The Independent Pricing and Regulatory Tribunal (IPART) has made major changes to the methodology used to calculate the rate peg.
The new formula will take effect in the 2024-25 financial year.
The rate peg will use a new formula to be based on a model that will forecast council costs, rather than the current system which uses actual figures but with a two-year time lag.
The rate peg sets the maximum amount a council can increase its overall rate increase for that year.
Central Coast Council CEO David Farmer supports the change – which replaces the Local Government Cost Index as the basis for the rate peg with a Base Cost Change Model based on employee costs, asset costs and other operating costs.
“The proposed model is simpler to explain and likely to be more readily understood by the community,” Farmer said.
“The proposed alignment of employee costs to the Local Government (State) Award wage increases is supported.
“Considering the significant portion of councils’ budgets that are attributed to resources, the inclusion of the relevant increase applicable to this cost is a long-awaited and logical improvement to the current methodology.”
Farmer said the forward-looking and more agile approach would better reflect the financial reality that councils faced and were required to build into their Integrated Planning and Reporting documents.
“This will be a significant improvement on the current two-year lag between the time that price changes are observed and when councils can recover these price changes by applying the rate peg to their rates income leaving an unrecoverable gap,” Farmer said in a submission to IPART during the public consultation period.
“Whilst volatility creates challenges when preparing forward plans, it is reflective of what happens in practice, as well as expenditure movements.”
The amount of the rate peg will be announced later this month.
IPART also recommended the NSW Government commission an independent review of the financial model for councils in NSW.
It said the rate peg could not address all the issues raised during the consultation period.
Issues included the inequities of rate exemptions.
IPART said one example was an aged-care facility with the majority of residents being self-funded but it becomes rating exempt with one social housing resident.
Councils would also prefer to see rates based on the capital improved value of land rather than the unimproved land value (UV).
“Mandatory use of the UV method means councils cannot set equitable, efficient rates for those who own apartments and units,” IPART said.
“This makes it difficult for them to raise an appropriate level of rates income from these residential and business ratepayers.
“This is an increasing problem as areas become more built up over time.”
Councils also complained that statutory charges don’t reflect the full costs of service provision.
The NSW Government regulates charges for certain statutory services provided by councils but councils say these have not been adequately indexed over time.
“When this occurs, councils may need to use rates income to cover the gap,” IPART said.
“As a result, ratepayers may be cross-subsidising statutory service users, placing undue upward pressure on rates levels.”
Examples given included the development contributions caps.
Councils can levy developers’ contributions towards the cost of providing local infrastructure such as new roads, stormwater management and open space.
However, councils cannot levy developers for the cost of providing community facilities such as swimming pools.
“We consider that the NSW Government review the amounts councils can charge for statutory services to ensure these amounts reflect the full cost of providing these services,” IPART said.
Councils also have to pay an Emergency Services Levy (ESL) to the State Government.
The new rate method will set council-specific ESL to enable councils to collect an amount that reflects their actual ESL contributions.
“This will ensure they can fund these contributions – which they are obliged to pay and have no control over – so will not potentially need to trade-off council services to cover this cost,” IPART said.
In May, Councils’ peak body, Local Government NSW (LGNSW), criticised the State Government for its decision to apply “sky-high” increases to the ESL.