Productivity Commission
Local Government Study

Executive Summary 

The Introduction states that the problems of local government are more than a single shire can be expected to solve along with adverse changes that have occurred over the last 150 years.

There is a remarkable interchange of conditions affecting local government and farming but the main one is; neither are paid in full for the services they deliver to the community Nationwide. 

This is born out in Capacity to Raise Revenue, admitting that it can be done under coercion but not willingly and the users have either no ability to pay (live outside jurisdiction) or there are gross distortions in ability to pay. 

This raises Mutual Obligations under Fairness and Equity and this impacts on individuals, groups, and organizations, treating some favourably and some very 
unfavourably. 

The passage of time and changes in technology have altered the circumstances for rural and regional local government, but there has been no countervailing action to overcome the systems disconnection of payment for service, the migration to cities and coast, the stress to fixed income retirees, and disparity of income. 

Shire Rates attempts to highlight the present system's shortcomings with a view to providing the reasons for a change away from the present system. 

Facing Reality disputes the ability of rural and regional shires to raise the full requirement to fund their needs. 

The user does not care where the finance comes from, so "local" has no impact and amalgamations are not the solution. Some excuses for inaction are listed. 

The Summary confirms the unsustainable situation facing local government and moves on to Suggested Restructure supporting aspects of LGSA's 8 Options and the 9th Option submitted by Gundagai District Council of NSW Farmers' Association. 

Introduction

I make this submission in my own name but really on behalf of family members, friends and the small farmers who are not members of NSW Farmers' Association,
and fixed income retirees.

I was chairman of the Gundagai District Council of the NSW Farmers' Association from year 2000 to May 2007 spending much of my time on the need for review of local government funding and some of the documents prepared for the Council and or Head Office to use, are attached. 

After years of enquires, comparing rates on a unit of area basis with other farmers in other districts, talking to shire councillors and council staff; the basic problem was not due to human frailty but commercial problems beyond the scope of a single shires' staff or its councillors to overcome. 

The use of Tumut Shire Council in this submission is because it is so a-typical and reveals extremes easily. Other shires could have the same problems as Tumut but not so obviously or have opposite extremes that all point to a single shire's incapacity to overcome the problem. 

Human frailty must appear from time to time but generally speaking shire administration has been exemplary, particularly in Tumut Shire.

While acknowledging Cost Shifting was the driving force behind this enquiry based on the Hawker Report, Cost Shifting is just one of those adverse changes that have occurred in the life of local government. 

This submission examines the "Impacts on individuals, organizations and businesses of the various taxes" and the desirability of an holistic solution because there is too much emphasis on the individual shire not the 700 single units that make up Local Government in Australia. 

The capacity to raise revenue 

Capacity is modified by "the willingness of the community to pay for the services" (1) 
and "the potential capacities of local governments to raise revenue from their own sources will be partly dependent on the ability and willingness of ratepayers and users to pay for the services provided" (2) my italics. 

"In turn, this is partly dependent on the income of the population and economic prosperity of businesses in the local area. "(3) 

In rural shires the longest and most consistent driver of the local economy has been farming. The decline in prosperity for small farms in particular and larger farms dealing with drought or edicts resulting in land use change are not all due to local government direct action, these external influences impact back on the prosperity of farms and their support industries, reducing their ability to contribute to local government revenue.

There is an erroneous belief that farming is just another business. The fact is that it is classed as a primary industry, but not recognised as the most primary and vulnerable of the other primary industries, fishing, forestry, and mining. 

When ABC reporters and local government finance officers say farmers should put their prices up; there is little wonder that no attention is paid to what effects there are from council rates on farmers and even less attention to the backlash on farms ability to keep paying rates. 

The ability of local government authorities to exact rates is a fact, but in rural councils it is seen by farmers in negative cash flow due to drought or commodity price downturn, as a gun held to their head. 

Ability needs to be subject to fairness and equity. 

Willingness depends on who is asked. The ABC TV program Landline circa 2003/4 showed the reaction of farmers in Ganawara Shire in Victoria to the newly elected council requiring farmers (13% of population) to pay 58% of the rates.(4) The usual generosity of the Australian sprit was absent going by the indifference displayed by interviewees to the unfairness to the minority, because they would have to pay more. 

Users are not confined to the shire and there is no commercial link available for a shire to recover the cost of service. There are various State and Federal grants that are supposed to make up for unrateable land such as Crown forests, reserves and National Parks.

Even within a shire there can be gross distortions in ability to pay. CSR Ltd with 3 factory complexes circa 1998 paid $5000 while I paid $6000 and my neighbour $9000. (5) It is not unreasonable to say those 3 factories would have earned our combined yearly turnover in the first few hours of every working day of the year. 

Fairness and Equity is like eaten bread--soon forgotten, when past efforts that still bring benefits are considered, but that does not excuse the past practices nor the present use of old concepts to justify current practice. 

Tumut Shire in the early 80s received 75% of rates from farmers who were 25% of the population (6) down now to 40% paid by 19% of population (7). Thus it was farmers who provided over and above their requirement of council service and put in place the infrastructure to attract the timber industry, tourism, the life style and views seekers.

These industries are not essential to farming and in fact can detract from farmers efforts. They do not justify a tax per dwelling three and a half times greater on farms than their rural urban counterpart. Page 196 

Rates from business are recoverable, farms can only hope to cover the cost. 

The past is the past but there is no excuse to keep denying farmers justice and fairness into the future. because local government and farmers are in the same predicament, the necessity to change this will be beneficial to both. 

On old concepts, to justify current practice see page 205 of "Are Councils Sustainable?" "on the other hand maintaining local roads takes up a large proportion of councils' resources".

The fact is, that while there are farms being accessed, the producers of inputs to those farms have the benefit of being able to deliver goods manufactured in towns and cities remote from rural local government.

This flow to farms has steadily increased over generations as farms' self sufficiency declined and dependence on outside inputs have increased. This is mirrored in the decline in self sufficiency of rural shires that have lost their local industries such as flour milling, baking, dairy processing, brick making to larger centres. People migrate with the jobs and with them the capacity of local government to raise revenue. Farmers are very large consumers. The produce coming away from the farms gives them revenue to pay rates but it also provides jobs and steady reliable prices for the community at large. 

Steady reliable prices from farms aided by good service from local government is the most important element for supermarkets who rely so heavily on them but also for the end consumer who needs steady prices. This is a fact that seems to be overlooked and not credited to local government and farmers. A monetary value would be helpful. 

No better example of lack of fairness can be given than in NSW the State average residential rate was $624, rural councils levied an average of $400. The average rate per farmland assessment was $1471 with 8% of rates coming from farms.(8) There were 40,827 farms in NSW at 30 06 2004 so that 1.75% of dwellings provided 8% of rates (9). 

By the same token National Parks and Forestry as pointed out (p 205) do not pay rates (Forestry make some contribution to the roads servicing them). In the case of National Parks they are created to please city dwellers but the infrastructure to access them, provide the support facilities for their employees and visitors, is supplied by the local council, who are not paid directly but by grants on a per capita basis. (see below) 

Forestry does provide local employment but the product flowing throughout the Nation has been subsidised by the local community with most coming from farmers rates.  

Table 9.2: Composition of Local Government revenue by council category, page 196 shows rural rates the lowest which confirms the inability of its main support structure farming to consistently create wealth. User charges and fees shows Regional town/city and rural the highest for two reasons. First, it covers the claytons extra rates transferred from them to rates. Second, water and sewerage is not separated off to another authority as in Sydney. Federal Grants (FAGs) almost equal rates for rural and are awarded on a per capita and disability base but only increase in line with CPI which does not keep up with awards. 

There is very little to no growth in the rural rates base. The percentage of elderly rates base is becoming apparent and the lack of "other revenue" sources eg developer contributions, parking meters etc are muted or non existent.

The alarm and urgency of the Independent Inquiry into the Financial Sustainability of NSW Local Government was over the shortfall of funding leading to a huge backlog in infrastructure renewals as set out in the forward of the report "Are Councils Sustainable?"

Thus it would appear that in NSW alone the surplus between revenue and expenditure would disappear. 

Shire Rates 

A look at this form of taxation shows that it has serious side effects that are ultimately self defeating for revenue raising and not in the community’s long term interest. 

These problems are: 

(1)	Only the Federal Government has income taxing powers There is no relationship to the ability of the farm asset to create the wealth to pay the tax. It is in effect a tax on a farm's main capital, which other businesses do not have to endure. Other business pay shire rates directly or indirectly, and have the commercial system to recover the cost but their major asset is not taxed. See CSR Ltd above 

(2)	Inflexibility 
Shire rates have to be paid regardless of natural disasters and/or falling commodity prices, often at a time when expenditure is greatest maintaining living stock. This attrition of capital is making it just that much harder for the farm business to accumulate cash reserves. 

(3)	Users not paying 
The activities in rural local government that flow on to State and National economies benefiting the timber industry and its down stream dependents, the building, furniture and packaging industries is a subsidy paid for by farmers but the Local Government involved can not levy those industries or their ultimate consumer. 

(4)	Disparity of Disposable Wealth 
Rates are a wealth tax of land owners but there has been a metamorphosis the resulting in the tax becoming perceived wealth of the investor/developer, views and lifestyle seeker, most of whom have been the beneficiaries of subsidies and taxes that favour cities and large aggregations of populations that rural people can not access. (10) In the case of shearers and wool shed staff, it is the farmer that subsidises their transport, not local or state government.

The result is that Land has become a commodity that is set to keep rising in value, which is good for local government finances but exacerbates the attrition of the neighbouring farms. It is a fact that banks are more willing to lend and is a positive but at some point the old culture up to the 1970s of paying for land that it is capable of yielding profit must come into consideration. 

(5)	Competition Policy Flouted, Ignored, Circumvented.
The change in land use has created unfair competition and as stated earlier, the traditional small farmer can not compete with the availability of cash possessed by the "Life Style and View" seekers, who to the farmer have more money than sense, but to whom he must ultimately concede, (a) to get his retirement fund, (b) the new level of shire rates makes his business subject to higher costs. 

The fixed income retiree who bought his retirement home in a quiet suburb or location is caught up with the same rising price syndrome thanks to the unequal wealth of developers.

The ability of farmers to compete in an open slather for Land is unsustainable, when after decades of productivity improvements, that have benefited everyone, has, now left 60% of farms requiring off farm support to keep farming.

The latest distortion to fair competition for land has been the introduction of Managed Investment Schemes (MIS) 

Tumut and other councils are in favour of planting forests and other MIS agricultural pursuits. Tumut with its large timber and paper industries wants to keep up the raw material supply to its mills. 

One of the functions of local government is to promote new industry and it is also in farmers interests that they do so. However it is a matter of equal opportunity and fair competition which can not exist between these schemes and their farming neighbours. 

The establishment of these schemes (see NFF attachment) by financial arrangements that are in practical terms not available to farmers, raises the question of fair competition. Even the necessity to establish these schemes is highly questionable. They are out of proportion to neighbouring farms and have other impacts of feral animal control, weed control and availability of water, particularly where forestry is in juxta position with farming.

Local Government are headed for extra expenditure on up grading and maintaining roads for constant heavy traffic without revenue increase. 

(6)	Horizontal Fiscal Imbalance 
Shire rates create further distortion of competition for farmers in that when the assessment is translated into the cost per hectare, there is a considerable discrepancy between shires for the farmers involved but those farmers sell on the same market. From Tumut to Gundagai to Wakool the difference is 6: 3 : 1 dollars payable per hectare. Over 10 years that is a huge denial of funds to improve productivity. 

(7)	Misuse of Natural Resources

The side effects of council rates extend to the misuse of our Natural resources in that whole districts like Cumberland, Illawarra, up and down the Eastern seaboard, anywhere within a four hour drive over reasonable highway conditions from large centres of population puts pressure on land prices. As prices rise and there is no countervailing right to farm legislation, the traditional landholder moves out if possible. 

In Cumberland area figures quoted for its agricultural production circa 1990s were two billion dollars, the latest figure is one billion. The Illawarra that was a dairy district is now a views and lifestyle centre. At Tumut where there were over 30 dairies in the 1970s there are now only 3. 

The net result is that food produced in reasonably safe areas from drought and close to consumers, now travels hundreds of kilometres extra adding to the cost and unnecessary emission of green house gases. Dairies on the North Coast of NSW, where water and irrigation does not present problems, along with suitable climate to compete with Victorian dairies, now need to move inland, if they can, where water and irrigation are a problem and weather is not as favourable to compete with Victoria. 

This may be considered a State Planning debacle but it is shire rates that have given the original impetus. 

Facing Reality 

The mere fact that grants to local government have been deemed necessary for decades, recognises that individual shires have not been in a position to raise all of their financial needs in spite of "The Government does agree with the Committee on the importance of local government authorities having the capacity to raise revenue from their own sources" (11)

In other words, it is a nice ideal but not practical to expect a rural or regional local government to provide all the finance required to maintain the full services demanded by the public. Raise what is fair and equitable but the balance has to come from the wider community. 

Bombala Council in reference to rate pegging specifically, but equally applicable to general revenue raising "Without a mechanism for recouping the foregone revenue over the longer term a degree of flexibility has been removed. This has a larger impact in the rural areas as rate increases can not be put through cycles matching the good and poor agricultural seasons" (12)

The word "local" would seem to be used at the convenience of the user.

From a financial aspect, the city consumer moving to a lifestyle weekend retreat expects the same service for both locations. It is of equal importance for the Tumut, Toorak, Vaucluse resident when travelling to have good water, sanitation, safe bridges and roads etc and if asked, could not care less as to where the finances were raised. As far as the tourist industry is concerned basic services to a standard have to be provided across all councils. If there is a variation in standard in some areas, they will avoid that locality with negative consequences for wealth creation. 

Financial pressures have been the reason for amalgamations in Victoria, NSW recently with the same contemplated for Queensland. There has been plenty of adverse comment with no apparent gain from the amalgamations so far. There has been a cooperative system for some time bringing good results for the councils in their region. It was pointed out to the NSW Minister at the time increasing the size does not compensate for lack of payment of services provided. 

From an administrative use of "local" covering 700 shires Nationally "local" needs to be the local area: already equipped with staff, infrastructure and councillors. There are benefits being gained by cooperation between councils in a larger districts such as the Riverina Eastern Regional Organization Councils (REROC), with 31 such ROC districts in NSW. 

When excuses are made for inaction they are on the lines of "autonomy of councils and their communities enjoy with regard to their local rating policy" , or clichés such as "those who spend the money should raise the money." All of which indicates a lack of desire to change and avoid exploring or striving for better productivity. 

Reasons could be: 

(1)	there is no incentive to abandon a system that delivers grants to bolster State coffers.
(2)	there is no incentive to introduce change if it can be avoided. 
(3)	 allows the impression that there are no new taxes, 
(4)	saves on welfare responsibilities to fixed income retirees 
(5)	 the consequences to the National economy are not their responsibility 
(6)	accountability for the State's rural economy is of secondary importance after satisfying coastal voters' desires 
(7)	Left as is Local Government is a convenience for Cost Shifting 
(8)	No reason to change when the other States are not changing

Summary 

The capacity to raise revenue under the existing system is non existent because as stated above, councils, particularly rural and regional can not levee the beneficiaries outside their jurisdiction and measures such as parking meters would be an additional burden on communities already disadvantaged by disparity of disposable income. 

FAGs contributions, welcome and necessary as they are, need to be increased. Eg The portion allocated to cover the inconvenience of `National Parks harbouring weeds and animals that invade and detract from both farms and local government road verges and parks, is inadequate.

The evidence shows that FAGs, tied to CPI is falling behind in its effectiveness as a counter to the funding shortfall in local government.

The infrastructure renewals backlog highlighted in "Are Councils Sustainable?" is conclusive proof of the present system's inability to raise adequate funds. 

The nature of shire rates needs to be addressed in a new system to overcome the 7 problems listed above. 

Not being able to impose income tax and the doubtful usefulness of the inflexible Unimproved Capital Value (UCV) indicates a new base is necessary plus the fact that users are not paying is the ultimate cause of lack of funds, from which the other problems are a natural progression. 

To overcome Horizontal Fiscal Imbalance all states need to change. 

Suggested Restructure

The LGSA had 8 options proposed in "Are Councils Sustainable?" and Gundagai District Council of NSW Farmers' Association put forward a 9th Option (attached) 

The 9th Option was deemed to be radical but not impractical because it would require something earth shattering to change current thinking in the Dept. Local Government to want to make change, instead of resisting it. That desire needs to be in all States. 

The holistic approach is the logical solution to most of the problems of funding local government along with elements of LGSA's 8 Options. 

The holistic approach is not radical because it is used in the UK by three times our population. 

FAGs is holistic in that it is for all 700 local governments 

The LGSA's Independent Inquiry used whole of state statistics and used dwellings as a base.

By contrast UK farmers interviewed said bluntly that our system was foolish. 

As in the UK system, dwellings, their size, location and reflection of wealth status is the logical replacement for UCV. 

Rural land is for rural use only and is not taxed but the cottage or castle is. 

Under these circumstances all dwellings contribute to the total funds required. The one consistent criticism of changing the system is that it will cost more.

That is obvious because there has been a shortfall in payment. However as the "Are Councils Sustainable?" points out the electorate at large does not know what the level for funding is. The rates being paid at present do not reflect or connect with the true cost of local government run sustainably. 

That farmers in NSW are paying $179,000,000 and should only be paying $24,700,000 towards the total State's local government. 

The evidence is that the present system is going to cost the electorate more regardless: now is the opportunity to bring in a fairer more inclusive system suitable to Australian limitations of distance, population disparity etc and boost our productivity as a bonus. 

In looking at the capacity to raise funds, there is a need to assess what those funds are to deliver and if the dynamics of our economy does not negate some of our efforts. There has just been the case of a cheese factory closing on the NSW South Coast going to Melbourne and a fruit juice factory at Griffith NSW going to Adelaide, both negating the local shires' involvement in promoting retention of population and maintaining employment. 

Alluded to in the introduction, there are forces acting beyond the scope of local shires to take direct action on and cover, buying power, market dominance/ restrictive trade, tax laws (10), subsidisation, lack of spending on rail maintenance by State Government resulting in more costs to local government servicing roads. These are all having a secondary effect on the capacity of local government to raise finance and a direct cause of City/Country Divide. 

Notes 

1	Local Government Revenue Raising Capacity p 6 
2	ibid 
3	ibid
4	Attached from ABC. Copy of video is $88.00 
5	The $5000 contribution by CSR Ltd was revealed in an aside by the General Manager Mr Paul Simpson to the Mayor of Tumut Shire Council Dr Geoff Pritchard in the presence of Mr James Hayes, the late Admiral Mike Hudson, myself and others at the Council Chambers cc 1997 
6	Research by Mr Paul McMahon BVS of Adelong NSW. 
7	Copy of information sheet from Tumut Shire Council
8	Are Councils Sustainable? p 196 Copy attached to Option 9 
9	ABS 
10	Mr David Trebeck, of ACIL Consulting, Canberra "The essence of the argument is that there have been long-standing, deep-seated and systematic distortions and biases against country living" 
11	Issues Paper, Origin of Study p 9
12	Rates and Taxes: A Fair Share for Responsible Local Government 3-70 p 41