Department of the Environment, Heritage & Local Government

The Challenge of Resourcing Local Government
As already discussed, local government has expanded its remit into new and expanded areas of activity in recent years. The aim is to strengthen the sector further to tackle the challenges ahead. However, local government cannot deliver to its potential unless it has the financial means to do so.

As with all parts of the Irish economy, local government has seen significant growth in terms of resources and expenditure. We have moved a long way from the debt-ridden and contracting local government service of the 1980s. Local government expenditure has grown from €3 billion per annum to €10 billion per annum over the past 10 years alone. While this is impressive there are significant financial challenges facing the sector in the coming years, which threaten the ability of local government to deliver a service to the level that is required. These challenges include:

Providing services to a growing population, which is more diverse and mobile than ever before;
Implementation of the National Development Plan up to 2013;
Improved environmental performance (in areas such as waste management, ground water protection and habitat maintenance);
The significant additional costs of operating new water and waste water treatment plants, as well as the cost of greater environmental compliance costs for all existing plants; and,
Compliance with other codes and policies, including health and safety, equality and disability requirements, employment protection and entitlement rights, as well as many important “process” requirements in areas such as financial accountability, procurement, official languages etc.

Traditionally, local authority management has had to balance and prioritise available resources, developmental objectives and environmental objectives. However, the need to ensure a more sustainable approach to all local authority activities, coupled with stricter legal obligations, means that environmental compliance is now a sine qua non rather than just another factor in the deliberative equation. This imposes an unavoidable financial cost which must be met.

Local authority financial planning is not assisted by the present arrangements for Government support for current expenditure. While there is a legal minimum threshold that the Exchequer contribution to the Local Government Fund must meet (see below), the actual contribution, and the allocations to individual local authorities, are only made known towards the end of each financial year – at the same time that councils are finalising their budgets. Changes to the motortax system, introduced in Budget 2008 to encourage more environmentally friendly vehicle choice, also bring added uncertainty to the motortax contribution to the local government fund for future years.

Local authorities have benefited from the certainties brought about through the multi-annual capital programmes, as well as the national pay agreements. Greater certainty on central current funding would also be beneficial.

In addition to financial constraints, local government faces a challenge in delivering required service enhancements due to constraints on staffing numbers which are subject to Government policy on public sector employment levels. The overall limitation on core staffing in the local government sector is 33,350 (whole time equivalent). The overall number has remained at this level for a number of years, despite increased demands for services due to economic and demographic developments, as well as the demands in environmental services mentioned above.

Part of the response to the future challenges lies undoubtedly in efficiency gains. The more than trebling in local authority expenditure over 10 years with only a small rise in staffing numbers shows what can be achieved. Towards 2016 seeks to develop staffing capacity and organisational flexibility. New ways of working, the ending of outdated practices, flexible attendance, shared services, public private partnerships, and performance management and recruitment policies which match the needs of local authorities must all be pursued to ensure efficiency gains.

However, efficiencies alone will not meet all of the challenges. This chapter discusses the issues around Irish local government finance, the systems of local taxation used elsewhere and the options for further consideration, particularly in the context of the newly established Commission on Taxation.

Local Government Sources of Income
Local government spent around €10.5 billion in 2007, approximately half of which is current spending and half capital. Current expenditure is recurring spending, e.g. environmental protection, operation of water services, salaries. Capital expenditure includes expenditure on assets such as libraries, road projects, new water treatment plants etc. See tables below:

Local authorities generate about 58% of their current revenues from rates on businesses and from goods and services. The remaining 42% of income comes from central government, which is divided almost evenly between general-purpose grants from the Local Government Fund and specific grants and subsidies.

The majority of local authority capital expenditure is sourced from a range of Government Departments. However, local authorities have generated significant capital income in recent years from the growth in construction and the reform of the development contribution system. The Planning and Development Act 2000 allows local authorities to require developers to part fund the provision of infrastructure. The development contribution mechanisms have come to constitute a significant income stream with €2.1 billion having been collected under the last National Development Plan (2000 - 2006) and a further €2.1 billion projected to be collected during the lifetime of the current NDP (2007-2013). This revenue is being used to fund a range of key public infrastructure, such as roads, water and sewerage infrastructure, which are necessary for all housing and commerical development to proceed, and for the purposes of specific community gain such as playgrounds, recreational areas, parks etc.

Funding is also being made available for specific rail projects under the Transport 21 investment programme. Thirteen specific contribution schemes have either been adopted or are under negotiation. It is estimated that the revenue to be collected over the lifetime of these schemes, typically 20 to 30 years, will be in excess of €2 billion.

The Local Government Fund, the most important element of central government support for local authority current expenditure, is funded from the proceeds of motortax (projected at some €1,080m for 2008), supplemented by an Exchequer contribution (€545m for 2008). In total, the Fund rose from €797m in 1999 to €1.6 billion in 2008. With the significant increases in funding to local authorities through the Fund in recent years, local authorities have been encouraged to keep rate increases as low as possible. In 2007, the average Annual Rate on Valuation increase over 2006 was 3.6%, down from an average of 4.4% in 2006 and less than the 2007 prevailing inflation rate of 5%. Notably, Limerick City Council reduced its rates by a further 0.2% in 2008 (having reduced them by 1% in 2007 and 0.5% in 2006). Economic growth has contributed to greater buoyancy in the yield from commercial rates. This has also assisted councils seeking to contain rate increases and has enhanced local authorities’ overall financial position.

However, local authorities are under considerable strain in dealing with the increasing costs of environmental protection in areas such as waste management, drinking water and waste water treatment, upgrading and maintaining physical infrastructure (such as local roads which are carrying more and heavier traffic) and servicing the needs of a growing population - running at 2% growth per annum – for example, in providing and staffing new libraries etc.

Reviews of Local Government Funding
The funding of local government has been subject to periodic review. In recent decades these have included:

The Financing of Local Authorities, prepared by the National Economic and Social Council (NESC) in 1985. It concluded that a local property tax (supported by a system of grants from central government) would improve local accountability, would be administratively feasible and would widen the national tax base.
In the same year the Commission on Taxation argued the importance of classifying the services provided by local authorities as either local or national, with local services financed from local taxation.³² Central government support should be provided to account for local differences in either needs or resources. It also recommended a local property tax.
Financing of Local Government in Ireland, a report prepared by KPMG Management Consulting for Government in 1996. It noted that Ireland had a “highly centralised system of financing of local government” and concluded that:

While the major conclusions of these reports have not been adopted, local government funding has been affected by a number of significant Government decisions over the past twenty years or so, including the introduction of service charges in the early eighties, the abolition of water charges for domestic users in 1997, the establishment of the Local Government Fund in 1999 and the revamp of the development contribution system under the Planning and Development Act 2000.

The Indecon Report
The most recent review of local government finance was carried out by Indecon Consultants – the Indecon Review of Local Government Financing of March 2006.

Indecon reported that local government in Ireland is characterised by a disconnect between money spent locally and money raised locally, with a high degree of centralisation in funding provision which results in a relatively low level of local fiscal autonomy, as compared to other international models.

The report noted that total current expenditure increased by 114.6% over the period 1996-2004 across all key programmes, reflecting the demands of a fast growing economy, a rising population and the implications of supporting a large scale national development infrastructure investment plan. The review predicted significant increases in nominal expenditure requirements in the period to 2010 and recommended that the funding gap would need to be addressed by a combination of efficiencies; increases in charges, commercial rates, or motor taxation; new sources of local revenues or increases in exchequer funds; or a reduction in services.

More local sources of funding;
Economic charging for local authority services generally;
A contribution from commercial properties not currently covered by commercial rates;
That local authorities should pursue alternative mechanisms for the cost effective delivery of services e.g. contracting-out and shared services provision;
The development of a costing system, the enhancement of audit committees, the expansion of financial reporting; and,
The extension of water charges and the introduction of a new tax on non-principal private residences.

Indecon also made recommendations for expenditure rationalisation and efficiencies in local authorities, and proposed incentives to drive further efficiencies.

In response to the report the Government committed to the pursuit of further efficiencies in local government. Government did not support the recommendations to introduce domestic water charges or a new tax on non-principal private residences.

In this context it was noted that there has been a considerable degree of natural buoyancy in the current revenue sources of local authorities, e.g. the valuation base of local authorities has been growing continually as a result of national economic growth, and revenue from motor taxation increased considerably ahead of increases in the rates of this taxation due to the growth of the national vehicle fleet.

Arising from the Indecon Report, the Department of the Environment, Heritage and Local Government undertook to examine the scope for greater sharing of services between authorities and for contracting-out of services by local authorities. It undertook to build on the new financial management systems and service indicators in local authorities by developing a standard costing system for the sector. The Department also committed to updating and improving the financial oversight of local authorities and to introduce reforms to the valuation and motortax systems to improve revenue-raising performance.

Submissions from the Public and Consideration by the Consultative Committee
While not specifically referred to in the Programme for Government, local government reform cannot be considered without at least discussing the issue of finance.

Many of the submissions from the public raised the issue. Many submissions called for greater local authority freedom to raise their own funding. There also were calls for a national debate or all-party agreement on the issue. A number of specific proposals were also put forward, including extending rates to all government buildings, a tax on hotel bedrooms etc. Many of these ideas have been put forward in the past. Others made calls for greater central government support for local authorities.

The Consultative Committee discussions on local government finance mirrored that of many previous considerations of the issue. It is recognised that strong local government ideally requires autonomy in raising local finance and there was consensus on the need to ensure that local government was adequately resourced. Yet it was also recognised that introducing new taxes or charges at local level creates huge resistance.

As noted earlier in this Paper, there is also a conflict between the theory of local decision-making and priority setting and the expectation from the public that local charges and local service delivery should be consistent or uniform throughout the State.

It was noted that, even if national taxes could be reduced to compensate for substitute local taxes/charges, such changes cannot be completely neutral. The focus would obviously be on the potential individual losers rather than on any benefits for the greater - anonymous - community.

Suggestions that did arise included new charges, or assigned national taxes, full implementation of the Indecon report, greater, or lesser, equalisation between local authorities and adequate provision from Government for services demanded of local authorities etc.

While all those issues are extremely challenging, there was a recognition that positive gains could be obtained from better use of technology, the shared services agenda and transparency in costing (now being rolled out).

It was also noted that there were immediate pressures coming on local government finances, including compliance costs with E.U. environmental legislation, health and safety compliance, operating costs of new water services infrastructure, public lighting and costs where local authorities cannot recoup the costs of service delivery e.g. the planning service. The need for a transparent equalisation process for local government financing was also mentioned.

A suggestion was put forward for a specific national forum on local government finance, which could input into the forthcoming Commission on Taxation.

Options for Change and The Commission on Taxation
In accordance with the Programme for Government, the Tánaiste and Minister for Finance announced the establishment of a new Commission on Taxation on 14 February, 2008. One of its tasks will be to consider and make recommendations on options for the future financing of local government. The Commission will inevitably involve a lengthy process of analysis and consideration and local government finance is but one element of this. The consideration of the issues in this Paper will provide an opportunity to open a debate on local government funding which should inform the work of the Commission.

Some of the major issues which should be considered in the debate on local government funding include the following:

Advocates of local government see merit in a local taxation system; it gives local government greater freedom to act and local representatives a greater sense of responsibility. Yet there is no sense that the general public would wish to see greater local taxation.
Any proposals on local government taxation must overcome a variety of concerns, for example many people will pay large once-off transaction taxes on property (through stamp duty), with reluctance perhaps, but would strongly oppose an annual property tax – with payments spread over many years -which raised similar levels of revenue.

The most common form of local government taxation in other jurisdictions in Europe and North America is some form of local property tax (and occasionally sales tax). The rates charged by local authorities in Ireland on commercial properties is a form of property tax. Domestic rates were abolished in 1977 in Ireland. While this might now be viewed to have been a very retrograde step for local authorities, it should be recalled that the system which was in operation up to 1977 was widely discredited as the basis for calculating rates had not been updated for many years and did not reflect then current valuations. The Supreme Court subsequently found that the system of agricultural rates could not be stood over for similar reasons. There has been little appetite to re-introduce domestic rates and there was significant resistance to centrally imposed property taxes introduced in the 1980s, although these had very limited impact.
Efforts to radically change the rates base of local tax to a Poll Tax in the U.K. during the 1980s, as an alternative form of local taxation, caused huge civil unrest. That experience has also coloured perceptions in Ireland.

There are already a range of mechanisms in place under the Planning and Development Act 2000 to secure a planning gain for local authorities and communities from decisions taken by planning authorities, including development levy contributions and the provision of land, sites, houses (or payment in lieu) at below market value for social and affordable housing. The Strategic Infrastructure Act 2006 also provides that conditions regarding community facilities can be attached to consent for strategic infrastructure granted under the Act.
In the context of the future funding of local government, consideration could be given to extending these betterment concepts. For example, other OECD countries, Denmark being a notable example, levy a “betterment” tax on agricultural lands that are zoned for development purposes – such a tax is additional to Capital Gains Tax and development levies.

There is tension between greater local taxation, giving individual local authorities more flexibility to raise resources, and national objectives of equity and balanced regional development. If national taxes are (partially) displaced by local taxes it is likely that the richer areas of the State will benefit more. Ireland, in common with most European States, already uses a system of equalisation to direct an additional proportion of national resources to areas in most need. This is part of the allocation process under the Local Government Fund. However, if equalisation were to fully compensate authorities for weaker local income (either due to lower local taxes or a weaker tax base), then the question would arise as to the efficacy of introducing additional local taxation systems in the first place.

There is a conflict between the notions that the taxation system should pay for certain essential public services delivered by local authorities in Ireland and the principle of the polluter pays. The polluter pays principle recognises that much human activity has an environmental cost – which if paid for in a visible way encourages corrective behaviour.
The pay-by-use waste system encourages the recycling of waste and the reduction of waste being sent to landfill. Waste charges were, however, a bone of contention in some areas when first introduced with opponents arguing that waste collection should have been a “free” service paid for through general taxation.
Government policy to date has been to prohibit the charging for water to domestic homes on the basis that this is a core public service. However, this policy does not give the price signal to homeowners that water is a resource which is costly to treat for drinking and even more costly to treat as waste water before it can be released back into the environment. This has become much more costly in recent years as Ireland puts in place the expensive infrastructure required to ensure discharge quality standards which are now required. Ireland is unusual in Europe for not charging the domestic user for these costs. The absence of a “conservation” mindset in relation to water actually costs the taxpayer significantly more, as additional capacity has to be built, maintained and operated, to provide the additional drinking water and waste water treatment.
It should be noted that the Independent Water Review Panel in Northern Ireland came out against the introduction of a domestic metering system, primarily due to the extra cost involved in installation and monitoring (report issued October, 2007). However, the panel also supported full cost recovery for water services and recommended that the domestic charge should be applied in a transparent manner through the existing domestic rates system.³³
There are other aspects of the local authority system, such as the planning service, which have potential to recover more of their costs. This particular issue is currently being considered by the Department. There is a general need for maximum clarity on the discretion of local authorities to be able to raise appropriate charges to cover costs of service provision and compliance with environmental and other regulations.

Central Funding for Local Authorities
Regardless of any changes to local funding mechanisms, there will always be a need for an element of financial support for local authorities from central government, in particular to assist those areas which have a weaker economic base. In the absence of greater powers to raise revenue locally, it is all the more important that the structures are in place to ensure that sufficient resources are provided to local authorities.

The possibility of introducing a multi-annual funding mechanism for current funding could be considered. Multi-annual capital funding has assisted public authorities in recent years to plan ahead. Such an approach could also bring benefits in relation to local authority financial planning on current expenditure.

Greater clarity to local government could also be developed in the context of the Estimates process. A factual tabular statement, bringing together all sources of local government funding provided by Government Departments, would be useful to get an overview of central funding sources for local government activity

The outputs from the financial costing system now being rolled out will help deliver better information in relation to local authority needs, as well as pointing to areas where efficiencies can be achieved. This system will also assist in supporting a better informed debate on the level of central government support needed for local government. The question of how motortax collection and direct Exchequer support is best applied to fund local government may also need to be considered.

In the immediate term, there are also issues around the current needs and resources model of funding which helps inform the allocations under the Local Government Fund. It is nearly a decade since the model was developed and financial systems and patterns of expenditure have changed considerably since then. There is a need to update the model and to introduce greater transparency regarding how it works.

The Commission on Taxation
As noted above, the Commission on Taxation which the Government has established will “consider options for the future financing of local government.” The main principles of local government funding are discussed above, while the Indecon Report has provided an up to date analysis of the current funding. This analysis should be part of the debate over the next few years.

However, the establishment of the Commission should not mean that there are no further developments in policy and/or legislative terms in relation to local government in advance of the Commission finalising its work, to build on the initiatives mentioned above.