May 2022
Contemplating a special rate variation (SRV) can be very daunting for a council, no one wants to tell people that they need to pay more tax.
But just like rate capping, SRVs are here to stay and there are good reasons why councils need them. For the ten-year period from 2011/12 to 2021/22 there have been some 165 special rate variation applications, of which 155 were approved. The average approved variation is 28%, with the highest approval being 70% and the lowest 2.7%, and over 70% of councils making at least one application.
The pressure on local government financial sustainability is growing. Rate caps, as the recently set 0.7% (excluding population factor) for 2022/23 demonstrates, do not keep pace with councils’ annual cost increases.
In the 2020/21 financial year, 74 NSW councils reported an operating deficit before capital items in the General Fund, 27 of these were worsening deficits from the prior year. Over the four years to 2019/20, the average operating performance ratio of NSW councils has steadily declined from 9.8% in 2016/17 to -0.2% in 2019/20.
Adding to this, communities are expecting more services from local government. The impact of climate change, increasing frequency and severity of weather events can’t be ignored and has a direct impact on council infrastructure costs particularly.
State and federal government expenditure has increased around managing the health response to and economic recovery through COVID-19, which increases fiscal pressure. A constricting of government spending to reduce the fiscal imbalance is coming and this will impact councils’ access to grants and other funding opportunities, as well as potentially increase cost shifting to councils.
All of this means that many councils will face the decision to seek an SRV or reduce services, or otherwise face the brink of a financial crisis. A finding in the recent Central Coast Council public inquiry report was that a significant factor in the deterioration of the financial position was repeated deficit budgets.
Councils shouldn’t wait until they are on the brink to talk about SRVs with their community. Financial sustainability is an obligation for all councils and is a key consideration for the resourcing strategy to achieve the delivery program for the term of council. The long-term financial plan (LTFP) should include scenarios and sensitivity analysis around the circumstances where the council would need to consider an SRV.
How many natural disaster recoveries are factored into a council’s base case? Does it address growth of communities and their need for better open spaces, community halls and other facilities? Is it addressing asset backlog quickly enough? How regularly are LTFPs updated and used for scenario testing?
The LTFP scenarios and sensitivity analysis will help identify the risk factors and explain to the community the options and impacts of variable assumptions and operational changes that would demonstrate an SRV is a real and viable option.
Are councils ready for an SRV? The next instalment in our SRV series is coming to you in June.
For further information and/or a confidential chat about your strategic financial planning needs, please contact Greg Smith (0407 294 765) or Janine McKenzie (0415 444 225).