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Appendix B : State Methods for Distributing Financial Assistance Grants 2000-01

The methods each State local government grants commission employed for allocating grants to councils in 2000-01 are provided under the following sections:

Descriptions of methods are based on information supplied by local government grants commissions.

The Australian Capital Territory requires no distribution of grant because the Territory Government directly exercises local government functions.

New South Wales

The New South Wales Commission's methodology has not changed significantly since 1999-2000. The two components of the grants are distributed on the basis of principles developed in consultation with local government and consistent with the national principles of the Commonwealth Act.

General purpose component

The general purpose component of the grant attempts to equalise the financial capacity of councils. The Commission uses the direct assessment method. The approach taken considers cost disabilities in the provision of services on the one hand (expenditure allowances) and a theoretical assessment of revenue-raising capacity on the other (revenue allowances).

Expenditure allowances are calculated for each council for a selected range of council functions. They attempt to compensate councils for expected above average costs because of factors beyond their control. Council policy decisions concerning the level of service provided, or if there is a service provided at all, are not considered (effort neutral).

Expenditure allowances are calculated for 21 functions or areas of expenditure. These functions are: general administrative services, aerodromes, services for aged and disabled, building control, public cemeteries, services for children, general community services, cultural amenities, control of dogs and other animals, fire control and emergency services, general health services, library services, noxious plants and pest control, town planning control, recreational services, stormwater drainage and flood mitigation, street and gutter cleaning, street lighting, and maintenance of urban local roads, sealed rural local roads, and unsealed rural local roads.

An additional allowance is calculated for councils outside the Sydney statistical district that recognises their isolation (see below).

The general formula for calculating expenditure allowances is:

No. of Units x Standard Cost x Disability Factor

where:

No. of units is the measure of use of the function for the council. For most functions the number of units is the population. For others it may be the number of properties or the length of roads;

Standard cost represents the State average cost for each of the 21 selected council functions. The calculation is based on a State average of each council's unit cost, excluding extreme values, using selected items from Special Schedule 1 of councils' 1998-99 Statements of Accounts; and

Disability factor is the extent to which it is estimated to cost the council more than the standard to provide the service.

A disability factor is the Commission's estimate of the additional cost, expressed as a percentage, of providing a standard service due to inherent characteristics that are beyond a council's control. For example, if it is estimated that it would cost a council 10 per cent more than the standard, for town planning, because of population growth in the area, then the disability factor would be 10 per cent. Consistent with the effort neutral principle, the Commission does not compensate councils for cost differences that arise due to policy decisions of council, management performance or accounting differences.

For each function the Commission has identified a number of variables that are considered to be the most significant in influencing a council's expenditure on that particular function. These variables are termed 'disabilities'. A council may have a disability due to inherent factors such as topography, climate, traffic, duplication of services etc. In addition to disabilities identified by the Commission, 'other' disabilities relating to individual councils may be determined from council visits or submissions.

The general approach for calculating a disability factor is to take each disability relating to a function and apply the following formula:

Disability Factor = (Council Measure - Standard Measure - 1) x 100 x weighting

where:

Council Measure is the individual council's measure for the disability being assessed (for example, population growth);

Standard Measure is the State standard (generally the average) measure for the disability being assessed; and

Weighting is meant to reflect the significance of the measure in terms of the expected additional cost. 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 organisations.

Generally negative scores are not calculated, that is, if the council score is less than the standard, a factor of zero is substituted. The factors calculated for each disability are then added together to give a total disability factor for the function.

The Commission uses the inclusion approach in the treatment of specific purpose grants. This means the disability allowance is discounted by the specific purpose grant as a proportion of the standardised expenditure.

For the functions of services for aged and disabled, and services for children, the deduction approach is used. This method deducts specific purpose grant amounts from all councils' expenditure before standard costs are calculated. This approach is considered more appropriate for functions where the level of specific purpose payment assistance is related to council effort. The deduction approach is, therefore, more consistent with the 'effort neutral' requirement specified in the principles. A deduction approach is used for street lighting because of differences in accounting practice between councils and county councils in various parts of the State.

The Commission also calculates an allowance for additional costs associated with isolation. The isolation allowance is calculated using a regression analysis model based on the additional costs of isolation and distances from capital cities. Details of the formula are shown later in this section. An additional component to the isolation allowance is included which specifically recognises the additional industrial relations obligations of councils in western New South Wales covered by specific award rates.

A pensioner rebate allowance is calculated which recognises that a council's share of pensioner rebates is an additional cost. Councils with high proportions of eligible pensioner rebates are, therefore, more disadvantaged than those with a lower proportion. Details of the formula used are shown later in this section.

The calculation of revenue allowances is a broad-brush attempt to compensate councils for their relative lack of revenue-raising capacity. Property values are the basis for assessing revenue-raising capacity because rates, based on property values, are the principal source of councils' income and property values, to some extent, are an indicator of the relative economic wealth of local areas.

In the Commission's methodology, calculation of revenue allowances involves determining each council's theoretical revenue-raising capacity by comparing land values per property to a State standard and applying a State standard rate-in-the- dollar.

To reduce seasonal and market fluctuations in the property market, the valuations are averaged over three years. In the revenue allowance calculation, councils with low values per property are assessed as being disadvantaged and are brought up to the average (positive allowances), while councils with high values per property are assessed as being advantaged and are brought down to the average (negative allowances). That is, the theoretical revenue-raising capacity of each council is equalised against the State standard. The Commission's approach excludes the rating policies of individual councils (effort neutral).

Separate calculations are made for urban and non-urban properties. Non-rateable properties are excluded from the Commission's calculations. This is because the calculations deal with relativities between councils, based on the theoretical revenue-raising capacity of each rateable property.

In developing the methodology for the 1986 legislation the Commission was concerned that use of natural weighting would exaggerate the redistributive effect of the average revenue standards. That is, the revenue allowances are substantially more significant than the expenditure allowances. This issue was discussed with the Commonwealth and the approved principles provide that 'revenue allowances may be discounted to achieve equilibrium with the expenditure allowances'. As a result, both allowances are given equal weight. This approach has continued under the provisions of the 1995 legislation.

The discounting helps to overcome the distortion caused to the revenue calculations as a result of the property values in the Sydney metropolitan area.

The objective approach to discounting revenue allowances reduces the extreme positives and negatives calculated, yet maintains the relativities between councils established in the initial calculation.

The Commission does not specifically consider rate pegging, which applies in New South Wales. The calculations are essentially dealing with relativities between councils, and rate pegging affects all councils.

Generally, movements in the grants are caused by annual variations in property valuations, standard costs, road and bridge length, disability measures, and population.

The Commission, because of the practical and theoretical problems involved, does not consider the requirements of councils for capital expenditure. In order to assess capital expenditure requirements the Commission would have to undertake a survey of the infrastructure needs of each council and then assess the individual projects for which capital assistance is sought. This would undermine council autonomy, because the Commission, rather than the council, would determine which projects were worthwhile. Further, councils that had failed to adequately maintain their assets could be rewarded at the expense of those that did maintain them.

The issue of funding for local water and sewerage undertakings was examined during the process of consultation between the Commission, the Local Government and Shires Associations, and local government generally. The consultation process preceded the development of the distribution principles required under the 1986 Commonwealth legislation.

The Associations and local government recommended to the Commission that water and sewerage functions not be included in the financial assistance grants distribution principles. The main reasons given were:

  • water and sewerage services are not functions performed by all general purpose councils in New South Wales;
  • if water and sewerage functions were to be considered, the level of funds available for other council functions would be significantly diminished;
  • including water and sewerage services would result in a reduced and distorted distribution of funds to general purpose councils; and
  • other sources of funds and subsidies are available to councils by the State government for water and sewerage schemes.

The Commission agreed with the submissions of the Associations and local government. Accordingly, water and sewerage functions are excluded from the distribution formula.

The Commission views income from council business activities as a policy decision and, therefore, does not consider it in the grant calculations (effort neutral). Similarly, losses are not considered either.

Debt servicing is related to council policy and is therefore excluded from the Commission's calculations. In the same way, the consequences of poor council decisions of the past are not considered.

Generally, the level of a council's expenditure on a particular function does not affect the grants. The use of a council's expenditure is generally limited to determining a state standard cost for each selected function. The standard costs for these functions are then applied to all councils in calculating their grants. What an individual council may actually spend on a function has very little bearing on the standard cost or its grant.

Efficient councils are rewarded by the effort neutral approach of the calculations. To illustrate this, two councils with similar populations, road networks, property values, and disability measures would receive similar grants. The efficient council can use its grant funds to provide better facilities for its ratepayers. The inefficient council needs to use its grant funds to support an inefficient operation and cannot provide additional services to its ratepayers. Therefore, the efficient council will benefit from its efficiency.

Council categories have no bearing on the grants. Categories simply provide a convenient method of grouping councils for analysis purposes.

Local roads component

The method of allocation of the local roads component is based on a simple formula developed by the New South Wales Roads and Traffic Authority. The formula uses councils' proportion of the State's population, local road length and bridge length. Refer to the 'principles' elsewhere in this report for details.

Summary of formulae used to calculate expenditure and revenue allowances of the general purpose component

Expenditure allowances

General

Allowances for the majority of functions are calculated on the following general formula

Ac = Nc x Es x Dc

where:

Ac = allowance for the council for the expenditure function

Nc = number of units to be serviced by council

Es = standard expenditure per unit for the function

Dc = disability for the council for function in percentage terms

Road length allowances

In addition to the disability allowances, length allowances are calculated for each road type based on the following formula:

Ac
=
Nc
x
Es
x
Lc
-
Ls
Nc
Ns

where:

Ac = allowance for road length allowance

Nc = number of relevant properties for the council

Es = standard cost per kilometre

Lc = council's relevant length of road per relevant property.
Nc

Ls = standard relevant length of road per relevant property.
Ns

Isolation allowances

Isolation allowances are calculated for all non-metropolitan councils based on the following formula:

Ac = Pc x ([Dsc x K1] + [Dnc x K2] + Ic)

where:

Ac = the isolation allowance for each council

Pc = the adjusted population for each council

Dsc = the distance from each council's administrative centre to Sydney

Dnc = the distance from each council's administrative centre to the nearest major regional centre (a population centre of more than 20,000)

Ic = the additional per capita allowance due to industrial award obligations (if applicable)

K1 and K2 are constants derived from regression analysis

Specific purpose payments

Allowances for functions are discounted where appropriate to recognise the contribution of specific purpose grants. The discount factor that generally applies is:

1
-
_____Gc____
(Nc x Es) + Ac

where:

Gc = the specific purpose grant received by the council for the expenditure function

Nc = number of units to be serviced by council

Es = standard expenditure per unit for the function

Ac = allowance for the council for the expenditure function

Revenue allowances

General

The general formula for calculating revenue
allowances is:

Ac = Nc x ts x (Ts -Tc)

where:

Ac = revenue allowance for the council

Nc = number of properties (assessments)

ts = standard tax rate (rate-in-the-dollar)

Ts = standard value per property

Tc = council's value per property.

The standard value per property (Ts) is calculatedas follows:

Ts
=
__Sum of rateable values for all councils__
Sum of number of properties for all councils

The standard tax rate (ts) is calculated as follows:

ts
=
Sum of net rates levied for all councils
Sum of rateable values for all councils

Pensioner rebates allowances

The general formula for the allowance to recognise the differential impact of compulsory pensioner rates rebates is:

Ac = Rc x Nc x (Pc - Ps)

where:

Ac = the allowance for the council

Rc = the standardised rebate per property for the council

Nc = the number of residential properties

Pc = the proportion of eligible pensioner assessments for the council

Ps = the proportion of eligible pensioner assessments for all councils

The standardised rebate for the council (Rc) is:

Rc = 0.25 x Tc x ts

where:

Tc = the average value per residential property in the council

ts = the standard tax rate (rate-in-the-dollar) for residential properties

The maximum value for Rc is set at $125.

NB. Tc and ts are calculated as for the revenue allowances except only residential properties are used.

Principles

General purpose (equalisation) component

These principles, consistent with the National Principles of the Local Government (Financial Assistance) Act 1995, are based on an extensive programme of consultation with local government prior to implementation of the 1986 legislation.

The agreed principles are:

  1. General purpose grants to local governing bodies will be allocated as far as practicable on a full equalisation basis as defined in the Local Government (Financial Assistance) Act 1995; that is a basis which attempts to compensate local governing bodies for differences in expenditure required in the performance of their functions and in their capacity to raise revenue.
  2. The assessment of revenue and expenditure allowances of local governing bodies will, as far as is practicable, be independent of the policy or practices of those bodies in raising revenue and the provision of services.
  3. Revenue-raising capacity will primarily be determined on the basis of property values; positive and negative allowances relative to average standards may be calculated.
  4. Revenue allowances may be discounted to achieve equilibrium with expenditure allowances.
  5. Generally for each expenditure function an allowance will be determined using recurrent cost; both positive and negative allowances relative to average standards may be calculated.
  6. Expenditure allowances will be discounted to take account of specific purpose grants.
  7. Additional costs associated with non-resident use of services and facilities will be recognised in determining expenditure allowances.
  8. In the event of council amalgamations, the new council will receive grants for two years as if the councils had remained separate entities and any subsequent change may be phased in at the discretion of the Commission.

Local roads component

Financial assistance which is made available as an identified local roads component of local government financial assistance will be allocated so as to provide Aboriginal communities equitable treatment in regard to their access and internal local roads needs.

1. Urban [metropolitan] area

'Urban area' means an area designated as an 'urban area':

  1. the Sydney Statistical Division
  2. the Newcastle Statistical District
  3. the Wollongong Statistical District

2. Rural [non-metropolitan] area

'Rural area' means an area not designated as an 'urban area'

3. Initial distribution

27.54 per cent to local roads in urban areas.
72.46 per cent to local roads in rural areas.

4. Local roads grant in urban areas

Funds will be allocated:

  1. 5 per cent distributed to individual councils on the basis of bridge length
  2. 95 per cent distributed to councils on the basis of:
    1. 60 per cent distributed on length of roads
    2. 40 per cent distributed on population

5. Local roads grant in rural areas

Funds will be allocated:

  1. 7 per cent distributed to individual councils on the basis of bridge length
  2. 93 per cent distributed to councils on the basis of:
    1. 80 per cent distributed on length of roads
    2. 20 per cent distributed on population

6. Population

Population will be based on the most up-to-date Estimated Resident Population figures available from the Australian Bureau of Statistics.

Road length will be based on the most up-to-date data available to the Local Government Grants Commission of New South Wales for formed roads, which are councils' financial responsibility.

Bridge length will be based on the most up-to-date data available to the Local Government Grants Commission of New South Wales for major bridges and culverts six metres and over in length, measured along the centre line of the carriageway, which are councils' financial responsibility.

The method of application of the statistics will be agreed to between representatives of the Local Government Grants Commission of New South Wales and the Local Government and Shires Associations of New South Wales.

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Victoria

The Victoria Grants Commission allocates general purpose and local road grants to councils on the basis of the relevant national principles.

General purpose grants methodology

General purpose grants are used to compensate councils for inherent cost disabilities and revenue-raising disabilities, recognising their unique needs. In keeping with the requirement of allocating general purpose grants to councils on the basis of horizontal fiscal equalisation, the Commission seeks to equalise the capacity of each council in Victoria to provide an average range of services at a standard level.

The methodology, based on horizontal fiscal equalisation, is qualified by the requirement that each council should receive a minimum per capita amount (an as-of-right grant) regardless of assessed need.

Formulae

The Commission's methodology requires an estimate to be made of the expenditure that each council would need to incur if it chose to provide a standard range and level of services (standardised expenditure) and the revenue that each council would raise if it rated its valuation base at a standard rate (standardised revenue). The difference between the standardised expenditure and the standardised revenue for a particular council is known as the raw grant. The model has the general form:

G = E - R

where:

G = the raw grant for any council

E = the standardised expenditure for that council

R = the standardised revenue for that council

Standardised expenditure (E)

Standardised expenditure is calculated for each of 20 Victorian standard expenditure functions for each council.

For any particular function the standardised expenditure (E) is calculated as the product of its units of need (u), the standard cost per unit of need (c), a discount factor (d) and its disability factor (D). This can be expressed as:

E = u x c x d x D

The Commission performs this calculation on each of the standard or core set of functions commonly carried out by councils. The products of these calculations for each particular council are aggregated to derive the standardised expenditure for a council on the set of core functions.

Units of need (u)

Units of need are the prime users or drivers of the service and are sometimes referred to as major cost drivers. They can be represented by the total population of the council for some functions or as a subset of the population for others, for example, aged services, or the total road length in other instances.

Standard cost per unit of need (c)

A standard unit cost for each function is derived by calculating the modal value of the gross expenditure per unit of need for all councils in Victoria. The main unit of need is the population or sub-categories of the population of the council, however some of the functions rely on other needs including lengths of local roads (for the road functions) and the number of households serviced (for the function of sanitation).

Standard cost (u x c)

The standard cost for any council is the product of the standard unit cost (uniform for all councils) and the number of units of need for that council.

Discount factor (d)

A discount factor is introduced into the equation to take account of revenue received by councils from grants and in some cases, revenue from other sources. The discount factor is calculated by dividing the council contribution by total expenditure on the service. The discount factor ranges from 0 to 1.0 and is calculated for each function for each council. A factor of 1.0 implies that there are no specific purpose grants or reimbursements and the whole cost of the service has been met from council funds. A discount factor of 0 implies that the whole cost of the service has been met from specific purpose grants or other sources of revenue.

Disability factors (D)

The Commission assigns a disability factor for each function for each council. These factors provide the avenue through which the inherent disadvantages, such as high service costs beyond a council's control, can be incorporated into calculation of the grants.

Standardised revenue (R)

The calculation of standardised revenue for each council involves the following steps. The total rate revenue for Victoria is obtained by adding the actual rate revenue reported by each council. The valuation base for each council is obtained from the Valuer-General, who provides the Commission with an estimate of the net annual value, indexed to a common valuation date. In mathematical terms, the standardised revenue (R) for each council can be expressed as:

R = V x r

where:

V = the valuation base for the council averaged over three years

r = the standard rate for all councils, calculated as a three-year average

Disability factors

The premise behind the principle of horizontal fiscal equalisation is that each council should be able to function at a standard not lower than the average standard of other councils in Victoria. To implement this principle, differences in the expenditure and revenue-raising capacity of councils are taken into account in light of council's needs. These needs are reflected in the disability factors that comprise one element of the equation to calculate standardised expenditure.

Disability factors are primarily used to compensate councils for factors beyond their control. These factors may include such variables as the socioeconomic profile of a council, its physical terrain or isolation, which all contribute to differences in unit costs and hence expenditure levels from one council to the next.

The model developed in 1996 by Dr Ian Manning of the National Institute of Economic and Industry Research identified multiple cost drivers, which, when given a suitable weighting, provided an improved measure of the relative expenditure disabilities of councils. The model, which has been subject to a number of successive modifications since 1996, was further refined for the 2000-01 allocation of grants.

Refinements to disability factors

The following changes were made to disability factors and their minor cost drivers for the 2000-01 allocation of grants:

  • Health and welfare disability factor - Last year the 'health and welfare' function was based upon three cost drivers, retail employment, socioeconomic status and aboriginality all carrying a third weighting. Calculation of the disability factor for the function of 'health and welfare' was changed in the 2000-01 allocation as follows:

    The retail employment minor cost driver which was used as a proxy for the relative effort required by councils in inspecting food premises was deleted and replaced with a new minor cost driver based on the number of registered establishments handling food. This cost driver was seen as a more appropriate indicator for the 'health and welfare' function.

  • Aged services disability factor - As a result of representations to the Commission from a number of councils the 'aged services' function was modified to include two additional minor cost drivers as follows:

    'English speaking proficiency' (as measured by the Australian Bureau of Statistics census data) was added. This was as a result of submissions from a number of councils servicing a significant number of people from different ethnic groups.

    'Isolation' was also included in response to representations from rural councils. This minor cost driver is based on the distance from the council's headquarters to Melbourne and to the nearest regional centre.

    The other minor cost drivers for the aged services function are 'socioeconomic status' and 'aged population over 70 years'. All four minor cost drivers had a range set to 1.0 to 2.0 and the English Proficiency Index was centred on the State average.

  • Community services - An index of the number of tourists visiting each municipality, based on Australian Bureau of Statistics data on total guest nights per council, has replaced 'duplication' as a minor cost driver for the function of 'community services'. Several councils made representations to the Commission seeking the introduction of a tourism component based on the impact significant numbers of visitors have made within their municipal boundaries. There had also been concerns about the continued use of the duplication index because of the age and accuracy of the data used in its construction; the fact that the number of administration centres may not necessarily reflect the dispersal of a council's population; and the fact that the number of centres is effectively a council policy decision and the indicator is not strictly effort neutral.

    The new 'tourism' index is based on Australian Bureau of Statistics data for accommodation establishments with 15 beds or more. It is centred on the State average for tourist bed-nights and both Melbourne City Council and Alpine Shire Council have been set at the maximum value of two. The three other minor cost drivers - 'isolation', 'scale' and 'growth' - used to calculate the overall disability factor for the 'community services' function, still apply.

  • Traffic management and street beautification - Based on arguments in council submissions that the scale used in the 'age of infrastructure' index was inappropriate because it did not account for the significant age of infrastructure in some of the older parts of some councils in the 'metropolitan developed' category. The 'age of infrastructure' minor cost driver used in the assessment of the functions of 'traffic management' and 'street beautification' was increased from 1.0 to 1.2 for councils in the 'metropolitan developed' category.
  • Sanitation disability factor - The Commission agreed to cap the discounted standardised expenditure for sanitation at 20 per cent above the actual expenditure (as was the case in 1999-2000) and not permit it to fall lower than actual expenditure. This reflects the reality that councils have only a limited discretion in the expenditure in this function, in part due to the requirements of external bodies such as the Environment Protection Authority.
  • Mulholland model - As a result of representations from councils requesting that the Mulholland factors more closely align those of neighbouring councils, data for the factors was revised based on the 1998-99 council returns and the submissions for the 2000-01 allocations. The revised factors also impact on the minor cost drivers for the functions of 'traffic management', 'aerodromes', 'sanitation' and 'environment protection and drainage'.

Movements in grants

The Victoria Grants Commission takes particular care to ensure that grants to councils do not fluctuate significantly from one year to the next. Due to a significant amount of variability in the 2000-01 determinations, the Commission sought to keep fluctuations in general purpose grants within a range of -6 per cent to +20 per cent compared to the corresponding grants of the previous year.

In recognition of the relatively greater reliance that smaller councils place on grant revenue, and the need to provide such councils with financial stability, the Commission decided to apply, for the second successive year, a staged floor to the caps for councils with populations of less than 20,000, such that:

  • for councils with a population of up to 10,000, the general purpose grant for 2000-01 was no less than the previous year's grant;
  • for councils with a population of between 10,000 and 15,000, any reduction was limited to 2 per cent; and
  • for councils with a population of between 15,000 and 20,000, any reduction was limited to 4 per cent.

Natural disaster assistance

A separate component of the financial assistance grants is an allocation for natural disaster relief. The Commission provides flood (storm damage) or bushfire relief on receipt of approved natural disaster documentation from the Department of Treasury and Finance and/or VicRoads, where the council contribution exceeds $10,000.

Councils are not eligible for natural disaster relief unless they have contributed to the repairs/restoration work, and relief is capped at $35,000 per natural disaster for each council in any one year. A total of $99,055 was allocated to four councils in 2000-01 to assist them with restoration relating to flood damage.

General purpose grants review

In February 2000 the Commission engaged consultants to undertake a major review of the methodology used to allocate general purpose grants to councils. The objective of the review is to ensure that general purpose grants are allocated in a manner which is fair, predictable, stable and transparent.

A draft 'issues and options' paper was circulated to interested parties in late 2000. A series of regional seminars was held in November 2000 and written submissions on the issues and options paper were received from councils and interested parties. The input from both the seminars and the written submissions was taken into account in the Review of the allocation of General Purpose Grants to Victorian Councils - Final Report, released in May 2001.

A revised Annual Return of Information and accompanying information manual is being prepared. The revised methodology is expected to be operational in 2002-03.

Local roads grants

The national principles include one which applies to the allocation of the roads funding element of the general purpose grant. It focuses on the relative needs of each council for roads expenditure and preservation of its road assets.

The distribution of local roads funding for 2000-01 was undertaken using a methodology which takes account of each council's population and length of local roads, by road type. 2000-01 was the last year that the Commission allocated the local roads grants using this methodology. A new formula will be used in 2001-02 which is based upon the length of all local roads and traffic volumes carried by those roads.

Formulae

Grant = P x (1 + c) x {a x population + b x sealed road length + b/2 x formed and surfaced road length}

where:

a = {category share of pool (ie 30 per cent, 7 per cent or 63 per cent) x category population weighting factor (ie 20 per cent or 40 per cent) x council loading factor (ie 0.9, 1 or 1.1)} divided by population for category, adjusted for loading factors

b = {category share of pool (ie 30 per cent, 7 per cent or 63 per cent) x category road weighting factor (ie 80 per cent or 60 per cent) x council loading factor (ie 0.9, 1 or 1.1)} divided by sealed road length plus half the formed and surfaced road length for category, adjusted for loading factors

c = a council's ratio of past special impact grants to the local roads formula grants (over 1994-95 and 1993-94, where there is comparable data; otherwise using 1994-95 ratios)

P = constant set so the total grants produced by the equations equals the allocation amount

a and b are constants for all councils in any single category of council for any given year, but change marginally from one year to the next with the total population and road lengths within each category of council. The loading factor is to allow for variations amongst councils in topography and rainfall.

In allocating local roads funding for 2000-01, for the second successive year the Commission set aside 4 per cent of the total pool, or approximately $3.3 million, to help councils develop their local roads databases. Each council was allocated a base sum of $20,000, with the balance of the available funds being allocated on the basis of each council's length of local roads. With the assistance of these special funds, new data in the form of daily traffic volumes in urban and rural areas was collected during June to July 2000 and will be used in conjunction with external cost modifiers and average life-cycle costs to undertake a modelling exercise using the proposed formula.

New local roads funding methodology

In late 1998 the Victoria Grants Commission engaged ARRB Transport Research Limited and the National Institute of Economic and Industry Research to undertake a review of the methodology used to allocate Commonwealth Government provided local roads funding to councils in Victoria.

The final report, released in July 1999, recommended introduction of a new methodology based on the average life-cycle costs of each council's local road network and incorporating several cost disabilities. It recommended that the key determinants for allocating local roads grants in future be road length and traffic volumes, supplemented by the application of cost modifiers relating to freight, climate, materials availability, subgrade condition and whether or not roads are strategic routes. In addition, it was recommended that a small pool of funds be set aside to assist councils in local road network planning and management.

The Commission adopted the final report's recommendations on an 'in-principle' basis, and wrote to all councils seeking traffic volume information on a consistent basis. This information was received by December 2000 and facilitated the modelling of the outcomes of the proposed new methodology. The new formula will be first implemented in 2001-02.

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Queensland

Methods

Fiscal equalisation component

The principles of fiscal equalisation attempt to provide the resources necessary to enable councils to supply services to an average standard while facing a diverse range of geographic, social and economic circumstances. The relative dependency of councils on the financial assistance varies considerably and this provides the basis for the allocation.

The Queensland Local Government Grants Commission uses a balanced budget approach.

The Queensland Local Government Grants Commission takes into account the expenditure needs and the revenue-raising capacity of councils. The Grants Commission therefore determines a notional budget for each local government in Queensland. The notional budget is calculated by assessing the expenditure need and revenue-raising capacity based on a state average for local government activities.

Once a notional budget has been determined for each council, a grant is calculated which ensures each council has an equal ability to fund its assessed expenditure need. This is presented in the equations below.

G = kE - (R + I), that is

I + R + G = kE

where:

k = scaling factor

G = the grant

R = revenue capacity

E = expenditure need

I = other grants treated as revenue

The formula ensures that the calculated grant (G) plus the assessed revenue (R) and other grants treated as revenue (I) would fund the same proportion (k) of expenditure needs (E) across all councils.

Expenditure need is calculated as the total assessed expenditure on services, roads and the actual expenditure on a range of functions referred to as 'effort positive' functions.

The revenue-raising capacity of each council is calculated as the total of assessed rates, assessed other revenue and effort-positive revenue.

In determining the grant for each council other grant contributions from the Commonwealth and State are taken into account as revenue.

The major inclusion for all councils is the Commonwealth's identified road grant. The Queensland Local Government Grants Commission takes 70 per cent of this grant revenue into account. It is discounted to 70 per cent as the grant revenue can be expended on functions excluded by the Grants Commission in calculating the fiscal equalisation grant, namely water and sewerage. It is estimated that, on average, 30 per cent of council expenditure is on water and sewerage.

The other source of grant revenue taken into account is the State and Commonwealth operating subsidies received by Aboriginal and Torres Strait Island councils. Sixty-seven per cent of this grant revenue is taken into account. It is discounted as the grant revenue is able to be expended on excluded functions, such as water and sewerage, and other functions, such as police services, which are not supplied by the non Aboriginal and Island councils.

Identified road component

In 2000-01 the identified road component was distributed between local governing bodies on the following basis:

  • 62.85 per cent in proportion to road length ($332.64 per kilometre); and
  • 37.15 per cent in proportion to population ($8.05 per capita).

Principles

National Principles

The National Principles relating to allocation of general purpose grants payable under section 9 of the Local Government (Financial Assistance) Act 1995 are at Appendix A.

Transitional modification of National Principles

Modification principle

Queensland was given an extension to phase-in significant grant distribution effects resulting from implementing the National Principles, in force under section 6 of the Local Government (Financial Assistance) Act 1995.

The phase-in arrangements are to accord with the agreement the Commonwealth and Queensland Ministers for Local Government entered into. The relevant phase-in conditions of that agreement are detailed below.

  • For any Aboriginal and Torres Strait local governing body, the actual payment of grants in 2000-01 is not less than the actual payment made to that local governing body in 1999-2000.
  • For any local governing body, other than an Aboriginal and Torres Strait local governing body, the actual payment of grants in 2000-01 does not reduce by an amount in excess of 15 per cent the actual payment made to that local governing body in 1994-95.
  • The actual payment of grants to any local governing body, other than an Aboriginal and Torres Strait local governing body, in 2000-01 is not less than 95 per cent of the actual payment received by that local governing body in 1999-2000.
  • An actual payment to a local governing body refers to the payment of allocations after any adjustments under sections 10 and 13 of the Act is to be taken into account.
  • The National Principles, save as modified by this determination, apply to Queensland.

Formulae

Fiscal equalisation component

In the equations the following codes are used:

TRP = Total number of rateable properties

GVRP = Gross value of rural production (averaged over five years)

PI = Personal income of all residents of a local governing body area (1996 Census data adjusted for taxable income)

RRTS = Residual retail turnover sales (the difference between the retail sales turnover in a local governing body area and that local governing body's urban personal income multiplied by the average state retail sales per state urban personal income, and adjusted for taxable income)

UCV = Unimproved capital value

POP = Population

KR = Kilometres of total local road

Revenue

Rate-raising capacity

Total rates $ = 24.896 x TRP + 0.01263558 x GVRP + 0.01473695 x PI + 0.00458692 x RRTS + 0.00214283 x UCV (local governments)

Total rates $ = 0.00 (Aboriginal and Torres Strait Islander councils)

Fees

Fees and charges $ = 134.76 x POP

Effort positive charges

Parking Fines and Fees
Aerodrome
Other Transport
} $ = Effort Positive
(actual revenue)

Expenditure

Services

Current and capital $ = 868 346 + 307.44 x POP (local governments)

Current and capital $ = 810.32 x POP (Aboriginal and Torres Strait Islander councils)

Roads

Current and capital $ = 3 196.83 x KR

Effort positive

Includes:

  • aerodromes
  • other transport
  • agricultural and forestry
  • urban storm water drainage
  • parking

Current and capital $ = effort positive (actual expenditure)

Other expenditure not elsewhere included

Current and capital are treated as an overhead and apportioned on a pro rata basis of total assessed expenditure needs of other functions.

Inclusions

The Commission treats the following items as inclusions.

  • 70 per cent of the year under review's identified road component.
  • 67 per cent of the Aboriginal and Torres Strait Islander councils' operating grant received from the Queensland Department of Aboriginal and Torres Strait Islander Policy and Development.

Identified road component

In 2000-01 the identified road component was distributed between local governing bodies on the following basis:

62.85 per cent in proportion to road length ($332.64 per kilometre); and

37.15 per cent in proportion to population ($8.05 per capita).

Table B.1: Fiscal equalisation formula

Changes to methodology from previous year

This year the Commission introduced budgetary stability and interstate consistency moderations to its basic methodology. The latter included a graduated cap (rather than the flat percentage used in 1998-99). During the year the Commission completed a review of the 'asset preservation' based road network factor. The State Office of Economic and Statistical Research was also briefed to examine new regression equations for rate revenue, and services expenditure.

With the current review of the Local Government (Financial Assistance) Act 1995, which could introduce basic changes to grants methodologies, the Commission decided that two changes in grant outcomes within a year or so were undesirable. In making its recommendations therefore it:

  • retained the current regression equations rather than changing to new ones, and
  • phased in the new road network factors over two years - the recommendations for 2000-01 therefore use a mean of the old and new factors.

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Western Australia

The Western Australian Local Government Grants Commission uses a balanced budget method for allocating the general purpose funds, and an asset preservation model for allocating the identified local road funding component.

It is the Commission's task to equalise the capacity of all local governments in Western Australia to provide services and facilities at an average standard, by allocating the Commonwealth financial assistance funds on a full horizontal equalisation basis.

The balanced budget method involves assessing the revenue-raising capacity (five categories) and the expenditure needs (eight categories) of each local government. The equalisation requirement of each local government is calculated by subtracting the assessed revenue from assessed expenditure. Local governments receive grants proportional to their share of the State total equalisation requirement, subject to the minimum grant provision.

In the 2000-01 determinations, there were 24 local governments receiving the minimum grant entitlement (the same number as in the previous year).

Detailed below is a list of refinements that have been made to grant calculation methods as a result of local government submissions and the Commission's on-going research programme.

Changes in population

The Commission has used the latest (30 June 1999) Australian Bureau of Statistics estimated resident population estimates (Cat. No. 3234.5) to calculate standards. Some 57 local governments showed a decline in population on the previous year.

Grant capping

The 2000-01 grants are based on a five-year average of 'preliminary equalisation requirement' of local governments. This is a change to last year's assessments, which were based on a four-year average of equalisation requirements. The Commission believes use of a five-year average provides more stability in grant outcomes.

The Commission considered a submission from the City of Albany for an extension to the period of grant level maintenance following the amalgamation of the former Town and Shire local governments. The Commission accepted the City's submission and maintained the City's grant at the pre-amalgamation level for a further year.

Maximum reduction

In reviewing the grant allocations derived from the final model, the Commission decided to apply a maximum decrease of 15.72 per cent. The effect of applying this limit was to lessen the reduction to be experienced by two local governments - the Shires of Busselton and Williams.

Revenue standards

The Commission adopted revenue standards for residential and commercial/industrial rates, agricultural rates, pastoral rates, mining rates and extraordinary revenue, as well as building control charges and recreation and culture charges, consistent with previous years.

Some adjustment was made to the gross rental values used for Ashburton, Exmouth and Moora to recognise the impact of cyclones Elaine and Vance on revenue capacity.

Agricultural rates

There was a significant increase in the per assessment component to the equation, from $127 to $232 per assessment. This increase means the equation better reflects the greater income capacity of local governments with a large number of small lots. The final equation adopted by the Commission includes the per assessment component of $232, as well as components for valuation and agricultural area (hectares).

Mining rates

Valuation data has been obtained from the Valuer-General for the first time. Data on tenements was previously sourced from the Department of Minerals and Energy.

Expenditure standards

There were two significant changes in the methods of calculating the expenditure standards compared to previous years.

Table B.2: Equations used to calculate revenue and expenditure standards

Expenditure net of disabilities

Last year the Commission 'netted out' the value of the disability allowances from the total governance expenditure for each local government before calculating this standard. If this is not done, the State total assessed expenditure, after disability allowances have been provided, can be about 10 per cent more than the actual expenditure. Under the 'netting out the disabilities' approach, when the disability factors are added later in the balanced budget, the total assessed expenditure will be close to the total actual expenditure. This also avoids the complication of calculating the standard on the actual expenditures, which are heavily affected by disability factors.

This approach was extended this year to the education, health and welfare, community amenities and recreation and culture standards.

One effect of this approach is to reduce the overall assessed expenditure needs in the State, as well as increase the final 'factor back' ratio.

Use of a dwellings/rate assessments indicator

Most of the Commission's expenditure standards have traditionally been calculated on a population (or adjusted population) basis. A number of submissions were made by local governments arguing that the Commission should consider other dwelling and property statistics when calculating standards. Following consideration of this request the Commission adopted an equation for governance which included a per assessment component and an equation for recreation and culture which included a per dwelling component. Both equations still include a weighting for (adjusted) population and a constant.

The effect of this change was to increase the assessments for local governments with relatively large numbers of dwellings or rate assessments, in particular those areas with holiday homes and hobby farms, which had submitted to the Commission that their overall expenditure needs had been under-assessed because of the Commission's reliance on population statistics.

Transport

As in previous years, transport needs were calculated for each local government by adding non-road expenditure items (footpaths, street lighting, laneways and aerodromes) to road preservation needs obtained from the asset preservation model.

The calculated transport standard would result in many large changes in grants. To cushion these changes, the phase-in arrangement, started in 1996-97, has been continued. The assessed expenditure standard for 2000-01 will be made up of 0.3 of the 1995-96 transport standard and 0.7 of the calculated 2000-01 transport standard.

Disability factors

Once again, a broad range of disability factors have been applied. A number of factors have been updated to reflect more current information (e.g. development and heritage factor). Major changes included revisions to the application of the location and population dispersion factor.

Location factor

The Commission has discontinued its use of the location factor to calculate an adjusted standard. Last year, the Commission applied the location factor in the same way as all other factors to all expenditure standards except governance. They were multiplied by the preliminary standard. This year the change was extended to governance, and this effectively removed the compounding effect of location on other factors.

This had the effect of reducing the disability allowances for all local governments with a location factor, but this was compensated for by the increases in the location factor arising from the recent review of the factor.

Tourism factor

The Commission has been considering the deletion of the tourism disability factor for some time. The Commission advised local governments of this possibility and invited comments on the issue, however the number of comments received was disappointing.

In light of the inclusion of a per-dwelling component in the recreation and culture expenditure assessment, the Commission decided to delete the tourism factor from that category only. The issue will be kept under review for the 2001-02 determinations.

Environment issues

The salinity allowance has been increased to recognise the 28 local governments in the Rural Towns Programme. An extra environmental allowance has also been provided to the three Shires affected by the Regional Forest Agreement.

The Commission plans to undertake a thorough review of all environment related disabilities for the 2001-02 determinations.

Local road funding

Under the current principles, 7 per cent of Federal funds is allocated for special projects (one-third for roads serving Aboriginal communities and two-thirds for major bridge works). The remaining 93 per cent is distributed according to the asset preservation model. The amounts involved are:

Roads serving Aboriginal communities $1,449,794
Bridges $2,899,589
Amount for distribution $57,718,947
Total $62,068,330

Special projects - roads serving Aboriginal communities

The Commission is advised by the Aboriginal Roads Committee which comprises representatives from the Western Australian Municipal Association, Main Roads Western Australia, Aboriginal Affairs Planning Authority, the Aboriginal and Torres Strait Islander Commission and the Department of Local Government. The aim of the Committee is to ensure that funds are allocated in accordance with the needs of Aboriginal communities.

The Committee has established funding criteria based on factors including the number of Aboriginal people served by a road, the distance of the community from a sealed road, the condition of the road, the proportion of traffic serving Aboriginal communities and the availability of an alternative access. These criteria have provided a rational method of assessing priorities in developing a five-year programme.

Special projects - bridges

The Commission allocates these funds in accordance with recommendations from Main Roads, which has specialised expertise in the management of bridges. Main Roads assesses proposals submitted by local governments using bridge condition reports and a bridge management programme. The recommendations are based on the priority of bridge maintenance needs.

Distribution of the 93 per cent component

These funds are distributed in accordance with road preservation needs determined by the Commission's asset preservation model. The model assesses the average annual cost of maintaining each local government's road network and has the facility to equalise road standards through the application of minimum standards. These standards help local governments that have not been able to develop their road systems to the same standard as more affluent local governments.

New asset preservation needs have been determined using updated road data. The principles of the asset preservation model, such as minimum standards and reconstruction standards, have been retained. Road lengths were generally similar to those used in 1999-2000, though a few local governments have updated their road statistics resulting in increased asset preservation needs.

While most local governments received increased grants, those that received increases of 10 per cent or more were due to increases in road statistics. Only three local governments received decreases, the maximum being by 4 per cent.

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South Australia

Methods - general purpose component

The methodology used to assess the general purpose component of the local government financial assistance grants is intended to achieve an allocation of grants to local governing bodies in the State consistent with the National Principles. The over-riding principle is one of horizontal fiscal equalisation, which is constrained by a requirement that each local governing body must receive a minimum entitlement per head of population as prescribed in the Commonwealth legislation.

The South Australian Local Government Grants Commission uses a direct assessment approach to the calculations. This involves the separate estimation of a component revenue grant and a component expenditure grant for each council, which are aggregated to determine each council's overall equalisation need. Available funds are distributed in accordance with the relativities established through this process and adjustments are made as necessary to ensure the per capita minimum entitlement is met for each council. For local governing bodies outside the incorporated areas (the Outback Areas Community Development Trust and five Aboriginal communities) allocations are made on a per capita basis.

Under the new methodology a standard formula is used as a basis for both the revenue and expenditure component grants. See explanation of formulae below.

Component revenue grants

Component revenue grants compensate or penalise councils according to whether their capacity to raise revenue from rates is less than or greater than the State average. Councils with below average capacity to raise revenue receive positive component revenue grants and councils with above average capacity receive negative assessments.

The Commission estimates each council's component revenue grant by applying the State average rate in the dollar to the difference between the council's improved capital values per capita and those for the State as a whole, and multiplying this by the council's population. The State average rate in the dollar is the ratio of total rate revenue to total improved capital values of rateable property. The result shows how much less (or more) rate revenue a council would be able to raise than the average for the State as a whole if it applied the State average rate in the dollar to the capital values of its rateable properties. This calculation is repeated for each of five land use categories, namely;

  • residential;
  • commercial;
  • industrial;
  • rural; and
  • other.

To overcome fluctuations in the base data, valuations, rate revenue and population are averaged over three years.

Subsidies

Subsidies which are of the type that most councils receive and are not dependent upon their own special effort, that is, they are effort neutral, and are treated by the 'inclusion approach'. Subsidies such as those for public bus and library services, and roads are included as a revenue function.

Component expenditure grants

Component expenditure grants compensate or penalise councils according to whether the costs of providing a standard range of local government services can be expected to be greater than or less than the average cost for the State as a whole due to factors outside the control of councils. The Commission assesses expenditure needs and a component expenditure grant for each of a range of function (see explanation of formula below) and these are aggregated to give a total component expenditure grant for each council.

The new methodology compares each council against the State average situation for each function. To enable the comparison to be consistent and to compare like with like, all comparisons are made on a per capita basis.

Each function is identified by a main driver or unit of measure. This is divided into the total expenditure on the function for the State as a whole to determine the average or standard cost for the particular function. For example, in the case of the expenditure function, for built-up sealed roads the unit of measure is 'kilometres of built-up sealed roads'.

Using this example, the length of built-up sealed roads per capita for each council is compared with the State's length of built-up sealed road per capita. The difference, be it positive, negative or zero, is then multiplied by the average cost per kilometre for construction and maintenance of built up sealed roads for the State as a whole (standard cost). This in turn is multiplied by the council's population to give the component expenditure grant for the function. As already indicated, this grant can be positive, negative or zero.

In addition, it is recognised that there may be other factors beyond a council's control which require it to spend more (or less) per unit of measure than the State average, in this example to reconstruct or maintain a kilometre of road. Accordingly, the methodology allows for a cost relativity index (CRI), to be determined for each expenditure function for each council. Indices are centred around 1.0, and are used to inflate or deflate the component grant for each council. In the case of roads, the CRIs measure relative costs of factors such as material haulage, soil type, rainfall and drainage.

Aggregated revenue and expenditure grants

Component grants for all revenue categories and expenditure functions, calculated for each council using the method outlined above, are aggregated to give each council's total raw grant figure. Where the raw grant calculation per head of population for a council is less than the per capita minimum established as set out in the Act, ($14.41 for 2000-01), the grant is adjusted to bring it up to the per capita minimum entitlement. The balance of the allocated amount, less allocations to other local governing bodies outside the incorporated areas, is then apportioned to the remaining councils based on their calculated proportion of the raw grant. Commission-determined limits may then be applied to minimise the impact on council's budgetary processes. (For 2000-01, no council's grant changed by more than -10 per cent or +20 per cent from the previous year's actual allocation.) An iterative process is then undertaken until the full allocation is determined.

Methods - Identified local road grants

In South Australia, the identified local road grants pool is divided into formula grants (85 per cent) and special local road grants (15 per cent).

The formula component is divided between metropolitan and non-metropolitan councils on the basis of an equal weighting of road length and population.

In the metropolitan area, allocations to individual councils are determined again by an equal weighting of population and road length. In the non-metropolitan area, allocations are made on an equal weighting of population, road length, and area of council.

Distribution of the special local road grants is based on recommendations from the Local Roads Advisory Committee. This Committee is responsible for assessing submissions from regional associations on local road projects of regional significance.

Methods - Outback Areas Community Development Trust

The Outback Areas Community Development Trust is prescribed as a local governing body for the purposes of the Grants Commission's recommendations.

The Trust was established in May 1978 under legislation of the South Australian Parliament. It has a broad responsibility for community development activities in the outback areas of the State and with particular emphasis on those functions that are at present normally undertaken by local councils elsewhere in the State.

Due to the lack of comparable data, the Commission is not able to calculate the grant to the Trust in the same manner as grants to other local governing bodies. Rather, a per capita grant has been established. The 2000-01 per capita grant was $150.00.

Methods - Aboriginal communities

Since 1994-95 the Grants Commission has allocated grants to five Aboriginal communities recognised as local governing authorities for the purposes of the Commonwealth Local Government (Financial Assistance) Act 1995.

The Aboriginal communities are Anangu Pitjantjatjara, Gerard Community Council Inc., Maralinga Tjarutja, Nepabunna Community Council Inc., and Yalata Community Council Inc.

Again, due to the unavailability of data, grants for these communities are not calculated in the same manner as grants to other local governing bodies. The Commission utilised the services of a consultant, Alan Morton, of Morton Consulting Services, who undertook a study on the expenditure needs of the communities and their revenue-raising capacities. Comparisons were made with communities in other states and a per capita grant was established. For 2000-01 the per capita grant varied from $220 for Gerard to $300 for Anangu Pitjantjatjara and Maralinga Tjarutja.

Formulae

General financial assistance

The formula for calculating the raw revenue grants can be expressed as:

G
=
Pc
x
S
x
[(
Us
x
CRIs)
-
(
Uc
x
CRIc) ]
Ps
Pc

Similarly, the formula for calculating the raw expenditure grants can be expressed as:

G
=
Pc
x
S
x
[(
Uc
x
CRIc)
-
(
Us
x
CRIs) ]
Pc
Ps

where:

G = council's calculated relative need assessment

P = population

U = unit of measure. Some units of measure are multiplied by a weight.

S = standard, be it cost or revenue =

expenditure or income
U

CRI = Cost Relativity Index (previously known as the disability factor). They are centred around 1.00, ie CRIs equals 1.00. If more than one CRI exists for any function then they are multiplied together to give an overall CRI for that function.

Subscripts of s or c are used to describe whether it applies to the State or a particular council.

Currently in all calculations, with the exception of stormwater, there are no disability factors applied and consequently, CRIc = 1.0.

The raw grants, calculated for all functions using the above formulae, both on the revenue and expenditure sides, are then totalled to give each council's total raw grant figure. Any council whose raw calculation per head is less than the per capita figure, ($14.41 for 2000-01), then has the per capita figure applied. The balance of the allocated amount is then apportioned to the remaining councils based on their calculated proportion of the raw grant. Commission-determined limits are then applied to minimise the impact on council's budgetary processes. (For 2000-01, no council's grant changed by more than -10 per cent or +20 per cent from the previous year's actual allocation.) An iterative process is then undertaken until the full allocation is determined.

Table B.3 details the approach taken to expenditure functions included in the new methodology.

Table B.3: Treatment of expenditure functions

The Commission is aware that there are many factors that may influence a council's expenditure and that it is not always possible to determine objectively the extent to which a council's expenditure is affected by inherent or special factors. Therefore, in determining units of measure and cost relativity indices, the Commission must exercise its judgement based on experience, the evidence submitted to the Commission, and the knowledge gained by the Commission during visits to council areas and as a result of discussions with elected members and staff.

Table B.4 enables a council to calculate its raw grant for each of the given functions. To do this the council must calculate its own unit of measure per capita, compare it with the similar figure from the table and then multiply the difference by the standard from the table and its own population. If CRIs are applicable they must be included as a multiplier against the council's unit of measure per capita. (CRIs are currently only used in the roads and stormwater functions. Further CRIs will be developed over time.)

Table B.4: Summary of standards by function

It must be stressed that this only allows the calculation of the raw grant, not the estimated allocation. The calculation of the estimated grant is not possible as per capita minimums need to be applied and the total allocation apportioned to the remaining councils.

Methodology update

Road length audit - Geographical Information System mapping

During 1999-2000, the Commission sought the assistance of consultants, PPK Environment and Infrastructure Pty Ltd, to audit council's road lengths by mapping all local roads across the State into a Geographical Information System (GIS). This consistently mapped framework provided a firm foundation for future work.

Early in 2001 the Commission engaged the services of an engineer, on a part-time basis, to refine the road length data (following updates supplied to the Commission by councils) and address other ongoing engineering-related concerns.

The CRIs developed previously to reflect the difference between councils of the cost of re-constructing and maintaining roads were re-run, to ensure the factors reflected the revised road lengths.

The outcome of revising the road length data was that:

  • no general trends were identified through the introduction of the revised road lengths. The adjustments were on an individual council basis; and
  • the revised CRIs resulted in a greater recognition of council's with very poor soils.

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Tasmania

General purpose grant distribution

The Commission's equalisation model is based on the 'balanced budget' approach. That is, each local governing body's grant entitlement is derived from the difference between:

  • the expenditure 'required' to provide a common range of services, given its unique cost conditions (standardised expenditure); and
  • revenue that could be raised by applying a standard or average rate per dollar of assessed annual values to all rateable property in that local governing body (standardised revenue), plus
  • specific purpose payments received that are treated by the 'inclusion' approach.

The difference between standardised expenditure and standardised revenue is the 'standardised deficit'. This becomes the net standardised deficit after adjustment for specific purpose payments and any special allowances. It should be noted that the total net standardised deficit normally exceeds the total of grant funds available. Accordingly, the final step in determining grant entitlements is to proportionately adjust the individual net standardised deficits to account for the shortfall.

Specific purpose payments are treated by either the 'inclusion' or 'deduction' approach. The 'inclusion' approach recognises funds received by councils as contributing to normal expenditure for the purpose of calculating expenditure standards. They are treated as a source of revenue and subsequently deducted from a municipality's standardised deficit. Using the 'deduction' approach, funds are excluded from expenditure and revenue data prior to the determination of expenditure standards. The deduction approach is employed where:

  • a council is effectively acting as an agent of the State or Commonwealth Governments and the specific purpose payment is a reimbursement of costs incurred; or
  • grants for a particular service are received by only a relatively small number of councils, and the service is generally provided only where grants are received.

Equalisation therefore occurs on the basis of 'net' expenditures where this particular approach to the treatment of specific purpose payments is adopted.

No matter how sophisticated the Commission's methodology might become, there is always the need for the Commission to exercise broad judgement as it considers the many and varied issues which confront it each year as it goes about its task of assessing grants.

A full explanation of the operation of the model is provided in the following paragraphs.

Calculating standardised revenue

A council's revenue-raising capacity, or standardised revenue, is determined by multiplying the rateable assessed annual value (AAV) of properties in the municipality by the average rate charged across the State. The Commission uses AAV data, adjustment factors and exempt AAV information supplied by the Office of the Valuer-General, and rate and water sales revenue information contained in the Australian Bureau of Statistics local government finance statistics. An adjustment is made to account for the value of properties which are partially exempt from rates, that is, liable for service charges only.

The rateable AAV for each council is determined and then adjusted using the Valuer-General's adjustment factors so that all figures are expressed in terms of a common valuation year. Total adjusted rateable AAV for the State is divided by the total rate revenue raised by all councils (which now also includes all revenues derived from the sale of water, including charges levied on a consumption basis) to yield a State average rate in the dollar. Standardised revenue for each council is then the product of its adjusted rateable AAV and the State average rate levied per dollar of AAV. The final standardised revenue for each council used in the base grant assessments is the relevant three-year averaged standardised revenue.

Calculating standardised expenditure

In general, the cost of providing council services varies depending upon the number of residents. Therefore, to determine the standard expenditure that is 'required' to provide a service, the Commission multiplies the State average expenditure per person by the number of residents in each municipality.

Many councils face a range of unavoidable cost pressures in providing services. This means they cannot provide a service at the standard level of expenditure. This is recognised by the Commission through the application of council-specific disability factors, which represent these unavoidable cost pressures, to standard expenditure to determine the standardised expenditure for each council. This method of estimating standardised expenditure is applied to all expenditure categories except the road category.

The Commission uses a modified version of the Mulholland asset preservation model to assess standardised road expenditure, based on each councils' road assets. The fundamental basis of the Mulholland asset preservation model is that, in statistical terms, a kilometre of road has an 'expected life', assuming it is appropriately constructed and maintained. At the end of this period, it will require re-construction followed by a new cycle of maintenance and rehabilitation in order to preserve it at an acceptable standard. The 'expected life', or durability, of a kilometre of road maintenance work will clearly differ depending upon both the type of activity (sealing, re-grading) and the type of road (urban sealed, urban unsealed, rural sealed, rural unsealed) involved. Similar arguments hold with respect to both road rehabilitation and road re-construction work.

Performance standards specify, for each road type, the length of road requiring re-construction, re-grading or re-sealing each year in order to preserve the existing road asset. For example, if the seal on a 9 km stretch of road has an expected life of 30 years, then, on average, 300 m will need to be sealed each year to maintain the road at the current standard. In this case, the performance standard is approximately 0.03, or 3 per cent. Average costs per kilometre for each road type and activity combination have been derived from published unit price estimates for the same undertakings. For any given council, specific disabilities may increase or decrease the average cost of undertaking a given activity.

The model recognises 'climate', 'drainage', material', 'soil', 'terrain', and 'traffic' disabilities in road rehabilitation and re-construction, and 'climate', 'material', 'terrain' and 'traffic' disabilities in road maintenance. The need for different sub-base depths (re-construction only) is incorporated within the workings of the model. Reflecting the conclusions of an extensive review, the model now also recognises a 'remoteness' disability factor, and an 'urbanisation' disability adjustment for all activities. These are intended to capture elements of expenditure disabilities not otherwise accounted for in the model, and apply to a minority of councils only.

The model also makes an allowance for additional bridge-related maintenance, by converting bridge areas to equivalent road lengths (which involves multiplication by 10 to recognise the greater cost per equivalent area) and adding these lengths to the road lengths used in the model.

Hence in assessing 'road' expenditure needs for a given council, performance standards are applied to each category of road (urban sealed, urban unsealed, rural sealed, rural unsealed) to determine the length of road to be maintained, rehabilitated and reconstructed in that year in order to preserve the existing road structure. The relevant disability factors and costs per kilometre are then applied to each of these figures and the whole is summed to yield standardised 'road' expenditure for that council.

An explanation of the types of expenditure that comprise each expenditure function is set out in table B.5.

Table B.5: Description of expenditure functions

Application of council-specific disability factors

Disability factors are used to reflect unavoidable relative cost disadvantages councils face in providing services. A range of factors have been developed to account for differences between councils in the demand for a service as well as variations in the per unit cost of supplying that service.

A factor is calculated for each municipality by comparing its demand or supply disadvantage with the State average. The councils which demonstrate the least relative disadvantage for the class of disability concerned are assigned a minimum factor of 1.00. All other councils are compared to those councils on the minimum to determine their relative disability factors.

The Commission has carefully considered the following disability factors and adopted a method to quantify them:

Scale
Population dispersion
Isolation
Regional responsibility
Population growth
Population decline
Worker influx
Absentee population
Unemployment
Age profile
Tourism
Day-trippers
Climate
Equivalent tenements

An outline of the approach the Commission developed to quantify each factor is provided below. The 'climate' disability factor is not specifically dealt with as the Commission continues to use broad judgement in determining this factor.

Scale

The scale disability accounts for the diseconomies of small scale that councils face in providing some services. Diseconomies occur where the cost per person of a certain activity is greater for councils with a small population than for those with larger ones. For example, each council requires a general manager whether the municipal population is 1,000 or 100,000. The cost per person of the general manager is therefore much greater for smaller councils than for larger ones.

Different expenditure categories show varying degrees of diseconomy, so three scale categories have been developed - high, medium and low. The application of these to the different expenditure categories is detailed in table B.6.

Table B.6: Application of disability factors to expenditure standards

Population dispersion

The dispersion disability relates to the additional costs incurred in servicing a widely scattered population within a municipality. The Commission recognises that associated costs arise from the need to both duplicate services and incur greater travelling and communication costs than would otherwise be the case.

This disability factor is determined according to the total area of the municipality relative to population (population density), the number of population centres (for which a minimum level of service is provided), and the total road length within the municipality.

Isolation

This factor recognises the increased costs which arise from geographical isolation. Such costs are associated with attracting staff to remote areas, communicating with relevant bodies, travelling and the supply of necessary construction and maintenance materials.

This disability factor is calculated according to the distance between a municipality's main centre and the closest major regional population centre, and the distance from Hobart, the main administrative and political focus within the State.

Regional responsibility

The Commission recognises a disability for those authorities (host municipalities) which provide particular services for the residents of surrounding municipalities, without there being a counter-balancing use of services in surrounding municipalities by residents of the regional centre, or any offsetting cash contribution for the use of those facilities.

The Commission recognises the fact that certain towns and cities throughout the State act as regional focal points for provision of some services. The expenditure categories which cover these services are general administration, planning and community amenities and recreation and culture.

Assessing the extent to which responsibilities are exercised involves making use of a regression equation to predict the relationship between the population served and the level of expenditure. The resulting equation is used to estimate the population which, on average, could be effectively serviced by the particular level of expenditure by a municipality. The disability factor is then calculated having regard to the magnitude of this 'implied population' relative to that of the host municipality and the relative level of responsibility of each regional centre to that of other regional centres.

It is important to note that levels of responsibility are relative to the size of the regional centre. Therefore, while a regional centre may effectively service a small surrounding population, if the surrounding population is large relative to the size of the 'host', a relatively high degree of responsibility will be recognised.

Population growth/population decline

The Commission recognises that a local governing body faces certain expenditure disabilities as a result of not being able to continually change staff numbers and the scale of infrastructure in response to fluctuations in population levels. Such changes typically require planning and implementation horizons of several years or more. As a consequence, councils are often faced with excess or inadequate capacity in certain service areas depending on whether they are faced with rapid population decline or growth. Both circumstances are believed to confront councils with added expenditure burdens.

The disability factors are determined by comparing the average annual rate of population growth/decline for a particular municipality over a five-year period, against the average rate of population growth/decline for either growing or declining councils in the State as a whole.

The Commission has determined that it will only allow growth and decline factors for councils that experience significant levels of population change. Disability factors are only applied to those councils with an average population growth or decline of greater than 2 per cent.

Worker influx

This disability factor reflects the additional costs imposed on those municipalities which have significant daily net influxes of non-resident workers. It is felt that this effect is likely to have an impact which is in excess of the more general effect of regional responsibility.

Consideration is given for potential worker influx for the major population centres in the State. Municipalities outside these main centres are unlikely to have sufficient commercial or industrial development relative to their surrounding regions to cause any net influx of non-resident workers which impose a significant cost on the municipality.

Determination of this factor involves estimating, from Australian Bureau of Statistics census data, the number of residents working outside the municipality and the number of non-residents working within the municipality. The difference, or the net worker inflow, is then used to derive a disability factor in relation to actual total population. Factors are now allocated to Hobart, Glenorchy, Launceston and Burnie. All other municipalities in the study areas had either a negative or zero net influx of non-resident workers.

Absentee population

Allowance is made by the Commission for the additional population which is not captured in the Census statistics but which nevertheless must be serviced. Specific reference is made here to those municipalities which have a significant number of holiday residences.

Calculation of this disability factor is based on the proportion of dwellings in each municipality which were unoccupied at the time of the 1996 Census.

For the 2000-01 assessments the Commission has made an adjustment to the absentee population factor in order to recognise the situation faced by the West Coast Council where mine workers reside outside of the municipality between shifts. It was accepted that the existing unoccupied dwelling statistics do not adequately reflect this phenomenon.

Unemployment

A disability factor reflecting the level of unemployment within a municipality has been calculated by the Commission using data on income support payments from Centrelink. This disability factor has been calculated to capture the costs to councils of having a higher than average proportion of working-age residents unemployed. For example, additional expenditure might be incurred in the provision of recreation/leisure facilities or welfare programmes as a result of the need to cater for unemployed residents.

Age profile

The Commission has calculated a disability factor based on the proportions of residents aged 0-5 years, 15-25 and over 65. This disability factor reflects the additional costs associated with having a higher than average proportion of the population in these groups. For example, additional costs may be incurred in the provision of health and welfare services for infants and retirees, or in the provision of sporting facilities for people under 25.

Tourism

The Commission recognises that councils generally incur additional costs as a result of tourist influx through increased use of council resources and infrastructure. A disability factor that seeks to recognise these costs has been determined on the basis of the equivalent number of tourist beds in all establishments ranging from motels to registered camping grounds in each municipality.

Day-tripper

Significant numbers of day-trippers who make use of council facilities are recognised as increasing council costs. Details of the number of tourist attractions and an index of visitor frequency have been combined with a factor representing the distance from major population centres and the population of those centres, to determine a relative disability. Municipalities close to large population centres receive higher factors.

Equivalent tenements

The use of population to estimate standard water and sewerage expenditure does not recognise expenditures incurred in providing water and sewerage services to non-residential establishments. Therefore, a factor has been developed to recognise the cost of providing these services to commercial properties. This has been done by dividing the total value of serviced commercial properties by the modal residential assessed annual value in each water and sewerage district to determine the number of residential 'equivalent tenements'. From the 2000-01 assessments, a disability factor is recognised for all councils, whereas previously it was only applied to those councils with greater than one thousand equivalent tenements.

Identified local road fund distribution

The national principle governing the distribution of road grants (Section 12 payments under the Commonwealth Act) are outlined in Appendix A.

To accord with the National Principle and while ensuring that the grant distribution reflects the particular needs of Tasmanian councils, the road grants are distributed in the following manner:

  • Road preservation component: 66.5 per cent of funds, based on the relative road expenditure needs of each council as determined using the Mulholland asset preservation model;
  • Bridge expenditure component: 28.5 per cent of funds based on relative bridge deck areas (including all concrete and wooden bridges, and box culverts over 3 metres total span); and
  • Special needs, or 'betterment' component: 5 per cent of funds allocated to councils with an above average proportion of rural unsealed roads, based on rural unsealed road lengths.

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Northern Territory

Methodology

The methodology the Commission used in making its assessments for 2000-01 conforms with the requirements of the Local Government (Financial Assistance) Act 1995. Wherever possible, it has followed horizontal equalisation principles as set out in section 6 (3) of the Act, and as embodied in the national distribution principles.

In assessing relative expenditure and revenue needs, the Commission utilised the 'balanced budget approach'. Using this approach, the Commission assesses the total standardised expenditure needs for each local governing body, and then deducts the assessed revenue-raising capacity to arrive at the standardised deficit. The deficit represents the funding required to enable each local governing body to deliver an average level of services when an average revenue-raising effort is made.

The methodology the Commission used calculates standards and applies disability factors and weightings to assess each local governing body's revenue-raising capacity and expenditure requirements.

The assessed revenue-raising capacity and assessed expenditure requirements are the Commission's measures of each local governing body's ability to function at the average standard.

The calculation of standardised expenditure and revenue needs took into account population changes. These cover both increases as well as decreases where they occurred. In order to smooth the effect of these variations, the Commission adopts a three-year average of its calculated core community populations.

Revenue-raising capacity

As the ownership of the land on which many communities are located is vested in Land Trusts established pursuant to the Commonwealth Aboriginal Lands Rights (Northern Territory) Act 1976, it is not feasible to use a land valuation system to assess revenue-raising capacity.

The method of calculating revenue-raising capacity is achieved through the use of personal income statistics, obtained from the Australian Bureau of Statistics. This allows the determination of a council's theoretical gross income. In addition, councils which are recipients of the Northern Territory Operational Subsidy have 50 per cent of this revenue taken into account. The Commission considers that, given the unique circumstances within the Northern Territory, this approach provides a reasonable indication of a council's revenue-raising capacity.

Expenditure needs and disability factors

The assessment of expenditure needs calculates standards in each category with disability factors applied as appropriate.

The Commission takes six expenditure categories into account. For 2000-01 the total standardised expenditure needs for each local governing body was adjusted by a combination of five disability factors. In arriving at these factors the Commission took into account the factors of distance, isolation, geographic location, dispersion, external access, growth and communications, which would influence costs of service delivery by individual councils.

Population estimates

In making its assessments, the Commission considered 1996 Census data provided by the Australian Bureau of Statistics. However, it was concerned that this data was at variance with that returned directly by the councils and endorsed by the Department of Local Government. The Commission has recently commenced a joint validation exercise with the Australian Bureau of Statistics in identifying reasons for the differences.

This may lead to future pilot counts in a number of regional communities.

Population data for smaller local governing bodies is more difficult to determine. This is partly because of enumeration difficulties in remote areas and the non-defined boundaries of some local governing bodies. In addition, whatever population is adopted may be of limited relevance in view of the seasonal increases and decreases of the predominantly Aboriginal communities.

The Commission has derived estimated resident population data for these smaller local governing bodies by reference to information obtained from a range of sources, including the Department of Local Government and the communities themselves.

In assessing the needs of communities, the Commission took into account local resident population and included a factor for those in outstations dependent on the relative council for local government services.

In addition, the Commission took into account interstate and overseas tourist visitors to communities that impact on the provision of local government services.

Formula

Revenue component

All councils:

Assessed revenue-raising capacity = Gross income/State income x $31,154,002

Assessed revenue = Assessed rates + 50 per cent operational subsidy

where:

Gross income = Community gross income

State income = Total Northern Territory gross income

Operational subsidy = Northern Territory operational subsidy 1999-2000

Total local government rate revenue = $31,154,002

Expenditure components

Amenity

Community population/Territory population x Northern Territory amenity expenditure x (isolation works x dispersion x growth) - amenity grants

General administration

Community population/Territory population x Northern Territory general administration expenditure x (isolation administration x dispersion x Aboriginality) - administration grants

A base level ($70,000) of expenditure is applied to all councils.

Human services

Community population/Territory population x Northern Territory human services expenditure x (isolation administration x Aboriginality x growth) - human services grants

Libraries

The population figure used for these calculations is the sum of the populations in those centres that are in receipt of library services.

Community population/Territory population x Northern Territory library expenditure x (isolation administration x Aboriginality x growth) - Northern Territory library grants.

Recreation

Community population/Territory population x Northern Territory recreation expenditure x (isolation works x growth) - Northern Territory recreation grants.

Transport

This category is calculated on weighted road lengths by surface type. The summing of these figures determines a council's road factor.

The road factor equation is:

Community road factor/Northern Territory road factor x Northern Territory roads expenditure. 10 x kerbed and sealed road + 8 x sealed road + 4 x gravel road + 1 x formed road + 0.4 x unformed road + 2 x cycle paths.

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