Thursday, 30 March 2017

Local Government Funding: The Shand Report Ten Years Later

Funding local government is back in the news. Most recently it was Phil Twyford floating an infrastructure bond scheme. As well as backing the Twyford proposal, the New Zealand Initiative are pushing very hard for a revenue sharing agreement between central and local government linked to GST. And there has been lots of discussion on a bed tax to fund tourism infrastructure. Auckland Council wanted to toll the government's motorway network to pay for their own transport projects. Local Government NZ did a sector-wide funding review and produced its own 10-point plan. What is in common to all these proposals is that there is a need for more infrastructure that is not being met quickly enough for lack of funds to get it built.

What is so hard about ensuring that public goods provided locally are properly funded? It's mainly political. Central government would have to either raise taxes or cut its own budgets to divert more money to councils. Or they would have to grant more freedom to councils to raise funds through new tax mechanisms (like bed taxes, tolls, regional sales tax etc). Both courses of action would require central government to reverse decades of stripping both power and funds from local government. And that is very unlikely to happen any time soon.

Central government have inadvertently painted themselves into a policy corner through their on-going narrative about the untrustworthiness of the entire local government sector. Most notably Rodney Hide and Nick Smith have been publicly critical of councils for spending too much money. But in reality almost all legislative changes pertaining to local government since and including the Local Government Act 2002 have had a sub-text of the need to rein in the sector and the need for central government to exert more control over local government. Obviously it is near impossible to promote that line over decades then turn around and simply hand over more money and/or power to councils.

So, I doubt there is any appetite outside Local Government New Zealand for granting the sector more money raising powers. I am OK with that if only because it gives us a chance to look properly at the problem rather than rush into a knee-jerk solution that will probably cause as many unforeseen problems as it solves.

What is missing from the equation is a shared, comprehensive understanding of local government finances and accounting practices. So what we are getting is a whole bunch of point solution proposals that may or may not work, and may or may not have unforeseen side-effects. Unfortunately we don't have a lot of independent analyses of local government finances to help us evaluate these proposals.

The Shand Report 2007

One place to start is the 2007 Shand Report (officially "Funding Local Government"). It is a wide-ranging look at local government funding with a focus on rates. To a large degree the main concern of the inquiry was affordability of rates so there are gaps. I don't think they really got to grips with the drivers of funding requirements but, from memory, the Terms of Reference stopped them from inquiring too deeply on that issue. Nevertheless there are still plenty of relevant takeaways in the report even 10 years on:

Local Government works

Overall the inquiry found that "local government works well....[i]t provides at reasonable cost a substantial range of basic services...". I cannot emphasise enough that the basic system, for all its faults, works fine. A close examination of the problems that get a public airing would show that the apparent faults in the system are specific to certain locations (especially Auckland) or to specific circumstances (e.g. tourism locations). We may not need sector-wide reform at all.

The Inquiry could not identify any glaring issue in local government funding so their recommendations are a basket of smaller reforms that were intended to stabilise rates funding and ensure its sustainability. Their recommendations included council spending restraints, changes to the rating system itself to make it fairer, more use of debt funding, permitting tolling, lifting the share of fuel tax payable to councils, possibly lifting roading subsidies on major urban arterial projects, and government funding support for the three waters.

Increased use of debt funding

Noting how much fully funding depreciation added to rates the Inquiry proposed that councils not fund depreciation and rely more on debt funding for capital renewals rather than accumulated reserves. This is a huge proposal that turns a lot of orthodoxy on its head and I'm not even sure it would be legal under the Local Government Act. But it is closely related to infrastructure bonds so it is very much still a live proposal.

More central government funding

The Inquiry were not coy about recommending that central government divert some of its revenues to local government. In passing it noted that government had withdrawn funding support for water infrastructure and needed to reinstate all or part of it.

More spending restraint

This is not about cutting down on the sausage rolls. The Inquiry's comments concern capital spending programmes. They assumed that councils have total discretion on their programme and should stretch their programmes out more. Because they didn't look too deeply into why councils spend what they spend they may have missed the fact that central government has mandated much of the capital programme over the last 20 years.

How did the Inquiry work out?

Obviously it didn't because successive governments have done almost everything except implement these recommendations. There has been a contestable Infrastructure Fund that has been a failure so far in its objectives and that's about all. From time to time we hear of a council adjusting its capital programme to smoothe out rates rises. Mind you rates affordability doesn't get the air time it once did either. John Palino made a concerted and plausible effort to capture the "down with rates" vote in the last Auckland Council elections but he didn't get very far.

But, as I have noted in passing, many of the Inquiry's recommendations are still live and may yet be implemented. But we can only wonder how Auckland would be today if Rodney Hide (the prime instigator of the Shand Inquiry) had implemented these recommendations when he became Minister of Local Government in 2008. Instead, after ten years of missed opportunity, we are still looking to see whether Hide's only legacy, the forced amalgamation of the Auckland region's councils into one, will ever deliver any significant benefits.