Where does council funding come from?

Local government funding is under growing scrutiny, as rising costs, shifting revenue streams, and potential policy changes force councils to rethink how they pay for services. This analysis examines the composition of operating income across New Zealand’s different council types, highlighting the dominant role of rates, the evolving contribution of subsidies – particularly for public transport – and the declining share of user-pays revenue.

It also explores how these trends differ between territorial, regional, and unitary authorities, as well as in Auckland, before considering the difficult trade-offs councils face in an environment where rates increases may be constrained but community expectations remain high.

Our analysis looks at the sources of local government operating income revenue, for council financial (June) years, since 1993 to 2024 (the latest data available).

The figures we have used to examine local government revenue by source is based on Stats NZ’s Local Authority Financial Statistics, which are based off the Local Authority Census (LAC) that councils are asked to complete. The figures provided in the LAC are different from those published in each councils’ Annual Report, with different definitions and published items. We are currently looking at alternative datasets to provide a different view of local government finances that better align to the way local government itself refers to finances.

Not all councils provide the same services or have the same approach to funding different activities. In this analysis, to provide a broad view of the sector, but also to recognise the differences in activities delivered, we have broken down the local government sector into four parts: territorial authorities, regional councils, unitary authorities, and Auckland. Auckland is counted separately as it is the largest council, which if included in other results would overly skew those figures, and also because Auckland operates with a more bespoke set of circumstances than other areas.

Territorial authorities derive the vast majority of their operating revenue from rates income directly. In 2024, 65% of territorial authority operating incomes were from rates directly. This figure has fallen slightly from a peak share of 69% in the 2020 year but remains higher than the 60% average since 1993.

Sales and other operating income is the second largest contribution to local government operating revenues, at 16% of the total. This group includes admissions fees, water sold by meter, rental income, rubbish bag sales, parking charges, and public transport ticket revenue.

Grants and subsidies are third, with 9.0% of operating revenue coming from this source, which includes grants, donations, subsidies, contributions, sponsorship from agencies like Creative NZ, civil defence, Sport NZ, etc.

Regulatory income only accounts for 5.0% of territorial authority operating income, and includes fees for building permits, animal registration, resource management applications, liquor licensing, as well as parking fines.

The rates proportion of income for territorial authorities has increased over time, since around the 2000s, with all other income groups showing a reduction in the share of contributing income. The largest reductions in the share of operating income contributed have been for sales and other operating income.

Just under half of total operating income for regional councils come from rates, with 46% of combined regional council revenue coming from rates in 2024. Rates revenue as a share of total operating revenue has been trending lower since a peak of 53% was recorded in 2016. In fact, the current rates share of regional council revenue is slightly below the 48% average seen since 1993.

A rising share of regional council operating income in recent years has been coming from grants and subsidies, with 30% of regional council operating revenue coming from this source in 2024. The increase in grants and subsidies is heavily influenced by higher public transport subsidies from central government in recent years. These have included some time-limited supports, includes subsidies in 2022 to 2024, following the Russian invasion of Ukraine, as well as the Community Connect scheme for young people, and subsidies for the Total Mobility scheme.

Those subsidies also saw the share of income coming from sales and other operating income fall, down to 13% in 2024, as public transport ticket revenue fell back with the subsidies picking up more of the tab.

Regulatory income remained fairly low, and broadly unchanged, at just 4.1% of operating income.

Unitary councils broadly mirror the regional council trend, but as these councils include both regional and territory authority council functions, the income shares are a mix of the two council types. In 2024, 49% of unitary authority income was derived from rates directly. More revenue had been provided by the previously mentioned public transport subsidies, lifting this share of income to 25% in 2024.

Sales and other operating income similarly dropped back to 18% for unitary authorities as public transport subsidies took over from ticket revenue, but regulatory income for unitary authorities remained low, at just 5.1%.

Auckland (being the combined figures for all local government entities in Auckland) similarly tracks the broad trends for regional councils and unitary authorities, with the rates share of operating income dropping back to around 50% in recent years. More income is being derived from grants and subsidies, with public transport subsidies supporting this higher income share.

Over time, the share of operating income for Auckland coming from sales and other operating income has fallen and was at 12% in 2024 – a slight jump from the 9% seen in recent years. This figure is below the 15% average seen since 1993 and had generally been trending lower over time.

Auckland has seen a greater level of user-pays emerge, with regulatory income lifting to 10% in 2024, and averaging 11% since 2019. However, this result is driven by the introduction of the Auckland Regional Fuel Tax, which has subsequently been repealed.

However, over a longer period of time, regulatory income in Auckland has remained a higher share of income. Since 1993, regulatory income in Auckland has averaged 8% of operating income, higher than the 6% average for territorial authorities, the 4% for regional councils, and the 6% for unitary authorities.

With the government proceeding with a rates capping policy in some form, revenue growth from rates is likely to be restrained sooner rather than later. Infometrics has provided our feedback to the Department of Internal Affairs on rates capping, to better inform policy makers about the importance of using reasonable data to calculate any caps, alongside the need to better recognise regional differences.

Notwithstanding these points, a constrained ability to fund local services, at the same time as costs to operate continue to rise, as does the community’s expectations for services, leaves councils in a difficult spot.

Recently, Whangarei District Council has been at a coalface of the difficult trade-offs being made. The community has said that they cannot and will not pay higher and higher rates increases and told the Council to cut back on spending. In response, the Council has raised as an option the potential to reduce spending by closing the local library on Sundays. The community has not responded positively. This example highlights the conundrum: councils are being asked to spend less but provide the same services – an outcome that cannot be achieved in the real world. If communities want lower rates (rises), they effectively also have to be alright with lower services, fewer services, or both. And when someone’s nice-to-have is someone else’s must-have, those -trade-offs become difficult.

Given these wicked problems, and the lower relative share of user pays fees and charges across local government, we expect that user pays models are likely to increase in the future. Shifting the cost burden from general rates towards a user pays fees system may well enable local government to direct ratepayers and residents to better assess what they are willing to pay for, and what they are not. In doing so, ratepayers and residents will also show what services they may – begrudgingly – be willing to go without, or to have reduced. Higher user charges for operations that have a clearer private benefit, and less of a wider public benefit, will quickly reveal underlying demand for services at a more direct cost.

But of course, not everything is quite as simple as a user fee. Having a card machine on the gate of local playgrounds, libraries, water fountains, or public toilets are unlikely, and in many cases, impractical. Some of these also, clearly, provide wider public amenity that may outweigh the private benefit, which locals may be willing to pay for collectively. As former US Congressman Barney Frank said, “government [including local government] is just the name we give to the things we choose to do together.”