Chapter 3 : Financial Assistance Grants to Local Government

In 2000-01, the Federal Government provided $1.33 billion nationally - equivalent to about $70 per capita - in financial assistance to local government. These financial assistance grants were paid through the States and had two components - general purpose grants and identified local road grants. In 2000-01, the general purpose grants were $920 million and identified local roads grants were $408 million.

The objective of general purpose assistance from the Federal Government to local government is to strengthen local government to enable it to provide a wider range of services and to promote equity between councils and certainty of funding. 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 recommendations. This was followed, over the next two decades, by gradual development in legislative arrangements for providing financial assistance to local government. These grants are currently provided under the Local Government (Financial Assistance) Act 1995, which replaced the Local Government (Financial Assistance) Act 1986 and came into effect from July 1995.

From July 1991, as a result of a decision at the 1990 Special Premiers' Conference, local roads grants to local government were provided under the 1986 Act (as amended). 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 them on local roads.

In 2000-01, the Commonwealth Grants Commission undertook a review of the operation of the 1995 Act (see box).

Review of the operation of the 1995 Act

Section 17 of the Local Government (Financial Assistance) Act 1995 requires the Federal Local Government Minister to undertake a review of the operation of the Act by 30 June 2001. In June 2000, the Minister asked the Commonwealth Grants Commission to undertake the review and its final report was handed to the Government in June 2001.

The terms of reference for the review required the Commonwealth Grants Commission to examine and report on:

  • the effectiveness of the current arrangements for achieving the purposes and goals of the Act;
  • the appropriateness of the current National Principles (see Appendix A) - in particular, whether the minimum grant arrangement should be retained or varied;
  • the effectiveness of the current arrangements in ensuring that assistance is allocated on a full horizontal equalisation basis;
  • the consistency of local government grants commissions' policies and methods with the National Principles;
  • the impact of the Act on revenue raising by councils and on the provision of assistance to them by States;
  • the implications of any changes in the functions or responsibilities of councils; and
  • eligibility for assistance under the Act of bodies declared by the Minister.

The full terms of reference for the review and the Commonwealth Grants Commission's main findings are in Appendix C.

Overview of current arrangements

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

  • At the beginning of each financial year, the Federal Government determines the quantum of general purpose and local roads grants estimated to be available for local government nationally. This is equal to the quantum of the grants received nationally in the previous financial year adjusted by an estimated escalation factor.
  • The estimated quantum of general purpose and local roads grants for each State is then calculated according to requirements of the Federal legislation and these amounts are advised to States.
  • Local government grants commissions in each State determine the allocation of general purpose and local roads grants among local governing bodies in their State.
  • The local government grants commission recommendations are then sent, by the State Minister, to the Federal Minister for approval.
  • Once these grants have been approved by the Federal Minister, quarterly payments are made by the Federal Government to the States and, without undue delay, these are passed on by the States to local governing bodies as untied grants.
  • Toward the end of the financial year, the escalation factor is revised and the final quantum of the grants for the financial year is recalculated.
  • An adjustment to the allocations to local governing bodies is made and their payments in the following year adjusted.

More details on each step in the procedure are given under 'Calculation of grants' below.

Some observations about the Australian system of grant allocations to local government from a recent international comparative study of 19 OECD countries are given in the box below.

An international comparative study of local government grant distribution systems

As part of a review of the system used in England for distributing grants from the central government to local government, PricewaterhouseCoopers undertook a study in 1999 of the systems used in 19 OECD countries.

In relation to the grants distribution system used in Australia, the report says that key areas of interest are:

  • the role of the independent local government grants commissions;
  • the use of legislation and the National Principles to articulate the objectives of the grant distribution system;
  • the role of councils in the consultation process; and
  • the use of specific purpose payments from the Commonwealth to State governments and to councils to promote national priorities.

As a result of the initial research, the grants distribution systems in eight of the 19 countries were the subject of more detailed review. Australia was one of these eight countries.

Further information on the review of the grant distribution system for England is available at

Source: PricewaterhouseCoopers (2000) Local Government Grant Distribution: An International Comparative Study

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Determining the quantum of the grant

Section 8 of the Act specifies the formula to be applied by the Federal Treasurer each year to determine the increase in 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.

Since 1994-95 these State grants, and hence grants to local government, have increased annually in line with population and consumer price index movements (except for 1997-98, when local government grants were increased for inflation, but not population growth).

Following the introduction of the new tax system in July 2000, increases in financial assistance grants to the States are no longer related to the consumer price index and population. This link was abolished from 1 July 2000 under the terms of the Intergovernmental Agreement on the Reform of Commonwealth-State Financial Relations. 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 States' financial assistance 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 existing provisions, the amendments provide the Treasurer with discretion to increase or decrease the escalation factor in special circumstances. In applying his discretion, the Treasurer is required to have regard to the objects of the Act (see box below) and any other matters he thinks relevant. The same escalation factor is applied to both the general purpose and local roads components of the grant.

Objects of the Act

Section 3 of the Act explains the objects of the Parliament in enacting the Local Government (Financial Assistance) Act 1995:

'(2) 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.'

In the review, the Commonwealth Grants Commission found that the current arrangements have broadly achieved the Commonwealth's purposes. It found that some of the existing purposes are not clear and that their description needs to be improved so they are better understood and more effectively achieved.

The Commission recommended that the operation of the Act would be improved if the Commonwealth's intentions in providing its assistance were clearer and more transparent, with a clearer relationship between the purposes and the funds provided. It said that this could be achieved if there were:

  • a per capita pool to provide every local governing body with a share of the assistance;
  • a local roads pool to contribute towards local governing bodys' costs of maintaining their local roads; and
  • a relative need pool to improve equity by providing additional assistance to the more disadvantaged local governing bodies.

Every local governing body would receive a fixed per capita share from the per capita pool. Every local governing body that has a road responsibility would receive funding from the local roads pool. Only relatively disadvantaged local governing bodies would receive funding from the relative need pool. As part of the changes, a purpose should be drafted for the Act to outline the Commonwealth's intentions in providing the assistance from each pool.

Calculation of grants

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

At the end of each year the estimated grant for local government is adjusted to an 'actual' entitlement, calculated using the actual 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 there is an estimated grant entitlement, an actual grant entitlement and an actual grant paid.

In the review of the Act, the Commonwealth Grants Commission found these arrangements confusing for councils and said that they created difficulties for councils in their planning and budgeting. The Commission suggested that the final grant distribution to the States for the coming financial year should be based on the estimates of consumer price index and population available at the time of the Commonwealth budget. It proposed that there be no adjustment in the following year for changes in these estimates. The Commission suggested that the Commonwealth, in consultation with the States and local government, develop improved arrangements along these lines.

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Interstate distribution

Table 3.1 shows the allocation of funds amongst the States for 2000-01. 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.

Table 3.1: General purpose and local roads grants, allocation amongst States, 2000-01

In contrast, the State shares of the local roads component of the grant are fixed. The distribution is determined on the basis of shares inherited from the former, tied grant arrangements. Therefore, each State's share of the local roads component is obtained by multiplying the previous year's funding by the escalation factor determined by the Treasurer.

Table 3.2 provides the per capita relativities of the State allocations for the general purpose, local roads and total grants in 2000-01. The State per capita relativities for GST revenue 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 a value of 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 3.2 shows that New South Wales, Victoria 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. Victoria has the lowest per capita relativity and the Northern Territory the highest for the financial assistance grants.

Table 3.2: Per capita relativities for general purpose, local roads, total grants and GST revenue, by State, 2000-01

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

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Principles for determining distribution of grants within States

The 1995 Act requires National Principles to be formulated in consultation with State Ministers and a body or bodies representative of local government. The National Principles came into effect from 1996-97 and apply to both grant components (see Appendix A). The National Principles applying to the general purpose component provide additional criteria to the objectives of full horizontal equalisation and the minimum grant (see box) which are established in the Act.

What is horizontal equalisation?

Horizontal equalisation would be achieved if every council in a State, by means of reasonable revenue-raising effort, were able to afford to provide a similar range and quality of services. The Commonwealth pursues a policy of horizontal equalisation when it distributes general purpose funding for 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 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 additional 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 less grant monies.

In the review of the Act, the Commonwealth Grants Commission said that the term 'horizontal equalisation' should be replaced with 'relative need based on equalisation principles' because this more clearly reflects the Commonwealth's intentions and what is being, and can be, achieved. It went on to say that the Commonwealth should also avoid using the language of horizontal equalisation in a different way from its use in the allocation of Commonwealth general revenue assistance to the States.

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.'

In the review of the Act, the Commonwealth Grants Commission was specifically asked to look at the minimum grant arrangements. It recommended that the provision of a minimum level of financial assistance to all local governing bodies should be retained. They proposed splitting the general purpose pool into a per capita pool and a relative needs pool. The per capita pool would provide a grant to all local governing bodies based on their population. This per capita grant would be funded by what is now 30 per cent of the general purpose pool.

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 horizontal equalisation, evolved as a result of difficulties in determining the latter. This difficulty stems mainly from variations in local government functions between States: in different States councils provide different services, operate under different legislation and use different accounting practices.

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 without affecting 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.

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 roads 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 received by councils 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. Queensland, Victoria and Tasmania requested, and were granted, such modifications which allowed phased introduction of changes resulting from implementing the National Principles. For 2000-01, only Queensland sought and obtained an extension of these transitional arrangements. Queensland has been granted transitional modifications each year since the 1996-97 grant year.

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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 required by the Federal Government as a condition of the State receiving local government financial assistance grants (see box). The State provides the resources for the Grants Commission. For information on contacts for State local government grants commissions, see Appendix L.

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; and
  • the Commonwealth 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; and
  • make their recommendations in accordance with the National Principles and any agreed State-specific principles.

After the local government grants commission has determined the grant distribution, the State Minister recommends the allocation to the Commonwealth Minister for approval. One of the conditions for approval is that the Commonwealth Minister is satisfied the State has adopted the recommendations of its grants commission.

The Commonwealth 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 they 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 can not be made before 15 August.

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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, 727 councils received grants in 2000-01. Included in this figure were 40 declared local governing bodies, made eligible under this provision. Table 3.3 shows the distribution of declared bodies by State.

Table 3.3: Distribution of local governing bodies by type by State at June 2001

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Review findings on eligibility

The Commonwealth Grants Commission was asked to examine the eligibility for assistance under the Act of bodies declared by the Minister to be local governing bodies. The Commission found that the current arrangements work well and should be retained. However, it recommended that the Act be amended to allow:

  • either the Commonwealth or State Minister to initiate a declaration - but require both to agree to it; and
  • the Ministers to revoke an existing declaration, provided both agree.

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Local government grants commissions methods

The State grants commissions are required to determine the distribution of 2000-01 grants in accordance with the National Principles and to take into account local circumstances. The National Principles are set out in full in Appendix A.

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 roads 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 2000 conference was held in Sydney in November. The conference included a presentation by the Commonwealth Grants Commission on it's approach to horizontal equalisation, the processes it is undertaking for reviewing the Act and some preliminary results from analyses it had undertaken for the review. There was an analysis of the submissions from grants commissions to the review and discussions on the use of the Socio Economic Index For Australia in grants commission methods.

In 2000-01, a number of meetings were arranged for local government grants commissions with staff from the Commonwealth Grants Commission. The Commonwealth Grants Commission explained technical aspects of its allocation methodology that could be considered for adoption by local government grants commissions.

In the review, the Commonwealth Grants Commission commented on ways to improve the accountability and transparency of the allocation of funds to councils by local government grants commissions. In the context of the grant distribution process, the Commission thought that transparency is about councils being able to understand how their grants have been calculated and accountability is about local government grants commissions providing sufficient information to allow a council, if it chooses, to understand its allocation and the reasons for any changes. The minimum information for such a process is set out in the box below.

Improving accountability and transparency

The Commonwealth Grants 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; and
  • understand the key drivers of its grant allocation.

In relation to their annual reports, the Commonwealth Grants Commission said that, as a minimum, the reports should provide information on:

  • the grant outcomes of all councils in the State;
  • the expenditure and revenue assessments of all councils in the State; and
  • the key drivers of local government grants commission's expenditure and revenue assessments.

Below is a brief description of the local government grants commissions' methods used in 2000-01 comparing their approach to rating capacity, road grants, expenditure and the needs of Indigenous communities. A detailed description of the methods used by each grants commission is contained in Appendix B. In addition to the summaries in the appendix, the commissions publish information about their methods in annual reports and occasional publications.

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Rating capacity

New South Wales distinguishes urban and rural land and applies State-wide average rates in the dollar to unimproved capital values, averaged over three years, to estimate the rating 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.

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

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

  • $24.90 per rateable property; plus
  • $0.013 per dollar of gross value of rural production; plus
  • $0.015 per dollar of personal income; plus
  • $0.005 per dollar of an indicator of retail sales; plus
  • $0.002 per dollar of unimproved capital value.

Rates assessment for Indigenous councils is set to zero.

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

The capacity of urban properties is estimated as the sum of two components: the first is the product of gross rental values, averaged over three years, and a constant more or less like an average rate in the dollar; the second is the number of rateable assessments and a corresponding constant value per assessment.

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

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

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

All data are averaged over three years to reduce fluctuation.

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

Much of the Northern Territory is unincorporated, with local government largely confined to the areas settled by Aboriginal communities, or a relatively few more densely settled municipalities. Land trusts own the land in the majority of Aboriginal communities and no possibility exists of distinct properties and values for the assessment of revenue-raising capacity. For this reason, statistics of personal income are used to estimate the revenue-raising capacity of all councils. In addition, councils which receive an 'operational subsidy' from the Territory Government have half of this taken into account.

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Roads grants

New South Wales distributes a little more than one-quarter of the local roads component to councils in Sydney, Newcastle and Wollongong, and a little less than three-quarters to other councils. Of the former, 57 per cent is distributed in proportion to road length, 38 per cent to population and 5 per cent to bridge length. Of the latter, about 74 per cent is distributed in proportion to road length, 19 per cent to population and 7 per cent to bridge length.

For the general purpose component, New South Wales distinguishes 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. Following the practices of councils, the average spending on maintaining urban roads per kilometre is more than double rural sealed roads which, in turn, is more than double rural unsealed roads.

Victoria distributes the local roads component using a formula that takes account of population and road lengths of councils. The assessments include loading factors which allow for variations among councils in topography and rainfall.

This was the last year that Victoria used this approach. A new methodology was implemented for 2001-02 based on road lengths and traffic volumes. It uses annual average preservation costs for given traffic volumes with the costs subject to a number of modifiers such as freight loading, climate, sub-grade material and strategic routes.

Queensland distributes about 63 per cent of its local roads component in proportion to the length of local roads and 37 per cent in proportion to population.

For the general purpose component, Queensland distinguishes urban and rural local roads by surface type (sealed, gravelled, formed, unformed) and width. It assesses a road disability factor with reference to traffic volumes, road type and topography. The assessments result in 'disability factors' reflecting different road needs applied to a standard expenditure of about $3,196 per kilometre of road. In allocating the general purpose component, not all the local roads component provided to councils is taken into account in determining council's net cost of road maintenance and construction. The local road component is discounted to 70 per cent. The Queensland Grants Commission does this, since, on average, about 30 per cent of council revenue is used on water and sewerage functions.

Western Australia distributes 93 per cent of its local roads component according to its (road) asset preservation model, described below. It distributes about 5 per cent for major bridge works following the advice of Main Roads Western Australian. Following advice from the Aboriginal Roads Committee and in consultation with communities it distributes about 2 per cent for roads serving Aboriginal communities.

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 of bridges to cost.

Western Australia uses the same model for roads in distributing the general purpose component. However, other transport-related expenditure needs, such as street lighting and aerodromes, are also taken into account. Western Australia is phasing in application of the model to moderate changes to grants. This year, 70 per cent of the standard is due to the model and 30 per cent to the standards applying in 1995-96.

South Australia divides the local roads component into formula grants (85 per cent) and special local road needs (15 per cent). Formula grants are divided between metropolitan and non-metropolitan councils in proportion to road length and population, equally weighted. For metropolitan councils, the same formula divides grants. For non-metropolitan councils, shares are estimated with reference to equally weighted road length, population, area and road needs. Special local road needs are distributed among a minority of councils on recommendations of a Local Roads Advisory Committee, which assesses submissions from regional associations about roads of regional significance.

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

  • sealed roads - urban;
  • sealed roads - non urban;
  • unsealed roads - urban;
  • unsealed roads - non urban; and
  • 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.

Tasmania distributes the local roads component so that:

  • 66.5 per cent is distributed according to relative road expenditure needs estimated by a Mulholland asset preservation model;
  • 28.5 per cent is distributed in proportion to bridge deck areas (including concrete and wooden bridges, but excluding culverts); and
  • 5 per cent is distributed among councils with above average unsealed roads in proportion to relative unsealed road length.

Tasmania distributes the general purpose component according to the same Mulholland asset preservation model used to allocate part of the local roads components. Performance standards define for each type of road the annual length needing reconstruction, re-grading or resealing. 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. In effect, the local roads component received is netted from road needs for the general purpose component.

In the Northern Territory, local government boundaries are not contiguous. Roads not allocated to a local government are maintained through a roads trust. Funds are allocated to the Local Government Association of the Northern Territory which, in consultation with the communities, manages the roads. The local roads component is distributed in accordance with weighted road lengths:

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

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 roads component.

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

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

Victoria assesses 20 categories of expenditure including three for roads. It defines a standard expenditure based on average modal expenditures per service unit (mostly population). Expenditure needs are equal to the standard per service unit multiplied by the number of service units, the overall disability for the category and a discount factor to take account of the expenditure needs met by specific purpose grants. The disability is an estimate of the unavoidable cost per unit of the council, relative to those of other councils.

Queensland assesses relatively few expenditure categories. For the bulk of expenditure it assesses current and capital needs as equal to a minimum of about $868,000 - a fixed cost or flagfall amount that is included irrespective of the number of people serviced by the council - and additional per-person needs of about $307 per person. The amounts so assessed are increased or decreased by a disability factor. For Aboriginal and Torres Strait Islander councils, it assesses no minimum but allows needs of $810 per person and provision for a disability factor as for other councils. For categories representing a small proportion of expenditure, known as 'effort positive', it assesses current and capital needs equal to actual expenditure.

Western Australia assesses eight expenditure categories. It assesses about 25 disabilities. It defines standard expenditure as a minimum amount specific to each category, and sometimes to a class within each category, and amounts per unit of service (usually population). Needs are defined as the product of the standard, the units of service, disabilities and discounts for needs met by special purpose grants.

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

Tasmania assesses eight expenditure categories, including one for roads (made up of four classes). It assess about 15 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 about 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 about $70,000 is allowed for general administration.

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Needs of Indigenous communities

The fifth National Principle for distribution of general purpose grants requires grants commissions to allocate assistance to councils in a way that recognises the needs of Aboriginal and Torres Strait Islander peoples within their boundaries.

All grants commissions allocate funding to councils taking into account the population of the council. Therefore, councils that have Indigenous people as part of their community will receive financial assistance funding in respect of them. However, this National Principle goes further than this and requires grants commissions to allocate grants in a way that recognises the additional costs of providing services to Indigenous people.

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 Aboriginal as a cost driver in its Health and Welfare expenditure assessment.

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

For mainstream councils, it is calculated as:

Assessed non-road expenditure =
$868.346 + ($307.44 x population)
x disability factor (local government)

Whereas for Indigenous councils, it is calculated as:

Assessed non-road expenditure =
$810.32 x population x disability
factor (Indigenous councils)

Western Australia includes two disability factors - socioeconomic disadvantage and population dispersion - in their expenditure assessments. The Commission believes that the particular needs of Indigenous people in the community and of Indigenous communities will be reflected in these factors. 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 road grant component as special project funds for improvements to access roads to remote Indigenous communities.

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

Five Indigenous communities receive financial assistance grant funding. Due to the unavailability of data, grants for these communities cannot be calculated in the same manner as grants to other councils so the Commission allocates funding on a per capita basis. These per capita amounts were established after comparisons were made with communities in other States. For example, in 2000-01 the allocation to Anangu Pitjantjatjara was $302 per capita.

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

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

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Grant outcomes for individual councils are provided in Appendix D, Distribution of financial assistance grants to local government 2000-01.

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Determining actual State entitlements for 2000-01 and estimated entitlements for 2001-02

For each State and for both components of the grants, actual entitlements for the previous year and estimated entitlements for the forward year are calculated using the respective final factor and estimated factor, which are determined in accordance with the Act (see 'Determining the quantum of the grant' above).

The factors used and the entitlements calculated for the 2000-01 actual entitlement and the 2001-02 estimated entitlement are set out in figures 3.1 and 3.2 respectively.

Figure 3.1: Calculation of financial assistance grants, actual entitlements for 2000-01

Figure 3.2: Calculation of financial assistance grants, estimated entitlements for 2000-01

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National grant allocation

The level of general purpose grants since the Commonwealth commenced general purpose assistance to local government in 1974-75 together with untied local road grants since 1991-92 are detailed in table 3.4.

Table 3.4: National financial assistance grant allocations, 1974-75 to 2001-02 ($)

The grant entitlements for States from 1997-98 to 2001-02 are provided in table 3.5. Estimated grants entitlements for 2001-02 by State, along with proportional changes from the previous year, are set out in table 3.6.

Table 3.5: Grant entitlements for all States by type of grant, 1996-97 to 2001-02 ($m)

Table 3.6: Estimated grant entitlements and percentage change from previous year by State, 2001-02

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Allocation of grants to councils

Payment to councils of financial assistance grants for 2000-01 were made in accordance with the recommendations made by State Ministers and approved by the Commonwealth Minister. Appendix D contains the final grant entitlements for all councils in 2000-01. The estimated entitlements for 2001-02 are also provided.

Table 3.7 sets out the average general purpose grant per capita to councils by State and the ACLG (a description of the ACLG is in Appendix F); and table 3.8 provides the average local roads 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.

Table 3.7: Average general purpose grant per capita to councils by State and ACLG category, 2000-01 ($)

Table 3.8: Average local roads grant per kilometre to councils by State and ACLG category, 2000-01 ($)

The results in tables 3.7 and 3.8 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 inquiring 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.

From the allocations of the general purpose grants and local roads grants to councils within a State, the implicit ranking of councils by the Local Government Grants Commission - from the most needy to the least needy - can be obtained. For the general purpose grants, these are obtained by ranking councils on their general purpose grant per capita while for local roads grants, these are on the basis of local roads grant per kilometre. Appendix E provides these ranking of councils by State for 2000-01.

Grants commissions are required, under the Act, to make their recommendations to State Ministers in accordance with the National Principles. The Commonwealth Grants Commission was asked to examine the effectiveness of arrangements under the Local Government (Financial Assistance) Act 1995 in ensuring that the allocation of funds is made on a full horizontal equalisation basis. They were also asked to assess the consistency of the methods of local government grants commissions with the National Principles. Their findings are summarised in the box.

Achieving horizontal equalisation and consistency with the National Principles

In the review of the operation of the Act, the Commonwealth Grants Commission recommended that:

  • The term horizontal equalisation be replaced with 'relative need based on equalisation principles' because this more clearly reflects the Commonwealth's intentions and what is being, and can be, achieved.
  • While the underlying intention of the Horizontal Equalisation National Principle is being implemented, some changes are needed in local government grants commissions' methods to promote more effective implementation of equalisation.
  • Local government grants commissions' methods are consistent with the Minimum Grant, Effort Neutrality and Identified Road Component National Principles but not with the Other Grant Support National Principle.
  • The Aboriginal Peoples and Torres Strait Islanders National Principle has not been consistently addressed by local government grants commissions.

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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 is around $14.50 but differs slightly between States. This difference arises from slight variations in data sources for population used to calculate the State share of general purpose grants and those used for the allocations for individual councils.

Table 3.9 provides the number of councils on minimum grant, by State from 1997-98 to 2001-02 and shows an upward trend nationally in the number of minimum grant councils.

Table 3.9: Numbers of councils on minimum grant and proportion of State poplation covered by minimum grant councils, by State, 1997-98 to 2001-02

Table 3.9 also shows a wide variation between States for the proportion of the population covered by councils receiving the minimum grant. The proportion ranges from zero per cent in the Northern Territory to just on 60 per cent for Western Australia and Queensland. This variation arises because of differences in circumstances in each State as well as differences in the methodology used by each State Grants Commission. However, if State Grants Commissions were achieving similar outcomes such a wide variation would not be expected.

In 2000-01, the proportion of general purpose grant that went to councils on the minimum grant was just over 9 per cent nationally. The proportion varied from zero per cent in the Northern Territory to 18 per cent in Queensland.

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 theminimum grant.

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The 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 and grants commissions have adopted policies to ensure 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 10 per cent and the maximum decrease to 5 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 5 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 otherwise.

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 3.10 summarises this information by showing the number and percentage of councils in receipt of grants above or below those strictly consistent with the National Principles and the extent of the differences.

Table 3.10: The influence of capping on grant distribution, by State, 2000-01 (general purpose grants)

The Commonwealth has accepted the use of phasing 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 phasing of even large changes to grants within a reasonably short period of time. Unless the new level of grants is achieved within three to five years, maximum, capping could be seen as impeding achievement of the objectives set out in the National Principles.

Table 3.10 shows that, in two States, a large proportion of councils receive grants more than 10 per cent different from what would be received under a strict interpretation of the National Principles. South Australia introduced considerable changes to its methods in 1998-99 to better conform to the requirements of the National Principles and as the result of its comprehensive review methods. This resulted in an increase in the percentage of South Australian councils that were within the plus to minus 10 per cent range from 13 per cent in 1998-99 to 19 per cent in 1999-2000. This proportion has remained consistent in 2000-01. South Australia advises that capping arrangements will be in use until its new methods are fully implemented in five years.

In Queensland, methods have changed little in the last five years, but the grants have been subject to phase-in arrangements over the past five years (see Appendix B). As a result, the grants for many Queensland councils diverge considerably from those consistent with the National Principles although they do comply with the transitional modifications to the National Principles. The differences vary from, at one extreme, around $1.3 million more for a council than an allocation consistent with the National Principles, to, at the other extreme, around $740,000 less. The impediments in grants moving to an allocation consistent with the National Principles is the transitional provision that grants cannot fall below a floor of 85 per cent of the grants received in 1994-95 and the limit of 5 per cent on total grants reductions in any year.

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