Chapter 6 : Developing A Framework For The Future Operation Of Local Government

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Review of the Local Government (Financial Assistance) Act 1995

In accordance with the legislative requirements specified in the Local Government (Financial Assistance) Act 1995, a review of the operation of the Act had to be conducted by 30 June 2001. Conducted by the Commonwealth Grants Commission (CGC), the final report of the review was released in July 2001. CGC review findings and implementation action required is at Appendix C.

In assessing the CGC report, the Minister decided that there are a number of other aspects of Local Government that need to be taken into account prior to further consideration of the report recommendations. Not least of these are the financial arrangements between all levels of government.

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Inquiry into Local Government and Cost Shifting

In May 2002 the Minister for Regional Services, Territories and Local Government announced the establishment of an inquiry into cost shifting and Local Government by the House of Representatives Standing Committee on Economics, Finance and Public Administration, to be chaired by David Hawker MP.

The Committee is one of the senior Parliamentary Standing Committees and consists of 10 members: six government members and four non-government members.

The Inquiry addresses three of the Government's election commitments relating to Local Government:

• cost shifting - the Government undertook to review the incidence of cost shifting by State Governments on to Local Government
• review of the Local Government (Financial Assistance) Act 1995 - the Government also committed to consulting with State Governments and Local Government Associations when considering the recommendations of the CGC's review of the Local Government (Financial Assistance) Act 1995 prior to making any changes to the current arrangements
• constitutional recognition - the Government undertook to work with State and national Local Government Associations in raising the debate concerning constitutional recognition of Local Government.

In establishing the Inquiry, the Government has responded to the findings of the CGC's review in relation to State assistance. The CGC found that since the introduction of the untied financial assistance in 1974, Commonwealth grants assistance has grown by around 10.8 per cent a year on average, whereas the States' contributions have only grown around 6.6 per cent a year on average. It also found that State assistance to Local Government has declined in relative importance over this period (that is, from 15 per cent of Local Government revenue in 1974-75 to 7 per cent in 1997-98), whereas Commonwealth assistance had remained relatively constant (that is, from 10.5 per cent in 1974-75 to 12 per cent in 1997-98).

In addition to providing an opportunity to inquire into issues of cost shifting, the scope of the Inquiry also provides for the issues and outcomes from the CGC review of the Act to be considered in conjunction with the views of State and Territory Governments. Further, it provides the opportunity to examine the financial position of Local Government (on the basis that the outcomes are budget-neutral for the Commonwealth) and the key challenges and issues facing Local Government in Australia.

As at the end of December 2002, the Inquiry had received in excess of 325 submissions from a diverse range of councils, regional organisations of councils, individuals, national and State organisations, with submissions from each State and Territory representing metropolitan, regional, rural, remote and Indigenous communities.

Witnesses at public hearings have stressed the difficulties experienced by Local Government caused by the instances of cost shifting, changing community expectations, greater administrative and compliance impositions, lack of consultation and impediments to revenue-raising.

The Inquiry will continue to collect additional evidence both through public hearings and submissions with a view to providing a final report to the federal parliament in the later part of 2003.

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DOTARS submission to the inquiry

The Department of Transport and Regional Services (DOTARS) provided a submission to the Inquiry. Below are some of the points made by the Department against the terms of reference:

The departmental submission noted considerable strengths in Local Government:

• Local Government offers a wide and well-established national network of public administration and in some cases, Local Government is the only institutional presence in small, rural and remote communities.
• Local Governments are directly accountable and have strong, long-term links to their local communities.
• A close community relationship and sense of ownership by local communities has developed through Local Government delivery of core community services - such as the coordination of emergency services, library services and post-natal health services - as well as important infrastructure development and maintenance.
• Local Government's legislative basis makes it both durable and financially stable, unlike some community and interest groups.
• Local Government has a practical service orientation and good links with local business and industry.
• Local Government is often best placed to deliver many services and respond to locally identified and regional issues.

Local Government's current roles and responsibilities

There is clear evidence that the role of Local Government has expanded and changed significantly over the past few decades and it continues to change and respond to community expectations and aspirations. Local Government is shifting its focus from 'hard' infrastructure provision to a greater relative importance on spending on social services such as health, welfare, safety and community amenities.

Local Government needs to be sufficiently flexible to meet the needs of communities in the future. However, demands on Local Government to deliver an expanded range of social services vary across Australia and councils' capacity to deliver is dependent on a range of local factors such as their revenue base, the community's capacity to pay and the capacity of the council to deliver quality services.

In responding to the enormous pressures on Local Government, flexibility and reform are essential, as is adequate sources of revenue.

Current funding arrangements

There have been significant changes to Local Government's funding mix since the Commonwealth first started providing funding in the 1970s. The share of revenue coming from State Governments has declined and use by Local Government of alternative funding sources is at an early stage. This, combined with the limitations many councils face in increasing their own-source revenue, has placed an increasing focus on revenue from the Commonwealth to support Local Government activities.

Local Government's capacity to meet existing obligations and develop opportunities at a regional level

Capacity is a complex issue involving a number of different factors (such as size, resource, human resources and skills) and the capacity to undertake more functions will vary between councils. However, a number of studies suggest that Local Government's capacity to fund and manage essential infrastructure is an ongoing area of concern (see Chapter 4 on Infrastructure).

Local Government is already involved in developing opportunities at a regional level, not only in terms of regional development generally but also in planning and providing regional roads.

Local government expenditure and cost shifting

One of the fundamental difficulties with defining and measuring cost shifting is that in order to show that cost shifting is occurring, it is necessary to decide which government is actually responsible for providing the service in question. However cost shifting does occur when a State Government fails to ensure there are sufficient funds or increased access to revenue to cover the imposition of functions and/or costs onto Local Government for which the State Government is normally regarded as responsible.

The CGC review noted that the financial pressures being faced by Local Government are not due to a single influence, and it is therefore unlikely that a single response is appropriate. It noted that the diversity of councils further complicates the issue of cost shifting, particularly as not every council has the same capacity to raise revenue. Further, devolving functions to councils that are already highly dependent on grants can impose particular difficulties.

Scope for rationalisation of Local Government in Australia

There is always scope to rationalise roles and responsibilities between the levels of government - but there will always be some complexity around defining roles. A cooperative approach between all levels of government will enhance the prospect of successful outcomes.

Structural reform of Local Government can also be an important way forward to ensure that Local Government continues to make better use of resources in order to deliver better quality services to local communities. Reform can in some cases be achieved by Local Government alone, in further developing the role of regional organisations of councils for example; in other areas, the Commonwealth and State participation will be required.

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The future

Given the scope of the Inquiry, there is potential for the House of Representative Committee's report to provide a comprehensive national picture of the operation of Local Government and the issues and challenges all spheres of government face in relation to ensuring a contemporary and responsive policy and financial framework for Local Government.

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