Five critical challenges and the opportunity for local government

The central government has recently announced it is considering[1] streamlining local government in New Zealand, while continuing to reiterate its “back to basics” approach. At the same time, our conversations with elected members and senior staff consistently reveal a sector grappling with unprecedented challenges – pressures that demand a re-evaluation of local government's role, responsibilities and financial models. Yet, within this crucible of complexity lies a great opportunity for revitalisation and focused purpose.

There are at least five interconnected challenges facing the sector, but as we point out, they also present an immense opportunity.

While the broader New Zealand economy shows signs of moderating inflation post-lockdowns, the financial burden on local councils continues. The strong rises in council rates are a direct consequence of the surge in cost of delivering essential services and maintaining infrastructure.

The need to balance budgets while confronting these price escalations is often also confronted by electoral promises of lower rate increases, and discussion on potential rates capping.

Across local government’s extensive holdings – from water networks to transport and community facilities – a monumental volume of replacement, renewal and upgrade work is urgently required. New Zealand's existing funding model, heavily reliant on property rates, is proving insufficient to meet the costs associated with maintaining and expanding infrastructure to support a growing population and economic development.

The eye-watering price tag of closing the gap has led to a stark realisation: current funding mechanisms are inadequate even for maintaining existing assets, let alone any expansion to accommodate growth. The consequences are evident in a growing to-do list of renewal and upgrade works, and a shortage of housing capacity underpinned by insufficient infrastructure.

The increasing frequency and intensity of extreme weather events – vividly demonstrated by Cyclone Gabrielle and the Auckland Anniversary floods – directly endanger council infrastructure. These risks require substantial investment in adaptation and resilience measures and confronting the complex, often politically charged, prospect of planned retreat from highly vulnerable areas.

Climate-related expenditures are often unbudgeted, imposing immense further pressure on already constrained council finances.

Successive central governments have introduced legislative requirements and expanded responsibilities for local councils, often without commensurate funding in a nation that already has one of the most centralised tax systems in the OECD. Examples include the plethora of National Policy Statements in such areas as freshwater management, indigenous biodiversity, and urban development. Councils are compelled to absorb these costs, diverting resources from other essential services or placing additional strain on ratepayer contributions.

The current central government is reviewing many of these guidance documents in light of a broader reform of the Resource Management Act but at this stage a heavy administrative burden remains on local government.

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Furthermore, many councils, driven by an admirable intent to address pressing local issues, have ventured into domains traditionally within central government's remit, such as homelessness or affordable housing. We understand in some instances, Government agencies in seeking solutions have encouraged local council involvement. However, these ventures often lack the funding, mandate, or specialised capability to deliver and potentially duplicate central government's role.

Beyond these practical challenges lies a more existential question. Ongoing reforms, including in water services and resource management; the current government’s commitments to rate capping and a “back to basics” view of local government; deliberations on streamlining local government; and varying views of the role of local government across the political spectrum and electoral cycle, all demand greater role clarity.

Traditional definitions of local government’s role, such as regional councils functioning as environmental regulators and local councils primarily as delivery agencies, may no longer apply. Clarifying this core purpose is crucial for effective governance and public trust.

The cumulative effect of these financial constraints, the infrastructure deficit, the growing resilience gap, the rise in central government requirements, and uncertainty regarding local government’s future, present a significant and compelling opportunity.

Local government can no longer sustain the full breadth and service levels of its traditional activities. It has little headroom to assume new roles without giving other roles up. Historically, services and facilities have often been maintained due to inertia – "we've always done that" – rather than a rigorous assessment of whether "our community genuinely needs that."

The challenging realities of today’s operating environment open the door for frank conversations with communities and central government on the role of local government. Some councils are already pioneering these discussions, presenting ratepayers with a smorgasbord of services and their associated costs during consultation processes, enabling more informed feedback and decisions on service offerings and levels.

There are basic questions that all councils should consider as they re-examine the full range of services they offer. These five key questions focus on three things – mandate, funding, and capability.

1. Can we specifically demonstrate how this service aligns with and actively contributes to the stated objectives of the Council’s overarching strategic documents? If not, exit.
2. Can this service be delivered by the private sector? If demonstrably so elsewhere in New Zealand, a strong case exists for local government to exit direct provision.
3. Has this service historically been the domain of central government? If so, its provision by local government without explicit mandate and adequate funding points to an exit.
4. Would a user-pays fee model be more appropriate for this service than general rates funding? If so, this suggests a potential for delivery by the private sector or user-fees.
5. Does the implied cost per user per year, the overall usage, or the revenue derived from a community facility (probably in that order) justify its renewal or continued investment? If not, exit.

This list is just a start. Triaging through these basic questions, the residual list of essential services may still exceed the funding available. This necessitates a more detailed process of prioritising among critical services including identifying more cost-effective ways to deliver services. At that point, elements such as deliverability, cost certainty, and criticality can be systematically assessed to effectively prioritise.

Today’s operating environment, while demanding, offers a unique opportunity for New Zealand's local government to emerge as a more focused, efficient, and resilient sector. By confronting these challenges head-on and embracing a rigorous approach to making hard choices, councils can improve their financial sustainability and better meet community needs.