Posted on June 12, 2023 by Bianca Crapis and Katie Mortimer 7

IPART Proposes Changes to Council Rate Peg Methodology

Last week the Independent Pricing and Regulatory Tribunal (IPART) released a draft report proposing changes to the council rate peg methodology (Draft Report).

Stakeholders can make submissions on the Draft Report until 4 July. In July 2023, IPART will hold an online public hearing before reviewing feedback and then submitting a final report to the NSW Government in August 2023.

The Draft Report was prepared in response to concerns regarding the current rate peg methodology, particularly how IPART measure the annual change in councils’ base costs, including IPART’s Local Government Cost Index.

The Rate Peg

The rate peg is the maximum amount, as a percentage, by which a council may increase its rate income in a year. IPART sets that percentage each year as delegate for the Minister for Local Government. The current rate peg methodology measures the change in all councils’ base costs using the Local Government Cost Index (LGCI), which provides an average annual cost change for all councils across NSW.

Proposed Changes to the Rate Peg Methodology

The Draft Report proposes to change the rate peg methodology to:

• Measure the annual change in councils’ base costs by three groups instead of one, divided into metropolitan, regional and rural councils. This is intended to better account for the diversity of councils’ base cost patterns,
• Use a new model to measure the annual change in costs in place of LGCI. The model is proposed as the ‘Base Cost Change’ (BCC) and would comprise three components measuring:
  • employee costs (including wages and superannuation)
  • asset costs
  • all other operating costs (including administration, utility costs, insurance)
• Use ‘forward-looking indicators’ to estimate the change in each BCC component,
• Make an explicit, council-specific adjustment for changes in councils’ Emergency Services Levy (ESL) contributions. This is proposed to allow councils to fund their required contributions to support NSW Fire and Rescue, NSW State Emergency Service, and Rural Fire Service without needing to reduce other services.
• Make additional adjustments to capture costs driven by external factors that affect councils, where councils have engaged with their community.
• Add a population factor to more accurately measure the change in councils’ residential populations.
• Continue to consider subtracting a productivity factor if there is evidence of productivity improvements in the local government sector that have not been fully incorporated in the BCC.

Subject to stakeholder views, IPART is proposing to implement the improved methodology in a staged process, with some changes being decided on the 2024 – 2025 rate peg, and the remainder for the 2025 – 2026 rate peg.

IPART is also proposing to review the rate peg methodology every 5 years via a consultative process, unless there is a material change in the sector or economy, to ensure the methodology is up to date and fit for purpose.

Proposed Changes to Financial Models for Councils 

In response to broader issues raised by IPART’s recent consultation, the Draft Report also recommends that the financial model for councils be investigated to identify improvements.

Draft Recommendations

IPART’s draft recommendations are:

1. That a local government reference group be established to advise on the implementation of the proposed new rate peg methodology,
2. That the NSW Government consider commissioning an independent review of the financial model for councils in NSW, including broader issues (described in the Draft Report as financial sustainability, funding, costs and expenditure, financial management and the impact on rates and ratepayers).

The Draft Report can be accessed here. You can make submissions or feedback on the Draft Report via IPART’s website here.

If you would like to discuss the Draft Report please contact Katie Mortimer on 8235 9716 or Bianca Crapis on 8235 9728.