Australia Covid-19 , Economy and regeneration , Finance

Financial impacts of COVID-19 on Australian local governments

Summary

The focus of this briefing is the impact that COVID-19 restrictions introduced by the federal and state governments have had on local government service provision, how local government is supporting their local economies, and how they are dealing with the financial challenges in the short- and long-term.

Briefing in full

Impact on service provision

The immediate impact of the Covid-19 restrictions on local government has been the cessation and/or closure of those services and facilities where people gather to try and prevent the spread of Covid-19. Common cessations/closures include:

  • customer service centres
  • libraries
  • maternal child health centres
  • community transport
  • youth programs and activities
  • playgroups
  • leisure and aquatic centres
  • neighbourhood houses
  • community centres
  • performing arts and culture
  • halls and meeting rooms for hire
  • stadiums
  • golf courses
  • off-leash dog parks
  • skate parks and playgrounds
  • outdoor exercise equipment.

In addition, the majority of council events have either been postponed or cancelled, and activities which involve vulnerable groups in the community (such as volunteer programs) have ceased. Essential services such as aged care, waste collection, cleaning and asset maintenance continue to operate as normal, but with enhanced procedures around cleanliness and social distancing.

Workforce impacts

The direct impact on council operations of the shutdown relates to the staff that work in the areas impacted by the Covid-19 restrictions. The immediate response of many councils has been to stand down casual staff and redeploy permanent staff into other areas. However, many councils are now faced with more difficult decisions around staff as the revenue generated in these impacted areas begins to decline or cease.

Councils in Sydney are reporting that they will face a plunge in revenue over the next six months due to the coronavirus pandemic, sparking warnings that they will need a funding injection from the State government to avoid cutting essential services and staff. Campbelltown Council anticipates a $12.5 million fall in revenue over six months in a worst-case scenario. Other councils such as Parramatta, Northern Beaches and Sutherland Shire are still trying to calculate the revenue fall. Many have waived parking and other charges to assist small businesses and residents, while also closing pools, venues and other facilities from which they derive revenue.

In Victoria the City of Greater Geelong recently stood down more than 500 staff members due to the financial hardship caused by the coronavirus. The City’s Chief Executive Officer Marvin Cutter said the decision aligned with those made in the higher tiers of government. “In line with the direction of the federal and state governments, we have made the difficult decision to extend all service closures until further notice. “Unfortunately, this means the 576 employees who have been stood down will remain stood down.”

The City of Greater Geelong has been roundly criticised by federal and state government MPs to the point that the Minister for Local Government (Vic) issued a media release stating that “Councils have a vital role to play in supporting and protecting local communities during these unprecedented times and dismissing or standing down staff is not consistent with that”.

Adelaide City Council CEO Mark Goldstone has indicated that his Council could lose up to $30 million in income over the next three months as a result of Covid-19.

In Western Australia, the City of Fremantle CEO Philip St John shared the anticipated impacts of COVID 19 on council revenue and in turn, their workforce:

  • Estimated revenue loss of about $6.2 million April to the end of the financial year, made up of lost car parking, rent from commercial properties and fees and charges.
  • Twenty-three senior staff, managers, directors and the CEO, will continue to work full time with a voluntary pay reduction of 20 per cent.
  • Approximately 170 staff will take a 20 per cent reduction in working hours, effectively shifting to a 4-day week.
  • Approximately 60 staff have been directly impacted by the closure of facilities, with some of these staff directed to take annual leave, and in some cases leave without pay if they have insufficient leave balances.

To compound the problem, Prime Minister Scott Morrison has confirmed that councils will be ineligible for wage subsidies through the Federal Government’s JobKeeper package, saying any necessary support should come from the states. With staff costs making up to half of councils’ expenditure, loss of revenue poses a number of financial challenges over the next 12 months. Rate revenue is also likely to be impacted as ratepayers seek deferrals or waivers of rates due to financial hardship.

In NSW, Local Government NSW and unions developed the Local Government (Covid-19) Splinter (Interim) Award, which applies for 12 months and operates in addition to the existing award and any individual council enterprise agreements. The Splinter Award gives councils and county councils greater flexibility to provide suitable alternative duties for permanent staff unable to perform their regular work, and clear leave balances, because of Covid-19 Public Health Orders.

The NSW Government recently announced a local government economic stimulus package which includes

  • A $250 million increase in low-cost loans for eligible councils through the state’s borrowing facility TCorp to kick-start community infrastructure projects. Councils can also request principal and interest payments deferrals on existing council loans for the next six months.
  • Up to $112.5 million to support a Council Job Retention Allowance of $1,500 per fortnight per employee, paid for up to three months to qualifying staff working in the NSW local government sector
  • $32.8 million to assist councils meet the cost of the FY2020/21 increase in the Emergency Services Levy.

Supporting local economies

Apart from the direct impact of Covid-19 on council services and facilities, the business community in particular has been heavily hit, with a range of businesses – including restaurants, bars, cafes, nightclubs, gyms and indoor sports venues – required to close. Those small- and medium-size businesses that can continue to operate may be forced to reduce staff and some may even face the risk of closure as they typically do not have the cash reserves to offset declining revenues. This reduction in the payment of wages will have flow-on impacts to households and cause major financial stress to many members in the community.

The Federal and State governments have both announced a range of economic and support measures targeting the vulnerable business sector. The economic initiatives are aimed at getting cash to businesses to help them keep their employees in jobs. A range of measures have also focused on household income through proposed changes to JobKeeper and JobSeeker payments, rental assistance and other family tax benefits.

Many councils are now adopting their own targeted economic support and stimulus packages, being careful not to stray into those areas already serviced by other levels of government. In the Melbourne metropolitan area, councils are identifying packages of up to $5 million to support their local economies. Most packages have a strong focus on the local business sector and include measures such as:

  • paying suppliers within 7 days of receipt of invoice
  • providing rent relief to commercial tenants in council buildings
  • refunding/waiving annual fees for food and health premises paid in the current year
  • refunding/waiving of footpath trading permits
  • suspending business special rate schemes
  • introducing small business grant schemes
  • waiving parking restrictions and fees in business areas.

Some councils are also identifying capital works projects which can be implemented to support the business sector during the recovery phase.

Community and sporting groups are being supported through the waving of rent, leases and other user payments for use of council owned properties. The wider community is also being supported through Covid-19 financial hardship relief policies, which include:

  • Deferring payments of rates, charges, fees and fines.
  • Suspending collection of interest on outstanding debts.
  • Deferring pursuit of legal action on outstanding debts.
  • Suspending charges for facilities or services that cannot be accessed.

South Gippsland Council, for example, is considering a zero rate increase in the 2020/21 year but this is an isolated example despite calls from ratepayer associations.

Dealing with the financial challenges

The 2020/21 year will be a year of two halves, with councils generally not expecting to begin resuming normal activity levels until at least 1 January 2021. The first six months of the period will be a continuation of the current arrangements with the main challenge being to fund council payrolls given reduced revenue. They will also need to fund the lost revenue and additional expenditures from their local stimulus packages. Councils do not have many levers to pull to address the funding gap and in the absence of being able to stand down staff, the most likely option will be a reduction in capital works projects to balance the budget. Other savings can be made by reducing agency staff, contractors and use of casuals. Non-staff costs in the services and facilities affected by Covid-19 will also be reduced.

Worst case scenario for those councils with smaller cash reserves will be the need for some sort of line of credit. Small rural councils are particularly at risk during the first six months as they are largely dependent on government grants to be financially viable. Any negative cash flow impacts arising from lost revenue or deferred rates through financial hardship claims may put them at risk of default. Pre-emptive discussions between councils and their lenders will be paramount to manage this risk. The Victorian government is also working with small rural councils to consider the implications of the pandemic on their operations.

The last quarter of the 2019/20 year will give all councils a clear indication of the financial challenges they will face for the first half of the 2020/21 year.

The second half of 2020/21 will be a gradual resumption of normal activity reaching something near full capacity by 30 June 2021. It is anticipated that all councils will need to prepare some type of revised budget after conducting a mid-year financial review at 31 December 2020, as the realities of Covid-19 on council budgets and operations are likely to be much different to what can be estimated at this point in time. Monthly finance reports should also be provided to elected councils to ensure local government organisations remain nimble and able to respond quickly to unexpected changes or impacts of Covid-19.

The most important thing councils can do during this period is protect their rate base. A number of Covid-19 hardship policies specifically acknowledge that rates are a secure and reliable source of revenue to fund delivery of services to the community, and in the case of a state of emergency, councils still require cashflow to deliver critical services. While councils will feel under pressure to offer zero-per cent increases (or even rate decreases) for the 2020/21 year, the long-term financial impacts of such decisions are significant given the compounding effect of changes in the rate base. Waiver of rates should be limited to cases of extreme hardship, and a better outcome is the deferral of rate instalments, with the establishment of future payment plans on a case-by-case basis.

This may also be the right time for councils to revisit those services which it has been considering scaling back (or exiting entirely) in the past, but may have lacked the impetus to do so. In Victoria, council services such as childcare and aged care now operate in competitive markets against private providers with much lower cost structures. For example, with income reduced due to closure of facilities, the NSW Government has needed to provide funding support for local governments in April (of up to $82 million to support local government childcare centres). However, this is temporary support and more broadly there is a real opportunity over the next six to twelve months for councils to restructure themselves to reflect the new post Covid-19 future.

Comment

Covid-19 will have a major impact on local governments as they come under pressure from state and federal governments to play their role in retaining local jobs and stimulating their local economies. This will present a number of financial challenges which councils must take early action against to ensure they remain financially viable in the long term. Smaller councils will be particularly at risk in the short term as they do not have the cash reserves of larger councils to mitigate the effects of lost revenue and delayed cash flows.

It is worth reiterating that the most important thing councils can do during this period is protect their rate base – rates are a secure and reliable source of revenue to fund delivery of services to the community. During this state of emergency, councils still require cashflow to deliver critical services.

 

For more information on this briefing or to contact LGiU Australia email mzierke@sgsep.com.au

 

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