2.6 Implementation of the Local Government (Rating) Act 2002

Local government: results of the 2002-03 audits.

Background

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Local authorities collected rates under the Local Government (Rating) Act 2002 (the Rating Act) for the first time in 2003-04. When we reviewed how local authorities had implemented the Rating Act, we took into consideration that the local government sector was dealing with large-scale change in its overall legislative framework. Consequently, we focussed on:

  • the new Rating Act policies through which local authorities can determine the circumstances under which they will forgo rating revenue, or delay the receipt of revenue;
  • Funding Impact Statements30 – to ensure that, for proposed general and targeted rates, the statements contained the information required by Schedules 2 and 3 of the Rating Act31; and
  • procedures for calculating use of uniform annual general charges and uniform targeted rates, to ensure that the cap is not breached on revenue raised by uniform rates.

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The Department of Internal Affairs provided us with the 2003-04 rates resolutions that had been forwarded to it as required by the Rating Act. Nineteen rates resolutions had not been provided to the Department at the time we conducted our review. We have directed our auditors to follow up this issue with the local authorities concerned.

New Policies

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The Rating Act introduces several new policies that, by their adoption, allow local authorities to determine the circumstances under which they will forgo rating revenue, or delay the receipt of revenue. These new policies are:

  • Rates Relief for Māori Freehold Land Policy: a few local authorities indicated either that they had not adopted such a policy or that they intended to adopt a policy that there would be no provision for rates on Māori Freehold Land to be remitted, although such rates might be remitted under other rates remission purposes. However, adoption of a Rates Relief for Māori Freehold Land Policy is required under the Local Government Act 2002 (the 2002 Act). Where a policy is to provide no such relief, that policy is to have been reached having regard to consideration of the criteria in Schedule 11 of the 2002 Act.
  • Remissions Policy: to be adopted if a local authority is intending to grant remissions. All but a handful of local authorities had adopted a Remissions Policy.
  • Postponements Policy: to be adopted if a local authority is intending to postpone receipt of rates that are owed to it. When such a policy is adopted, a local authority must grant any request for a postponement that falls within the policy. Nearly 70% of local authorities have adopted a Postponements Policy.
  • Early Payments Policy: to be adopted if a local authority is intending to receive early payments of rates in a current or subsequent financial year. About 65% of local authorities have adopted an Early Payments Policy.

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Local authorities need to be aware that they have power to remit or postpone rates or accept early payment of rates only in accordance with these policies. Therefore, local authorities need to be attentive to the provisions of these policies so that they remain relevant and appropriate.

Recording of Remissions and Postponement Costs

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Sections 86 and 89 of the Rating Act deal with a local authority’s recording obligations where it remits or postpones rates:

86. Recording remitted rates –
The local authority must record the remitted rates–

(a) on the rates record for the rating unit as paid on the due date; and

(b) in accounting documents as paid by the local authority on behalf of the ratepayer in accordance with the relevant objective in the remission policy.

89. Recording postponed rate –
(1) Subsection (2) applies if–

(a) a postponement fee is not added to the postponed rates; or

(b) a postponement fee is added to the postponed rates that is less than the maximum set out in section 88(2).

(2) The local authority must record the net cost of a postponement in accounting documents as paid by the local authority on behalf of the ratepayer in accordance with the relevant objective in the postponement policy.

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The recording obligations also specify the information that can be provided to the public about the cost of a local authority’s rates remissions and postponements, in terms of:

  • the purposes for which rates are remitted; and
  • the quantum of any remissions or postponement costs.

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The local government sector asked for our views on how the recording obligations in the Rating Act should be reflected in a local authority’s planning and reporting documents. In our view, disclosure of the costs and also the purposes of rates remissions and postponements in such documents is desirable, and best achieved by:

  • a reconciliation of all rates remissions and postponements, and the purposes for which they were remitted or postponed, in the notes to the financial statements, referenced to the revenue figure in the Statement of Financial Performance; and
  • disclosure of remissions within significant activity information and cost-of-service statements (where remissions are material or significant in terms of a local authority’s policy objectives).

Revenue and Financing Policy

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The Revenue and Financing Policy is a requirement of the 2002 Act, not the Rating Act. However, several ratepayer enquiries during the year have led us to consider whether particular rates have been set lawfully, because full information is not provided in the Revenue and Financing Policy about the reasons for the selection of sources of funds for activities. The ratepayer enquiries referred in particular to the sources of funds in relation to section 103 of the 2002 Act, noting that a number of policies had not provided reasons for the selection of the basis for general rates and for the choice to set a uniform annual general charge.

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We are not sure whether such omissions of information about rates have an effect, as there is no direct statutory link between the Revenue and Financing Policy and the rates set. However, we consider that, given the spirit and intent of the 2002 Act, it is reasonable to expect that Funding Impact Statements and rates resolutions would be consistent with the decisions reached in a local authority’s Revenue and Financing Policy. Where this is not the case, section 80 of the 2002 Act requires that the reasons for any inconsistency, and any intentions the local authority has to rectify the situation, be stated at the time of the decision. We consider that this information should be noted in the relevant long-term council community plan (LTCCP) and annual plan.

Funding Impact Statements – Setting of General Rates and Uniform Annual General Charges

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We reviewed local authorities’ Funding Impact Statements to ensure that, for proposed general and targeted rates, the statements contained the information required by Schedule 2 and Schedule 3 of the Rating Act. Under sections 14, 17, and 18, a local authority can only set rates in accordance with these schedules.

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Under Schedules 2 and 3, when setting rates, a local authority must take account of certain:

  • “matters”; and
  • “factors”.

“Matters”

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Under sections 14 and 17, the “matters” in Schedule 2 that may be used to define categories of rateable land are:

1. The use to which the land is put.

2. The activities that are permitted, controlled, or discretionary for the area in which the land is situated, and the rules to which the land is subject under an operative district plan or regional plan under the Resource Management Act 1991.

3. The activities that are proposed to be permitted, controlled, or discretionary activities, and the proposed rules for the area in which the land is situated under a proposed district plan or proposed regional plan under the Resource Management Act 1991, but only if –

(a) no submissions in opposition have been made under clause 6 of Schedule 1 of that Act on those proposed activities or rules, and the time for making submissions has expired; or

(b) all submissions in opposition, and any appeals, have been determined, withdrawn, or dismissed.

4. The area of land within each rating unit.

5. The provision or availability to the land of a service provided by, or on behalf of, the local authority.

6. Where the land is situated.

7. The annual value of the land.

8. The capital value of the land.

9. The land value of the land.

“Factors”

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Under section 18, the Schedule 3 “factors” that may be used in calculating liability for targeted rates are:

1. The annual value of the rating unit.

2. The capital value of the rating unit.

3. The land value of the rating unit.

4. The value of improvements to the rating unit.

5. The area of land within the rating unit.

6. The area of land within the rating unit that is sealed, paved, or built on.

7. The number of separately used or inhabited parts of the rating unit.

8. The extent of provision of any service to the rating unit by the local authority, including any limits or conditions that apply to the provision of the service.

9. The number or nature of connections from the land within each rating unit to any local authority reticulation system.

10. The area of land within the rating unit that is protected by any amenity or facility that is provided by the local authority.

11. The area of floor space of buildings within the rating unit.

12. The number of water closets and urinals within the rating unit.

Regional Councils

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The Rating Act provides Regional Councils with power to set a uniform annual general charge. This power had not been available to Regional Councils under the Rating Powers Act 1988. One Regional Council took advantage of this new provision.

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Another Regional Council did not set either a general rate or a uniform annual general charge. Instead, the Regional Council set a targeted annual charge, differentiated by location of properties within each territorial authority in its region.

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Five Regional Councils set general rates as a rate in the dollar on an undifferentiated basis. Five set general rates as a rate in the dollar on a differential basis. These five differentiated on the basis of the land situation “matter” set out in Schedule 2 of the Rating Act, to take into account the different revaluation dates that apply to territorial authorities within their region.

Territorial Authorities

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Eighteen territorial authorities used a general rate set as a uniform rate in the dollar. One City Council in this group also did not set any targeted rates except in respect of non-rateable properties (which would otherwise pay no rates for water supply, sewage disposal, waste collection, or services provided in relation to the land).

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In general, the remainder of territorial authorities set differential general rates using the following “matters” under Schedule 2 of the Rating Act:

  • the use to which the land is put (by far the most frequently used);
  • where the land is situated (also frequently used); and
  • the area of land within each rating unit.

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Fourteen territorial authorities did not set a uniform annual general charge.

Funding Impact Statements – Setting of Targeted Rates

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Targeted rates are similar to separate rates under the Rating Powers Act 1988, but provide a greater range of factors for setting differential targeted rates. Section 16 of the Rating Act provides that:

(1) A local authority may set a targeted rate for 1 or more activities or groups of activities if those activities or groups of activities are identified in its funding impact statement as the activities or groups of activities for which the targeted rate is to be set.

...

(3) A targeted rate may be set in relation to – (a) all rateable land within the local authority’s district; or (b) 1 or more categories of rateable land under section 17.

(4) A targeted rate may be set –

(a) on a uniform basis for all rateable land in respect of which the rate is set; or

(b) differentially for different categories of rateable land under section 17.

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Overall, local authorities appear to have had no difficulty in dealing with the requirement to select Schedule 2 “matters” and Schedule 3 “factors” in setting targeted rates. However, we have yet to see the more innovative approaches that were expected to emerge with flexible targeted rating powers, such as rating for particular services. At this stage, most local authorities are merely using the targeted rating power to continue rates formerly levied as separate rates under the Rating Powers Act 1988.

Regional Councils

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All Regional Councils set one or a number of targeted rates. The most common activities for targeted rates are land transport, environment, and biosecurity.

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For each of these activities, we considered the “matters” and “factors” used to set targeted rates. The most commonly used “matter” from Schedule 2 by which properties are identified as liable for a particular rate was where the land is situated. The provision or availability of a service provided by or on behalf of a local authority was also occasionally used. From Schedule 3, which provides the “factors” on which a property’s liability for a targeted rate is calculated (unless it is a uniform per property rate), the “factors” generally used were:

  • capital value of the rating unit (the most commonly used);
  • land value of the rating unit; and
  • area of land within the rating unit.

Territorial Authorities

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The wide range of targeted rates set by a number of territorial authorities and the extensive use of targeted rates made it difficult to prepare an analysis of trends in targeted rates used by territorial authorities. From our analysis, it appeared that all territorial authorities had set one or more targeted rates.

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We looked at the Schedule 2 “matters” and Schedule 3 “factors” used by territorial authorities to set targeted rates over several common activities. The analysis of targeted rates for these activities showed fairly consistent patterns in the identification of “matters” and selection of “factors” for calculating rating liability across the country:

  • Water supply: We identified more than 65 territorial authorities that set a targeted rate to fund some part of their water activity. For this activity the most frequently used “matters” were the availability of service, followed by where the land is situated. “Factors” commonly used were the extent of provision of service to the rating unit by the local authority, the number of separately used or inhabited parts of the rating unit, and the number or nature of connections for the land within each rating unit to any local authority reticulation system.
  • Sewerage and Wastewater: We identified nearly 70 territorial authorities that set a targeted rate to fund some part of their sewerage and wastewater activity. For this activity, the provision or availability to the land of a service provided by or on behalf of the local authority was by far the most commonly used “matter”, followed by where the land is situated. A range of “factors” were used to a greater and lesser extent with:
    • the number of water closets and urinals within the rating unit being the most commonly used, followed by;
    • the number of separately used or inhabited parts of the rating unit, followed by;
    • the extent of provision of service to the rating unit by the local authority, and the number or nature of connections for the land within each rating unit to any local authority reticulation system.
    A small number of local authorities also used the capital or land value of the rating unit.
  • Storm Water: We identified more than 30 territorial authorities that set a targeted rate to fund some part of their storm water activity. The main “matter” used was where the land was situated, while the main “factors” used were:
    • the capital or land value of the rating unit;
    • the number of separately used or inhabited parts of the rating unit; and
    • the extent of provision of service to the rating unit by the local authority, and the number or nature of connections for the land within each rating unit to any local authority reticulation system.
  • Refuse Collection: We identified more than 50 territorial authorities that set a targeted rate to fund some part of their refuse collection activity. For this activity, where the land is situated was the most frequently used “matter”, followed closely by the provision or availability to the land of a service provided by or on behalf of the local authority. The main “factor” used was the number of separately used or inhabited parts of the rating unit, followed by the extent of provision of service to the rating unit by the local authority.
  • Roading: We identified nearly 30 territorial authorities that set a targeted rate to fund some part of their roading activity. For this activity, where the land is situated was the most commonly used “matter”, followed by the use to which the land is put. The main “factors” used were the capital value or land value of the rating unit.
  • Community Board or Ward Rates: We identified nearly 20 territorial authorities that set a targeted rate to fund community board or ward activities. Almost all community board and ward rates were set using the “matter” of where the land is situated. However, the “factors” on which liability was calculated were more evenly distributed, with the land value of the rating unit, and the number of separately used or inhabited parts, being most commonly used, followed by the extent of service provision to the rating unit by the local authority, and the capital value of the rating unit.

Compliance with the 30% Cap on Uniform Charges

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The Rating Act retains a 30% cap on the proportion that certain rates can comprise of a Council’s total rates revenue. This cap applies to:

  • targeted rates that are–
    • calculated as a fixed dollar amount per rating unit or separately used or inhabited portion of a rating unit (and which is not used solely for water supply or sewage disposal); and
    • uniform for all properties to which the rate applies; and
  • uniform annual general charges.

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While the cap is not new, the Rating Act introduced the new, more flexible, targeted rating powers. As a result, calculation of the cap under the Rating Act is more complex and creates a risk that local authorities could inadvertently breach the cap – especially until they became more familiar with the requirements of the Rating Act. We therefore decided to review how local authorities calculated the rating cap.

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Overall, while we noted two breaches of the cap in our review of draft Funding Impact Statements, the local authorities concerned had taken steps to remedy these before adoption of their rates. Therefore, we did not observe any breaches of the cap in rates as finally adopted.

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Of the two local authority draft plans that contained breaches, in one instance – as part of the public consultation process – a ratepayer submitted that the cap had been breached. In the other, the Council had adopted a rates resolution but had not sent out rates assessments. Therefore, the Council was able to revoke the resolution that breached the cap, and adopt a resolution that complied with the cap calculation.

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We selected a sample of one-third of local authorities to look at the actual percentage of revenue generated by uniform general and targeted rates within the cap calculation. This analysis showed that the actual proportion of revenue raised by uniform general and targeted rates ranged from 6% to almost 29%, with the median being 21%.

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We would caution local authorities that have chosen to generate revenue through uniform general and targeted rates that is close to the 30% cap, to ensure that, in the process of making changes in response to public consultation, adjustments to revenue do not result in the cap being inadvertently breached.

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The potential for inadvertent breach and public confusion about what is set under targeted rating powers versus general rating powers is not helped where local authorities are not clear in their description of rates and do not provide a description of the activities for which the targeted rate is set, for example:

  • a uniform annual general charge set using the targeted rating powers over both rural and urban land; and
  • a rate described as a targeted uniform general rate set on every rating unit, using the targeted rating powers over the four locations in the district.

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Section 16(1) of the Rating Act states:

A local authority may set a targeted rate for 1 or more activities or groups of activities if those activities or groups of activities are identified in its funding impact statement as the activities or groups of activities for which the targeted rate is to be set.

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In our view, local authorities should take care in their Funding Impact Statements and rates resolutions to:

  • accurately describe the type of the rate being set; and
  • identify the activity or group of activities for which a targeted rate is set.

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We also noted a number of instances where the Funding Impact Statement description of rates to be set did not match the presentation of categories of revenue in local authority financial forecasts. Consistent presentation of information is necessary if ratepayers are to be able to use LTCCPs and annual plans as a basis for assessing the proposals of local authorities, and the costs involved.

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Finally, we note that the flexible powers available to set targeted rates could allow local authorities to set rates that, in substance, are uniform general rates, but which do not form part of the rating cap calculation – primarily through setting a targeted rate that varies by location but is flat in each location. For example, one local authority set a rate that purported to be a flat rate differentiated by location – however, the flat rate paid in each location was the same. This appears to make the differentiation by location irrelevant, as the same flat amount was paid by every property on which the rate was set.

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We consider that this is a position likely to generate public confusion, and have suggested to the Department of Internal Affairs that it monitor the use of targeted rates to see whether the current rating cap is effective as a means of managing the extent of rates that are set on a uniform basis.

Setting a Rate for Unforeseen and Urgent Needs

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We are aware that, during the year, one local authority used the power under section 23(3) to set a rate that was not provided for in its Funding Impact Statement. This is allowed if the local authority is satisfied that:

… the rate is required to meet an unforeseen and urgent need for revenue that cannot reasonably be met by any other means …

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We are concerned that the legislative tests were not met by this local authority’s circumstances, and we are discussing this with the local authority. However, we emphasise that any local authority considering using this provision must, at the time of making the decision, be satisfied that:

  • the rate is to meet an unforeseen need;
  • the need for revenue is urgent; and
  • the need cannot reasonably be met by any other means.

Footnote 30: Funding Impact Statements are required to be included in local authorities’ long-term council community plans and Annual Plans, and to set out information that discloses the revenue and financing mechanisms to be used by a local authority. Under section 23, rates are required to be set in accordance with Funding Impact Statements.

Footnote 31: Schedules 2 and 3 of the Rating Act establish:

  • the units of liability where a local authority is setting a general rate differentially under sections 13 and 14 of the Act; and

  • factors for calculating the liability where a local authority is setting a targeted rate under sections 16-20 of the Act (targeted rates are similar to separate rates under the now-repealed Rating Powers Act 1988).

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