SA Council Rate Capping — or “Rate Oversight”!

26 June 2018

The much-anticipated realisation of the State Government’s pre-election promise to introduce rate capping for SA councils has now materialised. It is in the form of the Local Government (Rate Oversight) Amendment Bill 2018 which was introduced to the Parliament late last week.

The Bill proposes the insertion of a new Part 1A into Chapter 10 (Rates and charges) of the Local Government Act 1999. If enacted, it will establish a new “rate oversight system” which provides for a “cap” on the amount of revenue that councils are able to recover through general rates. The new oversight system is proposed to come into operation from 1 July 2019.

The key considerations for councils (i.e. this Alert is a summary approach of key considerations only), arising from the Bill are –

• The requirement to understand the proposed concept of a “base standard rate”. This is a nominal single rate level that is calculated each year prior to applying the cap. It is calculated by reference to the total annualised revenue that is recoverable by a council from general rates within its area, as at 30 June in the base year (the year immediately preceding the ‘capped year’). This amount is then divided by the number of rateable properties within the council area at that same date, in order to establish the nominal single rate level.
• The requirement to understand the proposed concept of a “capped standard rate”. This is calculated by reference to the total annualised revenue that a council may recover from general rates within its area as at 1 July in the ‘capped year’ (i.e. the year immediately following the ‘base year’). This amount is then divided by the number of rateable properties within the council area at that same date, to establish a nominal rate for the capped year.
• The requirement to understand the proposed concept of a “primary rate cap determination”. This is a determination made by the Essential Services Commission of South Australia (ESCOSA), that applies to the ‘base standard rate’ to arrive at the ‘capped standard rate’. It is expressed as a percentage (i.e. ‘the primary rate cap’), by which the capped standard rate for a financial year must not exceed the base standard rate. A primary rate cap determination will be specified by ESCOSA by notice placed in the Gazette and will operate to limit the total amount of council revenue that is able to be recovered by way of general rates in the capped year.
• What this means is that in any capped year, a council’s capped standard rate must not exceed the base standard rate by more than the primary rate cap.
• It is to be noted that ESCOSA is not constrained to use any particular index in determining the primary rate cap.
• The Explanatory Paper published with the Bill advises that the intention of this method of calculation is to ensure that the growth in rateable properties over the base year is fully incorporated within the calculation of each year’s primary rate cap. In other words, a mechanism to allow councils to manage additional costs that inevitably come with growth in the area.
• The essence of this ‘oversight’ framework is, therefore, a mechanism which enables ESCOSA to control the quantum of general rate revenue that a council may recover in any particular financial year, effective from 2019/20. This means, of course, that 2018/19 will be the first base year.
• Therefore, the most notable immediate impact may be for councils that have sought to minimise rate revenue increases for 2018/2019 – and in so doing, to minimise the growth in their total general rate revenue. This means that, subject to further guidance from ESCOSA, the base standard rate for those councils will likely be determined by reference to the actual general rate revenue recoverable in 2018/19. Subsequently, for 2019/20, the primary rate cap determination by ESCOSA will set the percentage increase to that base standard rate for the purpose of establishing the capped standard rate.
• In response to the concern that rate capping will lead to a reduction in services available to, or the development of critical infrastructure for, communities, the Bill establishes a process for councils to apply to ESCOSA for a “rate cap variation determination”. If a determination is granted, it may fix a varied rate cap above the primary rate cap for one or more specified financial years, up to a maximum of five (5) financial years. The Minister has recognised that a variation is intended to support ‘extraordinary need’ from growth rather than ‘normal rateable growth’.
• The Bill sets out the matters that councils will be required to demonstrate to ESCOSA in making an application for a variation determination, which include, but are not limited to, whether the council has undertaken appropriate community engagement on the proposed variation, whether it has fully considered its spending priorities and explored alternative funding options and that the variation is consistent with the Council’s long term financial plan.
• A council that applies for rate cap variation must publish its application on its website and report this fact in the draft annual business plan that will be subject to community consultation.
• In considering whether it is appropriate to make a rate cap variation determination, ESCOSA must have regard to a number of specified criteria including the matters required to be addressed by the council in its application, the reasons for the proposed varied rate cap, the likely impact of the proposed varied rate cap on rate payers, the council’s record of compliance with any previous primary rate cap or variation and whether the council has complied with the requirements under section 29 of the Essential Services Commission Act 2002 relating to the provision of information relevant to the application.
• ESCOSA is, therefore, the proposed independent regulator of the rate oversight system. It will determine the rate cap in the form of the primary rate cap determination. It will receive and assess applications from councils seeking a variation to the rate cap. It will also undertake compliance monitoring and reporting on the effect of the rate oversight system. It is also noted in the Explanatory Paper that ESCOSA will provide guidance on how councils calculate annual rate revenue that incorporates the cap, total annualised revenue and the requirements for and the processing of variation applications.
• The Bill provides ESCOSA with the power, as the independent regulator, to decide the primary rate cap determination for each financial year. It will do so either on its own initiative or at the request of the Minister. The primary rate cap must be determined by ESCOSA by 31 December for the ensuing financial year. It is important to note, however, that the Bill also empowers ESCOSA to set another date by notice in the Gazette.
• The primary rate cap determined by ESCOSA may apply to all councils generally, to a class of councils or to a particular council. It is expected that a primary rate cap determination will only be applied to an individual council as an exception – related to previous non-compliance with a primary rate cap or variation or the introduction of other rates and charges that ESCOSA considers is intended to circumvent the objectives of the general rate cap.
• Before determining the primary rate cap ESCOSA is required to consider a number of matters, including but not limited to, the basis of the cap (which may or may not be a relevant price or cost index) and whether the cap should include any form of efficiency or productivity element.
• Although ESCOSA is responsible for managing the rate oversight system, the Bill allows the Minister to direct ESCOSA in certain matters when considering determinations. The Minister may direct ESCOSA to consider a matter as part of ESCOSA’s considerations in its primary rate cap determination in relation to councils generally or in relation to a particular council and on applications for rate cap variation determination. All Ministerial directions must be published on the ESCOSA website. ESCOSA maintains a discretion whether to act on such directions from the Minister.
• To address the concern that councils may generate an increase in rate revenue above the cap through the establishment of alternative revenue raising mechanisms or by changes to rating methodology, the Bill requires a council to inform ESCOSA of a proposal to change the basis upon which rates are assessed, to declare a separate rate, or to impose a service rate for annual service charges. ESCOSA may then consider the application of an alternative primary rate cap for that council if it determines that it is necessary to prevent an effective rate increase above the cap or that the council is utilising the application of fees and changes unreasonably.
• ESCOSA is required to monitor and review compliance by councils with the rate oversight system and to make annual reports to the Minister. ESCOSA must assess and provide a report to the Minister on the effect of the rate capping oversight system on councils every two (2) years.
• The Bill requires councils to comply with a primary rate cap determination made by ESCOSA, although it is to be noted that a failure to comply with this determination or a variation determination does not affect the validity of a rate.
• The Bill also proposes an amendment to section 273 of the LG Act to enable the Minister to take action on a report made to the Minister by ESCOSA under the new Part 1A of the LG Act. Relevantly, therefore, the Minister might make recommendations or issue directions to a council in instances of non-compliance. In a worst-case scenario of non-compliance, the Minister might recommend to the Governor that the council be declared as a defaulting council.
• The Bill also provides for other incidental amendments to the LG Act, including to the objects of the Act at section 3, to recognise that the Act, as amended, in addition to encouraging councils to provide appropriate services and facilities to meet the present and future needs of communities, will also recognise the need for appropriate financial contributions by rate payers to those services and facilities. Otherwise, it will amend section 123 of the LG Act to provide that the draft annual business plan must include a statement as to whether the council intends to apply for rate cap variation or has made such application or that such a variation application has been determined by ESCOSA for the financial year to which the annual business plan will apply.

If you have any further questions regarding the above please contact Michael Kelledy on 8113 7103 or mkelledy@kelledyjones.com.au