Local Government New Zealand’s (LGNZ’s) Funding Review discussion paper outlines options for addressing current and likely future funding shortfalls in local government.

The report, the first in a two-stage review, will be launched today.The paper details the findings of LGNZ’s major funding review, which began in 2014 to examine issues facing local funding, and considers alternative funding for increasing community demand on services and infrastructure – and incentives to drive economic growth.

LGNZ President Lawrence Yule says the findings, along with increasing demands from central government policy-makers, means we must take a fresh look at the way local government is funded for the benefits of communities. There is currently a significant shortfall between revenue and expenditure.

“Councils spend approximately 10.5 per cent of all public expenditure, yet they raise only 8.3 per cent of all public revenue,” says Mr Yule. The World Bank, in its recent report on local government finances, describes this as a vertical fiscal gap caused by a “mismatch between revenue means and expenditure needs.”

“As a result, a growing number of councils face financial challenges at a time when demand for infrastructure and services is greater than ever. Local government is also an important contributor to economic growth but the right incentives and resources must be in place to drive this growth,” Mr Yule says.

As part of the solution, LGNZ proposes a principles-based partnership model with central government. This would include central government fully considering the costs and benefits of decisions for local communities and co-funding costs where policy proposals have significant national and local benefit.

“The goal is not to increase the overall tax burden for New Zealand, but rather to determine whether a different mix of funding options for local government might deliver better outcomes for the country,” Mr Yule says.

“The sustainability of local government funding has become an increasingly important policy issue in the face of demographic and economic change. Some metropolitan councils are having to invest heavily in infrastructure to accommodate growth, while others have to maintain and renew infrastructure in the face of declining populations and funding bases.”

“This is alongside increasing community and central government expectations, and increasing impacts from natural hazards and environmental challenges. Earthquakes and flooding events in recent years have highlighted this.

”The paper elevates the key issues and identifies how present funding frameworks might be improved, and ways to incentivise local government.

It examines options that could sit alongside a property tax (rates) based funding system. Options suggested for discussion include local income tax, local expenditure tax, selective taxes, regional fuel taxes and transaction taxes.

“However, before pursuing fundamental changes to the funding regime, the local government sector needs to assure communities that it is open to innovation in service delivery, to build confidence in the quality of its spending decisions,” Mr Yule says.

Some councils, such as Rangitikei District Council, have already taken steps to develop innovative approaches to address funding gaps. Rangitikei is considering a number of measures to tackle the issue of population reduction. Likely changes to infrastructure by 2046 include a smaller number of council-managed community facilities, with some transferred to community ownership, and a larger network of roads, some in private ownership; along with modifications to its water and wastewater provision.

Other areas are planning for growth. Tauranga City and Western Bay of Plenty District, for example, are collaborating on a spatial plan, called Smart Growth Bay of Plenty, which is a comprehensive, long term strategy to ensure infrastructure is available for new residents.

The paper aims to stimulate discussion about the various funding opportunities and constraints in New Zealand. For the second stage of the review, LGNZ will collate ideas and responses into a final report proposing a long-term strategy and sustainable funding model for local government in New Zealand.

“It is vital that we raise public and government awareness about the factors contributing to the funding gap. The aim of this process is to identify options and alternatives to complement the funding tools available to councils and provide incentives to stimulate economic growth,” Mr Yule says.

“An appropriate funding mix includes the greater use of tools already available to local government, such as the use of prices (user charges) where appropriate and a prudent use of debt for assets that have an intergenerational benefit.”