Autopsy of municipal failure: the case of Central Darling Shire.
Drew, Joseph ; Campbell, Nicole
1. INTRODUCTION
Central Darling Shire is located 970 km from Sydney in far Western
NSW. The Shire covers 5 349 380 hectares, which is about 60 per cent of
the size of Tasmania or over one-fifth of the size of the entire United
Kingdom (Australian Bureau of Statistics (ABS), 2014). The municipality
is responsible for a range of government functions, inclusive of the
maintenance of 1 602 km of road infrastructure, and four aerodromes
which are used by the Royal Flying Doctor Service, State Emergency
Service and Rural Fire Service (Office of Local Government (OLG), 2015).
Yet Central Darling has a comparatively small rating base of just 1 580
properties (1 078 residential, 362 farm and 140 businesses) clustered
around four small towns which are separated by vast distances (the
distances relative to the council chambers in Wilcannia are: Menindee
306 km, White Cliffs 94 km and Ivanhoe 182 km) This disparity between
infrastructure responsibilities and taxation base is exacerbated by
harsh constraints of circumstance: Central Darling has the second lowest
socio-economic rating in the state; Indigeneity of 38.3 per cent and an
unemployment rate of 13.1 per cent. In addition, market failure owing to
remote location and low population density means that Council is often
called upon to provide important, one-off 'placed based'
commercial services to the community (see, for example, Dollery et al.,
2010). In remote regions with a small and declining population base many
services simply aren't a commercially viable proposition. Local
governments are then often faced with a stark choice: accept that
communities will no longer have access to essential services such as
banking and postal facilities, or, intervene and take over the running
of the service at a financial loss. Examples of Central Darling Shire
interventions to address market failure include the operation of the
Wilcannia Post Office (since the previous owners fell into
receivership); the operation of the Westpac banking agency and the
operation of two caravan parks to accommodate tourists.
The combination of environmental constraints, a heavy
infrastructure burden and low taxation base has resulted in the Shire
experiencing acute fiscal distress over a number of years. From at least
January 2011 various official reports cast doubt on the council's
long-term sustainability. On 23 December 2013 the (then) NSW Minister
for Local Government suspended the council and appointed an interim
Administrator pursuant to clause 413E of the Local Government (General)
Regulation 2005, in response to an unprecedented 'real possibility
of the Council running out of cash in the next few months' (OLG,
2014, p. 5). This interim order was extended for an additional three
months in March 2014. In October 2014 the Minister for Local Government
(Paul Toole) commissioned a Public Inquiry which led to Civic Offices
being declared vacant until September 2020.
In a stinging assessment of Councillor's performances the
state government's suspension report assessment says (sic) that
"most--if not all--of the maladies affecting the Council may be
laid squarely at the feet of a lack of leadership and managerial
expertise at both the elected and staff levels of the organisation"
(Bajkowski, 2014). However, from the outset the mayor and councillors of
Central Darling sought to highlight the role of insufficient
intergovernmental grants in the Shire's liquidity crisis. Moreover,
elected representatives made considerable efforts at the Public Inquiry
to emphasise what they felt to be inequitable intergovernmental grant
allocations. In the Central Darling Shire Council Public Inquiry Report,
Commissioner Colley was critical of councillor reticence to accept
responsibility for the fiscal plight of the Shire and noted his
'great concern [that], instead of considering remedial budgetary
actions, there has been a propensity to blame others for the
situation' (Colley, 2014, p. 60).
Since 1973 the federal government has provided intergovernmental
grants to councils with the objective of achieving horizontal fiscal
equalisation (HFE). HFE seeks to provide councils with the capacity
'to provide their residents with an equitable level of
services' (Local Government (Financial Assistance) Act 1995,
s3(2)(b)). The need for HFE arises as a result of: (i) vertical fiscal
imbalance whereby the federal government has powers to collect the bulk
of taxation and (ii) horizontal fiscal imbalance arising from different
revenue raising capacities and expenditure attributes of Australian
municipalities (Drew and Dollery, 2015a). Due to the absence of
constitutional recognition for Australian local government, the federal
HFE grants are allocated by seven separate Grants Commissions operated
by the states and the Northern Territory (Drew and Dollery, 2015a).
Notably, the Commissioner of the Public Inquiry into the Central Darling
Shire liquidity crisis was also the Chair of the NSW Local Government
Grants Commission (NSWLGGC, 2014).
Our central concerns in this context are to undertake a critical
investigation into the process of placing Central Darling Shire into
Administration for such an extended period, and to query the public
reasons for so doing against the backdrop of Australia's fiscal
federalism generally and the regime of transfers designed to accomplish
HFE in particular. The paper itself is divided into six main parts.
Following this introductory section, Section 2 provides a brief overview
of the operational context of the Central Darling Shire including a
comparative summary of environmental constraints, revenue metrics and
functional expenditure with respect to the other twenty councils
occupying the same OLG classification. Section 3 provides a review of
the theory and literature on intergovernmental grants. Section 4
outlines important events leading up to the decision to appoint a
permanent Administrator. We then provide a summary in Section 5 of the
Public Inquiry, with particular reference to the matter of
intergovernmental grant allocations. The paper ends in Section 6 with a
number of recommendations relating to the equitable distribution of HFE
grants and observations on the procedural fairness of the Inquiry.
2. CENTRAL DARLING SHIRE OPERATIONAL CONTEXT
Table 1 provides details of the environmental constraints facing
Central Darling Shire, along with comparative data for the other twenty
councils classified as Group 9 municipalities (medium size, remote and
agricultural councils). Notably Central Darling has the lowest
socioeconomic rating in the cohort (the second lowest in the state), the
lowest population density, highest proportion of Aboriginal and Torres
Strait Islander (ATSI) individuals in the cohort (and second highest in
the state), the second highest unemployment rate in the cohort (fourth
highest in the state) and highest metre road length per capita for the
state (OLG, 2015). The environmental constraint data is brought into
stark relief by the arithmetic mean of the various metrics for the
state, presented in the last row of Table 1. In sum, it is clear that
the residents of Central Darling have arguably the highest need for
municipal goods and services in the state whilst also exhibiting one of
the lowest capacities to pay for them. This environmental constraint
data suggests that the Shire might require comparatively high levels of
HFE grant aide.
Table 2 details the Financial Assistance Grants allocations for
Group 9 councils in the 2012/13 financial year (the year upon which the
Commissioner would have based his recommendations). FAG grants are
allocated in two tranches--General Purpose grants and Road grants even
though both allocations are untied. Central Darling Shire received the
highest General Purpose allocation in the cohort; however, the quantum
of the grant was just two-thirds of the NSW average. On a per assessment
basis, the Shire received the highest General Purpose allocation in the
state. However, it is important to be mindful of the stated purpose of
HFE grants--'to allow councils to function at a standard not lower
than the average standard in the State'--when assessing whether the
Shire's quantum was sufficient (Local Government (Financial
Assistance) Act, 1995). The final column of Table 2 details the quantum
of road allocation, which we also present in per kilometre terms in
parentheses. Central Darling received the fourth highest quantum in the
cohort, but curiously received a lower quantum than Lockhart council,
which maintains 114 km less road distance. Moreover, on a per kilometre
basis the Shire received the lowest road allocation in the cohort and an
allocation which was almost half of the state mean. This anomaly results
from the NSW Local Government Grants Commission's use of population
data as a key input into the road grant allocation algorithm (see Drew
and Dollery, 2015a).
Table 3 summarises taxation, domestic waste charge and water and
sewerage charge data for Group 9 councils for 2012/13. Central Darling
Shire had the fifth lowest residential rates and the lowest farm and
business rates in the cohort. Moreover, the average rates levied in
these categories were well below the state mean. However, the data
should be interpreted in the context of the tax limitation regime which
has operated in NSW for almost four decades (Drew and Dollery, 2015b).
In particular it is important to take account of the total imposts
placed on residents, as tax limitations do not apply to annual fees and
charges. The final column of Table 3 presents the average cumulative
charge to residential ratepayers (residential rates plus water, sewerage
and domestic waste).
When considered on this basis the Shire has an impost considerably
higher than the cohort average. Indeed, the residential revenue effort
which measures total municipal rates and charges as a function of total
income accruing to residents (Ladd and Yinger, 1989)--for Central
Darling in 2012 was the highest in the state (3.796%) and well over
three times the state mean (1.016%). This own-source revenue data is an
important consideration, given that HFE grants take into account the
revenue effort exerted by the municipality. We now consider the theory
and practice of horizontal fiscal equalisation grants.
3. INTER-GOVERNMENTAL GRANTS
The need for inter-governmental grants results from two factors
which are common to most federalist systems of government. First, most
federations are characterised by vertical fiscal imbalance owing to the
fact that central governments typically have the greatest taxation
powers but relatively less service provision responsibilities (Oates,
1999). For instance, in Australia the Commonwealth Government collects
over 80 per cent of the nation's total tax take whilst local
government collects just 3.4 per cent (ABS, 2015). Yet local government
has significant infrastructure responsibilities, including maintenance
of around 80 per cent of the national road network as well as the
majority of rural and regional airports (Chakrabarti et al., 2002).
Second, the constituent entities of most federations are distinguished
by pronounced horizontal fiscal imbalance in terms of both
revenue-raising capacity and expenditure need (Oates, 1999). Thus,
horizontal fiscal equalisation grants are 'a necessary counterpart
to decentralisation, offsetting its tendency to create disparities among
regions in the ability to provide public goods and services'
(Boadway, 2004, p. 212).
There are many reasons for pursuing HFE in a federation. Most
importantly, HFE eliminates inefficient migration of capital and labour
which might result if municipalities operated in vastly different fiscal
environments (Oates, 1999). However, an effective system of HFE also
helps to bind a federation together (Boadway and Shah, 2009), removes
potential for political conflict between municipalities (Lecours and
Beland, 2013), and eliminates wasteful lobbying and opportunities for
pork barrelling. Moreover, for rural and remote councils HFE has an
important role to play in regional economic development. For instance,
where HFE grants facilitate provision and maintenance of sealed road
infrastructure, primary producers enjoy cheaper and faster all-weather
access to markets along with higher prices for animal stock (which is
subsequently subject to less stress in transit).
In Australia HFE grants are administered according to the Local
Government (Financial Assistance) Act 1995. The statute stipulates that
funds should be allocated on a full horizontal equalisation basis which:
(a) Ensures that each local governing body in a state is able to
function, by reasonable effort, at a standard not lower than the average
standard of other local governing bodies in the state; and
(b) Takes account of differences in the expenditure required to be
incurred by local governing bodies in the performance of their functions
and in their capacity to raise revenue' (Local Government
(Financial Assistance) Act 1995, s6(3)).
Thus FAG grants should by definition provide councils with the
potential for service equality, given reasonable revenue effort. It is
important to note that actual service provision may differ from one
municipality to another in accordance with the specific preferences of
residents. Indeed, the raison d'etre of federal systems of
government is that 'by tailoring outputs of such goods and services
to the particular preferences and circumstances of their constituencies,
decentralised provision increases economic welfare above that which
results from the more uniform levels of such services that are likely
under national provision' (Oates, 1999, p. 1121).
The scholarly literature has been sceptical for some time regarding
whether the practice of FAG allocations in Australia does in fact accord
with the theory of HFE or, indeed, the definitions provided in the
enabling legislation (see, for instance, Dollery and Mounter, 2010; Drew
and Dollery, 2015a). One reason why practice diverges from the stated
purpose of the legislation can be found in s6(2)(b) of the Act, which
stipulates a minimum quantum for each council of 'no less than the
amount that would be allocated to the body if 30 per cent of the amount
to which the State is entitled under that section in respect to the year
were allocated among local governing bodies in the state on a per capita
basis'. This distortion of HFE objectives is compounded by the fact
that initial state and territory allocations are also based on
population size rather than need (see, Commonwealth Grants Commission,
2012). The other reason why actual practice does not accord with the
principles of HFE relates to the algorithms employed by the various
State Local Government Grants Commissions. For instance, the NSW Local
Government Grants Commission (NSWLGGC) employs standard expenditure
allowances based on the state average cost of providing twenty different
functions over a five-year period. Clearly expenditure allowances based
on state averages do not respond to s6(3)(b) of the Act--that is, state
averages implicitly (and implausibly) assume that all councils in the
jurisdiction face similar costs for providing services.
Moreover, the NSWLGGC generates revenue adjusters to control for
'revenue effort' in response to s6(3)(a) using a standard tax
rate which is calculated as the quotient of the sum of all general rates
levied by all councils in NSW with respect to the sum of rateable
unimproved property values for the entire state. Clearly this method of
adjusting for revenue effort is flawed on at least three counts. First,
for almost four decades NSW has operated a tax limitation regime which
caps the total tax take of all councils in the state. It is therefore
misleading to suggest that an average tax rate in any way reflects the
potential revenue which could be exacted by any particular council (Drew
and Dollery, 2015b). Second, the method employed entirely neglects
annual fees and charges levied by council. It is particularly concerning
that only a partial estimate of municipal impost is made given that
there is considerable evidence that tax limitations encourage upward
pressure on unregulated fees and charges (Blom-Hansen et al., 2014).
Third, municipal taxes are paid out of flows of income not stocks of
wealth--therefore, the NSWLGGC appears to be calculating
'effort' on an entirely incorrect premise (revenue effort
calculated as total municipal impost divided by total income accruing to
entities in the jurisdiction is the appropriate measure--see, for
instance, Ladd and Yinger, 1989).
It appears that the NSWLGGC makes some effort to adjust for
differences in need through employing a range of disability factors.
However, the process is not transparent and the NSWLGGC makes clear that
the disability factors are in part a product of 'weightings [which
are] meant to reflect the significance of the measure in terms of the
expected additional cost' (NSWLGGC, 2014, p. 20). Further, the
Commission's report states that 'the weightings have generally
been determined by establishing a factor for the maximum disability
based on a sample of councils or through discussion with appropriate
peak organisations' (emphasis added, NSWLGGC, 2014, p. 20). This is
a rather disappointing and chaotic approach to the allocation of HFE
grants, especially given that an empirically robust econometric method
for calculating grants has been outlined in the scholarly literature for
many decades (Ladd and Yinger, 1989)
We now briefly consider some of the key events leading up to the
decision to suspend the democratically elected representatives of
Darling Shire until September 2020.
4. CHRONOLOGY OF ADMINISTRATION PROCESS
One of the curious aspects of the unprecedented liquidity crisis
faced by Central Darling Shire is that it was preceded by at least three
years of adverse reports, ineffective interventions and requests from
the Shire for financial assistance (OLG, 2014). This section provides a
chronology of key events.
January 2011. The 'Promoting Better Practice Review' was
initiated into Central Darling Shire by the Department of Local
Government (now the Office of Local Government) and conducted by Angus
Broad (subsequently appointed assistant to Commissioner Colley). This
Review 'contained fifty six recommendations, highlighting
significant concerns about the current performance of the Council'
and 'commenting] on the difficulties faced by the Council in the
longer term' (Colley, 2014, p. 3).
September 2012. Six of the nine incumbent Councillors were returned
to office following local government elections. The elected
representatives had between six and 23 years of experience as
councillors (the mayor had served on council for 18 years).
17 December 2012. The Shire's 'Auditor's
Report' for the preceding financial year noted that the
Shire's liquidity position had 'deteriorated significantly
over the last year' and that 'this poor cash position will
have a major impact in the Council being able to deliver services into
the future' (Colley, 2014, p. 101).
27 February 2013. The Shire requested a $2 million finance facility
at a meeting with the Minister for Local Government, Minister for
Western NSW and Member for Murray-Darling (John Williams) to alleviate a
cash flow problem which had arisen due to changes in the way Roads and
Maritime Services (RMS) paid for work subcontracted to council
(Department of Premier and Cabinet, 2014, p. 38).
February 2013. The Office of Local Government expressed concern
that 'Council's financial position had deteriorated further
and was parlous' (OLG, 2014, p.2). This prompted an on-site review
over the period 12th-14th February which concluded that
'Council's financial sustainability in the longer term
remained questionable, with its cash position weakening significantly in
the last year' (OLG, 2014, p. 3).
14 March 2013. The NSW Treasury Corporation (TCorp, 2013),
commissioned by the Department of Local Government to conduct a review
of the financial sustainability of each council in NSW, published its
Central Darling Shire Council Financial Assessment, Sustainability and
Benchmarking Report. TCorp's (2013) review of Central Darling
Shire's sustainability concluded that 'we consider Council to
be in deteriorating financial position and to be unsustainable'
(TCorp, 2013, p. 33). Moreover, the Report noted that 'Council will
face liquidity pressures and will have limited capacity to service its
debt commitments' (TCorp, 2013, p. 4).
April 2013. The Department of Local Government (DLG) appointed Mr
Geoff Wise, former General Manager of Bourke Shire, as mentor to Central
Darling Shire.
10 May 2013. The DLG appointed mentor, Mr Geoff Wise, wrote an
'Urgent Central Darling Report' to Mr Grahame Gibbs, Deputy
Chair of the NSWLGGC, and copied same to Deputy Chief Executive of the
DLG (Steve Orr), stating that 'I totally support the Mayor and
Council management in immediately bringing this predicament to your
attention, and through you to the Minister, and additionally I recommend
on to the Premier' (Wise, 2013). Mr Wise also wrote that delegates
should be given the opportunity to 'seek an external funding
commitment to supplement the budget'. Mr Wise concluded his
'Urgent Report' with the following observations:
"Council's primary problem is a liquidity problem, with
Council having no control over generation of any sizeable income, and
extremely limited abilities in cutting costs without cutting essential
services. I suspect we are seeing at Central Darling Council the tip of
the iceberg of the ongoing imposts, demands and expectations placed on
all Councils (including cost shifting and one size fits all
requirements) in a situation where there is extremely limited ability to
absorb such externalities" (Wise, 2013).
September 2013. A delegation from the Shire attended the regional
cabinet meeting in Broken Hill and stated 'council's financial
position was perilous' (Department of Premier and Cabinet, 2014, p.
57).
4 November 2013. Mayor Ray Longfellow wrote to 'Local Member,
seeking, among other things, an immediate cash injection of $2 million
for Central Darling Shire from the State Government' (OLG, 2014, p.
5).
14 November 2013. Minister for Local Government wrote to the Shire
requesting further information on its financial predicament (Longfellow,
2013).
22 November 2013. Mayor Longfellow responded to the correspondence
from the Minister, stating that 'Council strongly urges the State
Government to support the equitable distribution of the FAGS ... the
current contribution is insufficient to provide Council with the funds
for servicing the basic needs of our communities'. In particular
the Mayor called for a 'redistribution of FAGs (for the 2014/15
financial year) to provide an equitable and viable share for Central
Darling' (Longfellow, 2013).
23 December 2013. The Minister for Local Government appointed Mr
Greg Wright (former General Manager of Camden Council) as Interim
Administrator for three months.
March 2014. Minister for Local Government extended the period of
Administration for a further three months.
14 March 2014. Report by consultants RSM Bird Cameron (commissioned
by the OLG) was published. The desktop analysis stated that 'it
does not make sense for Council to conduct non-core activities,
particularly where these are loss making'. Such activities included
a Westpac banking agency, Post Office, aerodromes, swimming pools,
community busses and aged care facilities. RSM Bird Cameron did not
acknowledge that the council conducts the activities in response to
market failure or cost shifting. For instance, the Post Office was taken
on by the Shire after it entered into receivership and the ownership and
maintenance obligations for the aerodromes were cost-shifted to local
government from the Commonwealth (ALGA, 2015). Moreover, the airports
are operated principally for the benefit of the Royal Flying Doctor
Service, Rural Fire Service and State Emergency Service. It is therefore
somewhat surprising that the consultant report recommended 'either
cessation or scaling back of ' non-core activities' that have
been taken on by Council' (RSM Bird Cameron, 2014, p. 13).
June 2014. Interim Administrator's Report outlined a
'recovery plan' for the Shire. This included
'returning' two of the three community transport contracts to
TransportNSW, ensuring all non-core services are fully funded, seeking a
third party to operate the swimming pools, refusing RMS contracts which
are not fully funded and 'work[ing] constructively with LGNSW, the
Grants Commission and other appropriate stakeholders to have the
Financial Assistance Grants formula revised to better meet the needs of
rural and remote Councils' (Wright, 2014, p.14). The Interim
Administrator's Report concluded with the following sobering
assessment of the Shire's recovery:
"The issues facing the Central Darling Shire Council are
serious and complex and they will take some considerable time to
resolve. Indeed, I am not certain that the resolution of all the issues
and the attainment of long term sustainability for the Council
will--ultimately --be something that the community will be prepared to
accept. The long-term solutions involve substantially pared back
services and, in all probability, fewer jobs at the Council. The
alternative, however, would be more unpalatable still."
The final step into long-term suspension of the democratically
elected body was the Public Inquiry conducted by Commissioner Colley and
assisted by Angus Broad. We now turn our attention to this.
5. PUBLIC INQUIRY
On Tuesday 12 August 2014, Commissioner Richard Colley opened the
Central Darling Shire Public Inquiry pursuant to s438(U) of the Local
Government Act 1993. The Commissioner went to considerable pains to
contrast the 'rules' of the inquiry to those which might
operate in a regular court. In particular, the Commissioner noted that
'the mere fact that a critical comment is made during the hearings
or contained in the report of the inquiry is not of itself sufficient to
open up that comment to scrutiny on the grounds of denial of procedural
fairness' and that the 'findings cannot be impugned for want
of procedural fairness no matter how distressing the criticism or
condemnation might be to the individual concerned' (Department of
Premier and Cabinet, 2014, p. 3). The Commissioner also made reference
to the RSM Bird Cameron report, before noting that 'it is not
intended to call any of its authors to appear at the public
hearings'. Finally, the Commissioner noted that the purpose of the
hearings was to allow him to make recommendations to the Minister, but
emphasised that the Minister and Governor would be responsible for
decision making.
Conflict of Interest?
Given the claims of inequitable FAG allocations made by the Mayor
(Longfellow, November 2013) and Interim Administrator (Wright, June
2014), along with the direct involvement of the Deputy Chair of the
NSWLGGC (May 2013) in the events preceding the Administration, it is
somewhat surprising that Richard Colley--incumbent Chair of the
NSWLGGC--was appointed by the Minister for Local Government as
Commissioner for the Public Inquiry. Indeed, Mr Colley's background
has led some to question whether the Inquiry was conducted in accordance
with the rules of procedural fairness, given that there may have been
some grounds for a reasonable apprehension of bias. 'Actual bias or
a reasonable apprehension of bias on the part of the decision maker are
a breach of the rules of procedural fairness' (Butt, 2004, p. 49).
Richard Colley disclosed his position as Chair of the NSWLGGC well
into the proceedings (after the luncheon adjournment on Wednesday 13
August, 2014) in the following exchange captured in the transcript of
proceedings (but not in the Commissioner's Report), when he
interjected to correct a witness who had incorrectly stated that FAG
were tied grants:
COMMISSIONER. I probably should declare a--not an interest, but
a--what would you call it?
MR BROAD: Defactive (sic) background.
COMMISSIONER: I happen to be the Chair of the New South Wales
Grants Commission (Department of Premier and Cabinet, 2014, p. 116).
The exchange suggests that (i) the Commissioner recognised that his
position as Chair of the NSWLGGC provided him with specialised knowledge
relevant to the Public Inquiry and (ii) that the Commissioner was at
pains to avoid the term '[conflict of] interest'.
Evidence on FAG Allocations
Councillor Rhoades, President of the NSW Local Government peak body
(LGNSW), provided evidence to the Inquiry on its first day of hearings.
Councillor Rhoades spent some time on the matter of inadequate FAG
allocations and stated that:
"Councils such as Central Darling and many others should be
receiving a greater share of that federal money than the way that the
formula is used a lot of the times based on population" (Department
of Premier and Cabinet, 2014, p. 20).
Moreover, Councillor Rhoades emphasised that the fiscal predicament
of the Shire was not an isolated case:
"Yes this may have been the first of the pins to fall but
that's not to say there's other pins that may not fall as well
if certain things within the structure of Local Government in New South
Wales don't change" (Department of Premier and Cabinet, 2014,
p. 22).
On the second day of hearings the matter of FAG allocations was
raised by Jennifer Thwaites, Acting CEO of the Wilcannia Local
Aboriginal Land Council. Her early comments cut right to the heart of
the HFE principle:
"I would also argue very strongly in the equity areas that the
services covered by this council that are being looked at as being
non-essential, or essential services that have been cut back, go through
the list, waste removal, water, sewerage, service centres, swimming
pools, community busses, air strips or aerodromes used for the Royal
Flying Doctor, post offices, aged care and community housing, property
management, waste tips, cemeteries, animal registration, environmental
planning, they are essential services and the residents of this Shire
have the right to expect adequate service provision in those areas.
Certainly we're never going to match the service provision of the
bigger urban areas, but why should we be penalised because we are living
in a council area that is huge but has limited population and a
socio-economically disadvantaged population" (Department of Premier
and Cabinet, 2014, p. 116)?
It is a claim that the residents of Central Darling were not
'able to function, by reasonable effort, at a standard not lower
than the average standard of other local governing bodies in the
state' (Local Government (Financial Assistance) Act 1995,
s6(3)(a)). Ms Thwaites then went on to assert that the NSWLGGC were not
allocating grants equitably, and this led to the Commissioner's
interjection and disclosure of a 'defactive (sic) background':
"Well I'm not saying I'm an expert in it, but
I've certainly gone through the guidelines for the federal
assistance grants. The two highest priorities of that are socioeconomic
disadvantage and Aboriginality. This Shire obviously, as the second
highest socioeconomically disadvantaged community in NSW, and with an, I
believe Aboriginal population of somewhere between 55 and 60 per cent,
has to qualify with both of those ..." (Department of Premier and
Cabinet, 2014, p. 116).
Councillor Page also spent some time expounding on what he
perceived to be inadequate FAG:
"I have lobbied the Federal Government in regards to the
funding, the FAGs grant, I met with Joyce Wheatley 15 years ago, she was
the Chair of the FAGs committee, that the FAGs committee was not giving
the councils in the outback the funding that it should have been getting
..." (Department of Premier and Cabinet, 2014, p. 154).
Councillor Page also provided a succinct summary of the
relationship between adequate FAG and the sustainability of regions:
"I think, you know, councillors do have a good intent to make
things better for their community so we need to have lobby groups
lobbying so we have more funding coming in from FAGs, but at the same
time, yes, we do need to have some housekeeping done as well ...
it's talking about the long term survival of outback Shires and
councils and a lot of young people living in the outback now need to be
given that bit of encouragement that things will get better in the
future" (Department of Premier and Cabinet, 2014, p. 170).
A number of other witnesses also commented on FAG allocations (see,
for instance, Councillor Astill's evidence in Department of Premier
and Cabinet, 2014). It is therefore somewhat surprising that the
Commissioner's 102-page report makes just the one reference to
equity in FAG allocations and, in doing so, draws not on the evidence
provided at the Inquiry, but rather on a selected text from the Interim
Administrators Report:
"Equity in the financial assistance grants system would be
beneficial, but is not the panacea for council's ills. The real and
pragmatic answer is to cut costs" (Colley, 2014, p. 94).
Reduction in Services
Reduction in 'non-core' services advanced in the RSM Bird
Cameron and Interim Administrator Reports had started to take place at
the time of the Inquiry. For example, the community bus contracts had
already been returned to TransportNSW and significant cuts to staffing
had been executed (full-time equivalent staff had been reduced by almost
one-fifth, from 54 in 2011/12 down to just 45 in 2013/14) (OLG, 2015).
The other strategy employed by the Interim Administrator to reduce
the size of the overdraft facility (which had peaked at well over $3
million) was to defer maintenance expenditure. The implications of this
strategy were recognised by Councillor Sullivan:
"The council, if it stays like it is under its current
structure, the recovery plan will only postpone the inevitable ...
You're not doing the workforce re-employments, you're not
replacing the housing, you're not doing any work on the housing,
you're not replacing plant and equipment right. So if you
don't replace those you don't spend the cash on them, you hold
the cash in hand, right but somewhere along the line those things have
to be fixed" (Department of Premier and Cabinet, 2014, p. 95).
The association between cuts in municipal staffing and services on
the one hand, and the flow-on economic implications for the town on the
other, was made by Councillor Page:
"If you do make cuts it affects your employment in the town,
it affects the morale of the town. You need to look at both sides of it.
Yes, we could be financially viable if [we only did] roads rates and
rubbish, but if you look at the other side of it, what would be the
overall outcome and the results, it's not an easy option to
take" (Colley, 2014, p. 94).
This apparent reticence of Councillors (see also Looney in
Department of Premier and Cabinet, 2014, p. 152) to accept cuts to
services was cited by the Commissioner in his concluding remarks as
justification for his recommendation to suspend the council until
September 2020:
"It is difficult to see the current Council having the
capacity to do so [implement the Recovery Plan], let alone, establishing
a foundation for a sustainable future."
The Role of HFE in Central Darlings Shire Liquidity Crisis
The principle of HFE which underpins the FAG grants rests on two
key concepts:
(i) The need for councils to exert reasonable revenue effort
(ii) The normative proposition that all councils exerting
reasonable revenue effort in the country should have the same potential
in providing an average standard of services.
As established in Section 2, Central Darling Shire has the highest
residential revenue effort in the state. Therefore, it is reasonable to
assume that the first principle has been satisfied. The question then
hinges on whether the FAG provided to Central Darling Shire are
sufficient for it to provide the average of the standard of services
provided in the state. This is highly questionable. For instance, 1
541km (or 96%) of the Shire's roads are unsealed. Cuts have been
made to swimming pool opening hours. The Shire does not have a library.
Aerodromes provided for the benefit of the Royal Flying Doctor service
are considered 'non-essential', as are cemetery facilities.
Only one of the four principal towns making up the Shire has sewerage.
White Cliffs does not have garbage collection but residents are required
to cart their rubbish to the tip and volunteers attend to the management
of the tip (RSM Bird Cameron, 2014). It is very difficult to argue that
the residents at Central Darling Shire receive the standard level of
services provided to other citizens of NSW.
Thus, there is prima facie evidence to suggest that the FAG
allocation for Central Darling Shire was inadequate according to the HFE
principles embodied in the enabling legislation. Moreover, since the
period of Administration the Shire has been the beneficiary of some
rather large increases to FAG allocations (see Table 4). In particular,
the NSWLGGC Report on FAG allocations presented by Richard Colley (in
his capacity as Chair of NSWLGGC) dated October 2014--the same month as
the Commissioner's Report on the Public Inquiry--increases the
total FAG allocation for the Shire by just over 7 per cent during a
period in which the state allocation actually decreased marginally (due
to the Commonwealth freezing indexation of FAGs for a period of three
years). One may question whether the Interim Administrator's report
or the evidence heard at the Public Inquiry influenced this significant
increase in FAGs. One must also question whether the additional $815 256
p.a. received in grants from 2012/13 levels might have avoided the
unprecedented liquidity crisis faced by the Shire on 4 November 2013.
6. CONCLUDING REMARKS
It is interesting to contrast the flurry of media and scholarly
attention engendered by the bankruptcy of the Municipality of Detroit in
July 2013 with the dearth of analysis associated with the liquidity
crisis experienced by Central Darling Shire at around the same time
(see, for instance, Davey and Walsh, 2013; Stiglitz, 2013; Chung, 2014).
One important reason for this disparity is the operation of an active
municipal bond market in the United States (for varying accounts of the
operation of the municipal bond market in the U.S., see, for example,
Doty, 2012; Feldstein and Fabozzi, 2008; Johnson et al., 2014). However,
it is also clear that the remote location of the Shire may explain why
so little attention has been given to Australia's first example of
local government financial failure.
Horizontal Fiscal Equalisation grants are an essential component of
a strong federation and play an important part in ensuring sustainable
futures for communities in rural and remote regions. However, it is
clear from the preceding analysis that the existing FAG allocations have
not achieved the objectives enshrined in statute. Key recommendations to
ensure FAGs achieve HFE objectives include: (i) changes to legislation
to remove the stipulation for a minimum quantum based on population size
and (ii) changes to NSWLGGC algorithms to remedy identified
deficiencies. There is evidence that a number of other rural and remote
councils are experiencing acute fiscal distress. It is thus very
important that prompt attention is given to implementing changes to FAG
legislation and allocation practices.
A second outcome of this study is that it has cast light on some
unsatisfactory processes leading up to the extraordinarily long period
of Administration for Central Darling Shire. Suspension of
democratically elected representatives for lengthy periods is an action
of the utmost gravity. It is therefore reasonable to expect procedural
fairness, thorough investigation and complete transparency. In
particular, there should be no cause for the suggestion of apprehended
bias. Moreover, it seems reasonable to expect that claims regarding the
cause of Central Darling's financial predicament might have been
investigated thoroughly in a manner akin to this study. It also seems
reasonable to expect that reports arising from Public Inquiries might be
responsive to the evidence recorded in the transcripts of proceedings.
For the residents of Central Darling Shire, Administration has
meant significant cuts to services, employment and the level of
maintenance expended on critical transport infrastructure. This serves
to underline the importance of the aforementioned recommendations if we
are to ensure that rural and remote communities might enjoy sustainable
futures.
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Table 1. Environmental Constraints of Medium Remote and
Agricultural Category Municipalities, 2013.
Council Socio Population Length ATSI (%)
Economic Density of Roads
Rating (capita/ (km)
[km.sup.2])
Balranald 33 0.1 1328 6.8
Bogan 40 0.2 1352 14.4
Bombala 45 0.6 629 2
Boorowa 74 1 608 2
Bourke 37 0.1 1883 30.2
Carrathool 76 0.1 2300 6.6
Central Darling 2 0.04 1602 38.3
Coolamon 80 1.8 1275 2.6
Coonamble 6 0.4 1393 29.3
Gilgandra 16 0.9 1293 12.2
Gundagai 64 1.5 694 2.5
Guyra 27 1.1 842 10
Harden 35 2 768 4.5
Hay 21 0.3 777 5.5
Lockhart 102 1 1488 2.5
Murrumbidgee 25 0.7 590 10.2
Tumbarumba 59 0.8 465 2.4
Wakool 82 0.5 1281 2.5
Walcha 84 0.5 807 7.4
Warren 49 0.3 964 13.3
Weddin 52 1.1 968 1.8
Group Mean 48 0.72 1109.9 9.86
State Mean 76 780.9 945.36 5.3
Council Unemployment Average No. Businesses
Rate (%) Taxable
Income ($)
Balranald 4.5 32 816 171
Bogan 5.8 36 149 188
Bombala 6.1 36 168 157
Boorowa 5.2 35 527 69
Bourke 14.5 37 544 216
Carrathool 4 38 064 195
Central Darling 13.1 38 248 144
Coolamon 3.9 35 448 232
Coonamble 8.9 35 735 206
Gilgandra 6.6 35 615 208
Gundagai 5.1 36 777 167
Guyra 5.9 32 075 144
Harden 5.4 35 333 228
Hay 6.8 32 664 211
Lockhart 3.7 36 245 251
Murrumbidgee 4 38 150 93
Tumbarumba 4.4 36 278 186
Wakool 6.1 32 444 270
Walcha 5.2 31 741 156
Warren 6.1 35 985 127
Weddin 5.7 30 621 131
Group Mean 6.24 35 220 179
State Mean 6.1 42 912 1251
Source: Office of Local government (2015); ABS (2015).
Table 2. Financial Assistance Grant Allocations, 2013.
Council Total No. Assess Population
Balranald 1516 2 371
Bogan 1938 3 037
Bombala 1899 2 401
Boorowa 1890 2 558
Bourke 1735 2 996
Carrathool 1954 2 792
Central Darling 1606 2 070
Coolamon 2815 4 276
Coonamble 2567 4 279
Gilgandra 2337 4 488
Gundagai 2538 3 747
Guyra 2422 4 645
Harden 2397 3 762
Hay 1921 2 962
Lockhart 2540 3 021
Murrumbidgee 1327 2 503
Tumbarumba 2521 3 521
Wakool 2829 3 979
Walcha 1815 3 087
Warren 1895 2 910
Weddin 2569 3 711
Group Mean 2 144 3 291
State Mean 19 741 48 723
Council General Purpose Road Grants
($ per assessment ($ per km in
in parentheses) parentheses)
Balranald 1 571 497 (974.87) 1 172 720 (883.07)
Bogan 1 623 020 (840.07) 1 302 018 (963.03)
Bombala 1 061 603 (561.40) 641 167 (1,019.34)
Boorowa 833 844 (437.25) 607 116 (998.55)
Bourke 2 189 941 (1257.14) 1 692 856 (899.02)
Carrathool 2 038 237 (1017.08) 2 046 343 (889.71)
Central Darling 2 200 748 (1392.88) 1 409 193 (879.65)
Coolamon 1 717 641 (607.37) 1 155 421 (906.21)
Coonamble 1 845 983 (712.18) 1 312 827 (942.45)
Gilgandra 1 538 735 (657.30) 1 190 715 (920.89)
Gundagai 1 113 438 (438.53) 736 875 (1,061.78)
Guyra 1 105 992 (455.14) 842 741 (1 000.88)
Harden 1 321 322 (542.19) 759 361 (988.75)
Hay 1 675 700 (871.85) 721 019 (927.95)
Lockhart 1 768 834 (690.68) 1 422 781 (956.17)
Murrumbidgee 1 046 024 (785.30) 545 073 (923.85)
Tumbarumba 1 329 417 (529.02) 519 896 (1 118.06)
Wakool 2 026 066 (714.91) 1 301 468 (1 015.98)
Walcha 788 347 (441.65) 822 049 (1 018.65)
Warren 1 270 954 (669.98) 924 165 (958.68)
Weddin 1 448 232 (562.64) 901 634 (931.44)
Group Mean 1 500 742 (721.88) 1 048 926 (962.10)
State Mean 3 171 664 (344.46) 1 262 544 (1 647.70)
Source: Office of Local government (2015); ABS (2015);
NSW Local Government Grants Commission (2014).
Table 3. Own-Source Revenue, 2012/13.
Council Average Average Farm Average
Residential Rate ($) Business
Rate ($) Rate ($)
Balranald 221.48 1 751.66 748.54
Bogan 219.85 2 157.74 1 095.74
Bombala 508.60 2 105.18 872.61
Boorowa 445.98 2 196.48 449.28
Bourke 298.08 2 605.33 430.56
Carrathool 387.03 2 856.79 1 010.26
Central Darling 233.79 991.83 222.22
Coolamon 289.72 1 642.94 280.17
Coonamble 295.87 3 954.75 597.09
Gilgandra 486.34 3 115.91 817.31
Gundagai 268.62 1 898.29 491.02
Guyra 410.36 2 171.39 631.94
Harden 396.34 2 205.22 706.14
Hay 517.53 2 643.22 1 341.23
Lockhart 231.51 1 397.37 334.66
Murminbidgee 199.16 2 963.18 279.57
Tumbarumba 375.36 1 556.49 682.80
Wakool 486.52 2 899.68 859.26
Walcha 401.33 3 266.84 666.67
Warren 456.30 4 980.91 1 267.72
Weddin 381.87 1 216.90 786.26
Group Mean 358 2 408 694
State Mean 712 2 195 2693
Council Typical Water Average Total Average
and Sewer Domestic Waste Residential
Charge ($) Charge ($) Charge ($)
Balranald 1 452 202.46 1 876
Bogan 1 501 344.16 2 065
Bombala 1 125 225.34 1 859
Boorowa 1 282 101.57 1 829
Bourke 1 683 205.42 2 186
Carrathool 978 194.56 1 559
Central Darling 1 483 275.80 1 992
Coolamon 350 202.10 842
Coonamble 651 295.19 1 242
Gilgandra 1 109 256.45 1 852
Gundagai 1 071 268.62 1 609
Guyra 1 106 209.95 1 727
Harden 1 647 290.11 2 333
Hay 1 462 182.93 2 163
Lockhart 464 258.49 954
Murminbidgee 640 240.95 1 080
Tumbarumba 1 152 310.52 1 838
Wakool 1 406 196.08 2 089
Walcha 845 304.88 1 551
Warren 1 267 179.39 1 903
Weddin 297 180.63 860
Group Mean 1 094 235 1 686
State Mean 1 129 298 Not applicable *
Note: * Given that only around half of the councils in NSW conduct
water and sewerage operations, it is not possible to calculate a
comparable statistic for the state. Source: Office of Local
government (2015).
Table 4. Changes to Financial Assistance Grant
Allocations to Central Darling Shire, 2013-2015.
Period General Purpose Road Component Total FAG
Component
2012/13 $2 200 748 $1 409 193 $3 609 941
2013/14 $2 645 837 $1 478 181 $4 124 018
2014/15 $2 944 280 $1 480 917 $4 425 197
Source: NSW Local Government Grants Commission (2014).
