Here is a summary of key aspects of the Essential Services Commission’s (ESC) Draft Report: A Blueprint for Change; Local Government Rates Capping & Variation Framework ReviewWhat is the proposed framework? There are three elements to the proposed framework:

  • rate cap: the maximum annual rate of increase that councils can apply to their rate revenue
  • variation process: a mechanism for councils to seek increases in rate revenue that are above the rate cap
  • monitoring and reporting: reporting on compliance with the cap or variation conditions and providing information about overall outcomes.

What is the rate cap? It is proposed that the rate cap only apply to:

  • general rates
  • municipal charges,

and so it would not apply to:

  • special rates and charges
  • service rates and charges (such as refuse collection and disposal)
  • ‘revenue in lieu of rates’
  • fire services levy
  • landfill levy
  • supplementary rates (in the year they occur).

The cap would be applied to the rates and charges paid by the average ratepayer. This is calculated by dividing a council’s total revenue required from rates in a given year by the number of rateable properties in that council area at the start of the rate year. This means that the rate cap will apply to the year-by-year increase in the rates paid by this average ratepayer, although some ratepayers may actually receive higher (or lower) increases. The 2015-16 rates levied on an average property would be adopted as the starting base for 2016-17.

The cap would be calculated as follows:

The efficiency factor is initially 0 but increasing by 0.05% each year subject to a review to determine the appropriate long-term rate (NB: the NSW rates capping regime adopts an efficiency factor of 0.04%).​

Annual rate cap:

=  (0.6 x increase in CPI)

+  (0.4 x increase in WPI)

–   (efficiency factor)

Where:

CPI = Department of Treasury and Finance’s (DTF) forecast Consumer Price Index published in December each year.

WPI = DTF’s forecast Wage Price Index published in December each year.

The efficiency factor is initially 0 but increasing by 0.05% each year subject to a review to determine the appropriate long-term rate (NB: the NSW rates capping regime adopts an efficiency factor of 0.04%).

There are no particular circumstances where an application would automatically be approved or rejected. Each application would be assessed on its merits. However, the principles guiding the framework’s design involve a council needing to satisfy the burden of proof when seeking a variation above the cap, and suggest that rate increases should be considered only after all other viable options have been explored. Councils would need to be precise about the rate outcome they are seeking through the variation process. The ESC would have the power to accept or reject an application for variation. It would not have the power to vary an application. Initially, variations for only one year would be permitted, although this would progressively change so that, by 2019-20 and beyond, variations of up to four years would be permissible.

What are the monitoring and reporting requirements?

Councils would be required to provide certain information to the ESC each year, such as total council revenue, total value of rateable properties, total number of rateable properties and breakdown of refuse related costs (including the landfill levy). The ESC would monitor and publish an annual rates report on councils’ adherence to the rate cap and any approved variation conditions. The ESC would also monitor and publish an annual monitoring report on the overall outcomes for ratepayers and communities.

What is the timing?

The proposed timelines for implementing the framework are as follows:

Submissions close: 28 August 2015

Final report provided to Ministers: end September 2015

Final report made public: October 2015

ESC announces cap: December 2015

Councils submit data and notify ESC of intention to seek a variation: January 2016

Councils apply for variation: March 2016

ESC assesses applications: March-May 2016

ESC notifies councils of decisions: May 2016

Council consults on draft budget: May 2016

Council adopts budget: June 2016

Some legal issues

The exclusion of special rates and charges from the rate cap may encourage some councils to look to special rates and charges as a means of funding new initiatives. A fresh look at special rates and charges may prove fruitful. It should, though, be recalled that special rates and charges have their limits – there must, for example, be a ‘special benefit’ to those ratepayers liable to pay, and a majority right of veto can sometimes apply.

When considering an application for a variation, the ESC will, like any decision-maker, be constrained by Administrative Law principles. A slavish adherence to policy or failure to give real and proper consideration to a council’s application will risk its decision being legally vulnerable.

Of course, amendments to the Local Government Act 1989 will be necessary in order for any rate cap of the kind supported by the Victorian Government and analysed by the ESC to be introduced. These legislative amendments and the guidance material to be published by the ESC will be critical to the final form of, and legal framework for, the rate capping regime.