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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 2003-04. 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 2003-04.

Table C.1 Features of grants commission models for assessing local road need, 2003-04

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 approach was introduced in 200102
and phased in with full implementation occurring in 200304.
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: Information provided by Local Government Grants Commissions.

General 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 2 and 3 of this procedure are then repeated to ensure that, in reducing grants to some councils in the fourth 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 will receive a per capita share of general purpose grants. If a council is disadvantaged, 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 used for the general purpose component for 2003-04 allocations

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.

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 needs to balance its assessed costs and assessed revenues.

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 revenues.

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 amenities

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 Yes No
- public transport No No Yes No Yes Yes No
- other transport Yes Yes Yes Yes Yes Yes Yes

Building control

Yes

Yes

Yes

Yes

Yes

Yes

No

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

No

No

Yes

No

No

Depreciation

No

Yes

Yes

Yes

No

Yes

No

Debt servicing

No

Yes

No

No

No

Yes

No

Entrepreneurial activity

No

No

No

No

No

Yes

No

Agency arrangements

No

Yes

No

No

No

Yes

No

Revenue

Rate revenue

Yes

Yes

Yes

Yes

Yes

Yes

No

Operation subsidies

No

No

No

No

Yes

Yes

Yes

Garbage charges

No

Yes

Yes

No

Yes

No

No

Water charges

No

No

No

No

No

Yes

No

Sewerage charges

No

No

No

No

No

Yes

No

Airport charges

No

No

Yes

No

No

Yes

No

Parking fees and fines

No

No

Yes

No

No

No

No

Other user charges

No

No

Yes

Yes

No

Yes

No

Note: Functions for which a 'yes' is provided above are not necessarily separately assessed by the relevant grants commission but may be included as part of another (assessed) function. For example, depreciation might be included as a cost under the category for which the relevant asset is provided. Similarly revenue functions might be included as reductions in the associated expenditure function.
Source: Table 11-2 in the Commonwealth Grants Commission Working Papers and updated for subsequent cha with information provided by Local Government Grants Commissions.

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 2003-04 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 that, in turn, is more than double the average spending on rural unsealed roads.

Victoria uses a similar method for the expenditure assessment for local roads for the general purpose component. Under this method, standard costs are derived for each of three expenditure categories: sealed roads, formed and surfaced roads, and natural surfaced roads. These standard costs are applied to the length of local roads in each municipality and then multiplied by a series of cost adjusters to reflect location (metropolitan, regional centres, rural agricultural, etc.), soil, traffic loading, climate, drainage, materials, terrain and wet days. The data for all factors (apart from location) were based on councils' own estimates.

Queensland uses a different model for assessing roads needs in the general purpose model. The asset preservation model used by Queensland uses costs to maintain a council's road network, including bridges and hydraulics, in average condition. It takes into account traffic volume (including heavy vehicles), type of construction, and cost adjusters such as climate, soil, terrain and location.

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 transport-related expenditure, 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. Bridge maintenance is also taken into account by the model, by converting the bridge length into an equivalent road length by multiplying by 10.

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 and grants from the Australian and 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 a State-wide average rate 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.

Own-sources revenue for family services, heritage, culture and recreation, and traffic management is taken into account indirectly in the assessment. These are included on the expenditure side of the method and treated as negative expenditure functions.

From 2005-06 Victoria will be revising its revenue assessment to use capital improved values for rate assessment and a new assessment for user fees and charges.

For rates, Queensland uses a cent in the dollar for land valuations in residential, commercial/ industrial and rural land use general categories. Residential rates are also adjusted by an index for household income. For 2003-04 a maximum cap of 15 per cent increase in the rating assessment from the prior year was applied.

Aboriginal and Island councils are assessed as having zero rating capacity as the land in their areas is not rateable. Fifty per cent of the State Government financial aid grant for Aboriginal and Island councils is included as revenue as a surrogate for rate income. Previously this was 67 per cent.

Fees and charges are apportioned on a per capita basis and garbage revenue is assigned per occupied urban property.

Grants relevant to the expenditure categories are included as revenue according to the actual amounts each council received rather than a State average.

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:

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

The agricultural rate capacity for each council is based on its improved capital value of agricultural land (averaged over three years), number of agricultural properties and area of agricultural land. 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 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 the five land use categories of residential, commercial, industrial, rural and other.

All data are averaged over three years to reduce fluctuation.

Tasmania applies a State-wide average rate in the dollar to each council's value of rateable properties, 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 of determining distinct properties and values for assessing revenue-raising capacity exists. For this reason, statistics of personal income are used in estimating the revenue-raising capacity of all councils. The actual total rate revenue for all councils in the Territory is apportioned among councils in proportion to their share of total Territory personal income. In addition, councils' that receive the Northern Territory Operational Subsidy have 50 per cent of their subsidy counted as revenue.

Expenditure assessments

In addition to expenditure on roads, already outlined, local governments' main expenditures are on general public services, which include the organisation and general and financial administration of councils, recreation facilities, and sanitation and protection of the environment, including 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 disability factors 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 disability factors for the category. The disability factors estimate 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 differential expenditure need per unit is assessed to be negative, zero is substituted, so generally no reductions are made to the standard assessments.

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 10 categories of expenditure. These do not include water and sewerage services. Expenditure in the categories of environmental protection and other transport are treated as effort positive, meaning that each council's actual expenditure is adopted as its assessed expenditure need because of the difficulty of determining reliable models for estimating these expenditure needs. In addition, 10 cost adjusters (disability factors) are applied, including for Indigenous descent where an additional 50 per cent per person in relevant categories is allowed.

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 in addition to road needs. Under the direct assessment method the available grant is initially allocated to councils in proportion to their population and positive or negative adjustments are calculated for each category. These adjustments are for factors outside the control of the council. For example, if the council has a higher number of residential properties per population than the State average, it will receive a positive adjustment for garbage collection expenditure. The methodology provides for a further adjustment through application of cost relativity indices. In the case of roads, the cost relativity indices measure relative costs of factors such as material haulage, soil type, rainfall and drainage.

Tasmania assesses nine expenditure categories, including one for roads (made up of four classes) and 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 2003-04.

Table C.4 Grants treated by inclusion in general purpose grant allocations for 2003-04, 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 Australian and State Government recurrent grants. This includes each council's local
road grant and 77 per cent of Roads to Recovery funding.
Qld Local road grant, library grant, 50 per cent Roads to Recovery, 50 per cent State road
and drainage grant, 50 per cent of the State Aboriginal and Torres Strait Island councils'
operating grant.
WA 93 per cent of local road grant, 63 per cent of Roads to Recovery grant, as well as other
relevant operating grants provided by Australian and State Governments for community
amenities; recreation and culture; and education health and welfare.
SA 85 per cent of the local road grants, library grants, bus grants and Roxby Downs unique
extraordinary grant.
Tas. The local road grant, a ll the Roads to Recovery grant and the State motor ta xes collected
on the registration of heavy vehicles (known as NRTC funds') for the year under review;
all other state and federal current and capital grants.
NT Local road g rant f or t he y ear under review, 50 p er ce nt of th e R oads t o Recovery gr ant
and 50 p er cent of Northern Territory operational gr ant.

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 (Commonwealth Grants Commission 2001, p. 27) 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'.

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 Indigenous councils or the Shires of Aurukun and Mornington. Indigenous councils are assessed as having zero rating capacity as the land in their areas is not rateable. In 2003-04, 50 per cent of the State Government financial aid grant for Aboriginal and Island councils was included as revenue as a surrogate for rate income. Previously this was 67 per cent.

In both Indigenous and mainstream councils, cost adjusters (disability factors) are applied for Indigenous descent whereby the assessed expenditure per person is increased by 50 per cent in relevant expenditure categories.

The phase-in arrangements for the new methodology, whereby increases and decreases in grant are capped, provide for Indigenous councils to receive a minimum increase of 5 per cent. The new methodology removes the former provision under which a different formula was used to calculate expenditure need in Indigenous councils.

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, there are recognised Indigenous communities both within and outside mainstream councils.

The needs of Indigenous communities within mainstream councils are recognised both through their inclusion within the population of the council and through special recognition of the proportion of Indigenous people within the council. The Commission allocates a dollar amount per capita in addition to their recognition within the existing council general purpose grant calculation. On top of this the Commission gives special consideration to councils that have a high non-resident use of their facilities, that is, those councils that have high seasonal influxes of Indigenous people.

Five Indigenous communities outside of traditional local government areas receive financial assistance grants. Due to the unavailability of data, grants for these communities cannot be calculated in the same way as grants to other councils. In 1994-95 the Commission undertook a study to determine the appropriate level of funding for these communities, which determined a per capita funding level for each community. These per capita amounts were established after comparisons were made with communities in other States. For example, in 2003-04 the allocation to Anangu Pitjantjatjara was $348 per capita. The Commission is undertaking a review into the appropriateness of this level of funding.

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.

Factoring back and satisfying the Minimum Grant Principle

Once the revenue capacity and expenditure need of each council has been determined its raw grant can be calculated by subtracting its revenue capacity from expenditure need.

There are two situations that require grants commissions to apply a 'factoring back' process to obtain the assessed grants from the raw grants. The first is when the total raw grant does not equal the available grant for the State. This can occur when the grants commission:

  • has not assessed all revenue and expenditure categories for councils in the State
  • has not ensured that the total assessed revenue and expenditure across all councils in the State equals the total actual revenue and expenditure for all councils in the State, or
  • has not used a budget result term for each council when applying the Balanced Budget approach.

This situation would not arise if grants commissions adopted the approach the Commonwealth Grants Commission uses for allocating grants.

The second situation occurs when the raw grant allocation for some councils does not comply 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.

Grants to councils with raw grant allocations below the minimum grant (including negative grants) must increase to comply with the Minimum Grants National Principle. This requires grants to other councils in the State to be reduced through a factoring back process.

Should the grant to one or more councils, following the initial factoring back process, reduce their grant below their minimum grant, the factoring back process would be repeated. This process would have to be repeated until both the minimum grant and available grant constraints are simultaneously met.

Grants commissions use two approaches for factoring back the raw grant. They are:

  • the proportional method - each council's raw grant is reduced by the same proportion so the total of the grants equals the available grant
  • the equalisation ratio method - each council's grant is reduced such that all councils can afford to fund the same proportion of their expenditure need with their total income (assessed revenue capacity plus other grant support and general purpose grant).

All grants commissions, except Queensland, used the proportional method in 2003-04.

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