident population, without adequate compensation for these costs8. Another factor that varies across the State is the impact of population growth. Between the 2006 and 2011 Censuses, the WA population grew by 14.3%, while the Australian population grew by 8.3%. In the WALGA FAGs survey a number of Local Governments indicated population growth was outstripping their capacity to adequately invest in infrastructure. In Metropolitan Perth a number of Local Governments covering the outer suburbs have absorbed a substantial proportion of this population growth. For example, the City of Wanneroo’s population increased by 41,136 (37.1%) between the 2006 and 2011 Censuses. Other outer Metropolitan Local Government Areas including Rockingham, Stirling, Cockburn, Swan and Gosnells had population increases of between 15,000 and 20,000. With such large increases in population, it can be difficult for Local Governments to provide the required infrastructure in the timeframes desired by the community. While the effects of population growth in WA are most obvious in Perth, a number of rural and regional Local Governments had a proportionally high rate of growth. Table 3.4 below shows that of the top ten Local Government Areas in terms of percentage increase in resident population, nine were located in regional WA. Table 3.2 Top ten WA LGAs by population growth 2006-2011 Local Government Area East Pilbara (S) Leonora (S) Menzies (S) Wiluna (S) Perenjori (S) Laverton (S) Yalgoo (S) Ashburton (S) Boddington (S) Perth (C)
Population 2006
Population 2011
6,544 1,410 217 678 533 727 244 6,080 1,381 11,573
11,950 2,512 385 1,159 905 1,226 402 10,001 2,228 16,715
Population increase 5,406 1,102 168 481 372 499 158 3,921 847 5,142
Percentage increase (%) 82.6 78.2 77.4 70.9 69.8 68.6 64.8 64.5 61.3 44.4
A number of rural Local Governments in WA have a low fiscal capacity due to the combined effects of a low population, low incomes and high levels of socio-economic disadvantage. Of the 139 Local Government Areas in WA, 85 have a population of less than 2,000. And of these 85 Local Governments, 52 have a median household income of less than $1,000 a week. In contrast, there are 54 Local Governments with a population greater than 2,000 and only four of those have a median household income of less than $1,0009. Local Governments’ capacity to raise revenue can also be compromised by the proportion of non-rateable land in their area. For example, a number of WA Local Governments have a significant proportion of land taken up by non-rateable State forests. The problem of
8
The Parliament of the Commonwealth of Australia 2013, Cancer of the bush or salvation for our cities? Fly-in, fly-out and drive-in, drive-out workforce practices in Regional Australia, p.58. 9 Source: ABS, Census 2011. Note that the Median household income for WA was $1,415.
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Interim WALGA submission to the FAGs review
diminished rates capacity for these Local Governments is compounded by the need to maintain public roads through the forests10. State Agreement Acts are another impediment to rates revenue for some, usually remote, Local Governments. State Agreements are essentially contracts, between the State Government and developers of resource projects, that have been ratified by an act of the WA Parliament. State Agreements typically restrict Local Governments to rating the Unimproved Value of land used for these projects. Although recent State Government policy changes allow Local Governments to use Gross Rental Valuation, this only applies to new resource projects and State Agreements that are about to be renewed. However, most current State Agreements have relatively long terms and therefore constrain the fiscal capacity of the affected Local Governments. 3.4.4 Impact of Changes to the FAGs Arrangements and Principles The main changes to the FAG arrangements that would benefit Local Governments in WA would be introducing a new escalation methodology and increasing the quantum of the FAGs pool. Since these changes are outside the scope of the review’s terms of reference, they are discussed in Section 4 of this submission.
10
WALGA 2007, Systemic Sustainability Study Revenue Expert Team, < http://walga.asn.au/Portals/0/Templates/LGReform/working_Group_Reports/revenue.pdf>, accessed 22 February 22 2013.
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Interim WALGA submission to the FAGs review
4. Other issues This section discusses aspects of FAGs, not contained in the CGC’s terms of reference, that the Association believes should also be considered. A number of potential changes to the current FAGs arrangements are presented. These changes are consistent with the objectives of FAGs, particularly the need to improve Local Governments’ effectiveness and financial capacity. The Association understands the CGC’s examination of the FAGs arrangements in 2013 is the first stage of a comprehensive review. The Association hopes, if there is no scope to consider these issues in the review’s current activities, they could be considered in the review’s second stage. The issues discussed below are:
the escalation methodology applied to the FAGs pool; the quantum of FAGs funding; and the interstate distribution of FAGs.
4.1 The escalation methodology applied to the FAGs pool The FAGs funding pool is currently escalated by a combination of population growth and the consumer price index (CPI). Using the CPI in the escalation process maintains the real per capita value of FAGs. Presumably, this is intended to account for the rising costs of Local Governments; however, the CPI is not appropriate for this task. The CPI measures changes in the price level of consumer goods and services used by households. This means it may be appropriate to use the CPI for purposes such as escalating government welfare payments to recipient households. Local Governments, on the other hand, purchase a very different set of goods and services than households. Key outlays for Local Governments include:
wages and salaries; superannuation; road, bridge and building construction costs; machinery and equipment purchases; and utilities costs.
The Association produces a measure of cost pressures for WA Councils: the Local Government Cost Index (LGCI). The LGCI is a composite indicator that is a weighted average of relevant ABS indexes for WA such as the Wage Price Index and the Road and Bridge Construction Index. Some of the other Local Government Associations use a similar methodology to calculate indexes for their States. The graph below compares changes over time in the CPI and the WA LGCI.
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Interim WALGA submission to the FAGs review
Figure 4.1 Comparison of Australian CPI and WA LGCI March qtr 2002 = 100
160
Index
150 140
WA LGCI
130 120
Australia CPI
110 100
Mar-2012
Mar-2011
Mar-2010
Mar-2009
Mar-2008
Mar-2007
Mar-2006
Mar-2005
Mar-2004
Mar-2003
Mar-2002
90
Source: ABS, 6401.0; WALGA LGCI data.
Figure 4.2 shows growth in the LGCI has generally been significantly greater than the CPI. From the March quarter 2002 to the September quarter 2012, the CPI increased by 33.8%. Over the same period, the LGCI increased by 53.1%. As a result of the indexation methodology used, FAGs have failed to keep up with the actual costs faced by WA Local Governments. This can be further demonstrated by assessing the FAGs contribution to total Local Government revenue over time: Figure 4.2 FAGs as a proportion of total WA Local Government revenue GPGs
Percentage of total revenue
12.00
IRGs
Total FAGs
10.00 8.00 6.00 4.00 2.00
2010-11
2009-10
2008-09
2007-08
2006-07
2005-06
2004-05
2003-04
2002-03
2001-02
0.00
Source: ABS, 5512.0; WALGGC Annual Reports; author calculations.
In 2001-02, FAGs made up 9.5% of Local Government revenue in WA. By 2011-12, the FAGs proportion had decreased to 7.2%. The steadily decreasing proportion of FAGs revenue means that Local Governments must rely more on other revenue sources, especially rates. This is particularly problematic for communities with a low rates base. The above analysis suggests a new escalation methodology should be adopted by the CGC. The CGC could potentially calculate an Australian LGCI for escalation purposes. Alternatively, the CGC could simply use the ABS’s Wage Price Index. This approach would have a number of advantages:
Administrative simplicity, since it would eliminate the need to compile multiple indexes. The index generally increases at a higher rate than the CPI, which makes it more appropriate to use for the Local Government sector. 20
Interim WALGA submission to the FAGs review
Wages and salaries are typically Local Governments largest expense (35.1% of the sector’s expenditure in WA).
4.2 The quantum of FAGs funding The Association believes there is a strong case for an increase in the quantum of FAGs. Under the current escalation methodology, FAGs have essentially stayed constant in real per capita terms. Over the short term, particularly in times of moderate economic growth, this may be appropriate and acceptable to Local Governments. However, over longer periods the current escalation methodology has clearly been detrimental to the sector, because it does not account for circumstances when Local Governments must increase their quality or quantity of services. Such circumstances include:
Periods of high economic growth and the subsequent increased use of Local Government infrastructure, particularly roads and waste services. The need to provide essential services to communities when these are withdrawn by other levels of government. Taking on additional responsibilities imposed by other levels of government. The need to improve services and provide additional services due to increased expectations from the community, particularly during periods of increasing household incomes.
The following figure shows that as a proportion of GDP, FAGs have steadily decreased over the last decade. The decreasing trend is still apparent even when Roads to Recovery funding is included in the total. Figure 4.3 FAGs as a proportion of nominal Australian GDP FAGs
0.25
FAGs + Roads to Recovery
Percentage of GDP
0.20 0.15 0.10 0.05
2010-11
2009-10
2008-09
2007-08
2006-07
2005-06
2004-05
2003-04
2002-03
2001-02
0.00
Source: Department of Regional Australia, Local Government National Reports; ABS, 5204.0; BITRE Public Road Related Expenditure Information Sheet; Author calculations.
This decreasing trend means FAGs are an increasingly ineffective method of addressing vertical fiscal imbalance. Increases in revenue from most Commonwealth and State taxes are generally driven by the same factors that increase nominal GDP. That is, these taxes grow according to increases in inflation, population and economic activity. Since FAGs only grow according to population and CPI increases, the current arrangements can only continue to worsen the vertical fiscal imbalance. The Association suggests this situation should be addressed by increasing the total FAGs pool to a level of 0.18% of nominal GDP. This would be slightly below the equivalent proportion in 2001-02 and would help to recognise the impact of increased infrastructure 21
Interim WALGA submission to the FAGs review
demands, community expectations and the need for Local Governments to provide a greater range of services. 4.3 The interstate distribution of FAGs 4.3.1 The interstate distribution of GPGs The Horizontal equalisation principle relating to the allocation of GPGs only applies to the intrastate distribution. At the interstate level, the GPG component of FAGs is distributed on an equal per capita basis. This represents an inconsistency in the current arrangements, since they consider the different fiscal capacities of Local Governments within States, but not the different fiscal capacities between States. Therefore, the distribution of FAGs could be more equitable if the differing fiscal capacities across each State were also considered. This would involve an extra horizontal equalisation process, which would need to be carried out by the CGC, to adjust each State’s per capita grant according to the fiscal capacity of the Local Government sector in that State. The LGGCs would then distribute their State’s GPG allocation using another horizontal equalisation process based on the distribution methodology they currently use. However, this approach would have a number of disadvantages. It would be more complex than the current approach and would have higher administration costs. Additionally, assessing Local Government fiscal capacity across States may be contentious, just as the allocation of GST revenues is a divisive issue for State Governments. An alternative approach would be for the CGC to assess the fiscal capacity of Local Governments at a national level, as suggested by a parliamentary inquiry in 2003 (the ‘Hawker Report’)11. Although this approach appears to deliver significant administrative efficiencies, since the State LGGCs would have a reduced role, the Association believes this would not be an effective methodology for the following reasons:
Differences in Local Government roles and functions across the States would be difficult to incorporate and consider in a national distribution model. The WALGGC has the discretion to consider the subjective ‘special needs’ of each Local Government in addition to the objective data in its equalisation model. It is more appropriate for State LGGCs, rather than the CGC, to make such value judgments. The WALGGC is able to regularly visit WA Local Governments and assess the challenges they face in delivering services to their communities. It is unlikely that this program of visits would be possible for the CGC.
The WALGA FAGs survey asked Local Governments if they thought GPGs should continue to be distributed to the States on an equal per capita basis. Most Local Governments (56.1%) were in favour of retaining the per capita distribution. The Local Governments that were not in favour were asked how they thought GPGs should be distributed to the States. Many thought there should be a horizontal equalisation process employed at the State level and felt there was a need to equalise for aspects such as remoteness, high costs, growth and infrastructure needs. Some respondents thought WA should be entitled to a greater share of the GPG funding due to the State’s disproportionate contribution to Commonwealth taxes.
11
The Parliament of the Commonwealth of Australia 2003, Rates and Taxes: A Fair Share for Responsible Local Government.
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Interim WALGA submission to the FAGs review
The Association believes adding an additional layer of horizontal equalisation would make the GPG arrangements unwieldy and complex. While the current arrangements are not necessarily equitable across States, they are simple and have low administrative costs. However, there may be a case for a compromise model that distributes most of the GPG pool on a per capita basis and then distributes the remaining funding in a simple horizontal equalisation process based on a few broad disability categories. If the CGC believes such an approach would deliver better outcomes, it should develop potential models and research their possible outcomes. But in the absence of such information, the Association’s position is that the status quo should be maintained. 4.3.2 The interstate distribution of IRGs The IRG pool is distributed to the States according to fixed proportions that have been used since 1991-92. The exact basis for these proportions is not known, though it is believed that population and local road length were taken into account. The State distribution shares of the IRG have become increasingly out of date. This has been partially recognised by the Commonwealth, which began providing supplementary funding to South Australia from 2004-05 onwards. The IRGs should be allocated according to each State’s need using a distribution methodology based on variables such as the relative lengths of different road types, relative use of those roads and their maintenance costs. A CGC inquiry in 2006 found that road data across the jurisdictions was not consistent or comparable and this would prevent the development of an effective need based methodology12. The Association believes that the Commonwealth should develop a strategy to improve road data across Australia so that an appropriate IRG distribution methodology can be developed. However, until such a strategy is initiated, the Association would be in favour of retaining the historical shares that are currently used.
12
CGC 2006, Report on the review of the interstate distribution of local roads grants.
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Interim WALGA submission to the FAGs review
5. Conclusions The limited terms of reference for this stage of the FAGs review appear to preclude identifying the reforms that would most benefit the Local Government sector and deliver positive outcomes for Australian communities. The Association believes there is a need for a comprehensive review of the fiscal capacities of all levels of government and the transfers that occur between them. Only such a holistic review could identify the reforms that are needed to properly address the fiscal imbalances (both horizontal and vertical) throughout government in Australia. Nonetheless, within the terms of reference of the current review, there are some improvements that could be made to the existing FAGs arrangements. The Association believes that improved service provision to indigenous communities could be more appropriately addressed through tied funding grants. This tied funding should be provided in addition to the current FAGs pool, so that no Local Government is disadvantaged by a potential reduction in their GPG if this National Principle is removed. The Association’s position on FAGs is that they should remain untied. Untied funding is an effective way of addressing the vertical fiscal imbalance that results from Local Government’s limited fiscal capacity. This is because untied funding, such as FAGs, allows Local Governments to allocate expenditure according to the conditions and the preferences of their community. Furthermore, untied funding arrangements have lower administration costs for both Local Government and the Commonwealth Government. The Association is not in favour of removing the Minimum Grant principle, because of the significant negative impact on the Local Governments currently receiving the minimum grant. Adjusting the distribution of FAGs within the current quantum of funding can only achieve one group of Local Governments gaining at the expense of another group. The Association believes the key problem with FAGs is the inadequacy of the funding, not the distribution model. A number of factors contribute to regional and remote Local Governments having greater relative need than their urban counterparts. In WA, these factors include:
high costs associated with remoteness; the costs associated with servicing a non-resident population; the need to provide additional services such as aged care and medical services; and low fiscal capacity, usually due to a small rates base.
Urban Local Governments in WA also faced a number of challenges to their financial sustainability. Outer Metropolitan Local Governments, in particular, experienced very high population growth and subsequently had difficulty with the timely delivery of infrastructure. The Association also believes there are further changes, outside the current review’s terms of reference, that could be made to the FAGs arrangements to increase Local Governments’ effectiveness and financial capacity. A particularly important change would be to review the escalation methodology applied to the FAGs pool. The CPI component of FAGs does not adequately reflect the cost increases faced by Local Governments. A more appropriate approach would involve the development of a national Local Government Cost Index. Alternatively, if a simpler approach is preferred, the escalation methodology could use the national Wage Price Index. Increasing the quantum of FAGs would help to address their diminishing contribution to Local Government revenue. It would also recognise the increased demands that have been 24
Interim WALGA submission to the FAGs review
placed on Local Governments due to increased infrastructure requirements, increased community expectations and the need to provide a greater range of services. The Association believes that the current State per capita based distribution of GPGs should be retained because it has the advantage of simplicity and low administration costs. The Identified Road Grants (IRGs) component of FAGs should be allocated on a needs based model, but only if a reliable distribution model can be implemented.
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