Submission on Wellington City Council Rating Policies Review

Overview

The Wellington Chamber of Commerce and Business Central (the Chamber) is a business membership association, representing over 1,000 organisations in Wellington and a further 2,600 businesses throughout Central New Zealand (Gisborne to Taranaki and down to Nelson). We have represented business in the Wellington Region for over 165 years and work with a range of organisations to help them network, share ideas and experiences, learn and develop, represent their interests to local and national government, provide Employment Relations support, and help with export and growth opportunities.

The Chamber works closely with the Wellington City Council (WCC) to ensure Wellington’s business community is consulted on the changes that impact them. We seek to play a constructive role in the future development of our city and would like to thank the Council for their continued engagement with us and the wider business community through a range of initiatives, such as the quarterly business huis and the Pōneke Promise forum, as well as the Long-term Plan review process. We look forward to further opportunities to work together.

Our Response

The Chamber recognises that the Council’s budget is increasingly under pressure and appreciates that difficult decisions will need to be made over the months ahead to ensure the stability of the city’s long-term financial position. We welcome the Council’s decision to carry out a review of ratings policy, looking in detail athow the ‘ratings pie’ is comprised. This is an important exercise: a broad ranging strategic review has not been conducted in recent decades. We agree with the Council that the rating policies review provides an opportunity to think about the future direction of Wellington and the economic opportunities, and risks, that lie ahead.

We are committed to being a constructive partner as the Council grapples with this complex issue. We believe this review comes at a critical time for local government across Aotearoa New Zealand more broadly: it’s unclear whether conventional models for financing local government activities are sustainable. This is a message for central government as well.

This review presents a real opportunity for Wellington to lead this discussion, and we urge the Council to engage closely with the new government as it determines its priorities over the weeks ahead.

Executive Summary

Earlier this year, Council confirmed that rates would be increased by 12.3%. While we understood the rationale, we did not agree that such an increase, which far exceeded annual inflation, was the right approach at a time when households and businesses are already confronted by rising costs. We made these points strongly at the time and maintain our position on this issue.

However, we recognise that this rating policies review is not about the overall ‘size of the pie’, but rather about how the ‘pie’ is constituted, and it’s on that basis that we have formulated this response.

At the outset, we welcome the Council’s proposal to reduce the commercial differential from 3.7 to 3.25 from July next year. This reduction is a welcome step that will help to ease the burden on Wellington businesses when wider commercial pressures are considerable. The reduction is a message for business that the Council is listening to them, even in tight financial conditions.

The Chamber also welcomes the principles behind the Council’s proposals to introduce a new vacant land differential of 4.5:1 – we hope this will drive improvements in our cityscape, though the policy will need to be clearly and carefully defined to limit unintended consequences.

Densification is the foundation of sustainable and affordable cities. It evidences their growth trajectory. Dense developments should be centred around liveable precincts, as people can live where they work. Our members are eager for the Council to better incentivise densification, working with developers to understand what’s required to deliver progress. The reality is that dense housing requires well integrated social services, recreation areas and transport support to succeed.

We have long argued that the differential is not an appropriate mechanism to calculate commercial rates. In the longer-term, we hope to see the differential reduced and ultimately abolished; however, getting to the point where Council is able to make this shift will require a significant amount of additional work and analysis. We support the Council’s commitment to continue to explore issues surrounding the rating base following the implementation of the 2024/2034 Long-term Plan – we look forward to further engagement on this issue in future.

In addition to this consultation response, the Chamber is pleased to have commissioned Wellington-based economic consultants, Sense Partners, to carry out independent analysis into, and modelling of, the impact of commercial rates on the local economy. A short report – Tax and the city – a closer look at the business differential and land taxation – has been produced and attached as an annex. We encourage Council to review this report alongside our response. We hope the Council, the Chamber and the wider business community will be able to work closely together on this issue over the months ahead.

In summary, the report finds that:

1. There is an opportunity for the city to flourish by improving revenue raising settings.
2. Wellington’s high business differential is likely to be reducing employment growth, crimping powerful agglomeration effects that would lift productivity and wages for workers.
3. The rating base is too narrow, more work should be done to expand funding and financing services. In addition, user charging, such as volumetric water and waste-water, should be more widely implemented to recoup the cost of service provision.
4. While taxing land rather than capital may offer some efficiencies, any shift brings distinct political difficulties and is by no means a silver bullet.
5. A simple and predictable tax system is required to support firms and households make better long-term decisions.

Please note, the contents of this report should not be viewed as preferred policy of the Chamber – rather the report is intended as a discussion document to support the development of the debate around local authority finances over the months and years ahead.

Lost opportunities: the impact of high rates

Analysis by Sense Partners demonstrates that local taxes (rates in this case) impact the places where firms choose to locate. As a consequence, the models suggest that decreasing the business differential by 1% would boost employment by a little under than 0.1%; decreasing the differential by 50% would increase employment by about 4%. But it’s not only the level of employment that’s impacted – a lower differential would support productivity improvements to deliver an additional $185.83 of income for incumbent workers each year. Overall, a lower differential could induce a $29.3 million increase in city-wide GDP for Wellington.

A new model?

To be clear, the Chamber is not advocating for expanding the revenue take, but any system change should include additional methods of raising revenue to reduce the cost of raising revenue through any single lever. The Sense Partners report sets out three additional revenue raising measures to be considered:

1. Expanding the set of user charges to include volumetric water and waste-water charges to recover the cost of providing services according to the beneficiary pays principle. Council is already moving in this direction. The Chamber believes that a principle of better targeting end users of specific benefits makes sense.
2. Better aligning development contributions to the context and cost of services. This might mean high development contributions in some situations and lower development contributions for other developments.
3. Increasing the use of special purpose vehicles for specific infrastructure projects could also broaden revenue. Investment in the Moa Point sludge minimisation facility uses this funding method and might be used for further infrastructure investments.

First implementing these options would reduce the extent of heavy lifting the rating base is required to achieve and better align who pays to beneficiaries. Any discussion of a shift from capital to a land value-based system, should be a second order consideration.

Tightening the purse strings

In addition to the review of how rates are composed, and any change in policy that’s decided on as a result, it’s critical that Council takes a hard look at its spending commitments and cuts its cloth accordingly.

The Council must re-examine opportunities for further savings and to take a fresh look at its various assets and how they are performing. For example, the Chamber believes there is a strong case to explore sharing services and some back-office functions with neighbouring councils to bring down costs. In addition, we would encourage the Council to review its stake holding in Wellington Airport to ensure ratepayers are getting value for money.

Council should transition towards the phased amalgamation of back-office functions and public services across Wellington, Porirua, and Hutt Councils over time. This process has already begun in some areas behind the scenes but needs to pick up pace. We urge the Mayor to use the Mayoral Forum to drive this conversation forward. Local authorities overseas have found that sharing services can unlock significant savings – in the UK, it’s estimated that around £200m (c.$400m) is saved annually by local authorities through pooling services.^[1]Councils in Australia have also realised multi-million-dollar savings from sharing services such as IT and procurement.^[2]There are a range of approaches to sharing services, from pooling back-office functions like finance and HR, through to sharing leadership teams across a region. We call on the Council to kick-start a discussion on amalgamation across the Wellington region and explore a range of options that could unlock savings for ratepayers.

We also call on the Council to look closely at existing initiatives and projects to ensure that ratepayers are always getting value for money. For example, we have heard concerns from members that the role of WellingtonNZ, which receives significant Council funding and a slice of the Downtown Levy, is not as clear as it could be. Its mandate and structure are also perceived to be complex and cumbersome. We urge the Council to clarify WellingtonNZ’s mandate by introducing key performance indicators (KPIs) based on economic growth and business success, and to consider making the funding the agency receives contingent on performance against these metrics. We would welcome the opportunity to work closely with Council and WellingtonNZ to better communicate the role and activities of the economic development agency to businesses in the city.

The Chamber would also like to encourage the Council to again examine its ownership stake in Wellington Airport. The Chamber would welcome an assessment from the Council of the return it receives from its 34% holding in Wellington International Airport and whether this delivers value for money for ratepayers. The Chamber appreciates that this topic was examined by the Council in 2021 but in the context of ever-increasing rates and rising costs to maintain and enhance our city’s infrastructure, we believe it’s now time for the city to seriously consider whether disposal of this asset would represent better value for ratepayers versus the alternative of raising funds by taking on more debt.

Finally, debt at WCC is a major concern for the Chamber – the scope of WCC’s planned capital programme must be scaled back as a result. This will require councillors and the executive to make difficult decisions. With borrowing forecast to reach $1.57bn by the end of the year – and further pressure added by recent cost blow-outs in relation to the Town Hall, the Central Library, the citywide network of cycleways and the sewage sludge plant – we encourage the Council to set out a clear plan to keep debt below the self-imposed cap in the medium-term, and falling in the longer-term, so that business owners and residents aren’t saddled with high debt servicing costs well into the future.

Demonstrating value for money

The connection between rates payments and adequate services for residents and businesses must be strengthened. Currently, business feels the year-on-year rates increases are out of step with actual Council service delivery and performance.

Our members in the city centre remain concerned around how the Downtown Levy portion of their rates bill is being spent. We have repeatedly asked for specific information about these funds and have never had a fulsome response.

When the levy was initially introduced, the resulting rates revenue was administered separately from other Council activities, and it was essentially a fund paid for by retailers for the promotion of retail. Over the years however, this seems to have evolved, with the 2022/23 Annual Plan specifying that the Downtown Targeted Rate is “set to pay for tourism promotion”, incorporating the following activities:

• 50 percent of the cost of the Wellington Regional Economic Development Agency (WREDA) and Venues activities
• 40 percent of the cost of the Wellington Convention Centre activity
• 70 percent of the visitor attractions activity
• 25 percent of galleries and museums activity

As a result, businesses subject to the Downtown Targeted Rate, which raised over $14m of revenue in 2022/23, don’t believe current activities paid for by the levy match the initial rationale. At the same time, at the end of the Covid period, city centre retailers are facing particularly challenging conditions as workers and shoppers increasingly opt to spend their time, and money, in the suburbs. We therefore urge the Council to re-examine the Downtown Levy as part of this review and commit to working with downtown retailers and other businesses to ensure the funds are spent in ways which support city centre business growth and development.

It is not just businesses in the downtown area that are subjected to additional targeted rates. Through the Business Improvement Districts (BIDs) scheme, businesses in Miramar, Khandallah, Kilbirnie, Tawa and Karori are all subject to additional targeted rates. Taken together, the revenue collected through these schemes equated to $413,740 in 2022/23. While this may be a fraction of the Downtown Levy’s receipts, it is still a considerable burden on businesses, many of which are SMEs, and we believe transparency is required around how these funds are spent and how these levies are expected to develop in the longer term. We are concerned that there is limited data available on the performance of these schemes and the nature of the projects funded in each area.

The Chamber is not opposed to the BIDs scheme per se, but we do believe that greater scrutiny of these schemes, and how they spend public money, is required to ensure value for money is delivered for ratepayers. In relation to the Johnsonville BID proposal outlined for establishment in this year’s annual plan for example, very limited information was made available around the parameters of the scheme. For example, the map of the proposed BID area was not made available online, and so it was difficult for businesses in Johnsonville to know whether they will be subject to additional rates in future.

Lastly, projects for change in the city such as the removal of carparks need to be understood in terms of their impact on Council revenue, and the public should be very aware of this. The revenue lost from parking fees will be recouped through rates as it must be, and the costs to them should be transparent to ratepayers.

Conclusion

Thank you for taking the time to review our response to the Wellington City Council Rating Policies Review.

Businesses in our Capital understand that the much-needed programme of upgrades and improvements scheduled by the Council over the years ahead will be costly and time-consuming. However, and as we set out in the Wellington Report last year, the Council needs to provide greater certainty around future costs; this will enable businesses to better prepare and plan. We welcome the opportunity that this review presents to shift Wellington’s ratings policy to a longer-term footing. A clear plan from Council which sets a long-term approach to rate-setting is required.

We urge the Council to consider our recommendations and believe that doing so would help to unlock economic growth and opportunities for Wellington, identify significant further savings and enable the Council to adopt a less aggressive approach to annual rate setting moving forwards.

In summary, the Chamber urges the Council to:

1. Set out a long-term plan for ratings policy that sees the commercial differential falling over time and ultimately abolished. Getting to this point will require a significant amount of additional work and analysis.
2. Explore additional methods of raising revenue to reduce the cost of raising revenue through any single lever. Additional measures could include: expanding the set of user charges to include volumetric water and waste-water charges; better aligning development contributions to the context and cost of services; increasing the use of special purpose vehicles for specific infrastructure projects.
3. Strengthen the connection between commercial rates payment and the provision of services and demonstrate to business that WCC delivers value for money.
4. Bring council expenditure under control by:
   1. exploring further opportunities for amalgamation of back-office functions and public services across Wellington, Porirua and Hutt Councils.
   2. reviewing the Council’s ownership of key assets (such as the airport) and providing an assessment of the value such shareholdings deliver for ratepayers.
   3. setting out a clear plan for reducing Council debt to below the Council-imposed cap of 225% of annual operating income.

We welcome any questions from the Council regarding is submission and the associated report. We look forward to continuing to work together to make Wellington an even better place to do business.

Simon Arcus
Chief Executive
Wellington Chamber of Commerce