Local Government funding and democratic efficiency
Released 23 Feb 2010
Speech by Don Nicolson, President of Federated Farmers, to the Local Government New Zealand Rural and Provincial Group
I had no hesitation in accepting this invitation to speak. I want to show that councils are not from Venus and that we farmers are not from Mars.
This will be a thought-provoking session so I'd like to thank in advance the co-chairs, Their Worships, John Forbes, Mayor of Opotiki District and Peter Tennent, Mayor of New Plymouth District.
I would also like to acknowledge Lawrence Yule, President of Local Government New Zealand as well as your Chief Executive, Eugene Bowen.
Local government is to farmers what the DHBs are to patients. I can't think of one council in New Zealand that doesn't have dealings with farmers in some way, shape or form.
Federated Farmers is a union of farmers but a union that looks after its members. We don't have a levy or rating powers but have to sing for our supper each and every year. We have to convince a sizeable proportion of farmers that we are worth the investment each year.
If you ring 0800 FARMING you'll see we are exceedingly keen to engage. We have to.
We literally help our members deal with things well ‘outside the farm gate'. If you want we provide their risk management for issues as diverse as stock on roads and other bylaws, to district and regional environmental planning as well as resource consent applications.
We punch well above our weight as the $200 million extra for rural broadband shows. Not to mention lobbying that helped slash the average per farm cost of the unloved Emissions Trading Scheme, from $30,000 per farm to $3,000.
It all puts the cost of an annual subscription into sharp relief. But a big part of what we do centres on rates and funding policy - the reason why I'm here today.
I mentioned DHBs because patients don't care about how DHBs are funded as long as they are looked after.
The way you are funded is arcane, Victorian and frankly, unfair. If you wish to see someone's eyes glaze over - just mention rates and funding policy.
As an organisation that is over 100 years old, peoples view of us can be years out of date. Under my presidency, we are an equal opportunity critic. We're quick to condemn, yes, but we are also quick to praise.
Look at the way we lavish praise on some regional councils in the latest National Farming Review.
So, instead of looking at rates and funding policy in the negative, let's seize a bold opportunity to fix something that is broken. New Zealand's entrepreneurial farmers want to be backed by solutions focused councils with verve. Funding reform is the hinge on that particular door.
Right now there's a revolution in local government, arguably the biggest development since the big bang of 1989.
That's the major reforms to Auckland Governance currently working their way through the system.
Here's a tip, if you want to put children to sleep, start with rates and funding policy then branch into local government governance. It's Rip Van Winkle stuff except for the enthusiasts, like us.
People might grumble about their rates or the quality of council services but unless there's a particularly contentious issue, like Otago Stadium, very few people ever bother to do anything more than grumble.
Yet, the changes being made to Auckland governance has made many pause, stop and think about the notion of local democracy.
Federated Farmers believes that unless the funding of local government is fixed - so that everyone in the community fairly shares the cost - there cannot be effective democratic governance in Auckland or anywhere else for that matter.
The significance of this cannot be stated enough.
The way in which local councils tax the population, that being what rating really is, is fundamental to the quality of democratic processes and governance.
Let's face it, the American War of Independence was about ‘no taxation without representation' but the way New Zealand local government is funded, we effectively have ‘representation without taxation'.
The form, function and funding of local government
There are three ‘F' words that are important for local government: form, function and funding.
In 1989, the ‘form' or the structure, of local government was substantially changed.
The organisations you all run are very different and far more complex than the counties and boroughs they replaced.
Now, twenty years on, there are more structural changes in the offing.
In 2002, the ‘function' or the roles and responsibilities of local government were substantially reformed. The Local Government Act was heavily revised giving councils broad powers to address the demands of modern communities - in particular their social, cultural, economic and environmental wellbeing.
The nature of the legislation moved from being prescriptive to giving councils a broad empowering framework.
With regard to the third ‘F' or funding, although we saw the Local Government Rating Act amended in 2002 with an Independent Rates Inquiry in 2007, funding reform has been put into a ‘too hard basket'.
Aside from the 2007 catharsis, funding has never been seriously or fundamentally addressed in the same way as local government's form and function has been.
The funding of local government remains a patchwork of antiquated property value rates, fixed per property charges, user pays and central government subsidies that are either one-off or ongoing.
This issue goes right to the heart of the problem with local government. Federated Farmers is in this space as we represent a rural community paying hundreds of millions of dollars of rates year-in, year-out.
While local government has been modernised in many ways - it continues to rely for a large part of its income on rates based on property value. A Victorian notion of the landed class.
Although councils have tools to reduce their reliance on these rates, such as user charges and uniform per property charges, the value of property remains key to allocating the cost of a council onto its community.
Despite a growing use of targeted rates and the continued use of differentials by some councils, any funding system that is reliant upon property values places a disproportionate burden on those who either have valuable land or land intensive businesses.
Federated Farmers 10k rates club
Six years ago, in 2004, Federated Farmers established a ‘10K Rates Club' to demonstrate how this affected the farming community - the country's economic backbone.
It was fairly easy as we just asked farmers paying over $10,000 per year in rates for general community services to send in their rates demand to us.
We decided to redo the exercise last year but have found an amazing burst of inflation. While the 10k Club remains, there's a gold VIP area for the 50k members and a platinum level for those paying 100k in rates!
The individual stories from our members are enlightening but also disturbing. I've included some examples on the slide. These aren't big farms on huge land areas.
A tiny 36 hectare property, in the upper South Island, pays $14,800 in rates or $411 per hectare. This property is in a grape growing area and is close to town.
A one small farm on 178 hectares in the upper North Island pays $38,000 in rates or $213 per hectare. Rates and fertiliser are its equal largest farm expenses.
A 303 hectare farm in the wider Bay of Plenty area pays $51,000 in rates or $168 per hectare.
The biggest member is for an operation with five sheep and beef and two dairy farms in the central North Island. It pays district rates alone of over $200,000.
There are also many ordinary, run of the mill sheep and beef farms, with rates bills of more than $20,000.
So if individual farming families are paying such huge amounts, then others in the community are clearly not paying their fair share.
These non-payers will have no conception just what their local council really costs to run. This in turn builds a vicious cycle of unlimited expectation from someone else's bank account. That someone being the likes of me and some of you.
I want to now to address some issues related to rates and farms before returning back to it.
2009 Federated Farmers rates survey
Last year, in response to a huge number of calls coming into the Federation about rate increases for farms, we ran a rates survey to get a clearer insight into the gravity of the situation.
We presented the results to the Minister of Local Government and also released them publicly.
That survey found two farms paying over $100,000 in rates, six more paying over $50,000 and farmers on average paying rates of $12,270 - up 12.5 percent on the previous year.
Farming needs a lot more land than say retailing or services to make an equivalent income. We are land intensive.
So when property value rating is at work its impact on farms can be financially devastating. How so? Let me show you.
Funding problem for farming 1: a big expense
To ram my last points home, I've put up a slide that lists the major farm working expenses for a sheep and beef farm.
This is from MAFs National Sheep and Beef Farm Model Budget for 2009/10.
Rates are listed at number six but what is even more telling is that there has been a 5 percent increase in rates compared to the previous year.
This is at a time when farmers have been trying to cut or flat-line their spending in response to heavily constrained incomes.
Unlike other areas of cost, farmers can't cut their rates because that means selling land, which would be illogical.
Sadly, the level of rates can be the difference between a farm making it or breaking it, particularly during tough economic times.
According to MAFs figures, the National Sheep and Beef Model was forecast to make an after tax profit of just $35,000 in 2009/10. That's also substantially lower than the median wage and salary income.
This also doesn't leave much for investment in the business or drawings for family living expenses. I've also got to ask you this, how many of your council's senior management team would be happy on $35,000?
Funding problem for farming 2: incomes falling
Now take a look at this slide.
Although there have been one or two semi-decent years, for the most part, this chart shows a declining trend in sheep and beef farm incomes over the past decade.
Some of you might say what about dairy incomes?
Yes they have shown some very good income years - but they have also had some very bad years and they often follow each other, such as 2008 and 2009.
This is why farmers don't have much sympathy with organisations in either the private and public sectors that build long-term cost increments into their budgets and then charge, rate, or tax accordingly.
Funding problem for farming 3: thin margins
This slide illustrates the consolidated ‘net income' position for the wider agricultural sector.
The information is from the 2009 Situation and Outlook for New Zealand Agriculture and Forestry, or SONZAF. It presents MAFs world view with sector forecasts predicated on a US$0.49 cross rate. Ponder that.
Last year, farm gate returns for the agricultural sector awarded to over $23.1 billion.
Yet after taking all the costs out of the system the amount that stayed inside the farm gate had shrunk by an amazing 93.8 percent to just over $1.4 billion. Put another way, that's around $23,000 per farm.
You'll see 2008s, 16 percent was due entirely to an extraordinarily strong year for dairying coinciding with an annus horribilis for sheep and beef farmers like me - our worst year in some 50 years.
The reality is that SONZAF masks massive disparity. There will be many in the meat and fibre and arable sectors, right now, drawing up their balance sheet in red ink. Remember, MAF believes the cross rate going forward ought to be US$0.49 when in fact it's currently US$0.69.
Yet SONZAF poses this important question - who's farming the farmer?
Since 93.8 percent of the average value from my labour goes anywhere but my bank account, we need local government to be buttoned down and focused. We need reform of funding because this trend line is simply unsustainable.
I must repeat that - the trend line for rating farmers is unsustainable.
So you can understand the frustration and the distress farmers feel when they learn that their rates are going up - and why they ring Federated Farmers to ask us what we're doing about it.
Here's a question for you here today - what are you doing about it.
And with home ownership down to 64 percent, over a third of urban residents are denying themselves a ‘pleasure' of cutting a direct debit to their local authority.
Another reason why reform is so pressing.
Funding problem for farming 4: fluctuating property values
Property value rates become an even bigger problem for farm viability when property values fluctuate by more than the district average.
This chart shows the median sales prices for farms for New Zealand as a whole, according to the Real Estate Institute of New Zealand.
As you can see, there was a steady and large increase in values from 2003, followed by a crash in values coinciding with the commodities implosion of late 2008.
In many areas all over Godzone, the increases then decreases in farm land values were larger than the average price changes for all properties, that by the way includes residential.
Some would say that land prices reflect economic fundamentals and ability to pay.
As you will recall from the chart on income levels, there doesn't seem to be a good relationship between changes in income and changes in property value.
The situation is even more pronounced where local or regional ‘averages' are based on what are often, just a handful of transactions.
Often land values leap for reasons with no relationship to its economic fundamentals, for example, the explosion in prices for coastal land or land on the urban fringe.
These reasons are often more emotion than economic.
Our Rates Survey illustrates this beautifully. Responders told us that the 2007-08 property revaluations, which fell in the bull run of agricultural land prices, resulted in the value of some farms massively increasing.
These increases outstripped district wide averages and has many farmers getting big rates demands during the current year.
Yet while the revaluations fell during a bull run, the rates increases have manifested themselves in a bear market for rural land. More so, as farm incomes are now severely constrained.
Now some might argue that in the next round of revaluations, farm average sale values will be lower and that, depending on movements in district averages, this will mean lower rates for farmers.
It might actually be true - but tell that to someone paying over the odds due to valuations done two years ago in 2008. Even more if they happen to be a sheep and beef or arable farmer.
This is unreasonable, inequitable and is no way to fund modern local government in the 21st century.
And we find it hard to imagine how this situation is good for local democracy or the sound governance of our councils.
Let me explain.
Given the picture painted above, it's little wonder that farmers are one of the groups of ratepayers most interested in local government.
It's also little wonder that farmers and others who are "asset rich but cash flow poor", like the retired, tend to be more vociferous about what our councils do.
They tend to engage actively in democratic processes by submitting on council plans, voting in elections and putting themselves up for election.
But the vast mass of voters hardly think about local government aside from when they are ticketed by parking wardens or when they need to build a garage.
And as 36 percent of citizens don't directly pay rates in any case, it doesn't stop them from demanding more services that someone else has to pay for.
That would be fine if they paid the true cost of what they want.
But they don't.
They either don't see or don't pay the true cost of local government and therefore, have less reason to care about the cost of what they want.
Urban residents are a majority in every council and at election time, they will always out-vote the farmers.
And because they are a majority, the elected representatives - even if they are farmers - have to factor this in before they think about the minority who pay such a large chunk of the bill.
The problem with only reforming two of the three ‘Fs' is that this problem has now become acute and as I stressed earlier, unsustainable.
The first F ‘problem' is that the 1989 reforms merged a lot of previously self-contained and largely rural counties in with the boroughs and cities.
Farmers, already a minority of voters, became an even smaller minority but retained their significance as a funding source for these new urban-rural councils.
The second ‘F' problem of the 2002 reform of the function of local government, meant that councils were encouraged to get involved in activities to advance the four ‘well-beings'.
This situation was exacerbated by central government imposing new requirements and costs onto local government without providing any funding to compensate.
In the United Kingdom, as you'll be aware, central government through an annual settlement provides local councils with the bulk of their annual funding.
I know that many New Zealand councils - particularly small rural ones - have been struggling with government imposed roles and compliance costs while trying to perform their core business.
Waitomo District springs to mind as a council that is really struggling. It's one that is something of an outlier in terms of the current level of rates and debt, not to mention forecast increases in its rates and debt.
Many ratepayers there, including the local branch of Federated Farmers, are so worried about this that they have taken their concerns to the Minister of Local Government.
They, the Council and LGNZ had a meeting with him yesterday to work through possible solutions.
Waitomo may be an extreme case but financial pressure may be building on other small, cash strapped councils. Waitomo maybe to our councils what Greece is to sovereign debt.
I further know that in a number of areas, Auckland-style consolidations and amalgamations are being seriously examined.
Yet further structural reform doesn't solve the funding issue - it builds the problem if rates remains the primary funding tool.
So what has been the result of a lack of attention to funding policy?
Local authority expenditure: 2000 - 2009
This slide shows a near doubling in council spending from 2000 to 2009.
And this expansion has driven rates up as shown by this slide.
Local authority rates revenue: 2000 - 2009
Recall the two earlier slides that showed where rates fit in the hierarchy of farm expenses and how farm incomes are under constant pressure.
Despite the recession, there has been virtually no slow down in council spending. There has been only a modest slow-down in revenue and rates growth over the past year.
Yes, the need to upgrade core infrastructure and higher input costs has been a big factor driving expenditure and rates.
But we also note that over the past few years, local authority employee costs have increased at a similar rate to overall spending. I can tell you my income hasn't.
This, to us, seems to imply ongoing growth in staff numbers and ever higher salary inflation.
This spending expansion turns on its head, the cliché of paying the piper.
There simply isn't the democratic check that there should be so let's contrast this with central government.
Central government is funded largely by taxes on income and spending.
One way or another, everyone pays tax and the tax we pay, whether it's income tax or GST, relates far better to income and an ability to pay.
Everyone knows the tax rate they will be paying and that tax rate is the same whether the business is in the Far North or Stewart Island.
Although we grumble about how much tax we pay, most New Zealanders take a strong interest in what the Government does with their money.
Yes, there have been big expansions in central government spending, revenue and taxes but in my experience the debate on these issues has generally been much more vigorous than at a local level.
Voters are more likely to make conscious choices between different policy prescriptions - because everybody pays and they pay according to what they get.
And voter turnouts are much higher in General Elections as a result.
The way local government is funded is a key reason, possibly the key reason, for the problems with democracy and governance at a local level.
Federated Farmers' solution is for the third ‘F' to be reformed. Unsurprisingly, we have a number of ideas as to how this should be done too.
Our overall goal is to reduce the reliance on property value rates. We want local government to be funded by the people that use and benefit from the services you provide.
We want local government to get its tax income from every resident and not just those who are considered to be ‘landed'.
The ‘landed' should not be expected to subsidise the rest of the community as a result of a theoretical value placed on their property.
Our future must be one where everyone pays for activities where everyone benefits equally - perhaps through a fixed charge on every adult resident.
I believe if it looks like a tax, feels like a tax and impacts your wallet like a tax, then let's stop calling it rates. Let's call a spade a spade.
A Residents' Tax is our preferred outcome as it impacts 100 percent not just 64 percent. Our starting point is that every adult should pay a Residents' Tax. Handing over your hard-earned money to a local council changes the psychological stake you have in a community. That includes beneficiaries too. Building community wellbeing starts with having an investment in a place. That place being your community.
This is one of a number of other proposals we are advocating for.
Some of these ideas can be done by local government right now but may need greater government encouragement. Others require central government to step in and drive change.
We have shared these ideas with Lawrence and Eugene and we'll be interested in taking this further.
Federated Farmers proposes the following changes to reform local government funding to substantially reduce the reliance on property value rates:
Federated Farmers funding solutions
- Councils making greater use of user charges for private goods.
- Councils to make greater use of uniform annual charges with Government abolishing the 30 percent cap. Serious consideration given to the replacement of rates with a Residents' Tax instead.
- In the meantime, councils could make greater use of targeted rates with Government providing guidance on their use.
- Government to increase the financial assistance rate for the funding of local roads.
- Government to abolish rating exemptions on Crown land.
- Government to provide greater guidance on appropriate roles and responsibilities for local government with funding for new or devolved roles and responsibilities.
- Another funding option is for Government to share general revenue share (e.g., one percent of GST) with councils, thereby reducing their general rates accordingly.
- Government to streamline requirements for planning and decision-making.
- Councils required to report information consistently in order to develop performance benchmarking.
- Councils to provide ratepayers with itemised rates assessments - where the cost of every significant activity is detailed on the rates bill. We congratulate those councils already doing this.
- Government to establish a rates review office.
These eleven ideas would in our view improve local government by providing it with sustainable income sources from a much broader base.
These reforms would also increase the visibility of the cost of local government. It will widen the interest in what councils do enhancing local governance and democratic participation.
I know that not all of these ideas will be supported by you, that's your right, but I also honestly know there is frustration among you that you rely on so few ratepayers for so much.
There's got to be common ground for us to push the government for real change.
In conclusion
So please allow me to conclude with a quote from one of our long-standing advocates for rates reform, Doug Fraser, Federated Farmers' Southland Local Government Spokesman.
"Only when there is a transparent relationship between the delivery of council service and the policy making and funding of that service will there be rational decision-making about the type and quantity and quality of service, and true efficiency in the provision of the service."
Thank you for your time.
I do look forward to taking this third ‘F' out of the shadows and into the light of day.
For further information contact:
Don Nicolson, Federated Farmers President, 027 226 6331
