Slicing the General Rate Pie

Slicing the General Rate Pie: How much should each type of property contribute to the General Rate?

Background

There’s no such thing as a free lunch. The services provided by Timaru District Council are paid for through various means by you. Some are paid for mainly through rates, such as civil defence and the cost of democracy. Others are paid for mainly through fees, such as building onsents. Some are paid through a mixture of sources, such as roading, using rates and government financial assistance. Who pays for what is determined by Council policy. Activities are generally funded according to where the benefits lie for individuals, particular groups of people or the wider community.

Rating for services isn’t easy. There will never be a perfect rating system. What the Council does try and achieve is a fair and equitable system for all within the restrictions of the law.

For services that are paid for through rates, the Council can use various rating tools available by law. These include a General Rate which can cover a bucket of services or a Targeted Rate which can cover one or more services (e.g. Aquatic Centre Rate).

A Uniform Annual General Charge (UAGC) can be used, which can also cover a number of services, but means every property pays the same flat amount across the district.

The General Rate currently provides funding for services such as roading, economic development and the cost of democracy. In 2014/15, the General Rate made up 27% of all the money the Council collected in rates or $13.1M.

Differentials enable the cost to be fairly spread across various categories of property in the district. Over time, using differentials, the Council has tried to ensure that the various pieces of the pie (i.e. property categories) pay about the same proportion of the General Rate.

Other impacts on the General Rate can occur if there is a significant change in costs or how particular Council services are funded (e.g. if the government changes the amount of financial assistance they provide for local roading).

The Issue

Council have previously used differentials to ensure that the various property categories pay about the same proportion of the General Rate pie.

The Council believes that this is no longer fair and that there needs to be an adjustment to ensure a greater proportion is paid for by the primary sector.

The reasons for this are:

  • Intensification in the rural sector as a result of the growth of rural activity, such as dairying
  • The damaging impact on the rural roading network due to rural development, increased traffic volumes and heavier trucks and farm equipment
  • The reduction of government subsidies for particular roading projects, meaning the Council has had to top-up the amount of rates funding to pay for them. Of this ‘top-up’, 90% has been used for rural roading projects
  • An overall increase in funding required for roading expenditure, as described under the ‘Our Road Funding shortfall’ section

Compounding this has been the recent district-wide property revaluation. This has meant changes in the total land value across the district and within the different sectors. For example, between 2011 and 2014 the total district-wide primary land value has moved from 49.7% to 56.4% of the total district value, while residential has
dropped from 41% to 37.4%. Values within sectors have also changed. The value of irrigation schemes have also been added to the district valuation roll.

The Council recognises the enormous value of the rural sector to the district, and how this helps all of us, not just farmers. However, currently the system is out of balance and does not reflect the changes in recent years. Funding of the General Rate pie therefore needs some adjustment to maintain fairness for all.

The Options

1) Retain the current differentials

This will mean there are changes to how the General Rate pie is paid for due to the overall change in district-wide property values. With this option, farming properties would continue to pay about 35.8 cents of the general rate for every $1 residential property owners pay. Due to the changes in property valuations from the 2014 revaluation, this would mean an increase in that paid by the primary sector of approximately $560,000 and reductions in other sectors (e.g. commercial/ industrial down $480,000).

2) Change the differentials to match the 2011 proportions of the pie

With this option, the differentials would be adjusted so that the various property categories pay the same proportion of the general rate as they currently pay. This would mean that the primary sector would
pay about 28.1 cents of the general rate for every $1 residential property owners pay. Individual properties would vary according to how their values have shifted.

Change the differentials to partially reflect the issues as described above

This option would see adjustment to the differentials resulting in a higher proportion of the general rate paid for by the primary sector. There are numerous options that the Council could choose. Other property categories (mainly commercial/industrial) would pay less overall.

Preferred Option

Option 3 is the Council’s preferred option to help address the imbalance that has been created over the last while. The Council believes that the following option is fair and is proposing to introduce it over a three year period.The table below shows how the differential factors are proposed to change:

 Current differential factorProposed differential factor
(at the end of three years)
Proposed $ change due to differential changes (at the end of three years)
Commercial/Industrial/Accommodation4.2124.0-707,159
Primary0.3580.4+845,966
Residential/Community Services11-127,295
Multi-unit2.0502-11,512

The effect of this change will mean primary category properties will pay a higher overall proportion of the general rate pie. Remaining categories will pay a lower proportion of the pie. The individual property effect will vary depending on the category a property belongs to and how its land value has changed with the 2014 revaluation.

Supporting Documents and Links

Quotable Value presentation on 2014 Timaru District revaluation

Council report on Differentials (Policy and Development Committee February 2015)