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Appendix C : Comparison of grants commission distribution models

Grants commissions use distribution models to determine the grant allocations to councils. There is one model for allocating the local road component among councils and a separate model for allocating the general purpose component. This appendix provides a comparison of the approaches Local Government Grants Commissions used in 2002-03. It draws on material in the Working Papers prepared by the Commonwealth Grants Commission in 2001 for the Review of the Operation of the Local Government (Financial Assistance) Act 1995, particularly Chapter 11.

Local road component

The National Principles (see Appendix A) require grants commissions to allocate local road grants so that, as far as practicable, the grants are allocated to councils 'on the basis of the relative needs of each council for roads expenditure and to preserve its road assets. In assessing road needs, relevant considerations include length, type and usage of roads in each council area.'

For the local road needs assessment, grants commissions use two main approaches. Grants commissions in New South Wales, Queensland, South Australia and the Northern Territory use relatively simple models to allocate the local road grant, using such factors as population of the council and the road length it maintains. These approaches appear to have been based on arrangements that were in place before 1991-92 when grants were paid to councils as tied grants.

Grants commissions in Victoria and Western Australia use asset preservation models to allocate local road grants. The asset preservation model attempts to measure the annual cost of maintaining a council's road network. It takes into account annual and recurrent maintenance costs, and the costs of reconstruction at the end of the road's useful life. It can also take other factors into account such as:

  • the costs associated with different types of roads (sealed, gravel and formed roads)
  • the impact of weather, soil types and materials availability on costs
  • the impact of traffic volume on the cost of maintaining these roads.

The State Grants Commission in Tasmania uses a combination of these approaches. It allocates 66.5 per cent on the basis of an asset preservation model and the remainder based on bridge deck area and the length of unsealed roads.

The Western Australian and South Australian Grants Commissions allocate a proportion - 7 per cent and 15 per cent, respectively - of the local road grants between councils with the aim of funding priority local road projects in their State. Expert committees advise the Commissions on the projects to be funded.

Table C.1 summarises the main features of the various grants commission allocation models used for determining local road grants in 2002-03.

Table C.1 Features of grants commission models for assessing local road need, 2002-03

State Features of the distribution model

NSW

The allocation of 27.54 per cent of the State road grants pool to councils in urban areas (in Sydney, Newcastle and Wollongong) based on population (57%), road length (38%) and bridge length (5%).

The remaining 72.46 per cent to councils in rural areas based on population (74.4%), road length (18.6%) and bridge length (7%).

Vic Allocation based on an asset preservation model. This is the second year of applying the asset preservation model with allocations being phased in over three years.
Qld Allocation for 63 per cent of the pool is based on road length and 37 per cent on population.
WA

Allocation for 93 per cent of pool based on an asset preservation model.

The remaining 7 per cent is for special projects - two-thirds for bridges and one-third for access roads serving remote Indigenous communities.

SA

Allocation for 85 per cent of pool is split between metropolitan and non-metropolitan councils based on population and road length.

Allocations for metropolitan councils based on population and road length and for non-metropolitan councils based on population, road length and area.

The remaining 15 per cent is set aside for special projects.

Tas

Allocation for 66.5 per cent of the pool is based on an asset preservation model and for 28.5 per cent is based on bridge deck area.

The remaining 5 per cent is allocated to councils with an above average proportion of unsealed rural roads based on rural unsealed road length.

NT

Allocation is based on cost weights applied to road lengths for road types.

The minimum allocation for a council is $10 000.


Source: Based on information provided by local government grants commissions.

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General purpose component

 

In allocating the general purpose component between councils in a State, grants commissions are to comply with the National Principles. These Principles require commissions to satisfy two objectives. These objectives are:

  • to allocate the general purpose grant pool between councils on a horizontal equalisation basis
  • to ensure that, when allocating the general purpose grant pool between councils, all councils receive at least the minimum grant.

With the funds provided, both objectives cannot be achieved simultaneously in most jurisdictions. In practice this means grants commissions determine an allocation that ensures all councils receive at least the minimum grant and the remaining grants are allocated, as far as practicable, on a horizontal equalisation basis.


Usually, this results in grants commissions adopting a three-step procedure to determine general purpose grant allocations.

Step 1 commissions determine an allocation of the general purpose grant between councils on a horizontal equalisation basis

Step 2 all councils receive at least the minimum grant. In most States, in order for all councils to receive at least the minimum grant, grants to some councils have to be increased relative to their horizontal equalisation grant

Step 3 if grants to some councils are increased in step two, grants to other councils must decrease relative to their horizontal equalisation grant. This is achieved in the final step in a process called 'factoring back'.

Steps two and three of this procedure are then repeated to ensure that, in reducing grants to some councils in the third step, they continue to receive at least the minimum grant. These steps are repeated until all councils receive at least the minimum grant and the general purpose grant pool for the State has been completely allocated.

The approaches grants commissions use for Steps 1 and 3 are outlined below.

Allocating on a horizontal equalisation basis

The Horizontal Equalisation National Principle for allocating the general purpose grant is:

General purpose grants will be allocated to local governing bodies, as far as practicable, on a full horizontal equalisation basis as defined by the Act. This is a basis that ensures each local governing body in the State/Territory is able to function, by reasonable effort, at a standard not lower than the average standard of other local governing bodies in the State/Territory. It takes account of differences in the expenditure required by those local governing bodies in the performance of their functions and in the capacity of those local governing bodies to raise revenue.

The average standard is a financial standard. It is based on the expenditure undertaken and revenue obtained by all councils in the State.

If a council is operating at the average standard then, under a horizontal equalisation approach, it would receive a per capita share of general purpose grants. If a council is disadvantaged, it means it needs more assistance per capita than a council operating at the average standard. Conversely, if a council is advantaged, it needs less per capita than a council operating at the average standard.

When determining grant allocations on a horizontal equalisation basis, grants commissions use one of two distribution models:

  • Balanced budget - based on the approach of assessing the overall level of disadvantage for a council using a notional budget for the council
  • Direct assessment - based on the approach of assessing the level of disadvantage for a council in each area of expenditure and revenue.

Table C.2 shows the differences in the distribution models grants commissions use.

Table C.2 Differences in the distribution models grants commissions use for the general purpose component

State Model used

NSW

Direct assessment model.
Separate assessment for Lord Howe Island, Silverton and Tibooburra.

Vic Balanced budget model.
Assistance for natural disaster relief taken out of the pool.
Separate assessment for Docklands Authority.
Qld Balanced budget model.
Separate assessment for the Deed of Grant in Trust councils.
WA

Balanced budget model.

SA

Direct assessment model.
Separate assessment for the Outback Areas Community Development Trust and five Indigenous Communities.

Tas

Balanced budget model.

NT

Balanced budget model.


Source: An update of Table 11-1 in Commonwealth Grants Commission Working Papers.

Balanced budget model

Grants commissions in Victoria, Queensland, Western Australia, Tasmania and the Northern Territory use the balanced budget approach. Their models are based on making an assessment of each council's costs of providing services and its capacity to raise revenue (including its capacity to obtain other grant assistance).

Horizontal equalisation, as defined in the Act, is about identifying advantaged and disadvantaged councils and bringing all the disadvantaged councils up to the financial position of a council operating at the average standard. This means the task of the grants commissions is to calculate, for each disadvantaged council, the level of general purpose grants it requires to balance its assessed costs and assessed revenues. This level of grants would leave it with a net financial capacity of zero.

This type of distribution model can be specified as:

general purpose grant equals assessed costs of providing services
plus assessed average operating surplus/deficit
less assessed revenue
less actual receipt of other grant assistance

Direct assessment model

Grants commissions in New South Wales and South Australia use the direct assessment approach. Their models are based on making an assessment of the level of advantage or disadvantage in each area of expenditure and revenue and summing these assessments over all areas of expenditure and revenue for all councils.

In each area of expenditure or revenue, an individual council's assessment is compared to the average council. The direct assessment model calculates an individual council's level of disadvantage or advantage for each area of expenditure and revenue including for other grant assistance.

Horizontal equalisation, as defined in the Act, is about identifying advantaged and disadvantaged councils and bringing all the disadvantaged councils up to the financial position of a council operating at the average standard. Thus, the task is to calculate the level of general purpose grants that would balance a disadvantaged council's assessed expenditures and assessed revenues and to leave it with a net financial capacity of zero.

This type of distribution model can be specified as:

general purpose grant equals an equal per capita share of general purpose grants
plus expenditure needs
plus revenue needs
plus other grant assistance needs

The balanced budget and direct assessment models will produce identical assessments of financial capacity for each council if the assessed average operating surplus or deficit is included in the balanced budget model.

Scope of equalisation

The scope of equalisation is about the sources of revenue raised and the types of expenditure activities that a grants commission includes when determining an allocation of the general purpose grants on a horizontal equalisation basis. Table C.3 shows the differences in the scope of equalisation of the grants commissions.

Table C.3 The scope of equalisation of grants commission general purpose models

Function
NSW
Vic
Qld
WA
SA
Tas
NT

Expenditure
Administration
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Law, order and public safety
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Education, health and welfare
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Community measures
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Recreation and culture
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Transport:
  • local roads
Yes
Yes
Yes
Yes
Yes
Yes
Yes
  • airports
Yes
Yes
Yes
Yes
No
No
No
  • public transport
No
No
No
Yes
Yes
Yes
No
  • other transport
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Building control
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Garbage
No
Yes
Yes
No
Yes
Yes
Yes
Water
No
No
No
No
No
Yes
No
Sewerage
No
No
No
No
No
Yes
No
Electricity
No
No
No
No
No
No
No
Capital
No
No
Yes
No
Yes
No
No
Depreciation
No
Yes
No
Yes
No
No
No
Debt servicing
No
Yes
No
No
No
No
No
Entrepreneurial activity
No
No
No
No
No
No
No
Agency arrangements
No
Yes
No
No
No
No
No
Revenue
Rate revenue
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Operation subsidies
No
No
No
No
Yes
No
Yes
Garbage charges
No
Yes
Yes
No
Yes
No
No
Water charges
No
No
No
No
No
Some
No
Sewerage charges
No
No
No
No
No
Some
No
Airport charges
No1
No
Yes
No
No
No
No
Parking fees and fines
No
No
Yes
No
No
No
No
Other user charges
No
No
Yes
Yes
No
No
No

Note: 1 This is not treated as a separate function, the charges are deducted from the relevant expenditure category.
Source: Table 11-2 in the Commonwealth Grants Commission Working Papers and updated for subsequent changes.

Assessing local road expenditure needs for the general purpose model

As part of the expenditure needs assessment for determining general purpose grants, grants commissions also assess each council's local road needs. Some grants commissions use the same methodology for the two assessments while others use different methodologies.

The main features of the models grants commissions use for assessing local road needs when allocating general purpose grants in 2002-03 are discussed below.

New South Wales used a different model for assessing roads needs in the general purpose component of the model. New South Wales uses the categories of local roads, urban local roads, sealed rural local roads, and unsealed rural local roads. Disability factors for topography, climate, soils, materials, drainage, heavy traffic, travel, and development increase expenditure allowances for each council. It also assesses needs with reference to the length of each type of road per urban or rural property, as applicable, and with provision for bridge and culvert needs per kilometre of roads. The average spending on maintaining urban roads per kilometre is more than double rural sealed roads which, in turn, is more than double the average spending on rural unsealed roads.

Victoria's standardised expenditure for the Local Roads and Bridges expenditure function within the general purpose grants model is based on the grant outcomes for each council under the Commission's local road grants model. This incorporates a number of cost modifiers to take account of differences between councils. Net standardised expenditure for this function is calculated by subtracting other grant support (based on actual identified local road grants and Roads to Recovery grants) from gross standardised expenditure.

For the general purpose component, Queensland distinguishes urban and rural local roads by surface type (sealed, gravelled, formed, unformed) and width. It assesses a road disability factor with reference to traffic volumes, road type and topography. The assessments result in disability factors reflecting different road needs applied to a standard expenditure of about $3066 per kilometre of road.

Western Australia uses the same asset preservation model for roads in distributing the general purpose component. The asset preservation model takes into account annual and recurrent maintenance costs and the costs of reconstruction at the end of the road's useful life. Roads are divided into two categories, urban and rural, because the former requires greater spending due to more traffic, more intersections and more kerbing and longitudinal drainage. The model takes the road surface into account (sealed, gravel, formed and unformed) and the contribution that bridges make to the cost of local roads. However, other expenditure needs that are transport-related, such as street lighting and aerodromes, are also taken into account.

For the general purpose component, South Australia divides roads into five categories:

  • sealed roads - built-up
  • sealed roads - non built-up
  • unsealed roads - built-up
  • unsealed roads - non built-up
  • unformed roads.

Road lengths are the units of measure. Cost relativity indices have been developed for each road category, to determine why it costs one council more than another to reconstruct or maintain a kilometre of road. Factors such as soil, terrain, drainage and materials haulage are components of the index. Further work is to be undertaken on the cost relativity indices to reflect traffic volumes.

Tasmania distributes the general purpose component according to the same Mulholland Asset Preservation Model used to allocate part of the local road components. Performance standards define for each type of road the annual length needing reconstruction, rehabilitation or maintenance. Average costs per kilometre derived from cost data supplied by city and rural councils are used to introduce values into the estimates. Disability factors like climate, drainage, materials, soil, terrain and traffic may increase or decrease the average costs for each council. Roads expenditure assesses urban sealed, urban unsealed, rural sealed and rural unsealed roads as separate expenditure categories.

For the general purpose component, the Northern Territory assesses road needs by weighted road lengths by surface type using the same weights as for the local road component. The weights used are:

  • sealed, kerbed and guttered 10.0
  • sealed 8.0
  • gravel 4.0
  • cycle path 2.0
  • formed 1.0
  • flat bladed track 0.4

Revenue assessments

Sources of revenue for local government are rates, user charges as well as grants received from the Federal or State governments. The Other Grants Support National Principle guides grants commissions when they determine grant allocations on the way they should treat grants that councils receive (see below).

In the revenue assessment, New South Wales distinguishes urban and rural land and applies State-wide average rates in the dollar to unimproved capital values, averaged over three years, to estimate the relative revenue-raising capacity of each council. It then discounts the differences by about 64 per cent in recognition of the impact of the Sydney property values and to achieve some parity with expenditure assessments.

For the assessment of rates revenue, Victoria applies a State-wide average rate in the dollar to the net annual values, generally averaged over three years.

Queensland uses a combination of indicators of rating capacity. These are derived by statistical estimation as accounting for most of the variation observed in actual rates collected. The method estimates revenue-raising capacity as the sum of a number of proportional components for each council (the figures shown are approximate):

  • $25.76 per rateable property; plus
  • $0.013 per dollar of gross value of rural production; plus
  • $0.015 per dollar of personal income; plus
  • $0.005 per dollar of an indicator of retail sales; plus
  • $0.002 per dollar of unimproved capital value.

Rates assessment for Indigenous councils is set to zero.

Fees and charges are assessed on a population basis and the Commission uses actual revenue collected by councils for parking, aerodromes and other transport.

For assessing rate revenue, Western Australia distinguishes urban properties, agricultural properties, pastoral properties and mining property and assesses capacity by different methods for each.

The capacity of urban properties is estimated as the sum of two components:

  • the product of gross rental values, averaged over three years, and a constant more or less like an average rate in the dollar
  • the number of rateable assessments and a corresponding constant value per assessment.

Agricultural rate capacity is based on improved capital values averaged over three years, a per assessment component and one for agricultural area in hectares. Pastoral rate capacity is based on unimproved capital values averaged over three years. Mining rate capacity is estimated with reference to mining unimproved capital value and a per assessment component.

Western Australia makes an assessment of revenue capacity for recreation and culture, and building control fees and charges. For revenues in other categories, revenues are netted out from expenditure.

South Australia estimates a State-wide average rate in the dollar per property and applies it to the difference between each council's improved capital values per capita and the State's improved capital value per capita for five land use categories:

  • residential
  • commercial
  • industrial
  • rural
  • other.

All data are averaged over three years to reduce fluctuation.

Tasmania applies a State-wide average rate in the dollar to rateable assessed annual valuations averaged over three years. Its rate includes provision for water and sewerage. It makes a corresponding assessment of gross expenditure on water and sewerage.

Much of the Northern Territory is unincorporated, with local government largely confined to the areas settled by Aboriginal communities, or a relatively few more densely settled municipalities. Land trusts own the land in the majority of Aboriginal communities and no possibility exists of determining distinct properties and values for the assessment of revenue-raising capacity. For this reason, statistics of personal income are used to estimate the revenue-raising capacity of all councils.

Expenditure assessments

In addition to expenditure on roads, already outlined, local governments' main expenditures are on general public services, which includes the organisation and general and financial administration of councils, recreation facilities, and sanitation and protection of the environment, which includes disposal of sewerage, stormwater drainage and garbage.

New South Wales assesses 21 categories of expenditure including three classes of road maintenance. It assesses more than 40 distinct disabilities among the categories. It defines a standard expenditure based on average expenditures, excluding extreme values. Differential expenditure needs are equal to the standard per service unit (mostly population) multiplied by the average number of service units and the overall disability for the category. The disability estimates the extent to which the unavoidable cost per unit exceeds the State average (positive disabilities) or falls short of it (negative disabilities). In most cases, if the cost per unit is assessed to be negative, zero is substituted, so generally no negative assessments are made.

Victoria assesses nine categories of expenditure. Expenditure includes all recurrent expenditure except for some business undertakings and work undertaken on behalf of and funded by VicRoads. The standardised expenditure is calculated using the population served, the average cost across all Victorian councils of providing the service and local factors beyond the control of the councils that influence their costs (cost adjustors). For three expenditure categories, an adjusted population is used for some low population councils to recognise the fixed costs of providing certain functions such as governance.

Queensland assesses all local government expenditure except for water and sewerage but does not disaggregate services into separate expenditure categories. For the bulk of expenditure it assesses current and capital needs as equal to a minimum of about $928 300 - a fixed cost or flagfall amount that is included irrespective of the number of people serviced by the council - and additional per-person needs of about $328 per person. The amounts so assessed are increased or decreased by a disability factor. For Aboriginal and Torres Strait Islander councils, it assesses no minimum but allows needs of $866 per person and provision for a disability factor as for other councils. For categories representing a small proportion of expenditure, known as 'effort positive', it assesses current and capital needs equal to actual expenditure.

Western Australia assesses seven expenditure categories and 18 disabilities. It defines standard expenditure as a minimum amount specific to each category, and sometimes to a class within each category, and amounts per unit of service (usually population). Needs are defined as the product of the standard, the units of service, disabilities and discounts for needs met by special purpose grants.

South Australia assesses 13 expenditure categories apart from those assessing road needs. It estimates component expenditure grants as positive or negative contributions to the overall grant according to whether the costs of providing each service 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. For each service, the total State expenditure is divided by a unit of measure to calculate the standard cost. For example, for garbage the unit of measure is the number of residential properties. The value of units for each council per capita is compared with the standard and the difference - whether positive, negative or zero - is multiplied by the average cost per unit and rescaled by population. This gives the component expenditure grant. For some services a further cost relativity index, defined with reference to a State average of one, is used to inflate or deflate the unit of measure per capita, to take account of other influences on expenditure beyond the control of councils.

Tasmania assesses nine expenditure categories, including one for roads (made up of four classes). It assesses 14 disabilities. It defines standard expenditure as the State average. Needs are defined as the product of the standard, the population and the cumulative disability allowance (one plus the sum of the amount by which each disability exceeds one).

The Northern Territory assesses six categories, including one for roads. It assesses five disabilities. Needs are defined as the product of the population, average expenditure per person, and the compounded disabilities, minus grants received. A flagfall of $70 000 is allowed for general administration.

Other grant support National Principle

The fourth National Principle for general purpose grants is:

Other relevant grant support provided to local governing bodies to meet any of the expenditure needs assessed should be taken into account using an inclusion approach.

This National Principle requires grants commissions, when determining the allocation of grants on a horizontal equalisation basis, to include all grants that are provided to councils from the Australian Government and State governments as part of the revenue that is available to councils to finance their expenditure needs. Only those grants that are available to councils to finance the expenditure of a function that is assessed by grants commissions should be included. Both the grants received and the expenditure it funds should be included in the allocation process.

Table C.4 provides details on the grants included by grants commissions in allocating the general purpose grants in 2002-03.

Table C.4 Grants treated by inclusion in general purpose grant allocations for 2002-03, by State

State Grants treated by inclusion

NSW

Local road grant, Roads to Recovery grant and library grant.
For other recurrent grant support the deduction approach is used.

Vic All State and Commonwealth recurrent grants. This includes each council's local road grant and 77 per cent of Roads to Recovery funding.
Qld 70 per cent of the local road grant for the year under review.
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.
WA

93 per cent of the local road grant as well as all other relevant operating grants provided by Commonwealth and State government agencies

SA

85 per cent of the local road grants, library grants, bus grants and Roxby Downs unique extraordinary grant

Tas

The local road grant, all the Roads to Recovery grant and the State motor taxes collected on the registration of heavy vehicles (known as 'NRTC funds') for the year under review.

NT

Local road grant for the year under review and 50 per cent of the Roads to Recovery grant


Source: Based on information provided by local government grants commissions.

Needs of Indigenous communities

The fifth National Principle for distribution of general purpose grants states:

Financial assistance shall be allocated to councils in a way, which recognises the needs of Aboriginal peoples and Torres Strait Islanders within their boundaries.

All grants commissions allocate funding to councils taking into account the population of the council. Therefore, councils with Indigenous people as part of their community will receive financial assistance funding for them. However, the Commonwealth Grants Commission (2001) stated that this National Principle goes further. It said the 'assessments [by grants commissions] should reflect differences in the demand for services by Indigenous people, the cost of providing services to them and the capacity to raise revenue from them - regardless of whether they live in a discrete community or in a mainstream community' (p. 27).

Councils in New South Wales with above the State average proportion of Indigenous people receive recognition for the additional costs of providing services to Indigenous people in the expenditure assessments for general administration and general community services.

Victoria incorporates the proportion of each council's population that is Indigenous as a cost adjustor in its Family and Community Services expenditure assessment.

In Queensland, most of the larger geographically discrete Indigenous communities are located within the 32 Aboriginal and Torres Strait Islander councils or the Shires of Aurukun and Mornington. The assessment of non-road expenditure for Indigenous councils is different to that for mainstream councils.

For mainstream councils, it is calculated as:

assessed non-road expenditure = 928 373 + 328.69 x population x disability factor

Whereas for Indigenous councils, it is calculated as:

assessed non-road expenditure = 866.33 x population x disability factor

Western Australia includes two disability factors - socioeconomic disadvantage and population dispersion - in their expenditure assessments. In addition, 16 councils receive an allowance that recognises the additional costs of providing environmental health services (that is, the inspection of food premises, water supply, waste disposal and dog control) to remote Indigenous communities.

Western Australia also sets aside 2.3 per cent of the local road component as special project funds for improvements to access roads to remote Indigenous communities.

In South Australia, the needs of Indigenous communities within mainstream councils are recognised through the proportion of Indigenous people in the council. The commission allocates a dollar amount per capita. In addition, the commission gives special consideration to councils that have a high non-residential use of their facilities.

Five Indigenous communities receive financial assistance grant funding. Due to the unavailability of data, grants for these communities cannot be calculated in the same way as grants to other councils so the commission allocates funding on a per capita basis. These per capita amounts were established after comparisons were made with communities in other States. For example, in 2002-03 the allocation to Anangu Pitjantjatjara was $310 per capita.

Tasmania makes no special allowance for Indigenous people as there are very few separately identifiable Indigenous communities in that State and there are no targeted services provided by councils for these communities that are not also provided to other residents.

Aboriginal councils make up 85 per cent of the local governing bodies in the Northern Territory. The additional cost of providing services to Aboriginal people is incorporated through inclusion of the proportion of the population that is Aboriginal for each council in the expenditure assessments.

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Factoring back

 

The second step in the procedure for allocating general purpose grants to councils is to check that the allocation complies with the Minimum Grant National Principle. This Principle requires:

The minimum general purpose grant allocation for a local governing body in a year will be not less than the amount to which the local governing body would be entitled if 30 per cent of the total amount of general purpose grants to which the State/Territory is entitled under section 9 of the Act in respect of the year were allocated among local governing bodies in the State/Territory on a per capita basis.

Once grants to those councils with allocations below the minimum grant have been increased to ensure the allocation complies with the Minimum Grants National Principle, the final step in determining the allocation of general purpose grants is known as 'factoring back'. This step is required because the funding provided for a State is insufficient for the grants commission to allocate the grants on a horizontal equalisation basis as well as ensuring all councils receive at least the minimum grant.

Grants commissions adopt two approaches to factoring back, they are:

  • the proportional method - all grants commissions, except Queensland, use this approach. For all councils not on the minimum grant, their horizontal equalisation grant calculated in the first step is reduced by the same proportion so the total of the grants to these councils equals the funds available after all minimum grant councils have been allocated their general purpose grant
  • the equalisation ratio method - this is the approach the Queensland Local Government Grants Commission uses. For all councils not on the minimum grant, the total of their assessed revenue (including other grant support and the horizontal equalisation grant) is compared with the total of their assessed expenditure. If the total assessed revenue is only able to fund a per cent of the total assessed expenditure, the horizontal equalisation grant for individual councils is reduced so the assessed revenue of the council equals a per cent of their assessed expenditure.

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