Attention Monash ratepayers: How to calculate your bill under CIV
Gavin R. Putland congratulates the Waverley Leader and Oakleigh Monash Leader for cutting to the chase instead of burying the news — and finishes with a mea culpa.
Question: Monash City Council is proposing to change the rating system to “CIV” or “CIV with differentials”. For each system, how can I calculate what my rates bill would be this year (2009/10) if that system were in force?
Answer: Get out your rates notice for 2009/10 and look for the “Capital-Improved Value” (CIV) of your property. Multiply that value by 0.001771 (i.e. 0.1771%), and you get your rates bill for “simple” CIV (no differentials). How's it compare with what you're paying now? Under “CIV with differentials”, the factor by which you multiply the CIV depends on what sort of property you have. If it's a residential property, e.g. your home, you multiply by 0.001605 (i.e. 0.1605%). If it's a commercial or industrial property, you multiply by 0.002657 (i.e. 0.2657%). Notice that home owners pay more, and businesses pay less, under “simple” CIV than under CIV with differentials. Your local Leader newspaper (July 28, 2009, p.5) has some real-life examples.
Question: So commerce and industry will be campaigning fiercely to ensure that if the system is changed, it is changed to “simple” CIV. But how keen is the Council to change the system at all?
Answer: Mayor Paul Klisaris, in his re-election acceptance speech last December, said that he wanted to change to CIV. He was supported by former Mayor and current President of the Australian Local Government Association, Cr Geoff Lake. The Ordinary Meeting of Council on January 27 passed a motion saying in part:
It is recommended that Council:
- Conducts a review of Council's Rating Strategy to enable any agreed changes to the Rating System to occur in the 2010/11 financial year;
- Notes the engagement of MacroPlan Australia Pty Ltd to assist in the conduct of the review...
The first point means that any change to CIV will take effect in a revaluation year, so that when some ratepayers complain about unexpectedly high bills, the Council will be able to blame changes in property values rather than the introduction of CIV. On the second point, note that MacroPlan Australia conducted the last Monash rating review, which reported as recently as 2004, and which — lo and behold — recommended CIV; but on that occasion the recommendation was defeated in the Council chamber. In support of the new review, the Council has published a brochure containing four numerical examples of how ratepayers would be affected by CIV, and suggesting that SV is overly generous to business owners and apartment owners at the expense of typical home owners. If you bear with me, I'll explain why that brochure is highly misleading and tendentious.
Question: You mean the fix is in?
Where the figures come from
Rates in Monash are presently levied on the Site Value (“SV”), which is the value of the ground and associated airspace, including any attached rights to build on that ground or into that airspace, but excluding actual buildings. The Capital-Improved Value (“CIV”) is the value of the whole property including buildings. If you're a typical home owner, the SV is the value of your land alone, while the CIV is the value of your land plus your house.
According to the Declaration of Rates & Charges for 2009/10, the Council decided to levy a rate of 0.2828% (or 0.2828 “cents in the dollar”) on the SV. As the total assessed SV of all rateable property was $25,183,553,500, this would yield a total revenue of $71,219,089 from general rates.
According to the same document, the total assessed CIV of all rateable property was $40,165,851,500. Dividing the revenue by the total CIV, we find that the rate required to collect the same revenue under “simple” CIV rating is 0.001773, i.e. 0.1773%. The brochure gives 0.1771%.
Under “CIV with differentials”, the rate on commercial/industrial property is 150% of what it would be under “simple” CIV. So the very small discrepancy in the “simple” CIV rate has flow-on effects. But, taking 150% of the “simple” CIV rate given in the brochure, and rounding to four significant figures, we get 0.2657%, as in the brochure.
Multiplying this rate by the total CIV of commercial/industrial property gives the revenue from that class of property, which when subtracted from the total revenue gives the revenue to be raised from residential property, which when divided by the total CIV of residential property yields the required rate on residential property.
Unfortunately we can't do that exercise, because the Declaration of Rates & Charges doesn't break down the total CIV into residential and commercial/industrial components. But we can work backwards to discover the breakdown that has been used in the brochure. The residential rate for “CIV with differentials”, according to the brochure, is 0.1605%. Let the residential and commercial/industrial components of the total CIV be CIVR and CIVC, respectively. Then the total CIV is
CIVR + CIVC
and the total revenue from general rates is
0.001605×CIVR + 0.002657×CIVC .
Solving the two equations in the two unknowns, we get
CIVR = $33,746,747,279
CIVC = $6,419,104,221
(give or take a few million dollars in each case).
For comparison, note that the 2008 Municipal Valuation gives the following aggregate values for rateable property in Monash:
My calculated CIVR and CIVC, and the SV for 2009/10, are slightly higher than the corresponding figures from the 2008 general valuation. This can be explained by supplementary valuations due to (e.g.) planning approvals and construction (the latter of which increases CIVs but not SVs).SV ($) CIV ($) Residential 22,119,990,500 33,535,154,500 Commercial/industrial 3,055,716,000 6,180,305,500 -------------- -------------- Total 25,175,706,500 39,715,460,000 .
Why the brochure is bunk
(a) Rubbery figures
The very small discrepancies in the CIV rates may furnish a convenient excuse to describe the CIV rates in the brochure as “estimates only”, although in fact there is no reason for the CIV rates (“Options 2 & 3”) to be any less accurate than the SV rate; both can be based on the valuations actually used in the 2009/10 budget. To make matters worse, the statement that
* Rate in dollar figures for Option 2 & 3 are estimates only
is immediately followed by
NB. Actual rates will change for 2010/11 due to the biannual revaluation of properties
— perhaps giving the impression that only Options 2 & 3 are subject to change under the new valuations, whereas in fact the SV rate (Option 1) is also subject to change.
But the real damage is done when the brochure offers a numerical example showing how CIV would affect the rates bills for a modest 3-bedroom house, a big new 4-bedroom house, a medical clinic, and a unit in a 4-storey block of 12 units. The four buildings are said to be built on four “identical” 800 sq.m. lots “in a street”. Crucially, the four lots are said to have the same site value. But therein lies the deception, because the value of a site depends on the permissions attached to it:
- While either of the two houses could be built on an ordinary residential lot as a matter of course, the construction of a 12-unit complex requires permission. That permission attaches to the site and increase the site value, hence the rates payable under SV, even before anything is built. But the example expects us to believe that for a CIV of $250,000 per unit, the site value is only $29,500 per unit!
- Likewise, one needs some sort of permission to build a clinic, and the permission adds to the site value. But the brochure makes no allowance for this.
The result is to understate the SVs for the clinic and the block of units, hence to understate their bills under SV rating. In reality, under SV rating, permission to build apartment blocks or business premises on certain sites would increase the shares of total revenue paid by the owners of those sites, hence reduce the shares paid by other site owners, including typical home owners.
By the way, the digitally-modified pictures that illustrate the four cases don't show four lots in the same street. They show four different buildings on the same lot. That compounds the deception by making it seem obvious that the site value stays the same, when the truth is that changing the permissions attached to the same lot changes its site value.
(b) A selective view of “capacity to pay”
In the four-part example in the brochure, the only valid comparison is between the two houses: under CIV rating, if a modest house and an opulent house stand on similar-sized lots in the same street, the more opulent house pays more; but under SV rates they pay the same. That is the only justification for the subsequent bald statement that “Site Value does not reflect the property owner's capacity to pay rates.” This conclusion is not validly supported by the medical clinic or the 12-unit complex, because the site values assumed in those cases are absurd. It also conveniently ignores the following facts:
- Richer ratepayers tend to live in more expensive locations, which have more expensive sites but not necessarily more expensive buildings, so that their wealth is better targeted by SV than by CIV.
- Because of these locational choices, richer ratepayers tend to have higher ratios of site values to building values than poorer ratepayers, and hence to pay a greater share of the burden under SV than under CIV.
- More expensive buildings tend to be newer, and newer buildings tend to be more heavily encumbered with mortgages that offset the owners' capacity to pay.
- The biggest winners under CIV are those who have the highest ratios of site values to building values. These includes speculators and “land bankers” who own multiple vacant lots and therefore have high capacity to pay.
Very conveniently, the example in the brochure doesn't include a vacant lot. If it did, on the same valuations, the owner of a vacant lot would pay the same as the owner of the 3-bedroom house under SV, but under CIV would pay 29% less. Under “simple” CIV, on the “rates in the dollar” given in the brochure, the owner of any vacant lot (of any value) would pay 37% less than under SV. And under “CIV with differentials”, the owner of a vacant residential lot would pay 43% less than under SV, while even the owner of a vacant commercial or industrial lot (“bombsite”) would pay 6% less than under SV.
The offending brochure is summarized in the article “Rates hotline ready to take your calls!” on p.3 of the July 21 edition of the Monash Bulletin. This article contains the same misleading four-part example as the brochure, but is worse for its brevity. At least the brochure eventually states the assumed rates in the dollar so that you can apply them to your current valuation — although delaying this information until after the fictitious example is a textbook case of burying the news (when the brochure is printed on two sides and folded, the critical information comes just before the end, as in the web version). The Monash Bulletin article doesn't merely bury the news, but omits it altogether.
In contrast, the article “Rates shake-up” in the Waverley Leader and Oakleigh Monash Leader (July 28, 2009, p.5) puts the news at the top of the page, and follows up with factual examples instead of impossible fictitious examples.
Who is pushing for CIV?
If values of buildings are added to the local tax base while keeping total revenue constant, the surest outcome is that owners of vacant land will gain at the expense of everyone else, including home owners. The discrimination against home owners could be countered by a “differential” system with a higher rate on vacant land. But in fact the only differential being proposed in Monash would distinguish between residential properties and commercial/industrial properties, not between vacant land and built-up land. With or without the proposed differential, owners of vacant land would get a tax cut at the expense of building owners.
When CIV rating is in place, anyone who adds value to a building, e.g. by renovating or extending, or by replacing a single dwelling by a duplex or “sixpack”, is penalized with a higher rates bill. And when there is no differential on vacant land, anyone who builds on vacant land is penalized. If these disincentives are created in Monash, the growth in the supply of accommodation in Monash will be retarded, and the demand for housing on the urban fringe, by default, will be accelerated. The beneficiaries of that “default” demand will be land bankers whose holdings are outside Monash.
Thus the issue boils down to this: Do the Monash City Councillors work for the ratepayers of Monash, or for someone else?
The original version of this article, posted on July 28, used total values from the 2008 Municipal Valuation instead of the 2009/10 Declaration of Rates & Charges. Although there was no new general valuation before the 2009/10 budget, the totals were increased by supplementary valuations. Consequently my calculated CIV rates were too high, by margins between 1.2 and 1.4 percent (not to be confused with percentage points!). This was unfair in the sense that it made the Council's preferred options look slightly worse than they are. It was also too kind in the sense that bigger discrepancies might look like a more respectable excuse to describe the CIV rates in the brochure as “estimates only”. As supplementary valuations can affect both SVs and CIVs, the use of the term “estimates” only for CIV rates suggests that the reason for the discrepancies is something more nebulous than supplementary valuations. This may help to explain why I overlooked the likely role of supplementary valuations and preferred my own calculations to those in the brochure. And of course the brochure did not help its credibility by pretending that the four lots in the example would retain the same SV.
But, be it kind or unkind, and be it forced or unforced, a 1.4% error is still a 1.4% error, and I'm sorry.
I thank the Monash City Council representative who first brought the changed total values to my attention.
[Last modified August 1, 2009.]