A parliamentary inquiry has exposed severe financial challenges faced by local councils in NSW.

The review casts doubt on councils’ capacity to sustain essential infrastructure and services under current revenue systems. 

The inquiry, led by Emily Suvaal MLC, found that these challenges, intensified by outdated legislation and growing responsibilities, could erode the long-term viability of local government.

The inquiry identified significant flaws in the current Local Government Act 1993, which has constrained councils' ability to set rates.

Despite rising costs and community expectations for expanded services such as childcare, aged care, and cultural programs, councils remain bound by the ‘rate peg’ - a fixed mechanism that fails to reflect real cost increases. 

Councils are described as the “provider of last resort” in regional areas, stepping in to deliver critical services such as post offices and even medical facilities where state, federal, or private sector options are unavailable. 

The committee warns that “fiscal discipline alone” cannot solve these revenue shortfalls, and a fundamental overhaul of the rating system is essential.

The report details the rising costs of service delivery and asset management, especially for rural councils, which have seen the sharpest increases in operating expenses. 

Evidence suggests that financial sustainability has been further undermined by cost-shifting - the transfer of state and federal responsibilities to local councils without adequate funding. 

Examples include the Emergency Services Levy and Waste Levy, which have forced councils to divert funds from essential infrastructure projects.

Natural disasters have also strained council budgets, requiring significant upfront expenditure for recovery efforts. 

While disaster funding from higher tiers of government exists, councils often face delays in receiving these funds, leading to cash flow challenges. 

The report calls for faster and more predictable disaster recovery funding, including a shift to “betterment funding” that strengthens infrastructure resilience against future disasters.

The committee made 17 recommendations to address these systemic issues, including:

  • Redesigning the rating system to allow councils greater flexibility while keeping rates affordable and ensuring continuous service evaluation

  • Increasing federal funding from 0.5 to 1 per cent of Commonwealth taxation revenue, with adjustments to the distribution formula to better support regional councils

  • Updating statutory fees and developer contribution frameworks to align with market costs and better support long-term infrastructure funding

  • Centralising disaster recovery funding under the NSW Reconstruction Authority to streamline processes and ensure timely access

Additionally, the inquiry calls for a review of accounting standards to remove unnecessary burdens on councils. 

It notes that depreciation of non-realisable assets, such as Rural Fire Service vehicles, artificially weakens council finances, calling for amendments to the Rural Fires Act 1997 to transfer asset ownership to the NSW Government.

The inquiry also highlighted a backlog in maintenance of critical infrastructure, including roads, bridges, and public facilities, which has worsened due to funding shortfalls. 

Regional and rural councils, which manage a disproportionate share of NSW’s road network, are particularly affected. 

Furthermore, staffing shortages, particularly a lack of skilled engineers, have led to inefficiencies in infrastructure delivery.

Additionally, the committee criticised existing performance measurement ratios, which fail to accurately reflect councils' financial health. It recommends overhauling these metrics to encourage more sustainable practices.

Local Government NSW (LGNSW), the sector’s peak body, praised the report. 

“The recommendations reflect recognition that the financial sustainability of councils is being persistently eroded, and without improvements, all communities will suffer,” said LGNSW president Cr Darriea Turley.

She urged the NSW Government to collaborate with councils to implement the proposed reforms, citing them as a necessary step toward securing sustainability and resilience.

The full report is accessible in PDF form, here.

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