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Local Government: New Framework Needed

Please find attached an article written at the request of the Independent Financial Review which appeared today, 13 September 2006.

Local Government: New Framework Needed

Auckland City Council funding séance courses and toll calls to the Congo; Hamilton losing $200,000 supporting Warriors matches against the Eels; South Waikato investing $600,000 in two broadband companies that failed; New Plymouth investing in high-risk ventures in China and talking about running a café; Wellington blowing nearly a quarter of a million dollars on Tiger Woods; sock and plastic factory fiascos on the West Coast; Christchurch setting up a garden show in competition with a private operator; Invercargill subsidising a Lotto shop; and uneconomic stadiums in Auckland and elsewhere – the list of recent local government follies reads like an unrolling scroll.

And if such decisions are being made in absurd cases, how many more bad ones are being made across-the-board, generating the mushrooming rate increases that are now causing a public outcry?

The problem doesn’t end with spending and rating. Councils have equity to the value of over $60 billion, or $14,500 per capita, in assets such as ports, as the attached table shows. Rates of return on port assets are poor in many cases, indicating that capital could be put to better use and that economic growth is being sacrificed, and council ownership is impeding port rationalisation.

Too many councils have strayed far beyond their proper role. A June 2006 survey commissioned by the Department of Internal Affairs found that 39% of respondents think councils waste ratepayers’ money compared with 32% who think they do not. Meanwhile core services are being neglected, as we saw recently when Kelly Tarlton’s was flooded with sewage.

There are exceptions, of course – Tauranga is one good model. Typically smaller councils are most focused on the basics and local democracy is stronger. In larger centres it is much weaker and calls into question ideas such as a super-city for Auckland. In a poll two years ago nearly 90 percent of Aucklanders could not name one member of the Auckland Regional Council.

The business sector, which nationally pays around half of all rates, is largely disenfranchised (hence the unjustified differential rates burden lumped on it by many councils). This year the Local Government Forum, representing a large cross-section of businesses, gave up making submissions on council plans.

Councils have been encouraged to become much more expansionary by the Local Government Act 2002. Rates have grown faster than the CPI, as the attached chart shows, and rates revenue nationwide is projected to grow by 7-8% over the next three years, much faster than projected economic growth. The government’s idea that councils would be constrained by the requirement for long-term plans and consultation processes was naïve. The plans have proved to be costly and unintelligible exercises in many cases. A major consultation meeting in May called by the mayor of Wellington in the council chamber had an attendance of four.

We need government at the local level essentially to facilitate the provision of public goods and services and some infrastructure, and to administer necessary local regulation. We should not have councils providing private goods and services (generally speaking, those that can be directly charged for), which should be left to the private sector. Central government should be largely responsible for necessary social services, such as housing.

Much of the current debate is wrongly focused. The government’s basic error was to give councils an expansionary mandate; criticisms that rates have gone up because costs have been shifted by central government are weaker. As minister of local government Mark Burton has noted, out of 67 pieces of legislation 28 were specifically requested by local government, 26 do not appear to impose costs, and other measures (some of which are dubious) have impacted on council fees, not rates.

Similarly the government’s proposed inquiry into local government risks missing the target. It appears to be focused on funding issues and alternatives to rating, rather than on what councils should be doing and on their spending.

This would involve looking at what activities should be put into region-wide governance structures (for example water and roading), which could be shifted to the private sector (such as ports and airports), and which should remain the direct business of councils.

Constitutionally, local government is a creature of central government and central government needs to give it a better framework, one that puts more power in the hands of ratepayers.

A framework with two key features would have considerable merit.

First, a new local government act would list the core public goods functions that councils could undertake. If they wished to go beyond them, they would need to get the support of, say, two thirds of their ratepayers in a poll. Decisions on such things as stadiums would be in the hands of ratepayers.

Secondly, annual increases in council spending and rating would be limited to the rate of inflation plus population growth, unless councils went to ratepayers with a case for higher increases. This would not disadvantage councils with requirements for lumpy expenditures: if a case could be made, why should the verdict of, say, two thirds of ratepayers not be trusted? Similar mechanisms in US states have seen voters both approve and disapprove proposals to relax spending limits.

Given such constraints, property rating in general is an adequate tax base for local government. It could be improved: for example it should be extended to most Crown properties and Maori land, and higher differential rating of businesses should be scrapped. However, the horse should be put before the cart: unless the focus is placed first on functions and spending, inquiries into rating are likely to bring little relief to aggrieved ratepayers.

Roger Kerr is the executive director of the New Zealand Business Roundtable.

Aggregate Assets, Liabilities and Ratepayer’s Equity
At 30 June 2004

Current assets $m / Current liabilities
Cash and bank deposits 731 / Debt 514
Other current assets 1,341 / Other current liabilities 1,102
Total current assets 2,072 / Total current liabilities 1,616

Non-current assets / Non-current liabilities
Land and buildings 8,161 / Debt 1,467
Infrastructure and other construction 46,574 / Other non-current liabilities 168
Investments 3,920 /
Other fixed assets 2,061 /
Total non-current assets 60,716 / Total non-current liabilities 1,635

/ Ratepayers' equity 59,537

Total assets 62,788 / Total liabilities 62,788


Note: Excludes activities undertaken through council-controlled organisations.


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