User charges and subsidies for local government services: towards a framework for determining funding sources

Abstract

During the late 1970s and early 1980s there was a widespread revolt against increasing taxation, both in New Zealand and elsewhere, which forced national and local governments to re-examine the rationale for both financing certain services and for providing them via publicly-owned organisations. One example which was widely publicised at the time was California's Proposition 13, which resulted in city and county governments losing an average of 57% of property tax revenue, their second largest source of revenue (Poole, 1980, p.21).Proposition 13 was enacted by a 2 to 1 margin in June 1978. City and county governments lost an average of 57% of property tax revenue as a result. However, the $6.4 billion left in private sector hands in the first year has been stated to have helped lead to the creation of 552,000 new jobs, far more than the 100,000 jobs lost from the public sector, and to have cut California's unemployment record to its lowest level in 15 years. In New Zealand too, concern has been expressed over the increasing level of rates, which has put pressure on local authorities to search for other sources of funding. Local government in New Zealand exists by virtue of statute, its powers bounded by the overarching power of Parliament. However, it is unusual, compared to other government services. It has not only taxing powers and regulatory responsibilities delegated from the centre, but also political responsibilities in that it is governed by politically-elected local councillors who are accountable to the local constituency for their decisions. As a result of the link to central government, the reforms which the New Zealand public sector underwent in the late 1980s have also been extended to the local government level. These reforms are designed to improve the efficiency, accountability, and management performance of local authorities, together with providing greater transparency in their policies and decision-making, particularly in the area of financial management and accountability. As part of these reforms, local authorities have been challenged to rationalise their ownership and operation of certain services. For some services the local equivalent of State-Owned Enterprises - Local Authority Trading Enterprises - have been established, with some being subsequently privatised, particularly in the case of electricity supply. Local authorities are still in the process of examining whether to own and provide services, or to sell the assets and/or contract-out the services.