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Ten key problems with the FESL

March 29, 2017

Many home owners will pay more
The Government will pay less
The Government is hiding the truth
The cost is being shifted from business to residents
The cost proportions do not reflect the users of the services
The FESL severs the current link between contributions and risk / property value
Multiple base rates are unjustified and unfair
The costs can be changed year to year
Local government is still involved
The Monitor must remain

1. Many home owners will pay more

FBEU modelling shows that owners of residential land with an unimproved value of approx. $500,000 or greater will pay more FESL than they are now under the insurance-based FSL.

To put that in context, the average unimproved land value for the greater Sydney area is $902,000.

2. The Government will pay less

The current funding arrangements require contributions from insurers, local government and the NSW Government as follows:

NSW Government – 14.6%
Local Government – 11.7%
Insurers – 73.7%

The FESL Bill maintains local government contributions at 11.7%, but replaces the insurers’ 73.7% with a combined 81% contribution from the property sectors and no mention whatsoever of a NSW Government contribution, which is left to cover whatever variable funding gap might remain:

NSW Government – 7.3%
Local Government – 11.7%
FESL – 81%

The NSW Government contribution falls from 14.6% to a nominal 7.3% – a saving of over $70 million pa, with the difference being shifted onto the FESL (the majority of which will be paid by residents).

3. The Government is hiding the truth

The Government’s FESL website (www.emergencyservicespropertylevy.nsw.gov.au) states “The exact levy rates are still being determined and will not be published until 30 April 2017 when property values for July 2016 and the budget for the emergency services agencies for 2017-18 are known.” This is disingenuous. While the “exact” levy rates might not yet be available, the release of already-known data would allow every property owner to make a very close estimate of the impact of the Bill on them.

The property values for July 2016 are already available and the combined FRNSW/RFS/SES 2017/18 budget can reasonably be expected to be in the area of $1.05 to $1.1 billion. The only data needed (but not publicly available) in order to accurately calculate the FESL paid by every single property owner is:

the number of vacant properties within each property sector;
the number of properties within each property sector that are subject to a pensioner discount; and
the number of properties within each property sector that are considered to be government land.

The Government has all of this data. If it really was confident about the scale and scope of the FESL’s beneficiaries then it would release this information now.

4. The cost is being shifted from business to residents

The FESL’s proportions for each property sector do not reflect the contributions being made under the current Emergency Services Levy on insurers. A June 2011 Insurance Council of Australia report showed FSL contributions were being drawn from the sectors as follows:

Residential – 45%
Business – 49%
Rural – 6%

The Bill’s section 30(1) transfers a significant proportion of the business sector’s current contribution rate to the residential sector:

(1) The relevant proportion for each property sector is as follows:

(a) for public benefit land—0.33%,
(b) for farmland—4.56%,
(c) for residential land—58.07%,
(d) for industrial land—10.38%,
(e) for commercial land—26.66%.

This essentially translates to:

Residential – 58% (13% more)
Business – 37% (12% less)
Rural – 5% (1% less)

5. The cost proportions do not reflect the users of the services

The FESL’s proportions for each property sector do not reflect the risks faced by each sector, or the cost of the emergency services used by each sector. A July 2012 NSW Government discussion paper reported FRNSW response to incidents by property sector to be as follows:

Residential – 34% (24% less than the FESL)
Business – 55% (18% more than the FESL)
Rural – 7% (2% more than the FESL)

Note that the remaining 4% of calls were not attributed to any property type. While these figures concern only FRNSW, they are considered representative of the RFS and SES residential response rate (their rural rates are likely to be somewhat higher and their business rates lower).

6. The FESL severs the current link between contributions and risk / property value

The current insurance-based Emergency Services Levy (ESL) recognises both risk and improved property value by way of higher insurance premiums (and consequently ESL contributions) being charged for both. For example, residential properties in bushfire prone areas will incur higher insurance costs (and ESL contributions) than houses in non-bushfire areas.

Because the FESL is based only on unimproved land value, it does not recognise the different risks (and service costs) between high and low risk properties in the way the ESL does and it has no relationship whatsoever to the property’s improved (ie actual) value.

7. Multiple base rates are unjustified and unfair

The FESL sets separate ($100 and $200) base rates for different property sectors:

(2) The base rate is as follows:

(a) $100 for public benefit land,
(b) $100 for residential land,
(c) $200 for farmland,
(d) $200 for industrial land,
(e) $200 for commercial land.  

Setting a lower base rate for residential and public benefit land seems reasonable and progressive. It is only when this is modelled that the opposite becomes clear.

The FESL works so that the higher the base rate is set for a property sector, the lower the ad valorem rate on each property’s value will be. The $200 base rate reduces the ad valorem rate (and final FESL) for most business properties, and causes the farmland property sector to avoid paying the ad valorem component altogether. For example, all farmland properties will pay the flat $200, regardless of their land value, so a farm with an unimproved land value of $4 miliion will pay less FESL than a nearby house with an unimproved land value of $400,000.

There should be a single base rate for all properties, regardless of property type.

8. The costs can be changed year to year

The FESL base rates and the proportions payable by each property sector can both be varied by regulation from one year to the next.

There is no justification for this, save that the Government is uncertain about the rates and proportions it has set and intends to adjust them later. These base rates and proportions are critical to the FESL amounts payable. The base rate should be subject to automatic indexation like the pensioner discount so it remains relevant, but any other change to the base rate or the proportions payable by each property sector should require amendment by Parliament to prevent the Government from increasing the cost on residents even further.

9. Local government is still involved

The involvement of local government in the organisation and funding of fire and emergency services is a historical anachronism that effectively causes property owners to pay twice. The Government has failed to take the opportunity to correct this. The FBEU shares the Local Government and Shires Association’s view that local government should be removed entirely from the funding of the state’s fire and emergency services, with the deficit being made up by higher contributions from the property sectors and the NSW Government.

10. The Monitor must remain

The Government has appointed a Monitor to ensure that insurers (who will no longer pay the ESL) pass on their savings to their policy holders, but only until 31 December 2018. The FBEU shares the Monitor’s scepticism about the market’s ability to stop the insurers from simply jacking up their premiums to pre-FESL levels, and therefore advocates a permanent and ongoing role for the monitor.

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Ten key problems with the FESL

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