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

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

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

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

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

Recommendations relating to financial assistance grants The report of the House of Representatives Standing Committee on Economics, Finance and Public Administration inquiry into Local Government and Cost Shifting made three recommendations relating to local government financial assistance grants. These were: Recommendation 9: The Committee recommends that local government bodies be required to audit the state of their infrastructure (using a nationally accepted methodology) and provide status reports to the Commonwealth Grants Commission as one of the inputs into the needs based formula for Federal financial assistance grants to local government. The infrastructure data collected should be used to adjust financial assistance grants where councils are found to be negligent in managing infrastructure. Recommendation 13: The Committee recommends that the Commonwealth Grants Commission, in consultation with the Local Government Grants Commissions in each State, assess the efficiencies of amalgamations or regional cooperation of local government, and use available mechanisms to adjust financial assistance grants for the benefit of the sector at large. To facilitate amalgamations, where appropriate, councils should not be financially penalised through a net loss of financial assistance grants payments for four years. Recommendation 16: The Committee recommends that a new methodology for the distribution of financial assistance grants to local government be designed which incorporates the following elements: a national model which is consistent across each local governing body distribution of funds on equalisation principles, that is, on the basis of need funds to be paid direct to local government funds to remain untied and be allocated from one pool data on local conditions/factors to be provided by Local Government Grants Commissions a weighted factor be applied to Indigenous community councils to ensure their level of disadvantage is taken into account appropriate acquittal arrangements a new model, as presented by Professor Farish, to be designed by a Federal and Local Government Finance Advisory Group of experts and phased in over three years, with the process to be facilitated by the Commonwealth Grants Commission.

Overview of current arrangements

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

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

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

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

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Determining the quantum of the grant

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

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

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

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

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

Objects of the Act Subsection 3(2) of the Act states the objects of the Act: The Parliament wishes to provide financial assistance to the States for the purposes of improving: the financial capacity of local governing bodies; and the capacity of local governing bodies to provide their residents with an equitable level of services; and the certainty of funding for local governing bodies; and the efficiency and effectiveness of local governing bodies; and the provision by local governing bodies of services to Aboriginal and Torres Strait Islander communities. The CGC in its 2001 Review of the Act examined the meaning of each of these purposes (Commonwealth Grants Commission 2001).

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Determining entitlements for 2003-04 and 2004-05

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

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

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

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

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

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

	2002-03 actual entitlement		2003-04 final factor		2003-04 actual entitlement		2003-04 estimated entitlement		2003-04 adjustment
General purpose	$1 007 855 326	X	1.0316	=	$1 039 703 555	less	$1 044 843 617	=	-$5 140 062
Local road	$447 215 068	X	1.0316	=	$461 347 064	less	$463 627 861	=	-$2 280 797
Total	$1 455 070 394	X	1.0316	=	$1 501 050 619	less	$1 508 471 478	=	-$7 420 859
General purpose			31 Dec 2002 population
NSW	$341 069 580		6 662 212		$350 627 269	less	$352 335 917	=	-$1 708 648
Vic.	$249 588 630		4 884 952		$257 091 396	less	$258 936 368	=	-$1 844 972
Qld	$189 108 056		3 754 154		$197 578 337	less	$198 076 244	=	-$497 908
WA	$98 770 852		1 936 902		$101937 713	less	$102 482 222	=	-$544 509
SA	$78 225 421		1 522 475		$80 126 729	less	$80 493 714	=	-$366 985
Tas.	$24 365 180		474 305		$24 962 320	less	$25 053 704	=	-$91 384
NT	$10 198 709		198 075		$10 424 539	less	$10 423 851	=	$689
ACT	$16 528 900		322 164		$16 955 252	less	$17 041 597	=	-$86 345
Total	$1 007 855 326		19 755 239		1 039 703 555	less	$1 044 843 617	=	-$5 140 062
Local road			2003-04 final factor
NSW	$129 751 124	X	1.0316	=	$133 851 259	less	$134 512 990	=	-$661 731
Vic.	$92 199 572	X	1.0316	=	$95 113 078	less	$95 583 296	=	-$470 218
Qld	$83 791 719	X	1.0316	=	$86 439 537	less	$86 866 875	=	-$427 338
WA	$68 379 841	X	1.0316	=	$70 540 644	less	$70 889 381	=	-$348 737
SA	$24 577 496	X	1.0316	=	$25 354 145	less	$25 479 490	=	-$125 345
Tas.	$23 699 239	X	1.0316	=	$24 448 134	less	$24 569 001	=	-$120 866
NT	$10 475 935	X	1.0316	=	$10 806 975	less	$10 860 402	=	-$53 427
ACT	$14 340 144	X	1.0316	=	$14 793 292	less	$14 866 427	=	-$73 135
Total	$447 215 068	X	1.0316	=	$461 347 064	less	$463 627 861	=	-$2 280 797

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

	2003-04 actual entitlement		2004-05 estimated factor		2004-05 estimated entitlement		2003-04 adjustment		2004-05 actual grant paid
General purpose	$1 039 703 555	X	1.0310	=	$1 071 934 365	less	$5 140 062	=	$1 066 794 303
Local road	$461 347 064	X	1.0310		$475 648 823	less	$2 280 797	=	$473 368 026
Total	$1 501 050 619	X	1.0310		$1 547 583 188	less	$7 420 859	=	$1 540 162 329
General purpose			31 Dec 2003 population
NSW	$350 627 269		6 716 277		$359 861 890	less	$1 708 648	=	$358 153 242
Vic.	$257 091 396		4 947 985		$265 115 812	less	$1 844 972	=	$263 270 840
Qld	$197 578 337		3 840 111		$205 755 302	less	$497 908	=	$205 257 394
WA	$101 937 713		1 969 046		$105 502 589	less	$544 509	=	$104 958 080
SA	$80 126 729		1 531 375		$82 051 932	less	$366 985	=	$81 684 947
Tas.	$24 962 320		479 958		$25 716 419	less	$91 384	=	$25 625 035
NT	$10 424 539		198 700		$10 646 457	plus	$689	=	$10 647 146
ACT	$16 955 252		322 579		$17 283 964	less	$86 345	=	$17 197 619
Total	$1 039 703 555		20 006 031		$1 071 934 365	less	$5 140 062	=	$1 066 794 303
Local road			2004-05 estimated factor
NSW	$133 851 259	X	1.0310	=	$138 000 648	less	$661 731	=	$137 338 917
Vic.	$95 113 078	X	1.0310	=	$98 061 584	less	$470 218	=	$97 591 366
Qld	$86 439 537	X	1.0310	=	$89 119 163	less	$427 338	=	$88 691 825
WA	$70 540 644	X	1.0310	=	$72 727 404	less	$348 737	=	$72 378 667
SA	$25 354 145	X	1.0310	=	$26 140 123	less	$125 345	=	$26 014 778
Tas.	$24 448 134	X	1.0310	=	$25 206 027	less	$120 866	=	$25 085 161
NT	$10 806 975	X	1.0310	=	$11 141 990	less	$53 427	=	$11 088 563
ACT	$14 793 292	X	1.0310	=	$15 251 884	less	$73 135	=	$15 178 749
Total	$461 347 064	X	1.0310	=	$475 648 823	less	$2 280 797	=	$473 368 026

 

Variations in reported grants Each year, the quantum of the grant to local government is estimated at the start of the financial year, using a formula based on forecasts of the consumer price index and population increases for the year. Councils are usually advised in August of their estimated grant entitlement for that financial year. At the end of each year the actual grant for local government is calculated using the final consumer price index and population figures. Inevitably there is a difference between the estimated and actual grant entitlements. This difference is added to or subtracted from the grant paid to the State in the following year. Therefore, for each year each council has three different, reported grants: an estimated grant entitlement, an actual grant entitlement and an actual grant paid. The Australian Government normally reports on actual grant entitlement.

 

Determining the final factor for 2003-04 Consistent with section 8 of the Act, the final factor for 2003-04 is calculated as: final factor = population of Australia at 31 Dec 2001 x CPI at March 2004 population of Australia at 31 Dec 2001 CPI at March 2003 That is, final factor = 19 755 239 x 144.1 = 1.0316 19 528 878 141.3

 

Supplementary funding to South Australian councils for local roads As an interim response to the House of Representatives Standing Committee on Economics, Finance and Public Administration inquiry into local government and cost shifting, the Australian Government announced in March 2004 increased local road funding for South Australian councils. South Australian councils will receive additional funding - $4.25 million in 2004-05, $9 million in 2005-06 and $13 million in 2006-07 - to address the State's current disadvantage in local road funding. The money is in addition to the Australian Government funding for local roads provided to South Australian councils as local government financial assistance grants and under the Roads to Recovery program. The funding arrangements are outside the legislation governing the local government financial assistance grants but the allocation and payment arrangements mirror those under the financial assistance grants for local roads.

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Interstate distribution of the grants

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

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

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

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

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

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

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

State	General purpose grant			Local road grant			Total grant
	$m	% of total	$ per capita	$m	% of total	$ per capita	$m	% of total	$ per capita
NSW	350.6	33.7	52.63	133.9	29.0	20.09	484.5	32.3	72.72
Vic.	257.1	24.7	52.63	95.1	20.6	19.47	352.2	23.5	72.10
Qld	197.6	19.0	52.63	86.4	18.7	23.03	284.0	18.9	75.65
WA	101.9	9.8	52.63	70.5	15.3	36.42	172.5	11.5	89.05
SA	80.1	7.7	52.63	25.4	5.5	16.65	105.5	7.0	69.28
Tas.	25.0	24.4	52.63	24	5.3	51.55	49.4	3.3	104.17
NT	10.4	1.0	52.63	10.8	2.3	54.56	21.2	1.4	107.19
ACT	17.0	1.6	52.63	14.8	3.2	45.92	31.7	2.1	98.55
Total	1 039.7	100.0	52.63	461.3	100.0	23.35	1 501.1	100.0	75.98

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

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

	General purpose grant		Local road grant		Total grant
	$m	% change	$m	% change	$m	% change
NSW	359.9	2.63	138.0	3.10	497.9	2.76
Vic.	265.1	3.12	98.1	3.10	363.2	3.12
Qld	205.8	4.14	89.1	3.10	294.9	3.82
WA	105.5	3.50	72.7	3.10	178.2	3.33
SA	82.1	2.40	26.1	3.10	108.2	2.57
Tas.	25.7	3.02	25.2	3.10	50.9	3.06
NT	10.6	2.13	11.1	3.10	21.8	2.62
ACT	17.3	1.94	15.3	3.10	32.5	2.48
Total	1 071.9	3.10	475.6	3.10	1 547.6	3.10

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

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

State	Population as at 31 Dec 2002	General purpose grants per capita relativities	Local road grants per capita relativities	Total financial assistance grants per capita relativities	State GST revenue per capita relativities
NSW	6 662 212	1.0000	0.8603	0.9571	0.8921
Vic.	4 884 952	1.0000	0.8337	0.9489	0.8710
Qld	3 754 154	1.0000	0.9859	0.9957	1.0201
WA	1 936 902	1.0000	1.5595	1.1720	0.9705
SA	1 522 475	1.0000	0.7131	0.9118	1.2134
Tas.	474 305	1.0000	2.2072	1.3710	1.6012
NT	198 075	1.0000	2.3363	1.4107	4.3910
ACT	322 164	1.0000	1.9663	1.2970	1.1510
Total	19 755 239

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

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Quantum of financial assistance grants allocation

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

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

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

Year	General purpose grants	Local road grants	Total grants
	($)	($)	($)
1974-75	56 345 000	n/a	56 345 000
1975-76	79 978 000	n/a	79 978 000
1976-77	140 070 131	n/a	140 070 131
1977-78	165 327 608	n/a	165 327 608
1978-79	179 426 870	n/a	179 426 870
1979-80 a	222 801 191	n/a	222 801 191
1980-81	302 226 347	n/a	302 226 347
1981-82	352 544 573	n/a	352 544 573
1982-83	426 518 330	n/a	426 518 330
1983-84	461 531 180	n/a	461 531 180
1984-85	488 831 365	n/a	488 831 365
1985-86	538 532 042	n/a	538 532 042
1986-87	590 427 808	n/a	590 427 808
1987-88	636 717 377	n/a	636 717 377
1988-89	652 500 000	n/a	652 500 000
1989-90	677 739 860	n/a	677 739 860
1990-91	699 291 988	n/a	699 291 988
1991-92 b	714 969 488	303 174 734	1 018 144 222
1992-93 c	730 122 049	318 971 350	1 049 093 399
1993-94	737 203 496	322 065 373	1 059 268 869
1994-95	756 446 019	330 471 283	1 086 917 302
1995-96 d	806 748 051	357 977 851	1 164 725 902
1996-97	833 693 434	369 934 312	1 203 627 746
1997-98	832 859 742	369 564 377	1 202 424 119
1998-99	854 180 951	379 025 226	1 233 206 177
1999-2000	880 575 142	390 737 104	1 271 312 246
2000-01	919 848 793	408 163 979	1 328 012 772
2001-02	965 841 233	428 572 178	1 394 413 411
2002-03	1 007 855 326	447 215 068	1 455 070 394
2003-04	1 039 703 555	461 347 064	1 501 050 619
2004-05 e	1 071 934 365	475 648 823	1 547 583 188

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

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

State	Type of grant	2000-01	2001-02	2002-03	2003-04	2004-05
NSW	General purpose	310.7	327.7	341.1	350.6	356.0
	Local road	118.4	124.3	129.8	133.9	138.0
	Total	429.1	452.1	470.8	484.5	497.9
Vic.	General purpose	228.7	239.1	249.6	257.1	265.1
	Local road	84.1	88.4	92.2	95.1	98.1
	Total	312.9	327.4	341.8	352.2	363.2
Qld	General purpose	170.8	179.8	189.1	197.6	205.8
	Local road	76.5	80.3	83.8	86.4	89.1
	Total	247.2	260.1	272.9	284.0	294.9
WA	General purpose	90.4	94.5	98.8	101.9	105.5
	Local road	62.4	65.5	68.4	70.5	72.7
	Total	152.8	160.0	167.2	172.5	178.2
SA	General purpose	72.3	75.4	78.2	80.1	82.1
	Local road	22.4	23.6	24.6	25.4	26.1
	Total	94.7	99.0	102.8	105.5	108.2
Tas.	General purpose	22.7	23.6	24.4	25.0	25.7
	Local road	21.6	22.7	23.7	24.4	25.2
	Total	44.4	46.3	48.1	49.4	50.9
NT	General purpose	9.4	9.9	10.2	10.4	10.6
	Local road	9.6	10.0	10.5	10.8	11.1
	Total	18.9	19.9	20.7	21.2	21.8
ACT	General purpose	15.0	15.9	16.5	17.0	17.3
	Local road	13.1	13.7	14.3	14.8	15.3
	Total	28.1	29.7	30.9	31.7	32.5
National total	General purpose	919.8	965.8	1 007.9	1 039.7	1 071.9
	Local road	408.2	428.6	447.2	461.3	475.6
	Total	1 328.0	1 394.4	1 455.1	1 508.1	1 547.6

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

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Principles for determining the distribution of grants within States

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

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

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

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

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

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

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

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

The Aboriginal Peoples and Torres Strait Islanders Principle seeks to address the specific needs of Aboriginal and Torres Strait Islander peoples in the provision of council services. The Principle requires that the level of grants councils receive should reflect the Aboriginal and Torres Strait Islander population within council boundaries. This means that calculation of the grant for councils should reflect differences in the demand for services by Indigenous people, the cost of providing services to them and the capacity to raise revenue from them.

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

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

What is horizontal equalisation? Horizontal equalisation would be achieved if every council in a State, by means of reasonable revenue-raising effort, was able to afford to provide a similar range and quality of services. The Australian Government pursues a policy of horizontal equalisation when it distributes GST revenue to State governments. More formally, section 6(3) of the Act defines horizontal equalisation as being an allocation of funds that: 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 takes account of differences in the expenditure required to be incurred by local governing bodies in the performance of their functions and in their capacity to raise revenue. Horizontal equalisation distribution of grants is determined by estimating the cost each council would incur in providing a normal range and standard of services, and by also estimating the revenue each council could obtain through the normal range and standard of rates and charges. The grant is then allocated to compensate for these variations in expenditure and revenue and (ideally) bring all councils up to the same level of financial capacity. This means councils that would incur higher relative costs in providing normal services, for example, in remote areas (where transport costs are higher), or areas with a higher proportion of elderly or pre-school aged people (where there will be more demand for specific services) will receive relatively more grant monies. Similarly, councils with a strong rate base (highly valued residential properties, high proportion of industrial and/or commercial property) will tend to receive relatively less grant monies.

What is the minimum grant? Section 6(2)(b) of the Act requires the Minister to ensure that: 'No local governing body in a State will be allocated an amount under section 9 (the general purpose component of the grant) in a year that is less than the amount that would be allocated to the body if 30 per cent of the amount to which the State is entitled under that section in respect of the year were allocated among local governing bodies in the State on a per capita basis.'

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Determining the distribution of grants within States

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

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

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

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

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

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

Local Government Grants Commissions Section 6 of the Act specifies the criteria a body must satisfy to be eligible to be recognised as a Local Government Grants Commission for a State. These criteria are: the body is established by a law of the State the principal function of the body is to make recommendations to the State government about the provision of financial assistance to local governing bodies in the State the Federal Minister is satisfied that the body includes at least two people who are or have been associated with local government in the State, whether as members of a local governing body or otherwise. Sections 11 and 14 of the Act require Local Government Grants Commissions to: hold public meetings in connection with the recommendations permit local governing bodies to make submissions to the Commission in relation to the recommendations make their recommendations in accordance with the National Principles and any agreed State-specific principles. The Grants Commissions are established under State legislation as follows: New South Wales - Chapter 15, part 11 of the Local Government Act 1993 Victoria - Victoria Grants Commission Act 1976 Queensland - Chapter 3, part 3 of the Local Government Act 1993 Western Australia - Local Government Grants Act 1978 South Australia - South Australian Local Government Grants Commission Act 1992 Tasmania - State Grants Commission Act 1976 Northern Territory - Local Government Grants Commission Act 1995.

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Bodies eligible to receive financial assistance grants

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

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

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

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

Type	NSW	Vic.	Qld	WA	SA	Tas.	NT b	Total
Councils established by legislation a	173	79	157	142	68	29	36	685
Declared	2	1	0	0	6	0	28	36
Total	175	80	157	142	74	29	64	721

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

Funding of councils in Australia 's Indian Ocean Territories Under an arrangement between the Australian and Western Australian Governments, the Western Australian Local Government Grants Commission provides an annual assessment of the general purpose and local road grants for the Christmas Island and Cocos (Keeling) Islands Shire Councils. The Commission determines the grant allocation as if these councils were a council in Western Australia . This is on the basis that funding from the Australian Government for non-self-governing territories should allow them to provide services that align with similar communities on the mainland. On the basis of these assessments, the Territories Office of the Department of Transport and Regional Services (DOTARS) provides Australian Government funds to these councils from a separate budget allocation to that provided under the Act. The amounts provided in 2003-04 were: Christmas Island Shire Council - $1 756 529 in general purpose grants and $224 800 in local road grants. Cocos (Keeling) Islands Shire Council - $1 088 043 in general purpose grants and $69 694 in local road grants.

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Local Government Grants Commission's methods

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

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

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

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

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

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

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

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

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

Internet addresses for Local Government Grants Commissions
State Internet address New South Wales http://www.dlg.nsw.gov.au/dlg/dlghome/dlg_CommissionTribunalIndex.asp?areaindex=%20GC&index=21 Victoria www.doi.vic.gov.au/vgc Queensland www.qlggc.qld.gov.au/ Western Australia www.dlgrd.wa.gov.au/lggc South Australia http://www.sacentral.sa.gov.au/ Tasmania http://www.treasury.tas.gov.au/ Northern Territory http://www.grantscommission.nt.gov.au/

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Allocation of grants to councils in 2003-04

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

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

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

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

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

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

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

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

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

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

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

Click on the image to view the larger version

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

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

Click on the image to view the larger version

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

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Councils on the minimum grant

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

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

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

This variation between States can arise because of differences in the geographic structuring of local government. Some areas, such as commercial areas with few residents, will have high rate revenue capacity relative to the cost of the services they require. These areas, if structured into separate local government areas, may have a negative assessed grant need but will still receive the minimum grant