Appendix C : Findings of the Commonwealth Grants Commission Review of the Local Government (Financial Assistance) Act 1995
The Federal Local Government Minister has a statutory responsibility to review, in consultation with the States and local government, the operations of the Local Government (Financial Assistance) Act 1995. The review was to be carried out no later than 30 June 2001. The Minister formally asked the Commonwealth Grants Commission to undertake this review and terms of reference for the review (see box) were referred to the Commission on 1 June 2000.
Terms of reference
The review under Section 17 of the Local Government (Financial Assistance) Act 1995 will examine and report on:
As required by Section 17 of the Act, the review shall also examine and report on:
The Review will not address the interstate distribution of the general purpose and local road grants or the quantum of funds available under the Act.
The review processes
In June 2000, the Commission released a discussion paper on the review and asked for submissions. From July to October 2000 the Commission visited the capital city and a number of regieponal centres in each State and the Northern Territory to discuss issues with representatives of local government, State Government dartments and local government grants commissions. The Commission released a draft report in December 2000 and provided its final report to the Federal Minister in June 2001. Working papers, associated with the Commission's report but prepared by the Commission secretariat, were also released.
Further details on the review including the Commission's report and the working papers are available on the Commission's website at www.cgc.gov.au.
The main findings from the Commonwealth Grants Commission's report are reproduced below.
The terms of reference for this review asked the Commonwealth Grants Commission to examine and report on:
- the effectiveness of the current arrangements for achieving the purposes and goals of the Act;
- the appropriateness of the current National Principles - in particular, whether the minimum grant arrangement should be retained or varied;
- the effectiveness of the current arrangements in ensuring that assistance is allocated on a full horizontal equalisation basis;
- the consistency of local government grants commissions' policies and methods with the National Principles;
- the impact of the Act on revenue raising by local governing bodies and on the provision of assistance to them by States;
- the implications of any changes in the functions or responsibilities of local governing bodies; and
- the eligibility for assistance under the Act of bodies declared by the Minister to be local governing bodies.
Effectiveness of the current arrangements, including the National Principles
The Act aims to provide financial assistance for local government to meet three underlying intentions:
- to provide all local governing bodies with at least a minimum level of assistance;
- to provide funding to contribute to the costs faced by local governing bodies in maintaining their local roads; and
- to provide relatively greater financial assistance to those local governing bodies which are relatively more disadvantaged compared with other local governing bodies because they face greater costs in providing services or because their ability to raise revenue is more limited.
In broad terms, the Commission found that current arrangements have led to a distribution of funds in line with these intentions.
The Act sets out five purposes. Six National Principles have been developed to guide local government grants commissions in allocating the assistance to achieve those purposes. The purposes, the Commission's interpretation of them and the associated National Principles are:
- Financial Capacity, which is about ensuring that every local governing body receives a share of the financial assistance provided by the Act. It is supported by the Minimum Grant and the Identified Road Component Principles.
- Certainty of Funding, which aims to ensure certainty of funds to the local government sector.
- Equitable Level of Services, which aims to ensure that relatively greater funds are provided to local governing bodies which, because of their greater costs of providing services or because of their more limited ability to raise revenue, are more relatively disadvantaged than other local governing bodies. The Horizontal Equalisation, Effort Neutrality, Other Grant Support, Aboriginal Peoples and Torres Strait Islanders and Minimum Grant Principles all bear on this purpose.
- Efficiency and Effectiveness, which aims to improve the efficiency and effectiveness of local governing bodies.
- Aboriginal Peoples and Torres Strait Islanders, which relates to improving the provision of services by local governing bodies to Indigenous people and has an associated Aboriginal Peoples and Torres Strait Islanders Principle.
The Commission believes the Financial Capacity purpose is being achieved. The Minimum Grant Principle, which is well understood and correctly applied by local government grants commissions, ensures that each local governing body receives a minimum of 30 per cent of their population share of the general purpose pool. All local governing bodies with roads responsibilities also receive a share of assistance from the Local Roads pool, in accordance with the Identified Road Component Principle.
The provision of at least a minimum level of assistance to all local governing bodies reflects one of the underlying intentions of the Commonwealth. The Commission recommends that this intention continue to be implemented, but expressed in the form of a per capita grant to ensure that every local governing body receives a share of assistance. The current rate of this assistance (30 per cent) should be retained.
The Commission believes the Certainty of Funding purpose is also being achieved. The Act includes an escalation process that provides for growth in the level of funds to the local government sector for the duration of the Act.
The Commission believes the Equitable Level of Services purpose is described in terms of horizontal equalisation, as far as practicable. The definition of horizontal equalisation in the Act, the language of the Act, and the limited amount of funding indicate the purpose is about providing additional assistance to disadvantaged local governing bodies. As such, the Commonwealth Grants Commission believes it is broadly being achieved.
However, the Commission recommends that the language of the Act and of the associated Horizontal Equalisation National Principle be revised. In particular, the Commission believes that the term 'horizontal equalisation' should be replaced with 'relative need based on equalisation principles' because this more clearly reflects the Commonwealth's intentions and what is being, and can be, achieved. It would also avoid using the language of horizontal equalisation in a different way from its use in the allocation of Commonwealth general revenue assistance to the States.
The Commission found that the Minimum Grant Principle conflicts with the Horizontal Equalisation Principle because minimum grants and equalisation grants are funded from the same pool. As the minimum grants are not distributed on an equalisation basis, they reduce the assistance available to meet the Commonwealth's equity objective.
Implementation of the Horizontal Equalisation National Principle requires local government grants commissions to make comprehensive assessments covering all areas of local government expenditure and revenue, all influences that might affect the expenditure required and the revenue raised, and to assess both relative advantages and relative disadvantages. The Commission recommends some changes in the methods of local government grants commissions to better implement the intent of this National Principle.
The Effort Neutrality and the Other Grant Support Principles are integral aspects of any distribution of untied grants on the basis of equalisation principles or relative need. The Commission found that the Other Grant Support Principle is not consistently interpreted or implemented by local government grants commissions, with implications for local governing body grants. The Principles are appropriate for an untied grant arrangement on equalisation principles, but the language of them could be improved to make the concepts better understood.
The Efficiency and Effectiveness purpose attempts to impose conditions on the allocation of the financial assistance. The Commission believes that this is not an appropriate purpose for an Act that distributes untied assistance on equalisation principles and recommends it be removed from the Act.
The Aboriginal Peoples and Torres Strait Islanders purpose attempts to direct local governing bodies to spend part of their assistance on improving services to Indigenous people. The Commission believes that it is inconsistent with the untied nature of the assistance being distributed and should be removed. However, the Commission recommends that the associated Aboriginal Peoples and Torres Strait Islanders Principle be retained even though conceptually it is not required in a grants distribution process based on relative need.
The Commission recommends that this Principle be strengthened to make it explicit that relative need requires an assessment of the impact of Indigenous people on the expenditure requirements and revenue-raising capacity of local governing bodies.
The Commission believes that the National Report needs to take on a stronger monitoring role in this area. The Commission recommends that the National Report monitor and report on:
- the extent to which local government grants commissions' assessment methods recognise the needs of Indigenous people; and
- the performance of local governing bodies in providing services to Indigenous people (performance measures should be developed for this purpose).
The Act also identifies two goals of the Commonwealth in providing the financial assistance. They are to:
- increase the transparency and accountability of the allocation of funds by local government grants commissions; and
- promote greater consistency in the methods used to allocate equalisation grants.
Transparency and accountability are not defined in the Act. The Commission believes transparency is about local governing bodies being able to understand how their grant has been calculated and accountability is about local government grants commissions providing information to further assist that understanding. Improvements in these areas are required. Local government grants commissions should provide more and clearer information in their annual reports and the National Report should provide commentary on the different approaches of the local government grants commissions.
The consistency goal described in the Act relates to consistency in the methods used by local government grants commissions to allocate funds. There are many differences between local government grants commissions in the areas of expenditure and revenue covered by their assessments, the range of influences on expenditure and revenue levels assessed, and the methods of measurement. Such differences are to be expected given the differences in the circumstances of local governing bodies both between and within the States. Local government grants commissions require the flexibility to adopt methods that best reflect their circumstances.
The Commission believes that the consistency goal should focus on the consistency of local government grants commissions' methods with the National Principles. Changes in local government grants commissions' assessment methods would be required to achieve consistency with the Relative Need, Other Grant Support and Aboriginal Peoples and Torres Strait Islanders Principles.
The Commission believes that the Identified Road Component Principle is appropriate because it is consistent with the intent of the Act and provides guidance to local government grants commissions on how to allocate their local roads grants.
Improving the arrangements
The Commission recommends that the operation of the Act would be improved if the Commonwealth's intentions in providing its assistance were clearer and more transparent, with a clearer relationship between the purposes and the funds provided. The Commission believes this could be achieved if there were:
- a per capita pool to provide every local governing body with a share of the assistance;
- a local roads pool to contribute towards local governing bodies' costs of maintaining their local roads; and
- a relative need pool to improve equity by providing additional assistance to the more disadvantaged local governing bodies.
Every local governing body would receive a fixed per capita share from the per capita pool. Every local governing body that has a road responsibility would receive funding from the local roads pool. Only relatively disadvantaged local governing bodies would receive funding from the relative need pool. As part of the changes, the Commission recommends that a purpose be drafted for the Act to outline the Commonwealth's intentions in providing the assistance from each pool.
Transitional arrangements. The proposed changes to implement the three-pool arrangement will not alter the total amount of assistance available or the allocation to the States. However, the Commission believes that requiring local government grants commissions to amend their assessment methods to make them more consistent with the National Principles is likely to change the current distribution of grants to local governing bodies within States. A five-year transitional period would be appropriate to enable local government grants commissions to modify their methods and local governing bodies to adjust to the changes in their grants.
The National Report should play a much stronger monitoring role. The Commission believes that areas the National Report should monitor and report on include:
- the extent to which local government grants commissions' assessment methods and approaches are consistent with the National Principles;
- the extent to which local government grants commissions are modifying their equalisation assessments to deliver greater stability in annual grants;
- the extent to which local government grants commissions' assessment methods recognise the needs of Indigenous people;
- assessing the performance of local governing bodies in providing services to Indigenous people;
- the extent to which local government grants commissions explain how individual grants have been calculated and provide sufficient information to enable local governing bodies to calculate them if they wish; and
- the effectiveness of the proposed transitional arrangements.
Impact on revenue raising and the provision of State assistance
Since the introduction of the Commonwealth's financial assistance grants in 1974-75, local government revenue from all sources has grown on average by 10.1 per cent per annum. Revenue from local government taxes and charges was about the same proportion in 1997-98 as it wasin 1974-75. The introduction of Commonwealth assistance appears to have had little impact on local government revenue-raising effort at the national level.
State assistance to local government has increased absolutely in real terms over the same period. However, the rate of increase has been less than the rate of increase of other sources of local government revenue. The Commission found that State assistance has declined in relative importance from about 15 per cent of local government revenue in 1974-75 to 7 per cent in 1997-98.
Implications of changes in functions and responsibilities
Local government functions and responsibilities have expanded over the period since 1974-75. Analysis of local government expenditure over the period 1961-62 to 1997-98 shows that the composition of services being provided by local government has changed markedly over the last 30-35 years. Local government is increasingly providing human services at the expense of traditional property-based services (particularly roads). Some changes are the result of the changing priorities of local government, others are imposed on them by other spheres of government. The Commission found that the general broadening of local government functions has implications for local government finances.
Eligibility for assistance
The Act provides the Commonwealth Minister with the capacity to declare bodies that are providing local government-type services, but are not local governing bodies under State legislation, to be eligible to receive financial assistance grants. Forty of the 730 local governing bodies eligible to receive grants under this Act are declared local governing bodies. These arrangements are working well and should be retained. The Commission recommends that the Act be amended to allow:
- either the Commonwealth or State Minister to initiate a declaration - but require both to agree to it; and
- the Ministers to revoke an existing declaration, provided both agree.