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Financial assistance grants to local government

In 2003-04, the Australian Government provided $1501 million nationally in financial assistance to 721 councils - on average, about $75 per capita or $2.08 million per council. These financial assistance grants were paid through the States and have two components - general purpose grants and identified local road grants. In 2003-04, the general purpose grants were $1040 million and identified local road grants were $461 million.

The objective of general purpose assistance from the Australian Government to local government is to strengthen local government to enable it to provide a wider range of services than it would otherwise and to promote equity between councils and certainty of funding (see 'Objects of the Act'). These grants are untied in the hands of the receiving council. This means that councils are able to spend the grant according to the priorities of their communities.

The general purpose grants commenced in 1974-75 with allocations in the 1974 and 1975 Budgets distributed according to Commonwealth Grants Commission (CGC) recommendations. This was followed, over the next two decades, by development in legislative arrangements for providing financial assistance to local government. These grants are currently provided under the Local Government (Financial Assistance) Act 1995 (the Act), which replaced the Local Government (Financial Assistance) Act 1986 and came into effect from 1 July 1995 .

From July 1991, as a result of a decision at the 1990 Special Premiers' Conference, local road grants to local government were provided under the 1986 Act (as amended) and the 1995 Act in addition to the general purpose grants. These grants are intended to help councils with the cost of maintaining their local roads but, as they are also untied, councils are not required to spend the grant on local roads.

In 2000-01, the CGC reviewed the operation of the 1995 Act (a review is required under section 17 of the Act) and its report was handed to the Government in June 2001 (Commonwealth Grants Commission 2001). Subsequently, the House of Representatives Standing Committee on Economics, Finance and Public Administration conducted an inquiry into Local Government and Cost Shifting. The inquiry looked at the financial position of local government and examined the findings of the CGC review of the Act. The Committee tabled its report - Rates and Taxes: A Fair Share for Responsible Local Government - in Parliament in November 2003. Recommendations 9, 13 and 16 of the Committee's report relate to financial assistance grants arrangements (see 'Recommendations relating to financial assistance grants'). The Government is consulting with State and Territory Ministers and Local Government Associations as part of formulating its response to the Committee's report.

Recommendations relating to financial assistance grants

The report of the House of Representatives Standing Committee on Economics, Finance and Public Administration inquiry into Local Government and Cost Shifting made three recommendations relating to local government financial assistance grants. These were:

Recommendation 9: The Committee recommends that local government bodies be required to audit the state of their infrastructure (using a nationally accepted methodology) and provide status reports to the Commonwealth Grants Commission as one of the inputs into the needs based formula for Federal financial assistance grants to local government.

The infrastructure data collected should be used to adjust financial assistance grants where
councils are found to be negligent in managing infrastructure.

Recommendation 13: The Committee recommends that the Commonwealth Grants Commission, in consultation with the Local Government Grants Commissions in each State, assess the efficiencies of amalgamations or regional cooperation of local government, and use available mechanisms to adjust financial assistance grants for the benefit of the sector at large.

To facilitate amalgamations, where appropriate, councils should not be financially penalised
through a net loss of financial assistance grants payments for four years.

Recommendation 16: The Committee recommends that a new methodology for the distribution of financial assistance grants to local government be designed which incorporates the following elements:

  • a national model which is consistent across each local governing body
  • distribution of funds on equalisation principles, that is, on the basis of need
  • funds to be paid direct to local government
  • funds to remain untied and be allocated from one pool
  • data on local conditions/factors to be provided by Local Government Grants Commissions
  • a weighted factor be applied to Indigenous community councils to ensure their level
    of disadvantage is taken into account
  • appropriate acquittal arrangements
  • a new model, as presented by Professor Farish, to be designed by a Federal and Local
    Government Finance Advisory Group of experts and phased in over three years, with
    the process to be facilitated by the Commonwealth Grants Commission.

Overview of current arrangements

In determining the distribution of grants to councils, the current arrangements are:

  • At the beginning of each financial year, the Australian Government estimates the quantum of general purpose and local road grants local government is entitled to nationally. This is equal to the national grant entitlement for the previous financial year multiplied by the estimated escalation factor.
  • The estimated quantum of general purpose and local road grants for each State is then calculated, according to the Act, and the States are advised of these amounts.
  • Local Government Grants Commissions in each State recommend to the State Minister the distribution of general purpose and local road grants among local governing bodies in their State.
  • The State Minister forwards the Local Government Grants Commission recommendations to the Federal Minister.
  • When satisfied that all legislative requirements are met, the Federal Minister approves the payment of the recommended grants.
  • Once the Federal Minister has approved these grants, the Australian Government makes quarterly payments to the States and, without undue delay, the States pass these on to local governing bodies as untied grants.
  • Toward the end of the financial year when the requisite CPI and population data becomes available, the escalation factor is recalculated and the actual grant entitlement is determined.

As a result of the difference between the estimated and actual grant entitlements, an adjustment to the allocations to local governing bodies is made and their payments in the following year adjusted.

More details on each step are given in the following sections.

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Determining the quantum of the grant

Section 8 of the Act specifies the formula the Federal Treasurer applies each year to determine the escalation factor for increasing the level of local government financial assistance grants.

Up to and including 1999-2000, the annual increase in local government grants was based on the increase in financial assistance grants and special revenue assistance to the States. Between 1994-95 and 1999-2000, these State grants were increased annually in line with population and consumer price index movements and consequentially so were grants to local government. An exception was 1997-98, when local government grants were increased for inflation, but not population growth.

As a result of the introduction of The New Tax System in July 2000, increases in State financial assistance grants are no longer related to the consumer price index and population. The States now receive the goods and services tax (GST) revenue.

In June 2000, the Act was amended to remove the nexus between movements in the local government financial assistance grants and State grants. The escalation factor for local government financial assistance is now on a real per capita basis similar to that previously operating for the State grants.

As with the previous provisions, the amended Act provides the Treasurer with discretion to increase or decrease the escalation factor in special circumstances. In applying this discretion, the Treasurer is required to have regard to the objects of the Act (see 'Objects of the Act') and any other matter the Treasurer thinks relevant. The same escalation factor is applied to both the general purpose and local road components of the grant.

Objects of the Act

Subsection 3(2) of the Act states the objects of the Act:

The Parliament wishes to provide financial assistance to the States for the purposes of improving:

  • the financial capacity of local governing bodies; and
  • the capacity of local governing bodies to provide their residents with an equitable level of services; and
  • the certainty of funding for local governing bodies; and the efficiency and effectiveness of local governing bodies; and
  • the provision by local governing bodies of services to Aboriginal and Torres Strait Islander communities.

The CGC in its 2001 Review of the Act examined the meaning of each of these purposes (Commonwealth Grants Commission 2001).

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Determining entitlements for 2003-04 and 2004-05

Actual entitlements for 2003-04 and estimated entitlements for 2004-05 are calculated using the respective final factor and estimated factor, which are determined in accordance with the Act.

The factors used and the entitlements calculated for the 2003-04 actual entitlement and the 2004-05 estimated entitlement and actual grant paid are set out in Tables 2.1 and 2.2 respectively. See 'Variations in Reported Grants'. The basis for calculating the final factor for 2003-04 is explained in 'Determining the final factor for 2003-04'.

The estimated entitlement for 2003-04 was $1508 million comprising $1045 million in general purpose grants and $464 million in local road grants (see Table 2.1). In 2003-04 the Australian Government paid this amount in grants to local government through the States in respect of that year. However, at the end of 2003-04 and once the final factor for 2003-04 had been determined, the final entitlement was calculated as $1501 million comprising $1040 million in general purpose grant and $461 million in local road grants (see Table 2.1). As a result, local government had been overpaid $7.4 million in 2003-04 comprising $5.1 million in general purpose grants and $2.3 million in local road grants.

The estimated entitlement for 2004-05 is $1548 million comprising $1072 million in general purpose grants and $476 million in local road grants (see Table 2.2). The actual cash paid to local government from the Australian Government in 2004-05 will be $1540 million. That is, $1548 million in estimated entitlement for 2004-05 less the $7.4 million overpaid in 2003-04 (see Table 2.2).

In addition to these grants, the Government announced the payment of supplementary funding to South Australian councils for local roads over three years (see 'Supplementary funding to South Australian councils for local roads').

Table 2.1 Calculation of financial assistance grants actual entitlements and adjustments for 2003-04

 

2002-03 actual
entitlement

 

2003-04
final factor

 

2003-04 actual
entitlement

 

2003-04 estimated
entitlement

 

2003-04
adjustment

General purpose

$1 007 855 326

X

1.0316

=

$1 039 703 555

less

$1 044 843 617

=

-$5 140 062

Local road

$447 215 068

X

1.0316

=

$461 347 064

less

$463 627 861

=

-$2 280 797

Total

$1 455 070 394

X

1.0316

=

$1 501 050 619

less

$1 508 471 478

=

-$7 420 859

General purpose

 

 

31 Dec 2002
population

 

 

 

 

 

 

NSW

$341 069 580

 

6 662 212

 

$350 627 269

less

$352 335 917

=

-$1 708 648

Vic.

$249 588 630

 

4 884 952

 

$257 091 396

less

$258 936 368

=

-$1 844 972

Qld

$189 108 056

 

3 754 154

 

$197 578 337

less

$198 076 244

=

-$497 908

WA

$98 770 852

 

1 936 902

 

$101937 713

less

$102 482 222

=

-$544 509

SA

$78 225 421

 

1 522 475

 

$80 126 729

less

$80 493 714

=

-$366 985

Tas.

$24 365 180

 

474 305

 

$24 962 320

less

$25 053 704

=

-$91 384

NT

$10 198 709

 

198 075

 

$10 424 539

less

$10 423 851

=

$689

ACT

$16 528 900

 

322 164

 

$16 955 252

less

$17 041 597

=

-$86 345

Total

$1 007 855 326

 

19 755 239

 

1 039 703 555

less

$1 044 843 617

=

-$5 140 062

Local road

 

 

2003-04 final
factor

 

 

 

 

 

 

NSW

$129 751 124

X

1.0316

=

$133 851 259

less

$134 512 990

=

-$661 731

Vic.

$92 199 572

X

1.0316

=

$95 113 078

less

$95 583 296

=

-$470 218

Qld

$83 791 719

X

1.0316

=

$86 439 537

less

$86 866 875

=

-$427 338

WA

$68 379 841

X

1.0316

=

$70 540 644

less

$70 889 381

=

-$348 737

SA

$24 577 496

X

1.0316

=

$25 354 145

less

$25 479 490

=

-$125 345

Tas.

$23 699 239

X

1.0316

=

$24 448 134

less

$24 569 001

=

-$120 866

NT

$10 475 935

X

1.0316

=

$10 806 975

less

$10 860 402

=

-$53 427

ACT

$14 340 144

X

1.0316

=

$14 793 292

less

$14 866 427

=

-$73 135

Total

$447 215 068

X

1.0316

=

$461 347 064

less

$463 627 861

=

-$2 280 797

Table 2.2 Calculation of financial assistance grants estimated entitlements and actual grant paid for 2004-05

 

2003-04 actual entitlement

 

2004-05 estimated factor

 

2004-05 estimated entitlement

 

2003-04 adjustment

 

2004-05 actual grant paid

General purpose

$1 039 703 555

X

1.0310

=

$1 071 934 365

less

$5 140 062

=

$1 066 794 303

Local road

$461 347 064

X

1.0310

 

$475 648 823

less

$2 280 797

=

$473 368 026

Total

$1 501 050 619

X

1.0310

 

$1 547 583 188

less

$7 420 859

=

$1 540 162 329

General purpose

 

31 Dec 2003
population

           

NSW

$350 627 269

 

6 716 277

 

$359 861 890

less

$1 708 648

=

$358 153 242

Vic.

$257 091 396

 

4 947 985

 

$265 115 812

less

$1 844 972

=

$263 270 840

Qld

$197 578 337

 

3 840 111

 

$205 755 302

less

$497 908

=

$205 257 394

WA

$101 937 713

 

1 969 046

 

$105 502 589

less

$544 509

=

$104 958 080

SA

$80 126 729

 

1 531 375

 

$82 051 932

less

$366 985

=

$81 684 947

Tas.

$24 962 320

 

479 958

 

$25 716 419

less

$91 384

=

$25 625 035

NT

$10 424 539

 

198 700

 

$10 646 457

plus

$689

=

$10 647 146

ACT

$16 955 252

 

322 579

 

$17 283 964

less

$86 345

=

$17 197 619

Total

$1 039 703 555

 

20 006 031

 

$1 071 934 365

less

$5 140 062

=

$1 066 794 303

Local road

   

2004-05 estimated factor

           

NSW

$133 851 259

X

1.0310

=

$138 000 648

less

$661 731

=

$137 338 917

Vic.

$95 113 078

X

1.0310

=

$98 061 584

less

$470 218

=

$97 591 366

Qld

$86 439 537

X

1.0310

=

$89 119 163

less

$427 338

=

$88 691 825

WA

$70 540 644

X

1.0310

=

$72 727 404

less

$348 737

=

$72 378 667

SA

$25 354 145

X

1.0310

=

$26 140 123

less

$125 345

=

$26 014 778

Tas.

$24 448 134

X

1.0310

=

$25 206 027

less

$120 866

=

$25 085 161

NT

$10 806 975

X

1.0310

=

$11 141 990

less

$53 427

=

$11 088 563

ACT

$14 793 292

X

1.0310

=

$15 251 884

less

$73 135

=

$15 178 749

Total

$461 347 064

X

1.0310

=

$475 648 823

less

$2 280 797

=

$473 368 026

 

Variations in reported grants

Each year, the quantum of the grant to local government is estimated at the start of the financial year, using a formula based on forecasts of the consumer price index and population increases for the year. Councils are usually advised in August of their estimated grant entitlement for that financial year.

At the end of each year the actual grant for local government is calculated using the final consumer price index and population figures.

Inevitably there is a difference between the estimated and actual grant entitlements. This difference is added to or subtracted from the grant paid to the State in the following year.

Therefore, for each year each council has three different, reported grants: an estimated grant entitlement, an actual grant entitlement and an actual grant paid.

The Australian Government normally reports on actual grant entitlement.

 

Determining the final factor for 2003-04

Consistent with section 8 of the Act, the final factor for 2003-04 is calculated as:

final factor =
population of Australia at 31 Dec 2001
x
CPI at March 2004
population of Australia at 31 Dec 2001
CPI at March 2003

That is,

final factor =
19 755 239
x
144.1
= 1.0316
19 528 878
141.3

 

Supplementary funding to South Australian councils for local roads

As an interim response to the House of Representatives Standing Committee on Economics, Finance and Public Administration inquiry into local government and cost shifting, the Australian Government announced in March 2004 increased local road funding for South Australian councils. South Australian councils will receive additional funding - $4.25 million in 2004-05, $9 million in 2005-06 and $13 million in 2006-07 - to address the State's current disadvantage in local road funding.

The money is in addition to the Australian Government funding for local roads provided to South Australian councils as local government financial assistance grants and under the Roads to Recovery program.

The funding arrangements are outside the legislation governing the local government financial assistance grants but the allocation and payment arrangements mirror those under the financial assistance grants for local roads.

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Interstate distribution of the grants

The Act specifies that the national allocation of the general purpose component of the grant is to be divided amongst the States on a per capita basis. This uses the Australian Bureau of Statistics' estimate of each State's population and the estimated population of all States as at 31 December of the previous year.

In contrast, the States' shares of the local road component of the grant are fixed. The distribution is determined on the basis of shares inherited from the former, tied grant arrangements (see 'History of the interstate distribution of local road grants' in 2001-02 Local Government National Report, pp. 25-6). Therefore, each State's share of the local road component is obtained by multiplying the previous year's funding by the escalation factor determined by the Treasurer.

Table 2.3 shows the allocation of the actual entitlement for 2003-04 amongst the States while Table 2.4 shows the allocation of the estimated entitlements for 2004-05 amongst the States. Table 2.4 also shows the percentage change in the grants from 2003-04 to 2004-05.

Table 2.5 provides the per capita relativities of the State allocations for the general purpose, local road and total grants in 2003-04. The State per capita relativities for GST revenue determined by the CGC are provided for comparison. The per capita relativity for a State is the ratio of the per capita grant for the State to the average per capita grant across all States. Per capita relativities have values around 1.0. If the per capita relativity for a State is less than 1.0, the State receives less than its per capita share of the grants. If the per capita relativity is greater than 1.0, the State receives more than its per capita share.

Table 2.5 shows that New South Wales , Victoria , Queensland and South Australia receive less than their per capita share for financial assistance grants while the remaining States receive greater than their per capita share. South Australia has the lowest per capita relativity and the Northern Territory the highest for the financial assistance grants.

The GST revenue relativities have a far greater variability than the financial assistance grant relativities. The GST revenue relativities for all States, except Queensland , Western Australia and South Australia , have the same direction of movement away from 1.0 as the financial assistance grant relativities.

Table 2.3 General purpose and local road grants, allocation amongst States, 2003-04

State

General purpose grant

Local road grant

Total grant

$m

% of
total

$ per
capita

$m

% of
total

$ per
capita

$m

% of
total

$ per
capita

NSW

350.6

33.7

52.63

133.9

29.0

20.09

484.5

32.3

72.72

Vic.

257.1

24.7

52.63

95.1

20.6

19.47

352.2

23.5

72.10

Qld

197.6

19.0

52.63

86.4

18.7

23.03

284.0

18.9

75.65

WA

101.9

9.8

52.63

70.5

15.3

36.42

172.5

11.5

89.05

SA

80.1

7.7

52.63

25.4

5.5

16.65

105.5

7.0

69.28

Tas.

25.0

24.4

52.63

24

5.3

51.55

49.4

3.3

104.17

NT

10.4

1.0

52.63

10.8

2.3

54.56

21.2

1.4

107.19

ACT

17.0

1.6

52.63

14.8

3.2

45.92

31.7

2.1

98.55

Total

1 039.7

100.0

52.63

461.3

100.0

23.35

1 501.1

100.0

75.98

Note: These figures may not add to totals due to rounding.
State populations estimated at 31 December 2002.
Source: Department of Transport and Regional Services.

Table 2.4 Estimated grant entitlements and percentage change from previous year by State, 2004-05

 

General purpose grant

Local road grant

 

Total grant

 

$m

% change

$m

% change

$m

% change

NSW

359.9

2.63

138.0

3.10

497.9

2.76

Vic.

265.1

3.12

98.1

3.10

363.2

3.12

Qld

205.8

4.14

89.1

3.10

294.9

3.82

WA

105.5

3.50

72.7

3.10

178.2

3.33

SA

82.1

2.40

26.1

3.10

108.2

2.57

Tas.

25.7

3.02

25.2

3.10

50.9

3.06

NT

10.6

2.13

11.1

3.10

21.8

2.62

ACT

17.3

1.94

15.3

3.10

32.5

2.48

Total

1 071.9

3.10

475.6

3.10

1 547.6

3.10

Note: These figures may not add to totals due to rounding.
Source: Department of Transport and Regional Services.

Table 2.5 Per capita relativities for general purpose grants, local road grants, total grants and GST revenue, by State, 2003-04

State

Population as at 31 Dec 2002

General purpose grants per capita relativities

Local road grants per capita relativities

Total financial assistance grants per capita relativities

State GST revenue per capita relativities

NSW

6 662 212

1.0000

0.8603

0.9571

0.8921

Vic.

4 884 952

1.0000

0.8337

0.9489

0.8710

Qld

3 754 154

1.0000

0.9859

0.9957

1.0201

WA

1 936 902

1.0000

1.5595

1.1720

0.9705

SA

1 522 475

1.0000

0.7131

0.9118

1.2134

Tas.

474 305

1.0000

2.2072

1.3710

1.6012

NT

198 075

1.0000

2.3363

1.4107

4.3910

ACT

322 164

1.0000

1.9663

1.2970

1.1510

Total

19 755 239

       

Note: State GST relativities have been adjusted to reflect State populations at 31 December 2002 .
Sources: Department of Transport and Regional Services; and table 7 in Federal Financial Relations 2004-05; Commonwealth Budget Paper No. 3 (Costello & Minchin 2004).

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Quantum of financial assistance grants allocation

Table 2.6 shows the level of general purpose grants since the Australian Government started providing general purpose assistance to local government in 1974-75 together with untied local road grants since 1991-92.

Table 2.7 provides the level of general purpose grants, local road grants and total financial assistance grants for States over the five years from 2000-01 to 2004-05.

Table 2.6 National financial assistance grant allocation, 1974-75 to 2004-05

Year

General purpose grants

Local road grants

Total grants

 

($)

($)

($)

1974-75

56 345 000

n/a

56 345 000

1975-76

79 978 000

n/a

79 978 000

1976-77

140 070 131

n/a

140 070 131

1977-78

165 327 608

n/a

165 327 608

1978-79

179 426 870

n/a

179 426 870

1979-80 a

222 801 191

n/a

222 801 191

1980-81

302 226 347

n/a

302 226 347

1981-82

352 544 573

n/a

352 544 573

1982-83

426 518 330

n/a

426 518 330

1983-84

461 531 180

n/a

461 531 180

1984-85

488 831 365

n/a

488 831 365

1985-86

538 532 042

n/a

538 532 042

1986-87

590 427 808

n/a

590 427 808

1987-88

636 717 377

n/a

636 717 377

1988-89

652 500 000

n/a

652 500 000

1989-90

677 739 860

n/a

677 739 860

1990-91

699 291 988

n/a

699 291 988

1991-92 b

714 969 488

303 174 734

1 018 144 222

1992-93 c

730 122 049

318 971 350

1 049 093 399

1993-94

737 203 496

322 065 373

1 059 268 869

1994-95

756 446 019

330 471 283

1 086 917 302

1995-96 d

806 748 051

357 977 851

1 164 725 902

1996-97

833 693 434

369 934 312

1 203 627 746

1997-98

832 859 742

369 564 377

1 202 424 119

1998-99

854 180 951

379 025 226

1 233 206 177

1999-2000

880 575 142

390 737 104

1 271 312 246

2000-01

919 848 793

408 163 979

1 328 012 772

2001-02

965 841 233

428 572 178

1 394 413 411

2002-03

1 007 855 326

447 215 068

1 455 070 394

2003-04

1 039 703 555

461 347 064

1 501 050 619

2004-05 e

1 071 934 365

475 648 823

1 547 583 188

Notes:
a Grants to the Northern Territory under the program commenced in 1979-80, the initial allocation being $1 061 733.
b Prior to 1991-92 local road grants were provided as tied grants under a different Act.
c In 1992-93 part of the local road grant entitlement of the Tasmanian and Northern Territory Governments was reallocated to local government in the respective State.
d Grants to the Australian Capital Territory under the Act commenced in 1995-96, the initial allocation being general purpose ($13 572 165) and local road ($11 478 714).
e For 2004-05 the national grant allocation is the estimated entitlement.
Source: Department of Transport and Regional Services.

Table 2.7 Grant entitlements for all States by type of grant, 2000-01 to 2004-05 ($m)

State

Type of grant

2000-01

2001-02

2002-03

2003-04

2004-05

NSW

General purpose

310.7

327.7

341.1

350.6

356.0

 

Local road

118.4

124.3

129.8

133.9

138.0

 

Total

429.1

452.1

470.8

484.5

497.9

Vic.

General purpose

228.7

239.1

249.6

257.1

265.1

 

Local road

84.1

88.4

92.2

95.1

98.1

 

Total

312.9

327.4

341.8

352.2

363.2

Qld

General purpose

170.8

179.8

189.1

197.6

205.8

 

Local road

76.5

80.3

83.8

86.4

89.1

 

Total

247.2

260.1

272.9

284.0

294.9

WA

General purpose

90.4

94.5

98.8

101.9

105.5

 

Local road

62.4

65.5

68.4

70.5

72.7

 

Total

152.8

160.0

167.2

172.5

178.2

SA

General purpose

72.3

75.4

78.2

80.1

82.1

 

Local road

22.4

23.6

24.6

25.4

26.1

 

Total

94.7

99.0

102.8

105.5

108.2

Tas.

General purpose

22.7

23.6

24.4

25.0

25.7

 

Local road

21.6

22.7

23.7

24.4

25.2

 

Total

44.4

46.3

48.1

49.4

50.9

NT

General purpose

9.4

9.9

10.2

10.4

10.6

 

Local road

9.6

10.0

10.5

10.8

11.1

 

Total

18.9

19.9

20.7

21.2

21.8

ACT

General purpose

15.0

15.9

16.5

17.0

17.3

 

Local road

13.1

13.7

14.3

14.8

15.3

 

Total

28.1

29.7

30.9

31.7

32.5

National
total

General purpose

919.8

965.8

1 007.9

1 039.7

1 071.9

Local road

408.2

428.6

447.2

461.3

475.6

Total

1 328.0

1 394.4

1 455.1

1 508.1

1 547.6

Notes: All years are actual entitlement except 2004-05, which is an estimated entitlement. These figures may not add to totals due to rounding.
Source: Department of Transport and Regional Services.

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Principles for determining the distribution of grants within States

The Act requires National Principles to be formulated by the Federal Minister in consultation with State Ministers and a body or bodies representative of local government. These National Principles provide guidance for States in allocating the financial assistance grants to councils within the State.

The current National Principles came into effect from 1996-97 and apply to both grant components. The National Principles applying to the general purpose component provide additional criteria to the objectives of full horizontal equalisation and the minimum grant which are established in the Act (see 'What is horizontal equalisation?'). The National Principles are set out in full in Appendix A.

For the general purpose grant, the most important Principle is that the grants are distributed so as to contribute to achieving horizontal equalisation. Horizontal equalisation is achieved if each council in a State is able to provide the average range, level and quality of services by reasonable effort, taking account of differences in their capacities to raise revenue and in their expenditure needed to provide average services.

The distribution of grants between States on a per capita basis, rather than on a horizontal equalisation basis, evolved as a result of difficulties in determining the latter. In the 1991 CGC report on the per capita relativities for distribution of general purpose assistance, the Commission did not recommend using the relativities it had calculated. It considered its assessments to be subject to important reservations about the appropriateness of the methods it had used and the quality of available data (recommendation cited in Commonwealth Grants Commission 1995 p. 131).

Horizontal equalisation within States aims to bring all councils in that State up to the same fiscal level. The effect of distributing grants between States on a per capita basis means councils in different States may be brought up to different fiscal levels.

The Effort Neutrality Principle requires that a council's grant be independent of its policies. This means the grant to a particular council is not influenced by that council's actual rates charged, its actual expenditure on particular functions or the extent of its reserves or debt. This process allows a council to decide its own spending priorities and revenue-raising policies knowing that the decisions it takes will not affect its grant entitlement.

The Minimum Grant Principle ensures that each council receives at least a minimum level of general purpose assistance as required by the Act. This minimum is set at 30 per cent of a council's per capita share of general purpose grants (see 'What is the minimum grant?').

The Other Grant Support Principle requires other grants provided to a council by another sphere of government for the provision of services to be regarded like any other source of revenue and taken into account when assessing the overall financial capacity of each council. In the assessment of each council's financial capacity, local road grants provided under this Act should be included as well as any other grants that relate to the provision of local government services that are within the scope of services covered by the grant allocation process.

The Aboriginal Peoples and Torres Strait Islanders Principle seeks to address the specific needs of Aboriginal and Torres Strait Islander peoples in the provision of council services. The Principle requires that the level of grants councils receive should reflect the Aboriginal and Torres Strait Islander population within council boundaries. This means that calculation of the grant for councils 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.

There is one National Principle applying to the Identified Road Component. It requires distribution of this component on the basis of road expenditure needs, including consideration of factors such as length, type and use of roads.

Section 26 of the Act allows the Federal Minister to approve transitional modifications of the National Principles for individual States for specified years. For 2003-04, the Federal Minister agreed to transitional arrangements for Queensland . The State has been granted transitional modifications each year since 1996-97.

What is horizontal equalisation?

Horizontal equalisation would be achieved if every council in a State, by means of reasonable revenue-raising effort, was able to afford to provide a similar range and quality of services. The Australian Government pursues a policy of horizontal equalisation when it distributes GST revenue to State governments.

More formally, section 6(3) of the Act defines horizontal equalisation as being an allocation of funds that:

  1. ensures each local governing body in a State is able to function, by reasonable effort, at a
    standard not lower than the average standard of other local governing bodies in the State; and
  2. takes account of differences in the expenditure required to be incurred by local governing
    bodies in the performance of their functions and in their capacity to raise revenue.

Horizontal equalisation distribution of grants is determined by estimating the cost each council would incur in providing a normal range and standard of services, and by also estimating the revenue each council could obtain through the normal range and standard of rates and charges. The grant is then allocated to compensate for these variations in expenditure and revenue and (ideally) bring all councils up to the same level of financial capacity.

This means councils that would incur higher relative costs in providing normal services, for example, in remote areas (where transport costs are higher), or areas with a higher proportion of elderly or pre-school aged people (where there will be more demand for specific services) will receive relatively more grant monies. Similarly, councils with a strong rate base (highly valued residential properties, high proportion of industrial and/or commercial property) will tend to receive relatively less grant monies.

What is the minimum grant?

Section 6(2)(b) of the Act requires the Minister to ensure that:

'No local governing body in a State will be allocated an amount under section 9 (the general purpose component of the grant) in a year that is less than the amount that would be allocated to the body if 30 per cent of the amount to which the State is entitled under that section in respect of the year were allocated among local governing bodies in the State on a per capita basis.'

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Determining the distribution of grants within States

Local Government Grants Commissions, established within each State (except the Australian Capital Territory ), determine individual council allocations in accordance with the National Principles. In the Australian Capital Territory , local government is integrated with the Territory government and there is no role for a Commission.

Local Government Grants Commissions are State authorities the Australian Government requires as a condition of the State receiving local government financial assistance grants (see 'Local Government Grants Commissions'). The State determines the membership of the Commission and provides the resources for the Grants Commission.

After the Local Government Grants Commission has determined the grant distribution, the State Minister recommends the allocation to the Federal Minister for approval. One of the conditions for approval is that the Federal Minister is satisfied the State has adopted the recommendations of its Grants Commission.

The Australian Government pays grants to each State government as a tied grant to be passed on to councils in accordance with the approved distribution. Although a tied grant to the States, the grants are untied in the hands of local government, to give councils discretion regarding local priorities.

Section 15 of the Act requires, as a condition on the payment to local government from the States, that the grants are paid by the State without undue delay and without conditions. Further, each State Treasurer must give the Federal Minister, as soon as practicable after 30 June each year, a statement detailing payments made to councils during the previous financial year as well as the date the payments were made. The State Auditor-General must certify the statement.

The grants are paid to the States in equal instalments in the middle of each quarter. The first payment for a financial year is paid as soon as statutory conditions are met. One of the requirements of the Act is that the first payment cannot be made before 15 August.

Local Government Grants Commissions

Section 6 of the Act specifies the criteria a body must satisfy to be eligible to be recognised as a Local Government Grants Commission for a State. These criteria are:

  • the body is established by a law of the State
  • the principal function of the body is to make recommendations to the State government about the provision of financial assistance to local governing bodies in the State
  • the Federal Minister is satisfied that the body includes at least two people who are or have been associated with local government in the State, whether as members of a local governing body or otherwise.

Sections 11 and 14 of the Act require Local Government Grants Commissions to:

  • hold public meetings in connection with the recommendations
  • permit local governing bodies to make submissions to the Commission in relation to the recommendations
  • make their recommendations in accordance with the National Principles and any agreed State-specific principles.

The Grants Commissions are established under State legislation as follows:

  • New South Wales - Chapter 15, part 11 of the Local Government Act 1993
  • Victoria - Victoria Grants Commission Act 1976
  • Queensland - Chapter 3, part 3 of the Local Government Act 1993
  • Western Australia - Local Government Grants Act 1978
  • South Australia - South Australian Local Government Grants Commission Act 1992
  • Tasmania - State Grants Commission Act 1976
  • Northern Territory - Local Government Grants Commission Act 1995.

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Bodies eligible to receive financial assistance grants

Only local governing bodies are entitled to receive financial assistance grants. All councils constituted under State local government Acts are automatically local governing bodies. In addition, section 4(2) of the Act provides for 'a body declared by the Minister, on the advice of the relevant State Minister, by notice published in the Gazette, to be a local governing body for the purposes of this Act'.

In total, 721 local governing bodies received grants in 2003-04. Included in this figure were 38 declared local governing bodies, made eligible under this provision. Table 2.8 shows the distribution of declared bodies by State.

The Cocos Islands and Christmas Island Councils are part of Australia 's Indian Ocean Territories . They are not entitled to receive funding under the Act but receive the equivalent of financial assistance grant payments (see 'Funding of councils in Australia 's Indian Ocean Territories ').

Table 2.8 Distribution of the local governing bodies by type, by State, at june 2004.

Type

NSW

Vic.

Qld

WA

SA

Tas.

NT b

Total

Councils established by legislation a

173

79

157

142

68

29

36

685

Declared
2
1
0
0
6
0
28
36

Total

175

80

157

142

74

29

64

721

Notes:
a These are local governing bodies eligible under section 4(2) of the Act as they are constituted under State local government Acts.
b Includes Northern Territory Road Trust Account.
Source: Department of Transport and Regional Services.

Funding of councils in Australia 's Indian Ocean Territories

Under an arrangement between the Australian and Western Australian Governments, the Western Australian Local Government Grants Commission provides an annual assessment of the general purpose and local road grants for the Christmas Island and Cocos (Keeling) Islands Shire Councils. The Commission determines the grant allocation as if these councils were a council in Western Australia . This is on the basis that funding from the Australian Government for non-self-governing territories should allow them to provide services that align with similar communities on the mainland.

On the basis of these assessments, the Territories Office of the Department of Transport and Regional Services (DOTARS) provides Australian Government funds to these councils from a separate budget allocation to that provided under the Act.

The amounts provided in 2003-04 were:

  • Christmas Island Shire Council - $1 756 529 in general purpose grants and $224 800 in local road grants.
  • Cocos (Keeling) Islands Shire Council - $1 088 043 in general purpose grants and $69 694 in local road grants.

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Local Government Grants Commission's methods

Local Government Grants Commissions in each State are required to determine the distribution of 2003-04 grants to councils in accordance with the National Principles and to take into account local circumstances.

To determine the allocation of general purpose grants within a State, the respective Grants Commission assesses the amount each council would need to be able to provide a standard range and quality of services, while raising revenue from a standard range of rates and other income sources. The Commission then develops recommendations for grant distribution by allocating the available grant to councils taking account of their assessed grant need, and the minimum grant requirement. Distribution of the local road component is determined based on assessments of councils' road expenditure need.

These are difficult tasks, requiring considerable experience and judgement. Grants Commissions need to accurately and quantitatively assess the unique circumstances of a large number of councils in their jurisdictions in terms of providing a variety of services and raising a number of revenues.

Local Government Grants Commissions meet annually at a national conference to share insights and discuss common issues. The 2003 conference was held at Ballarat in Victoria in October 2003 with the theme 'What we do best'. The conference included a roundtable discussion on issues before the Cost Shifting Inquiry and presentations by grants commissions on the treatment of population dispersion, isolation and environmental factors in determining relative needs. There were presentations on social capital and its measurement and the views of two Victorian Council CEOs on the challenges facing regional and rural councils.

Since 1994 the Australian Government has sponsored a two-day meeting in Canberra of the Executive Officers of the Local Government Grants Commissions in order to encourage the sharing of technical knowledge on methodology between them. This meeting arose out of a recommendation of the 1994 review of the 1986 Act that an annual technical workshop was desirable. The report stated:

The more that the few personnel with technical knowledge pool this experience, the greater the potential for improvements in methodology (Morton 1994, p. 15).

The 11th meeting of Executive Officers was held in Canberra on 3 and 4 March 2004 . A focus for the meeting was consideration of Indigenous needs in the allocation of financial assistance grants with presentations from Executive Officers, the CGC and ATSIS. There was also discussion on the proposed Roads to Recovery program under AusLink and the recommendations arising from the House of Representatives Standing Committee on Economics, Finance and Public Administration inquiry into local government and cost shifting.

A detailed description of the methods each Grants Commission uses is contained in Appendix B. In addition to the summaries in the appendix, the Grants Commissions publish information about their methods in annual reports and occasional publications. Copies of these are usually available on the Internet (see 'Internet addresses for Local Government Grants Commissions').

A comparison of the Local Government Grants Commission methods used in 2003-04 is in Appendix C.

Internet addresses for Local Government Grants Commissions

State

Internet address

New South Wales

www.dlg.nsw.gov.au/dlg/dlghome/dlg_CommissionTribunalIndex.asp?areaindex=%20GC&index=21

Victoria

www.doi.vic.gov.au/vgc

Queensland

www.qlggc.qld.gov.au/

Western Australia

www.dlgrd.wa.gov.au/lggc

South Australia

www.sacentral.sa.gov.au/

Tasmania

www.treasury.tas.gov.au/

Northern Territory

www.grantscommission.nt.gov.au/

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Allocation of grants to councils in 2003-04

Payments to councils of financial assistance grants for 2003-04 were made in accordance with the recommendations made by State Ministers and approved by the Federal Minister. Appendix D contains the actual grant entitlements for all councils in 2003-04. The estimated entitlements for 2004-05 are also provided.

Table 2.9 sets out the average general purpose grant per capita to councils by State and the Australian Classification of Local Government (ACLG - a description of the ACLG is in Appendix F); and Table 2.10 provides the average local road grant per kilometre. The ACLG has been developed to aid comparison of councils with like councils, and is used here to indicate trends and allow comparison of grants to individual councils with the average for their category.

The results in Table 2.9 and Table 2.10 suggest there are some major differences in outcomes between States. Notwithstanding the capacity of the ACLG system to group like councils, it should be noted that there remains considerable scope for divergence within these categories, and for this reason the figures should only be taken as a starting point for enquiring into grant outcomes. This divergence can occur because of factors including isolation, population distribution, local economic performance, daily or seasonal population changes, age of population and geographic differences. Divergence can also occur because of variations between States of the relative ranking within the State on the basis of need of the different ACLG categories.

The Local Government Grants Commission's implicit ranking of councils, from those assessed as needing the most assistance to those needing the least assistance, can be obtained from the allocations of the general purpose grants and local road grants to councils within a State. For the general purpose grants, these are obtained by ranking councils on their general purpose grant per capita, while for local road grants, these are obtained on the basis of local road grant per kilometre. Appendix E provides these ranking of councils by State for 2003-04. Figures 2.1 and 2.2 provide an illustration of this ranking of councils using the example of South Australia .

Table 2.9 Average general purpose grant per capita to councils, by State and ACLG category, 2003-04 ($)

Classification
State
NSW
Vic.
Qld
WA
SA
Tas.
NTa
Average
Urban Capital City (UCC)
15.84
15.84
15.99
15.87
15.81
15.83
16.65
16.00
Urban Development Small (UDS)
15.84
16.36
n/a
15.87
15.81
n/a
n/a
15.86
Urban Development Medium (UDM)
18.77
28.04
16.44
15.87
15.81
n/a
n/a
18.64
Urban Development Large (UDL)
20.55
28.30
17.18
15.87
28.64
n/a
n/a
25.04
Urban Development Very Large (UDV)
26.36
30.85
15.99
15.87
n/a
n/a
n/a
27.25
Urban Regional Small (URS)
88.69
105.58
124.76
86.63
85.66
49.19
40.67
88.50
Urban Regional Medium (URM)
67.54
97.82
23.69
28.76
n/a
23.52
n/a
63.00
Urban Regional Large (URL)
72.21
76.88
20.28
n/a
n/a
n/a
n/a
52.34
Urban Regional Very Large (URV)
n/a
62.57
17.13
n/a
n/a
n/a
n/a
34.02
Urban Fringe Small (UFS)
n/a
98.68
101.69
15.87
39.91
60.91
35.83
79.12
Urban Fringe Medium (UFM)
40.28
58.56
29.01
38.34
67.90
n/a
n/a
45.17
Urban Fringe Large (UFL)
67.51
43.51
24.16
15.87
n/a
n/a
n/a
31.53
Urban Fringe Very Large (UFV)
34.21
48.56
n/a
15.87
40.01
n/a
n/a
36.77
Rural Significant Growth (RSG)
n/a
62.79
n/a
53.17
n/a
n/a
n/a
54.80
Rural Agricultural Small (RAS)
415.50
n/a
1257.7
368.88
375.19
328.70
n/a
463.25
Rural Agricultural Medium (RAM)
257.31
n/a
430.74
128.53
186.87
157.47
n/a
267.73
Rural Agricultural Large RAL)
191.77
220.08
182.71
211.70
140.89
107.28
n/a
176.49
Rural Agricultural Very Large (RAV)
127.02
126.08
71.65
115.29
79.43
75.94
48.54
99.29
Rural Remote Extra Small (RTX)
346.18
n/a
4121.30
3096.46
348.64
n/a
159.96
948.16
Rural Remote Small (RTS)
n/a
n/a
2450.05
845.45
n/a
n/a
138.65
584.16
Rural Remote Medium (RTM)
735.37
n/a
964.26
579.08
347.02
n/a
138.37
569.07
Rural Remote Large (RTL)
351.81
n/a
400.20
306.92
150.71
n/a
n/a
314.13
Average
52.81
52.76
53.33
52.89
52.71
52.82
52.18
52.89

Note: a Excludes Northern Territory Trust Fund.
Source: Department of Transport and Regional Services.

Table 2.10 Average local road grant per kilometre to councils by State and ACLG category, 2003-04 ($)

Classification
State
NSW
Vic.
Qld
WAa
SAa
Tas.
NT
Average
Urban Capital City (UCC)
2597.37
1665.44
1869.14
3788.83
1996.01
4111.22
2884.51
2079.96
Urban Development Small (UDS)
1881.85
1646.67
n/a
1625.54
1502.47
n/a
n/a
1655.14
Urban Development Medium (UDM)
1990.65
1165.51
2236.23
1612.78
1663.37
n/a
n/a
1768.77
Urban Development Large (UDL)
1874.49
1041.09
1640.59
1589.44
1582.36
n/a
n/a
1414.27
Urban Development Very Large (UDV)
1889.49
1106.18
1808.04
1541.22
n/a
n/a
n/a
1481.45
Urban Regional Small (URS)
1066.35
722.14
694.77
875.31
648.67
1925.6
2736.05
871.83
Urban Regional Medium (URM)
1257.95
777.63
1032.44
1030.25
n/a
2405.90
n/a
1030.43
Urban Regional Large (URL)
1419.15
906.63
1202.81
n/a
n/a
n/a
n/a
1102.86
Urban Regional Very Large (URV)
n/a
1026.62
1391.00
n/a
n/a
n/a
n/a
1373.10
Urban Fringe Small (UFS)
n/a
842.62
502.82
1260.14
1024.79
1467.52
2656.40
637.87
Urban Fringe Medium (UFM)
1329.66
1128.95
762.06
1158.05
656.02
n/a
n/a
968.64
Urban Fringe Large (UFL)
1310.36
1055.72
842.74
1319.09
n/a
n/a
n/a
1152.19
Urban Fringe Very Large (UFV)
1578.48
1231.87
n/a
1468.31
1031.69
n/a
n/a
1393.30
Rural Significant Growth (RSG)
n/a
847.46
n/a
845.22
n/a
n/a
n/a
845.57
Rural Agricultural Small (RAS)
640.67
n/a
378.43
417.73
206.86
1076.33
n/a
390.55
Rural Agricultural Medium (RAM)
682.13
n/a
387.16
628.20
190.91
1278.76
n/a
506.27
Rural Agricultural Large RAL)
703.10
439.92
420.78
598.58
205.95
1656.35
n/a
541.45
Rural Agricultural Very Large (RAV)
770.04
678.40
479.18
495.81
233.09
1642.88
2209.29
616.77
Rural Remote Extra Small (RTX)
n/a
n/a
382.66
324.73
389.26
n/a
500.70
370.95
Rural Remote Small (RTS)
n/a
n/a
377.25
386.24
n/a
n/a
569.95
431.07
Rural Remote Medium (RTM)
617.74
n/a
373.64
407.43
119.02
n/a
552.62
407.02
Rural Remote Large (RTL)a
634.92
n/a
398.35
527.98
n/a
n/a
503.09
Northern Territory Trust fund
n/a
n/a
n/a
n/a
n/a
n/a
340.32
340.32
Average
935.49
741.18
585.18
582.00
337.12
1743.56
791.60
694.26

Note: a Averages for all classifications in these States include special roads grants received by councils.
Source: Department of Transport and Regional Services.

Figure 2.1 General purpose grant per capita for councils in South Australia ($)

Click on the image to view the larger version
Click on the image to view the larger version

Note: For clarity not all councils are shown.
Source: Department of Transport and Regional Services.

Figure 2.2 Local road grant per kilometre for councils in South Australia ($)

Click on the image to view the larger version
Click on the image to view the larger version

Note: For clarity not all councils are shown.
Source: Department of Transport and Regional Services.

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Councils on the minimum grant

Councils receiving the minimum grant entitlement generally fall within the classification of Capital City , Urban Metropolitan Developed or Urban Fringe as described in the ACLG. Councils on the minimum grant are identified with a hash (#) in Appendix D. The per capita grant of these councils in 2003-04 is about $15.80 but differs slightly between States. This difference arises from slight variations in data sources for population used by the Australian Government to calculate the State share of general purpose grants and those used by the Local Government Grants Commissions for allocations for individual councils.

Table 2.11 provides the number of councils on the minimum grant, by State from 1996-97 to 2004-05 and shows an upward trend nationally in the number of minimum grant councils and the proportion of the population covered by minimum grant councils.

Table 2.11 also shows a wide variation between States for the proportion of the population covered by councils receiving the minimum grant. In 2003-04, the proportion ranges from 0 per cent in the Northern Territory to 70 per cent in Western Australia.

This variation between States can arise because of differences in the geographic structuring of local government. Some areas, such as commercial areas with few residents, will have high rate revenue capacity relative to the cost of the services they require. These areas, if structured into separate local government areas, may have a negative assessed grant need but will still receive the minimum grant. If these areas were instead combined with residential areas having a positive grant need, such that the overall grant need for the combined areas was still below the minimum grant, the total population subject to the minimum grant would be much greater.

Variations can also arise because of differences in the methodology used by Local Government Grants Commissions. However, if Grants Commission methodologies were consistent with the National Principles, such a wide variation would not be expected.

In 2003-04, the proportion of general purpose grant that went to councils on the minimum grant was just over 10 per cent nationally. The proportion varied from 0 per cent in the Northern Territory to around 21 per cent in Western Australia .

Some councils appear concerned if they receive the minimum grant. However, according to the Grants Commission methods, councils on the minimum grant are able to afford above average standards of service and/or below standard revenue-raising efforts. It simply demonstrates that they are relatively affluent compared to the other councils in the State that are not on the minimum grant.

Table 2.11 Numbers of councils on minimum grant and proportion of State population covered by minimum grant councils, by State, 1996-97 to 2004-05

 

NSW

Vic.

Qld

WA

SA

Tas.

NT

Total

1996-97

no. of councils

21

5

0

14

4

1

0

45

% of population

22%

10%

0%

43%

10%

10%

0%

15%

1997-98

no. of councils

22

7

2

17

4

1

0

53

% of population

22%

18%

10%

52%

10%

10%

0%

19%

1998-99

no. of councils

22

6

4

22

4

2

0

60

% of population

24%

13%

19%

57%

10%

19%

0%

22%

1999-2000

no. of councils

22

7

7

24

5

2

0

67

% of population

24%

15%

52%

61%

10%

19%

0%

30%

2000-01

no. of councils

22

9

9

24

5

2

0

70

% of population

24%

17%

57%

61%

10%

19%

0%

31%

2001-02

no. of councils

21

9

10

23

9

2

0

74

% of population

24%

18%

59%

57%

16%

19%

0%

31%

2002-03

no. of councils

21

7

11

26

14

2

0

81

% of population

24%

12%

61%

67%

43%

19%

0%

34%

2003-04

no. of councils

22

7

8

28

17

2

0

84

% of population

26%

14%

57%

70%

44%

19%

0%

34%

2004-05

no. of councils

20

8

7

28

22

1

0

86

% of population

24%

14%

55%

70%

56%

10%

0%

34%

Source: Department of Transport and Regional Services.

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Reviews of Grants Commission methods

Local Government Grants Commissions have programs for monitoring grant outcomes and refining aspects of their allocation methods. However, from time to time, it is appropriate for Grants Commissions to undertake a thorough review of their allocation methods.

Since the introduction of the Local Government (Financial Assistance) Act 1995 in July 1995, most Grants Commissions have undertaken major reviews of their methodology, are in the process of undertaking such examinations or have such activities planned.

The need for methodology reviews was reinforced by the CGC review of the operations of the 1995 Act that identified the need to revise methodologies to achieve consistency with the Relative Need, Other Grant Support and Aboriginal Peoples and Torres Strait Islander Principles (Commonwealth Grants Commission 2001, p. xii). Some States have not addressed these issues.

The status of reviews of methods by the Local Government Grants Commissions as at 30 June 2004 is given in Table 2.12.

Implicit with the requirements of the Act, such reviews should be undertaken in consultation with local governing bodies.

Table 2.12 Status of major methodology reviews undertaken since July 1995, by State, as at 30 June 2004

State

General purpose grants

Local road grants

NSW

None planned

None planned

Vic.

Completed in May 2001 and implemented from 2002-03. Review of revenue component completed in 2004 and to be implemented in 2004-05

Completed in July 1999 and implemented from 2001-02

Qld

Completed in December 2002 and implemented from 2003-04

Completed in December 2002 and implemented from 2003-04

WA

Completed in 2002-03

None planned

SA

Completed in 1997-98, and implemented in 1998-99

None planned

Tas.

Commenced in 2001-02 and expected to be implemented in 2005-06

Completed in 1999-2000, implemented from 2000-01

NT

Review of methodology to be completed in 2003-04. Implementation expected in 2005-06.

None planned

Source: Department of Transport and Regional Services.

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Impact of Grants Commission 'capping' policies

Year-to-year variations in the data Grants Commissions use to calculate the grants to councils are capable of leading to big changes in grants. Sometimes changes to Grants Commission methods, to improve their assessments of the grants most likely to achieve horizontal equalisation, also lead to changes. Unexpected changes in grants would impede efficient planning by councils so Grants Commissions have adopted policies to ensure year-to-year changes are not unacceptably large.

Many Commissions average the data of several years to reduce fluctuations. Nevertheless, they have found that policies to limit changes, by capping the maximum increase and decrease possible, are needed to limit year-to-year variation. For example, capping may constrain the maximum year-to-year increase in grants to 15 per cent and the maximum decrease to 6 per cent. Under this regime, a council that, for example, would otherwise have received an unconstrained grant 7.5 per cent lower than in the previous year would have its reduction limited to 6 per cent.

No council receives less than the minimum grant, so councils on the minimum grant are exempt from capping. In some circumstances, a Grants Commission may decide a council's grant should not be capped. Usually, this is to allow a larger grant increase than would otherwise be possible.

Commissions estimate the unconstrained grants in conformity with the National Principles for allocating grants. For this reason, capping changes the allocation from those consistent with the National Principles, although usually the extent of the divergence is relatively small.

However, to monitor the influence of capping, information was sought from each State. Table 2.13 summarises this information by showing the number and percentage of councils in receipt of grants above or below those grant outcomes provided by the methodology and the extent of the differences.

Table 2.13 Influence of capping on grant distribution, by State, 2003-04 (general purpose grants)

State

 

Change in quantum of grant due to capping

   

Total
councils

   

Reduction in quantum of grant

Change in quantum of grant of less than 0.5%

Increase in quantum of grant

More than
10%

Between
0.5% and 10%

Between
0.5% and
10%

More than
10%

NSW

No.

7

60

46

60

2

175

%

4

34

26

34

1

100

Vic.

No.

4

2

8

65

1

80

%

5

3

10

81

1

100

Qld

No.

25

32

43

28

29

15

%

16

20

27

18

19

10

WA

No.

1

2

139

0

0

142

%

1

1

98

0

0

100

SA

No.

6

28

25

4

1

74

%

8

38

34

5

15

100

Tas.

No.

0

0

29

0

0

29

%

0

0

100

0

0

100

NTa

No.

0

35

1

19

9

64

%

0

55

1

30

14

100

Notes:
a Excludes Northern Territory Road Trust Fund.
Source: Information supplied by State Grants Commissions.

The Australian Government has accepted use of phase-in arrangements like capping to ensure reasonable stability of funding to councils as having a useful role to play in allocating grants. However, capping should allow the phase-in of even large changes to grants within a reasonably short period of time. Unless the new level of grants is achieved within a maximum of five years, capping could be seen as impeding achievement of the objectives set out in the National Principles.

In two States, a large proportion of councils received grants in 2003-04 that were more than 10 per cent different from what they would receive under a strict interpretation of the National Principles (see Table 2.13). South Australia introduced considerable changes to its methods in 1998-99 so as to better conform to the requirements of the National Principles. As a result of this comprehensive review, it chose to phase in the changes in general purpose grants to councils over five years. The percentage of South Australian councils that were within the plus 10 to minus 10 per cent range has increased from 13 per cent in 1998-99 to 77 per cent in 2003-04. South Australia advises that its capping arrangements for the phase-in of its new methods will need to extend beyond the intended five years because of the impact that recent changes in valuation data are having on grant outcomes.

Queensland introduced a revised methodology for general purpose grants following a major review of its methods in 2003-04. The following phase-in arrangement for the period 2003-04 to 2006-07 was agreed between the Australian and Queensland Governments:

  • All Indigenous councils and similarly disadvantaged councils identified by the Grants Commission are to receive their full grant entitlement determined under the revised methodology.
  • In 2003-04 other councils are to receive grants equal to 75 per cent of their 2002-03 grant plus 25 per cent of their grant entitlement determined under the revised methodology. An adjustment is to be made to these grants if necessary to reduce the total grant payable to the level of the available grant.
  • In 2004-05 the respective ratios are to be 50 per cent and 50 per cent and in 2006-07, 25 per cent and 75 per cent.
  • No council to receive less than the minimum grant.

The new methodology should be fully phased-in in 2007-08.

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Increasing accountability and transparency of Grants Commission processes

One of the goals of the Act is to increase the States' transparency and accountability in allocating financial assistance grants to councils. The requirement in the Act for Local Government Grants Commissions to hold public hearings and to accept submissions from councils supports this goal, as does the tabling in the Australian Parliament of this National Report on the operation of the Act. In addition, Local Government Grants Commissions are required to:

  • meet with councils on a regular basis to explain their methods
  • issue discussion papers and hold meetings with councils when reviewing their methods
  • distribute information papers on the grants.

However, in its report for the 2001 review of financial assistance grants arrangements (Commonwealth Grants Commission 2001), the CGC identified transparency and accountability of Local Government Grants Commissions as needing improvement. The Commission defined transparency as being about local governing bodies being able to understand how their grant has been calculated, and accountability as about Local Government Grants Commissions providing information to further assist that understanding.

The Commission indicated that a council should be able to:

  • verify its grant allocation
  • understand why its allocation has changed from its previous level
  • understand why it differs from the grant allocation of a neighbouring or similar council
  • understand the key drivers of its grant allocation.

In relation to their annual reports, the CGC said that, as a minimum, the Local Government Grants Commissions should provide information on:

  • the grant outcomes of all local governing bodies in the State
  • the expenditure and revenue assessments of all local governing bodies in the State
  • the key drivers of Local Government Grants Commission's expenditure and revenue assessments.

In addition to their annual reports, Local Government Grants Commissions now make supporting information available to councils on the Internet (see 'Internet addresses for Local Government Grants Commissions').

In the 2001-02 National Report, we assessed the material available to councils about the allocation of 2001-02 grants. At the time of preparing the 2002-03 National Report and again this year, few Local Government Grants Commissions had released their annual reports for the reporting year. An assessment of the 2002-03 reports and additional material on the Internet is included here.

Table 2.14 provides a summary of DOTARS' assessment against the CGC's criteria of the adequacy of information Local Government Grants Commissions made available to all councils on 2002-03 grant allocations either in their annual reports or on the Internet.

Table 2.14 Information on 2002-03 grants provided by Grants Commissions in annual reports and/or on the Internet

State

Sufficient
information for
councils to verify
allocation

Expenditure and
revenue assessments
for all councils

Grant outcomes
available for
all councils

Key drivers
of revenue and
expenditure
assessments

NSW

no

no

yes

no

Vic.

yes

yes

yes

no

Qld

noa

noa

yes

no

WA

yes

yes

yes

no

SA

no

no

yes

no

Tas.

yes

yes

yes

no

NT

part

yes

yes

no

Notes:
a Information provided to enable calculation of expenditure and revenue for any individual council however it is not practical for a reader to make comparisons between councils of assessed expenditure, revenue or raw grant need.
Source: Department of Transport and Regional Services.

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