It may normally be the Liberals who are the party of smaller government, but it took a Labor government in Victoria to plough ahead with a regime of rate capping for local councils. Premier Daniel Andrews first announced the policy as opposition leader 20 months ago. Nine months into his premiership, it is now starting to take shape, and the policy will be fully operational for the 2016-17 council budgets, which will collect about $5 billion in rates and charges from Victorians. Victoria’s Essential Services Commission (ESC) will run the regime, which will announce a cap each December based on Treasury’s projected CPI forecasts, along with some consideration of the wage price index for local government, and a very modest efficiency dividend starting at just 0.05%. If the 2016-17 cap is set at 3%, councils that wish to increase their average rates bill by more than 3% will have to apply for a variation by March 2016 at the latest, and the ESC will deliver a response within eight weeks so budgets can be formally adopted before June 30. Unlike with other forms of regulation, the ESC is recommending there will be no halfway houses. It will either agree to the council proposal for a specific above-cap increase or reject it, so it won’t make sense to lodge an ambit claim. New South Wales introduced rate capping in 1979, and for the first 30 years it was highly politicised because the local government minister was the decision-maker. Rate rises remained pretty modest over that period, and an enormous infrastructure backlog built up as some smaller NSW councils became financially unsustainable. Once the Independent Pricing and Regulatory Tribunal (IPART) took over as the decision-maker in the post-Carr Labor days, it became less politically fraught to ask for an above-CPI rate rise, and IPART has been quite happy to approve multi-year increases where a sound case has been made. Victorian councillors, especially in the rural areas, have been indignant about rate capping, seeing it as a centralist-interventionist power grab by resource-rich city folk in Spring Street. So it was a brave ESC commissioner Ron Ben-David who fronted an audience of 50 local government figures for more than two hours at the Victorian Local Government Association offices in Carlton yesterday. Ben-David was peppered with questions and statements from 19 different inquisitors during the marathon Q&A session. They came from as far as Mildura and Wodonga to get stuck in, but at the end of it all, he was still standing and suffered no knockout blows. The commissioner patiently explained that that the system would be simple with no new reporting framework or excessive red tape for councils, but plenty of useful information and monitoring coming out of the ESC. Rural councillors quietly nodded when he pointed out that even if he approved a 10% rate rise, the community wouldn’t cop it and couldn’t afford it. Community support for the proposed “variation” is going to be a be a big factor, and Ben-David said he would look “very favourably” at reports such as the City of Melbourne People’s Panel, in which 43 randomly selected ratepayers endorsed a 30% real increase in rates over 10 years after a forensic six-day citizen jury process. Victorian Local Government Minister Natalie Hutchins made a strong speech in Parliament this week in which she repeated her mantra about average rates rising by 6% compound for the past 15 years, making them the second-highest household bill after mortgage payments. It’s hard to argue with this fact, especially when you consider that Victorian councils have the strongest balance sheets in Australia, with total debts below $1 billion. Victorian local government infrastructure is in better shape than all other states, and there is also plenty of surplus land that could be offloaded from those lazy balance sheets if push came to shove. Similarly, there are big savings to be had rolling out sector-wide procurement and shared services. Hutchins also regularly criticises the high salaries of council CEOs, while failing to mention the elephant in the room, which is the generous enterprise agreements for council staff. Most councils spend the majority of their rates revenue on staff, so 15 years of above-CPI wage rises have soaked up most of the revenue raised from rocketing rates since the defeat of the Kennett government in 1999. With wage growth stagnating in the broader economy, rate capping will presumably lead to greater discipline in future negotiations with local government unions. This might explain why the Australian Services Unions made this long and cranky submission to the ESC before its draft report was released earlier this month. Submissions on that draft report are due by August 28 before we get the final ESC report in October and then legislation before Christmas so that the regime can start early in 2016. Ben-David strongly hinted yesterday that he would change the draft recommendation to slowly roll out multi-year variation approvals. Don’t be surprised if he sticks with 2016-17 requests only and if very few councils bother to apply heading into council elections in October next year. However, given the four-year election cycle and the frantic work councils have to do in their first eight months working up their four-year council plan, logic would suggest councils will be able to seek a four-year variation starting in the 2017-18 budget, rather than just two years as currently proposed. If re-elected to the City of Melbourne, I’d be open to applying for compounding 5% rate rises over four years on the back of the People’s Panel recommendation. If granted, you couldn’t go above 5% in any year, but you could choose to stay below if circumstances warranted. It’s a bit like companies that seek to refresh their shareholder approval to issue 15% of their stock by way of placement in any 12-month period. Usually they don’t issue the capital, but boards like the flexibility. Given that the state government is intervening and councils primarily rely on rates to raise additional capital, third-party approval for revenue raising should be sought, even if not absolutely required or implemented. *Stephen Mayne is chair of the Finance and Governance Committee at the City of Melbourne and was not paid for this item.