Australia Covid-19 , Finance

How are local government budgets responding to COVID-19?

Summary

  • Local governments are under pressure from their communities to minimise rate increases and provide stimulus packages for their local economies during the COVID-19 pandemic.
  • This briefing is focussed on how Victorian local governments have responded to COVID-19 in their 2020-21 budgets, based on a survey undertaken by Local Government Finance Professionals, a peak body that supports finance professionals working in the sector.
  • This briefing will be of interest to councillors, CEOs, CFOs, and senior executives who are looking to provide leadership and support to their local communities through their annual budgets during COVID-19 restrictions, especially in Victoria.

Briefing in full

COVID-19 impacts

The March 2020, COVID-19 restrictions saw the cessation or closure of those services and facilities where people gathered to try and prevent the spread of COVID-19, which had a significant impact on local government’s human presence and infrastructure. The majority of council events were either postponed or cancelled, and activities which involved vulnerable groups in the community (such as volunteer programs) ceased. Essential services such as aged care, waste collection, cleaning and asset maintenance continued to operate as normal but with enhanced procedures around cleanliness and social distancing.

The direct impact of the shutdown on local government operations relates to the staff that work in the areas directly impacted by COVID-19 restrictions. The immediate response of many local governments was to stand down casual staff and redeploy permanent staff into other areas. However, many local governments are faced with more difficult decisions as the revenue generated in those impacted areas began to decline or cease and councils were asked to retain staff without access to the Australian Government’s JobKeeper Payment. To compound these financial problems, local governments were also faced with compliance costs arising from the introduction of the new Local Government Act 2020, as discussed in part in this LGiU Australia briefing, which commenced from 1 July as well as the substantial costs of running general elections in October 2020.

In addition to the direct impact of COVID-19 on local government services and facilities, the business community in particular was heavily hit – a range of businesses including restaurants, bars, cafes, nightclubs, gyms and indoor sports venues were required to close. For those local governments whose local economies rely on the tourism sector, their business activities – such as caravan parks, accommodation providers and tourist attractions – were significantly impacted by the travel restrictions. Those small- and medium-size businesses that could continue to operate were forced to reduce staff, and some even faced the risk of closure as they typically did not have the cash reserves to offset declining revenues. This reduction in the payment of wages had flow-on impacts on households, causing major financial stress to many members in the community.

In July 2020, metropolitan Melbourne and Mitchell Shire was forced back into Stage 3 restrictions for six weeks, after a period of greater freedom wherein local government services (such as libraries, leisure and aquatic centres, golf courses and outdoor exercise apparatuses) were allowed to open. In August, metropolitan Melbourne moved to Stage 4 restrictions for a further six weeks, and regional Victorian councils moved to Stage 3 restrictions. These unprecedented restrictions will have significant impacts on the broader economy, including council ingoings and outgoings.

Survey of Victorian local governments

Local Government Finance Professionals (FinPro) is the peak body servicing Local Government Finance Professionals working in the Victorian local government sector. The Association has over 550 members representing all 79 Victorian local governments, five regional library corporations, and over 20 other organisations.

FinPro recently undertook a survey of its 79 member governments to understand how the sector was responding to the COVID-19 pandemic through the adoption of their 2020-21 Budgets. In particular, how councils were dealing with the impact of service closures and consequent workforce stand downs/redeployments, and financially supporting their community and local businesses, were of interest. FinPro found that the COVID-19 budget responses of various Victorian local governments for the 2020-21 year mainly focussed on the following areas:

  • rates and charges
  • fees and charges
  • community and business support packages
  • financial hardship.

The survey results for each of these is considered below:

Rates and charges

The survey asked local governments what rate increase they proposed for the 2020-21 year, and whether they were planning to provide rebates or other rate reductions to incentivise or support particular parts of their rate base.

The following graph compares the average rate increase for each geographical grouping (Melbourne metropolitan, Melbourne interface, regional cities, large shires and small shires) for the 2020-21 year:

Metropolitan governments had the highest average rate increase of 1.9%, with regional cities the lowest at 1.4%. The rate cap for the 2020-21 year is 2.0%

The following graph compares for each council grouping, depicting the following rate increase outcomes for the 2020-21 year:

How are local government budgets responding to COVID-19?

  • 0% (rate cap)
  • greater than 0% but less than 2.0%
  • 0% or less.

How are local government budgets responding to COVID-19?

Five large shires (or 26% of the group) had rate increases of 0%, closely followed by small shires with four (or 21% of the group). By contrast, 21 (or 95% of) metropolitan councils had rate increases equal to the rate cap with only one council offering a 0% rate increase. Ararat Rural City was the only local government in Victoria to offer a rate reduction (of -1.0%).

Local governments also provided a range of rebates, waivers and discounts to certain rate base cohorts, or in some cases, to the whole rate base. Examples include:

  • rate waivers for ratepayers receiving JobSeeker (Frankston City Council)
  • rate waivers for pensioners (Dandenong City Council)
  • rate rebates for business ratepayers on JobKeeper (Kingston City Council)
  • a rate rebate of $225 to business ratepayers (Surf Coast Shire Council)
  • a rate rebate of 10% to all ratepayers (Monash City Council)
  • rate rebates equal to rate increases to all ratepayers (Yarra Ranges Shire Council)
  • increased rebates for pensioners and health card holders (Moreland City Council)
  • waste charge rebates to all ratepayers equal to rate increase (Borough of Queenscliffe)
  • an early payment discount of 2% (Stonnington City Council)
  • a rate discount for businesses that create additional employment (Macedon Ranges Shire Council).

The local governments noted above are included as an example only; other councils may have offered the same or similar concessions. 

Fees and charges

The survey asked local governments what increase in fees and charges was proposed for the 2020-21 year, and whether they were offering any refunds, discounts or waivers to community groups or businesses which were unable to operate, or had reduced operations, due to the COVID-19 restrictions.

The following graph compares the fees and charges increase for each council grouping for the 2020-21 year.

How are local government budgets responding to COVID-19?

The majority of local governments increased their fees and charges (non-statutory) in line with the Consumer Price Index or market rates. Eight local governments decided to retain their fees and charges at 2019-20 levels.

Most local governments provided a range of fee relief measures for their local business sectors in 2020-21, including:

  • Rent relief to commercial tenants in council buildings.
  • Refunding or waiving annual fees for food and health premises paid in the current year.
  • Refunding or waiving of footpath trading permits.
  • Suspending business special rate schemes.
  • Waiving parking restrictions and fees in business areas.

Community and sporting groups were also supported through the waiving of rent, leases and other user payments for council-owned properties. Local governments that generate significant income from parking revenue (such as Yarra and Port Phillip) also supported their communities through the waiving of parking charges or parking fines.

Community and business support packages

The survey asked local governments whether their 2020-21 budgets contained any targeted economic support and stimulus packages. The following table summarises the financial range of packages by council grouping.

Council Group High Low
Metropolitan* $13.5 million $2.8 million
Interface $5.0 million $2.0 million
Regional City $10.7 million $0.5 million
Large Shire $4.8 million $0.1 million
Small Shire $1.7 million $0.2 million

*The City of Melbourne’s package was $50 million

It is difficult to compare the support packages of each council as there was no consistent approach taken to what was included for the purposes of quantification. In some cases, councils took an ‘all in’ approach, including everything that could be directly or indirectly connected to COVID-19 support, such as lower rate increases or targeted capital works projects. For other councils, the value of their packages was based on direct support (such as small business grant schemes, expanding existing community grant programs) or supporting state Government funded programs (such as the $500 million Working for Victoria program).

Overall, the survey found that every local government offered some amount of targeted support to their community and businesses in their 2020-21 budget. A number of local governments also reduced their payment terms from 30 days to either 14 or seven days.

Financial hardship

The survey asked local governments whether they had implemented measures to support ratepayers who were experiencing financial hardship as a result of COVID-19. The following graph compares the approach taken by the 79 Victorian local governments in responding to financial hardship – in particular, whether deferrals or waivers were available on application, or available to all ratepayers regardless of circumstance.

How are local government budgets responding to COVID-19?

Most local councils developed a COVID-19 financial hardship policy either as a standalone measure or as an extension of existing rate hardship policies. In regard to rate arrears, all local governments required ratepayers to make an application for a payment deferral, and a waiver would only be considered in extreme cases. In regard to the charging of interest on arrears, 45 councils (57% of respondents) required ratepayers to apply for a deferral or waiver. The remaining local governments waived the charging of all interest on arrears for varying periods of time. In regard to the payment of the 4th instalment for the 2019-20 year, 62 (78%) of local governments required ratepayers to apply for a deferral. The remaining local governments extended the payment date for the fourth instalment to various dates in the 2020-21 financial year.

Examples of capital city responses

As addressed in a recent LGiU Australia briefing, the City of Sydney’s recently-released City Recovery Plan sets out the next steps in the City of Sydney’s response to COVID-19 and its impacts. The Plan comprises three separate plans: an Organisational Recovery Plan; a Financial Recovery Plan; and a Community Recovery Plan.

The Financial Recovery Plan sets out the key pillars of the City of Sydney’s financial response:

  • ongoing financial assistance through rates and rental relief
  • a $25 million infrastructure stimulus package
  • a $47.5 million relief package for small business and creative sector
  • a financial recovery plan.

The various strategies the City of Sydney has put in place to assist the local community in response to COVID-19 are estimated to have cost $72.5 million.

The City of Melbourne’s Annual Plan and Budget 2020-21 has been termed a ‘COVID-19 Recovery Budget’, designed to support jobs and businesses, protect ratepayers and rebuild the local economy. The COVID-19 pandemic has hit Melbourne particularly hard, with Stage 4 restrictions still in place for the entirety of metropolitan Melbourne for the foreseeable future.

COVID-19 has had a material impact of $101 million on the Council’s 2020-21 budget, resulting in an underlying deficit of $57.4 million (excluding capital contributions). This means that for the first time in 30 years, the City of Melbourne will record a deficit. The Council noted on its website that ‘rebuilding our vibrant city economy will take time and hard work. But years of disciplined financial management means Council can step-up in these unprecedented times to provide much needed support to our community’.

Key aspects of the 2020-21 budget include:

  • Total budget: $632 million.
  • A zero-net increase in rates for residential and commercial properties.
  • COVID-19 Recovery Package: $50 million.
  • Fully funded $175.8 million capital works infrastructure program.
  • Investment in transport: $41 million.
  • Climate action and waste services: $30 million.
  • Community facilities: $12.5 million.
  • 49 initiatives to be delivered in the fourth year of Council Plan 2017-21.
  • Hardship policy at a cost of $18.8 million.
  • Underlying budget deficit of$57.4 million.

Impact of COVID-19 on financial sustainability

As well as delivering services to their communities, local governments are responsible for managing more than $100 billion in assets – assets which must be maintained and renewed. As asset managers, local governments have a responsibility to maintain their financial sustainability over the long term to ensure that they discharge their stewardship responsibilities under the Local Government Act 2020.

Many of the Victorian local governments surveyed are expecting to report operating deficits in the 2020-21 year (some for the first time) and have budgeted to either use cash reserves or take out borrowings to maintain liquidity. This has been driven by the loss of revenue from closed services and facilities, and the cost of maintaining its full workforce without access to government support (such as the federal Government’s JobKeeper package). Add to this the cost of council support and stimulus packages, and the financial outlook for some local governments (especially small shires) is bleak. There are also a number of local governments still recovering from the impact of the 2019 bushfires. In the longer term, it’s likely that rate increases will be far lesser than recent levels due to a sluggish Consumer Price Index (CPI) which has been a proxy for rate cap increases since inception, experiencing a 1.9% fall in the June 2020 quarter.

Despite this financial outlook, a recent newspaper article stated that all but five of Melbourne’s metropolitan governments were proposing 2% rate increases despite recording surpluses. In particular, it cited the examples of Wyndham City Council ($157 million surplus), Whittlesea City Council ($132 million surplus), Hume City Council ($119 million surplus), Casey City Council ($79 million surplus) and Cardinia Shire Council ($92 million surplus). It is interesting to note that all of these local governments are ‘interface’ councils that receive significant income from developer contributions and capital grants due to the extensive development and population growth occurring within their boundaries. These income types – which are ‘tied’ and not available for general use by the councils – contribute almost the entirety of their budget surpluses. When these income types are subtracted, these local governments are generating small surpluses at best.

For the 15 Victorian local governmentsa that decided to adopt 0% rate increases, the long-term financial impacts of such a decision are significant. The following graph shows the cumulative rates lost over ten years (assuming 0.5% growth and an annual cap of 2%) by freezing rates in the 2020-21 year, for a range of rate base sizes.

How are local government budgets responding to COVID-19?

For a council with a $20 million rate base, the cumulative loss over 10 years would be $4.5 million; for a $50 million rate base it would be $11.3 million; and for a $100 million rate base, it would be $22.5 million.

The following rating outcome examples are taken from recently adopted council budgets for the 2020-21 year:

Council Rate +increase/-decrease Lost rates over 10 years*
Ararat Shire -1% $6M
Moyne Shire 0% $5M
Latrobe Regional City 0% $18M
Melton City 0% $28M
Melbourne City 0% $68M

* Assumes 0.5% annual growth and annual cap of 2%

As can be seen from the above graph and table, the most important thing that local governments can do during this period is protect their rate base. Rates are a secure and reliable source of revenue to fund the delivery of services to the community and, in the case of a state of emergency, councils still require cashflow to deliver critical services. While Victorian councils feel under pressure to offer up zero per cent rate increases (or even rate decreases) for the 2020-21 year, as the earlier graph shows, the long-term financial impacts of such decisions are significant given the compounding effect of changes in the rate base.

In NSW, it was reported that local governments that choose not to pass rate increases onto their communities – increases owing to COVID-19, the summer’s bushfires and drought – will have the option of applying the increases in future years under reforms proposed by the NSW government (as reported by the Sydney Morning Herald on 7 May 2020). The Victorian government, however, has not gone down that path.

Comment

The FinPro survey found that Victorian local governments have been significantly impacted by the COVID-19 restrictions, both in their ability to deliver services to their communities and financially through the loss of revenue. They have been required to retain staff (with no access to government support such as JobKeeper) as well as fund local community and business support packages, some as great as $13.5 million (or in the case of the City of Melbourne, $50 million).

Victorian local governments have also been faced with compliance costs arising from the introduction of the new Local Government Act 2020 (as discussed in part in this LGiU Australia briefing) and the undertaking of general elections in October 2020. Fifteen of Victoria’s 79 local governments kept rate increases at 0% or less for the 2020-21 year in response to community pressure – which will result in significant long-term rate losses. Many local governments surveyed are expecting to report operating deficits in the 2020-21 year (some for the first time) and a number of local governments (especially smaller rural entities) are faced with bleak long-term financial outlooks.

COVID-19 will have long-lasting impacts on community and business behaviours which will change the way that local government engages and provides services into the future. Facilities – such as performing art centres, cinemas or even indoor aquatic and sports centres – may not be fully utilised for many years, constituting future planning and cost challenges.

Councils are now faced with a new post-COVID-19 normal – one which previous history and experience offers little guidance on how to adapt in order to meet the new needs of their communities. A great deal of planning will be required by the sector to respond to the aftermath of the pandemic.

 

LGiU Australia is a partnership between LGiU and SGS Economics and Planning. We’ve made all of our COVID-19 content free during the pandemic. To register for LGiU Australia updates, contact SGS Principal & Partner Luke Nicholls.