Posted on August 17, 2021 by Elaine Yeo and Stuart Simington

IPART Review of Rate Peg – Population Growth

The Independent Pricing and Regulatory Tribunal (IPART) is reviewing the rate pegging system to include population growth.

The ‘rate peg’, under s506 of the Local Government Act 1993 , is the maximum percentage by which a council may increase its general income for a year. That amount is currently calculated by reference to the Local Government Cost Index (which measures increases in costs) and improvements in productivity.

IPART is reviewing the way the rate peg is calculated so that it can account for population growth. The purpose of the review is to ensure that residents in local government areas experiencing population growth are provided with adequate infrastructure and services.

A draft report has been released for public exhibition (Draft Report). A final report will be released in September 2021.

Draft Report by IPART

The Draft Report provides that the costs of population growth are not being fully met for NSW councils. Councils with fast growing populations have had slower growth in total revenue per capita.

The draft methodology proposed by IPART purports to adequately compensate local councils for population growth under the rating system. The methodology now includes a ‘population factor’ which is based on the percentage change in residential population in each council area to reflect the relationship between council costs and population growth.

The population data is sourced from the Australian Bureau of Statistics (ABS) because IPART is of the view that ‘ABS data is more accurate than projections and will reduce the need for a true-up‘.

The proposal is to maintain each council’s general income on a per capita basis as its population grows. In November each year, IPART will publish a rate peg methodology that will apply to NSW local governments based on this formula:

Rate peg = change in LGCI – productivity factor + other adjustments + population factor

The formula now specifically includes the addition of the ‘population factor‘.

The ‘other adjustments’ factor that is part of the existing rate pegging formula accounts for miscellaneous costs such as the costs of the 2021-22 election.

‘Population Factor’

The population factor in the rate peg formula is calculated as follows:

Population factor = max (0, change in population – supplementary valuations percentage)

The ‘change in population’ for each council will be published on the IPART website. The change is calculated using the estimated residential population specified by ABS.

The ‘supplementary valuations percentage‘ is calculated by councils using a formula based on the notional general income of the council for the previous year and any adjustments made to that general income based on changes in the valuation of rateable land.

Each year, each council will have a population factor that is equal to the annual change in its residential population, adjusted for additional revenue received from supplementary valuations of rateable land in the previous year.

Councils with negative population growth will have a population factor of zero, so that they are not worse off under this rate peg methodology. Councils that have recovered more from supplementary valuations than is required to maintain their per capita general income as their population grows will also have a population factor of zero.

Data used for the Draft Report

The Draft Report has taken the residential population rather than service population to calculate the population factor. Councils may have larger service populations due to tourism or because they are employment, business or cultural hubs.

Backward-looking ABS data was used to measure changes in residential populations rather than the Department of Planning, Industry and Environment (DPIE) population projections. IPART considered that using third party population projections were not appropriate because the relationship between third party providers and councils is not independent.

ABS data is updated after a census every five years. IPART is considering whether it would be appropriate to re-base the population factor every 5 years following the census.

Implications for Councils

The proposed change to the rate pegging system could see a significant increase in revenue for local councils in high growth areas.

However, the changes are not designed to eliminate all issues faced by councils with regard to the rate pegging system. For example, the special variations process to vary the rate peg under ss 508A and 508(2) may still be required where per capita general income does not accurately reflect the costs of servicing the population and a one-off adjustment to the rate base is required.

To read the Draft Report, click here.

To discuss this blog, please leave a comment or contact Stuart Simington, Partner, 02 8235 9703 or Elaine Yeo, Associate, 02 8235 9712.