FINANCIAL ASSISTANCE GRANTS REVIEW

FINANCIAL ASSISTANCE GRANTS REVIEW
FINANCIAL ASSISTANCE GRANTS REVIEW


  LOCAL GOVERNMENT ASSOCIATION OF SOUTH
               AUSTRALIA
 SUBMISSION TO THE COMMONWEALTH GRANTS
                COMMISSION



                                   March 2013




NOTE: This document was endorsed by the LGA Senior Executive Committee meeting on
21 February 2013
Financial Assistance Grants Review
                       Local Government Association of South Australia – Submission



INTRODUCTION

Local Government Association of SA (LGA)
The LGA is a membership organisation for all Councils in South Australia and is the voice of
Local Government in this State. The LGA is created by Councils and endorsed by the South
Australian Parliament through the South Australian Local Government Act 1999 and is
recognised in 29 other South Australian Acts.

All 68 Councils are members of the Association, as are Anangu Pitjantjatjara Yankunytjatjara
and the Outback Communities Authority (as associate members).

The LGA provides representation, quality service and leadership relevant to the needs of
member Councils. The LGA also operates specific units / entities providing:
      • all public liability and professional indemnity cover for all South Australian
        Councils;
      • all workers compensation cover for all South Australian Council employees;
      • all asset cover for South Australian Councils; and
      • extensive education and training; procurement; online services and a research
        and development scheme.

The LGA is involved in the operation of (and establishment of):
      • the Local Government Finance Authority;
      • Local Super; and
      • Public Library Services.

The LGA has a formal State / Local Government Relations Agreement with the Premier of
the State, and is a constituent member of the Australian Local Government Association.

Local Government in South Australia
Local Government in South Australia comprises 68 Councils of which 19 are metropolitan
Councils and 49 are rural or regional Councils. A large land area of the State is not
incorporated under the Local Government Act but for the purposes of the Commonwealth
Local Government (Financial Assistance) Act comprises five Aboriginal communities and the
Outback Communities Authority.

The Constitution Act 1934 (SA), the Local Government Act 1999 (SA), and the Local
Government (Elections) Act 1999 (SA) and the City of Adelaide Act 1997 (SA), create the
primary legal framework within which Local Government operates and the four-yearly
election process which underpins the representative nature of Councils in this State.

The Local Government system in South Australia is integral to the democratic system of
Government in Australia which provides vital economic, social and environmental support for
communities.

In 2010 / 2011, South Australian Councils were managing about $18 billion of community
infrastructure and other assets and incurred operating expenses of $1.7 billion. Councils
receive significant Commonwealth and State funding and work in partnership at the local
level for communities.




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Local Government in South Australia generally is typified by:
       • high standards of operational competence and accountability;
       • sharing resources, working consultatively and cooperatively with other Councils
          and other spheres of Government;
       • low levels of indebtedness and conservative management of finances; and
       • expanding roles and increases in standards of service to respond to community
          demands, other Governments and service gaps.




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EXECUTIVE SUMMARY

The Commonwealth Government raises the bulk of taxation revenue extracted by the three
tiers of Government in Australia (82%) and distributes funds to State and Local Government
to enable the delivery of services. Grants are transferred to the State Government based on
principles of fiscal equalisation (grants are distributed on the basis of capacity of the state to
raise their own source revenue and based on differential costs of service delivery). Grants
can be untied - or allocated for specific purposes. Grants from the Commonwealth are
distributed to Local Government largely through the states based on population share (and
since the mid 90’s have been increased only with population and inflation and have not
recognised real income growth nor allocation of activities and demand for services). Grants
are then required to be distributed intra-state on the basis of fiscal equalisation principles (ie
recognise the capacity of a local area to raise revenue and the cost of providing services).

It should be noted that untied grants to the State / Territory Governments are theoretically
more than is required to allow the most disadvantaged State / Territory to deliver an average
level of services with reasonable effort on their own part. The total pool of funds for FAGs to
Local Government is not adequate to achieve this outcome.

Financial Assistance Grants (FAGs) which are un-tied in the hands of local Councils are
intended to improve Local Government’s capacity to provide communities with an equitable
level of services and to increase the effectiveness and efficiency of Local Government.

The Commonwealth Government is currently undertaking a review of this process.

The review involves two stages. The first stage is to examine the impacts of FAGs on Local
Government bodies and includes a component to identify options for improving the
administration (efficiency) of the current process for determining the annual FAGs allocation.

The objectives of the second stage have not yet been specified, but it would be hoped that it
would look at the balance of funding made available. The importance of this aspect of the
review cannot be understated.

The history of Local Government financing over the last three decades has resulted in a
situation where year on year the role of Local Government is undermined because of
reducing shares of the general taxation revenue. Local Government produces public goods,
but has limited access to a taxation base.

Over the last decade there have been a number of reviews of Local Government financing
into the future. None of the recommendations of these reviews have been acted on, though
all confirm that:
     • Local Government has made significant improvements in terms of responsible
        financial management. There have been substantial advances in managing the
        expenditure side of the process with a focus on asset management. In today’s
        environment of economic uncertainty, the options for new funding options are limited,
        while there is an understanding that effectiveness in operations is critical;
     • Local Government is under-funded – over the last four decades, the funding provided
        to Local Government relative to the other spheres of Government has gradually
        declined. This is inadequate to continue traditional roles and fails to recognise the
        demands on Local Government in providing an extended range of services; and
     • The mechanisms in play are not consistent, nor complete (not through lack of desire,
        but through measurement and process constraints). The specific identification of road
        funding has been driven by political mechanisms that do not match current realities.



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But most significantly, it is clear that once again, unless the question of the level of funding,
including road funding and a more appropriate approach to that is identified, the Stage 1
terms of reference are insufficient.

This paper considers the terms of reference of the review and provides the following
conclusions as outlined below.

In 2003 the House of Representatives Standing Committee on Economics, Finance and
Public Administration identified the disadvantages to South Australian Councils under the
Local Roads component of Financial Assistance Grants (FAGs) and agreed that the
historical formula of the Local Roads component lacked transparency.

The Commission for the purposes of this review has been advised by the Treasurer that
references to the current funding envelope is exclusive of the South Australian
supplementary road funding allocation.

Given that the current funding allocation of the Identified Local Roads component of the
FAGs lacks transparency, how does the Commission propose to address the disadvantages
to South Australia within the current funding envelope?

This is an issue that cannot be ignored and the LGA SA requests that this matter be drawn
to the attention of the Commonwealth Government.


With regard to per capita based grants, differentials in the ability of people to pay rates mean
that the effective contribution of the Federal Government is different in different areas with
similar populations.

The Commonwealth Grants Commission distributes grants funding to the states based on
the same principles and similar models as used at the state level for Local Government.
While it accepts these principles as relevant for state funds, and requires them to apply by
the States in distributing funds to Local Government, it is without question inconsistent that
the Commonwealth Grants Commission does not adjust Local Government funds on this
basis.

The LGA SA is supportive of a Commonwealth standard framework which would seek to
promote, as far as practical, greater consistency in application of the national principles and
greater consistency in methodologies. However, individual Local Government Grants
Commissions (LGGCs) should retain scope to make their own methodological decisions
(consistent of course, with the Commonwealth Act and the national principles).

A Council’s capital investment decisions are based on expectations on a range of future
variables (ie size and composition of the population and economic activity). This makes it
difficult to reliably and systematically assess needs in respect of these future variables. It is
feasible however, to address needs for the use of infrastructure and other assets during the
period they are used, ie based on depreciation expenses.

The LGA is opposed to any move to further Tie grants as to do so would completely distort
the current model of compensating Councils for relative disabilities associated with providing
a similar service level across communities. Tied grants are also very inefficient and resource
allocation at the local level is more effective than centralisation.




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Any proposal to pool R2R and Identified Road Grant funding is not supported on the basis
that the current untied IRG methodology provides capacity for Councils to respond to
community service level requirements, has relevant accountability checks and balances and
reporting requirements are efficient and effective.

Proposals to pool the General Purpose and Identified Road component of FAGs would
require further examination and consideration, particularly (but not limited to) the impact any
specific proposal would have on South Australian Special Local Roads Program.

Removing or reducing the minimum grant cannot be considered in isolation and should be
aligned with the review of the overall grant pool and interstate disbursements to ensure
horizontal equalisation can be facilitated and to minimise the impacts on these affected by
the interstate redistribution . Any recommendation should include a requirement for changes
to be phased in over time (ie over five years).

Questions remain as to what incentive or interest Councils may have that do not receive
FAGs funding (where there is no minimum grant) to complete ongoing information returns.
This consideration may also be extended further in regard to how are the objectives and
policy requirements associated with tied grants, should tied grants apply, to be achieved
where Council do not receive any FAGs (through removal of minimum grants).

Development and subsequent application of a national Local Government Cost index to the
annual indexation of FAGs should be considered.




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Financial Assistance Grants
The major taxation collection responsibilities in Australia rest with the Commonwealth
Government. The Commonwealth collects 82% of every taxation dollar collected in
Australia1 while State Governments collect 14.7% and Local Governments 3.3%.

However, State Governments are responsible for 49.9% of public expenditure and Local
Governments are responsible of 10.4%. Given the differences in revenue raising scope and
expenditure responsibilities, the balance is managed by the Commonwealth transferring
funds to State and Local Government in the form of grants. Grants are transferred to State
Governments based on principles of fiscal equalisation (grants are distributed on the basis of
capacity of the state to raise their own source revenue and based on differential costs of
service delivery). Grants can be untied - or allocated for specific purposes.

FAGs which are un-tied in the hands of local Councils are intended to improve Local
Government’s capacity to provide communities with an equitable level of services and to
increase the effectiveness and efficiency of Local Government.

The Federal Government has announced a review of the equity and efficiency of the total
current funding of FAGS. The objective of the Review is to identify tangible measures for
improving the impact of the Local Government FAGs on the effectiveness of Local
Governments and their ability to provide services to their residents within the current funding
envelope.

The Commission is to examine the impacts of FAGs on Local Government bodies and its
appropriateness by focusing on:
   a. examining in the intrastate context whether the National Principles that guide the
      allocation of the general purpose grants remain valid and are conceptually consistent
      with each other;
   b. evaluating the economic and financial benefits of untied versus tied funding for
      enhancing the effectiveness of Local Governments and their ability to ensure
      effective services for their residents;
   c. identifying the impact of the Minimum Grant principle on the intra-state distribution of
      FAGs; and
   d. assessing the relative need of Local Governments in each state and territory with a
      particular focus on those that service regional and remote communities.

This also includes a component to identify options for improving the administration
(efficiency) of the current process for determining the annual FAGs allocation.

It is disappointing that the terms of reference have been constrained to consideration ‘within
the current funding envelope”.

All Councils in South Australia have supported the representations which the LGA has made
over many years to have equalisation principles applied to the interstate distribution of
FAGs. There also is support for the application of fiscal equalisation to the intrastate
distribution. To the extent that there may be differences of views between Councils in South
Australia, they relate to secondary but admittedly significant issues (ie on the question of the
minimum grant arrangements or on the details of some of the LGGC’s calculations).
However, any differences only arise because of the inadequacy of funds available.



1
       Source: ABS 5501.0.55.00.1 Government Financial Estimates, Australia, 2012-13, Table 1.


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The LGA appreciates that the insufficient quantum of available funding means that fiscal
equalisation does not apply anywhere near adequately to the Local Government sector (as
distinct from full equalisation for State and Territory Governments). Nevertheless, existing
funding levels are significant and certainly have beneficial effects in terms of assisting
Councils with lesser capacity to raise revenue and / or higher expenditure needs to operate
at standards closer to those financially stronger Councils than would otherwise be possible.
For example, the existing arrangements have reduced the gap between financially stronger
metropolitan Councils on one hand and rural and remote Councils with lower socio-
economic status on the other.

If the application of fiscal equalisation principles can be extended, as the LGA believes it
should, that will clearly have the effect of furthering such objectives, with particular benefit for
Councils that service regional and remote communities.

Identified Local Road Grants
South Australian Local Government manages 11% of the nation’s road network and has
approximately 7.6% of the nation’s population, but only receives 5.5% of identified local
roads grants funding (under the legislation) from the Federal Government. In 2003, the
House of Representatives Standing Committee on Economics, Finance and Public
Administration identified the disadvantages to South Australian Councils under the Local
Roads component of FAGs and agreed that the historical formula of the Local Roads
component lacked transparency.

This disadvantage is recognised by the Federal Government which put in place a temporary
supplementary funding arrangement, initially for three years but currently secured until
2013 / 2014. The annual “gap” is in the order of $16 million.

It is of significant concern, despite continued representation by the LGA, that seven years
after Federal Government recognition of this anomaly there is still neither a fair system in
place for the distribution of Identified Local Road Grants nor any clear plan to achieve one.
The LGA also acknowledges that some other States / Territories have concerns about their
shares, albeit facing far less disadvantage than South Australian Councils. This matter
requires a permanent fix.

The Commission for the purposes of this review has been advised by the Treasurer that
references to the current funding envelope is exclusive of the South Australian
supplementary road funding allocation.

Given that the current funding allocation of the Identified Local Roads component of the
FAGs lacks transparency, how does the Commission propose to address the disadvantages
to South Australia within the current funding envelope?

This is an issue that cannot be ignored and the LGA SA requests that this matter be drawn
to the attention of the Commonwealth Government.

Taxation
The major taxation collection responsibilities in Australia rest with the Commonwealth
Government. The Commonwealth collects 82% of every taxation dollar collected in Australia
while State Governments collect 14.7%and Local Governments 3.3%.
Grants from the Commonwealth are distributed to Local Government largely through the
states based on population share (and since the mid 90’s have been increased only with
population and consumer price index). There has not been any recognition of additional
responsibilities required by legislative change imposed by State or Federal Government or
change in expectations of residents.

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The Local Government Association of South Australia (LGA) Policy Manual

The Local Government Association of South Australia (LGA) Policy Manual is a guide to
the policies of Local Government in South Australia. The principles and policies contained
in the manual represent positions adopted by a majority vote of member Councils at the
General and Annual General Meetings of the LGA. Individual Councils are not bound by
the LGA's policies, but the policies do represent the 'sector wide' opinions of Local
Government in South Australia.

LGA SA policy relating to issues concerning the review includes:
6.5     INTERGOVERNMENTAL FINANCES
6.5.1   Federal and State governments should accept the principle of equitable
        revenue sharing with Local Government. Accordingly, Local Government is
        entitled to receive a guaranteed share of Federal taxation.
6.5.2   The vertical fiscal imbalance between the Federal, State and Local
        Governments must be addressed.
6.5.3   Local Government supports the Australian Local Government Association's
        positive involvement in the negotiation of a tripartite Intergovernmental
        Agreement and ongoing Council of Australian Government (CoAG) processes
        to expose and minimise cost shifting and encourage good practice behaviour
        between governments.
6.5.4   The Federal Government should not attempt to reduce tax sharing percentage
        levels or tie those funds derived from shared tax revenues to specific purposes.
6.5.5   Local Government's revenue sharing entitlement must not be amalgamated
        with the State Government's revenue sharing entitlement.
6.5.6   Local Government's revenue sharing entitlement should be calculated as a
        fixed percentage of total Federal taxation. The distribution of revenue sharing
        entitlements for Local Government between States and Territories should be
        based on needs. Every Council should be guaranteed a per capita share of the
        funds allocated to South Australia at the level set by negotiation with the LGA.
        Allowance should be made for non-residential consumption of services i.e.
        where the per capita population funding does not reflect demands on services.
6.5.7   The Federal Government should determine revenue sharing with Local
        Government after consultation with the LGA and the State Government.
6.5.8   In moving to equitable sharing of revenue shares between States and
        Territories no State or Territory funding should be reduced in dollar terms with
        changes phased over time through increased funding.
6.5.9   The annual revenue sharing allocation should be guaranteed to be not less
        than if it were increased in accordance with the Consumer Price Index.
6.5.10 The LGA, on behalf of Councils, will engage with the State and Federal
        Governments early during their Budget processes regarding:
        • impacts on Local Government; and
        • specific purpose programs.




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The Local Government Association of South Australia (LGA) Policy Manual (cont)

       6.5.11    The LGA will work to ensure that State and Commonwealth Governments
                 recognise the benefits of partnering with Councils to deliver more effective
                 services at the local level through specific purpose grants.
       6.6      SOUTH AUSTRALIAN LOCAL GOVERNMENT GRANTS COMMISSION
       6.6.1     Distribution of grants should be a function of the SA Local Government
                 Grants Commission with agreed LGA representation.
       6.6.2     The Grants Commission must remain an independent Statutory Authority.
                 State or Federal Governments should not have the power to override
                 allocation decisions by the Commission.
       6.6.6     Grants must be allocated between Councils with the aim of fiscal equalisation.
       6.7       UNTIED AND SPECIFIC PURPOSE GRANTS
       6.7.1     The State and Federal governments should recognise that a general system
                 of untied revenue sharing grants is the most appropriate and effective means
                 of financial assistance to Local Government.
       6.7.2    Specific purpose grants may be appropriate:
                 • for local roads based on a proper assessment of needs;
                 • to achieve national or State objectives and priorities through Local
                      Government participation, provided the conditions are implemented in
                      consultation with the LGA and participating Councils. Where changes
                      adverse to participating Councils are proposed, ample notice is to be
                      given and, where appropriate, compensation/phasing agreed; and
                 • provided that Federal or State tied funding is not at the expense of the
                      untied revenue sharing entitlement.
       6.7.3    Specific purpose grants should be negotiated with the ALGA and the LGA and
                 should be:
                 • program based;
                 • based on local/regional strategic plans;
                 • program wide funded; and
                 • based on negotiated agreements.




Ability to pay
With regard to per capita based grants differentials in the ability of people to pay rates mean
that the effective contribution of the Federal Government is different in different areas with
similar populations. In addition, many Local Government costs are related to the land area of
the Council, the costs of providing services to non resident populations, the choice made by
Councils to provide transport services in areas when state funded transport does not exist.
Funding based on resident population alone does not implement the horizontal equity
principles.

The table below analyses the distribution of per capita grants against the LGA population.
There are very large variations in per capita grants for the smallest Councils and this
variation diminishes as the resident population increases. This suggests that using resident
population as a basis for funding works better for high resident population Councils than for
low population Councils.




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Further analysis of grants data was undertaken. Council were grouped into clusters of
resident population in increments of 5,000 and maximum and minimum per capita grant
levels were analysed by State. This confirmed the high level of variability of grants to smaller
Councils and also revealed that different states had very different patterns of distribution of
the minimum rate. This pattern did not seem to be related to the use of direct and balanced
budget allocation approaches, but to be a State specific pattern attributable to the different
mix of factors taken into account in the State allocation process.

It can be concluded that the Commonwealth model of allocation of funds on a resident
population basis adjusted for CPI results in funding adjustments that are not in line with the
ability of Councils in different States and different types of area to raise revenue and deliver
services. It is unlikely that full harmonisation can be achieved because of the wide difference
in the revenue and cost bases of Councils across Australia. However some progress could
be made if there was an agreed core component of Local Government services that formed
the basis of Commonwealth allocation and adjustment. The definition of that core would
allow use of an inflator that followed real costs of delivery of Local Government services. In
addition rather than a linear adjustment based on resident population, the population could
be adjusted to reflect the cost weight for how the population was distributed.

The core issue here is that Commonwealth adjustment of the funding pool does not
presently follow the actual revenue and cost structures of delivering Local Government
services. This mismatch leads to in consistencies in which States attempt to allocate
funding. The inconsistencies are not based on whether direct or balanced budget methods

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are used, but on the need to respond to the on the ground delivery challenges in each state.
The definition of a core of Local Government Services and assessment of the changing cost
structure over time and in different population density zones, would result in smoother
adjustment and more efficiency in the State distribution task.

Cost of delivery, level of service
Within the constraints of the Commonwealth Grants Commission’s (CGCs) terms of
reference, it is challenging to identify suggestions how significant improvements can be
made in the ability of Councils, and in South Australia’s case, the Outback Communities
Authority and five outback Aboriginal communities, to provide services to communities in
regional and remote communities. However, the LGA SA is acutely aware that in most
regional and remote communities in South Australia, inadequate equalisation is reflected in
significant differences in service levels compared with metropolitan areas. The effect of this
is to compound the socio-economic problems which exist in the less financially advantaged
Councils, indigenous communities and the Outback Communities Authority and severely
limit their abilities to help towards reducing those problems. There remains however a
significant challenge in determining who misses out when there is inadequate funding in the
total pool to equalise all Councils.

Equity and population
There is an inherent inconsistency involved in being able to achieve the objectives given that
aggregate grants income is distributed to the states purely on a per capita basis. It is noted
that the South Australian State Government receives a higher proportion of state funding
based on revenue raising capacity and cost disability factors. But this is not considered in
Local Government funding, reinforcing the issues discussed above about the insufficiency of
the total pool and the constraints that implies for achieving equalisation.

The CGC distributes grants funding to the states based on the same principles and similar
models as used at the state level for Local Government. While it accepts these principles as
relevant for state funds and requires them to apply by the States in distributing funds to
Local Government, it is without question inconsistent that the CGC does not adjust Local
Government funds on this basis.

South Australia receives over 28% more funding than their per capita share in GST funds
distributed to the states – based on the Commonwealth Government’s horizontal
equalisation principles. That percentage is expected to go down over time (more related to
the increase in the relativity for NSW). However it would suggest that at the present time, if
fiscal equalisation were to be applied to the existing pool of General Purpose grants for
Local Government, South Australia indicatively would receive 28% more than the current
distribution, or an increase of $29 million – to a total of $135 million.

Analysis of 2009 / 2010 grants data shows that population differences account for less than
half of the variation between grants received at the Local Government level. See Figure 1

Comparative data of representative Councils (nationally) across states
There is a wide range of different interpretations by State LGGCs of the national principles
and the inconsistencies in their methodologies. A recent report by an ALGA consultant
seems to indicate that, despite collaborative work between CGC officers and State
Commissions over the last ten years or so on methodological issues at the technical level,
these inconsistencies have become greater.

The LGA SA is supportive of a Commonwealth standard framework which would seek to
promote, as far as practical, greater consistency in application of the national principles and
greater consistency in methodologies. However, individual Local Government Grants

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Commissions (LGGCs) should retain scope to make their own methodological decisions
(consistent, of course, with the Commonwealth Act and the national principles) .

The LGA SA appreciates the extremely difficult task of LGGCs in having to balance equity
objectives against the practicalities associated with having insufficient funding to meet
anywhere near all of the assessed needs. The greatest difficulties occur when determining
grants for Councils outside metropolitan areas which tend to drive assessment of disability
and functional costs because of the population and overall financial turnover.



   Financial Assistance Grants Scheme; a suggested plain English approach
   •    a local property tax base is inadequate to provide the resources for adequate
        minimum Local Government services in many localities;
   •    taxation powers rest with the Commonwealth and there is a need to ensure that
        local property based taxes are supplemented so that a minimum level of
        infrastructure and services is provided in all locations;
   •    the FAG scheme therefore provides partial supplementation of the resource base
        for Local Government;
   •    the scheme recognises that the portion of supplementary funding required by
        each council to provide core minimum infrastructure and services is determined
        by its ability to raise revenue through property taxation and the cost of providing
        infrastructure and services to the local population and others who live outside the
        Local Government area, but utilise local infrastructure or services;
   •    the scheme recognises that:
        o there is a minimum cost for Local Government operational and administrative
            infrastructure that applies regardless of population in order to meet the
            legislated service requirements;
        o cost of providing Local Government services and infrastructure is strongly
            influenced by the physical environment including area of coverage, inclusion
            or exclusion of coastline, local climatic factor, isolation from services and
            supplies;
        o the ability to raise revenue is strongly affected by the income of residents, the
            cost of purchasing good and services including access to health care; and
   •    the Commonwealth seeks to reduce disparities in basic Local Government
        services and to provide incentives for effective and efficient administration in
        Local Government.


Validity of National Principles
The two questions in the context of the validity of the principles are firstly whether the
principles are relevant, and secondly whether the methodology employed is effective in
achieving the principles.

Horizontal Fiscal Equalisation (HFE) is the making of payments to State governments with
the objective of equalising their fiscal capacities to provide public services. It is a feature of
the financial arrangements in many federations that aims to reduce the inequalities in the
fiscal capacities of sub-national governments arising from the differences in their geography,
demography, natural endowments and economies. (Commonwealth Grants Commission)




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The concept of horizontal equalisation exists to ensure that communities that         have own
revenue capacity disadvantages or cost disadvantages are not in themselves            subject to
service delivery questions, within a context of a policy neutral setting. It is       a broadly
accepted concept though those that receive less funding as a consequence              of it often
complain.

Some issues include:
  • the practice is applied at the whole of Council level, and therefore there is “limited
      protection” for smaller communities (ie sub council level) and the concept of
      equalisation across sub-communities is dependent on political process. This can
      create anomalies given the arbitrary nature of borders. For example households
      across the road from each other with similar socio-economic context can find
      themselves as recipients of different grants by virtue of being in different councils;
  • the concept of policy neutral is practically difficult to determine. In principle it is
      achieved by using the drivers of a given expenditure function (with a disability) factor,
      adjusted by a standard expenditure. However, Worthington and Dollery (2000)
      conclude that “there is some anecdotal evidence to suggest that LGGC
      methodologies do influence Council efficiency and therefore compromise the primacy
      of the horizontal equalisation objective” as the standard expenditure amount is
      influenced by (and encourages) a degree of inefficiency in the system (despite the
      fact that Councils themselves believe that LGGC engagement has encouraged
      increased efficiency. An example of how this impacts is the variable response to the
      Greater Adelaide 30 year plan, with for example some Councils resisting growth
      pressure implied within the State plan, others will embrace it. This policy choice
      reflects on population growth outcomes and as such will impact on grant outcomes.
      The Greater Adelaide Plan requires an effective interaction between State and Local
      Government activity. The Plan has a target / prediction of an increase of 560,000
      people in the greater metropolitan area over the thirty years and while there is a
      considerable emphasis on infill and greater density, the bulk of this is in the fringe.
      The Northern area is “required” to “contribute” 30% of this population increase (ie
      169,000) and the Southern area is expected to “contribute” 82,000 or 15%. In
      addition, the Barossa region is “required” to contribute 110,000 people;
  • the second question is whether the formula used locally and the processes adopted
      work to achieve equalisation? Most states use similar version of models to achieve
      the outcome and in South Australia, the mathematical form of the model could
      certainly be sufficient in principle, but is in reality constrained in achieving
      equalisation. Apart from insufficient funding, the key constraining issues are outlined
      below;
  • while many cost categories are considered, only selected cost factors have a
      disability measure applied – granted these are the major cost drivers but not all
      expenditures are included in the metrics, and using the choice between depreciation
      and capital expenditure as an example there is debate as to how to include some
      costs. Additionally there are a variety of costs categories that are not experienced by
      all Councils, ie coastal processes, industrial degradation:
           o the question of revenue raising capacity is subject to issues of income and
               wealth measures. Rate revenues are based on property values – a measure
               of wealth, with the context of asset rich and income poor in the mix. The
               commission moved from property based revenue assessment to a mix of
               SEIFA and property values, and neither are completely satisfactory. Issues
               that impact on this in terms of capacity to pay rates, relate to the extent of
               mortgage commitments (the mortgage belt is predominantly found in growth
               councils and is impacted in terms of real living standards by interest rate
               changes etc). There are also interactions between factors in determining local
               disability. An isolated low SEIFA community has far less ability to pay and it

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               costs more to service than a community in close proximity to health and social
               services in a nearby location. The concept of distance from capital city is a
               very poor measure of isolation.

Different states have different coverage and different treatments – but the major revenues
and costs are covered and it would not be expected that the differences would produce
major differences in outcome. Further, the drivers or units of measure that are used as a
basis for the distribution model are all historic and static in nature – they are generally
“stock” variables such as population, number of residential properties, road length etc.

Some costs (and revenues) will be driven by changes in these variables (or “flow” variables)
rather than the variable itself. For example, population growth will significantly impact on the
demand for new capital expenditures – in terms of parks and gardens, sports and recreation
facilities and community centres, employment growth would create different cost and
revenue pressures.

Planning expenditures do have the number of applications as a measure and this is to some
extent reflective of flow variables (the change in housing stock), but at present that is the
only measure of its kind and it is applied to a very specific item of expenditure. Therefore
there would be some justification for considering inclusion of some flow variables in the
model. There is precedence in this regard and for example the Victoria Grants Commission
includes population growth in their cost adjustors for expenditure on relevant items as one
possible approach to consider.

The South Australian Local Government Grants Commission is one of only two
Commissions that use the direct assessment method while other states use the balanced.
The advantage of the indirect method is that it stands outside the expenditure history to
some extent and therefore avoids the circular feedback loop where flawed expenditure and
income measurements are carried through to new grant calculation. With no definition of
required minimum service standards for core services and no assessment of the service
level offered against these standards, the quest for horizontal equity remains hit or miss.

Where capital expenditure rather than operating expenses is considered, depreciation is
generally used as the basis across all states. It is noted that depreciation in this context is
subject to issues of accounting choice or methodology.

 A Council’s capital investment decisions are based on expectations on a range of future
 variables (ie size and composition of the population and economic activity). This makes it
 difficult to reliably and systematically assess needs in respect of these future variables. It is
 feasible however to address needs for the use of infrastructure and other assets during the
 period they are used, ie based on depreciation expenses.

While perhaps picked up to some degree within the cost relativity indices population growth
brings some advantage to a given Council through improvements in economies of scale and
scope.

The South Australian LGGC has also separately commenced a review of the entire
methodology it uses to determine its recommendations for the distribution of Commonwealth
Financial Assistance Grants to local governing authorities in South Australia. It is anticipated
this review will identify the relevance (and materially) of some of the disability functions as
well as the accuracy of the data being provided by many Councils.

With respect to road grants, the national principle is to allocate to local governing bodies as
far as practicable on the basis of the relative needs of each local governing body for roads

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expenditure. For South Australia only, the identified local road grants pool also is divided into
formula grants (85%) and special local road grants (15%). The formula component is divided
between metropolitan and regional / rural councils on the basis of an equal weighting of road
length and population. In the metropolitan area, allocations to individual councils are
determined again by an equal weighting of population and road length. In regional / rural
areas, allocations are made on an equal weighting of population, road length and area of
council.

Tied versus untied grants
Local Government has made significant improvements in terms of responsible financial
management. There have been substantial advances in managing the expenditure side of
the process with a focus on asset management. In today’s environment of economic
uncertainty, the options for new funding options are limited, while there is an understanding
that effectiveness in operations is critical.

Local Government’s strength is its community base. While centralised decision making (as
implied by tied grants) may be seen to improve efficiency through linkage to national
priorities and accountability, it loses the valuable input of local communities – and as such
effectiveness must be questioned. It is critical that systems that reinforce accountability and
acknowledge the national good – but also acknowledge the role of local communities are the
basis of governance and the role of Local Government is reinforced. Tied funding can
disadvantage communities in developing new initiatives and can impede critical alternate
programs where matching funding for a key national initiative arises. Communities generally
are at different stages of development and must have the capacity to fund local initiatives
accordingly.

The R2R funding distribution recognised that there were inequities in the distribution of the
Identified Road Grants and the R2R distribution was based generally on a weighting of
population and road length. R2R funding is a tied grant for road funding and the Identified
road grant is untied.

The LGA is opposed to any move to further Tie grants as to do so would completely distort
the current model of compensating Councils for relative disabilities associated with providing
a similar service level across communities. Tied grants are also very inefficient and resource
allocation at the local level is more effective than centralisation.


Any proposal to pool R2R and Identified Road Grant funding is not supported on the basis
that the current untied IRG methodology provides capacity for Councils to respond to
community service level requirements, has relevant accountability checks and balances and
reporting requirements are efficient and effective.

The Commonwealth Parliamentary Committee report, Rates and Taxes; A Fair Share for
Responsible Local Government “concluded that as both the General Purpose pool and
Identified Road component of FAGs are currently untied and provide the discretionary
funding necessary to meet local needs they should remain untied and collapsed into one
pool” (recommendation16).

Proposals to pool the General Purpose and Identified Road component of FAGs would
require further examination and consideration, particularly (but not limited to) the impact any
specific proposal would have on South Australian Special Local Roads Program.

The Special Local Roads Program (SLRP) was established under the joint approvals of the
South Australian, Commonwealth and Local Governments.

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The SA LGA State Executive established the Local Government Transport Panel (LGTAP)
which proposes and monitors a continuing program of strategic road construction and
maintenance projects for the prioritisation of funding under the SLRP.

Funding for SLRP is provided from:
   • 15% of identified local road grants;
   • 15% of funding from the SA allocation of R2R2; and
   • 15% of SA supplementary road funding in recognition of inequities on the funding
      formulae.

Councils also make a material contribution to succesfull projects and $11.8 Million was
allocated to South Australian Councils through the 2011 / 2012 SLRP program.

The Impact of the Minimum Grant
This is a Commonwealth imposed requirement over the distribution formula used at the state
level. The major argument for the requirement seems to be political – to ensure every
Council receives a grant – there is no argument as to the justification of this on an economic
or market failure argument.

A project undertaken by the Australian Institute of Social Research modelled the impactions
of removing the minimum grant requirement for South Australian Councils. The results are
summarised below in Table 1. The modelling indicates that the results are significant in
terms of dollars in grants. However what should be also noted is that in general that grants
are much more significant to rural and regional Councils than they are to metropolitan
Councils. Removing the minimum grants requirement would see a significant redistribution
from Adelaide City and the “mature” metropolitan Councils to rural Councils.


Table 1: Average aggregate grant allocations under alternative policy frameworks
Average grant amount per capita (ie aggregate General Purpose Grant divided by
population)

                                                                Modelling
                                               Actual    -
                                               adj     for
                                               "Other                           Equal    No
                                               Special          Modelled        Per      minimum
                                 Actual        Needs"           Result          Capita   grant
    Adelaide City Council        $18.7         $18.7            $18.7           $57.8    $0.0
    High Growth Metro            $53.1         $53.1            $52.8           $57.8    $48.6
    Low Growth Metro             $18.7         $18.7            $18.7           $57.8    $0.0
    High            Growth
    Rural/Regional          $114.8      $107.9      $104.8 $57.8 $140.9
    Low             Growth
    Rural/Regional          $298.6      $275.6      $276.8 $57.8 $381.7
    Total                   $60.9       $57.8       $57.8  $57.8 $57.8
   Source: Barry Burgan and John Spoehr, FEDERAL ASSISTANCE GRANTS TO LOCAL
   GOVERNMENT REVIEW, June 2011, Report prepared for: Cities of Playford, Mt
   Barker, Onkaparinga and Salisbury, AISR, June 2011.




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Removing or reducing the minimum grant cannot be considered in isolation and should be
aligned with the review of the overall grant pool and interstate disbursements to ensure
horizontal equalisation can be facilitated and to minimise the impacts on these affected by
the interstate redistribution . Any recommendation should include a requirement for changes
to be phased in over time (ie over five years).

South Australian Councils currently provide substantive information to the South Australian
Local Government Grants Commission through financial and general information returns.
This in turn contributes to national information requirements. Such information has been
invaluable in relation to Financial Sustainability and other work undertaken by the LGA.
Receipt of FAG funding is generally considered a fine incentive to complete relevant
information returns in an accurate and timely manner. In the LGA’s view, it would be
unfortunate if not all Councils could see some financial return for participating in this activity
(particularly given that a key to ongoing improvement in Local Government financial
governance and performance is the availability of good financial data).

Questions remain as to what incentive or interest Councils may have, if they were not to
receive FAGs funding (where there is no minimum grant), to complete ongoing information
returns. Notwithstanding the financial aspects of the possible removal of the minimum
grants, table 1 of the Commonwealth Grants Commission Issues Paper identifies that
nationally there are 97 Councils representing 34.34 % of the population currently receiving
the minimum grant.

Relative need of Local Governments in each state and territory
The Commonwealth Grants Commission distributes grants funding to the states based on
the same principles and similar models as used at the state level for Local Government.
While it accepts these principles as relevant for state funds and requires them to apply by
the States in distributing funds to Local Government, it is without question inconsistent that
the CGC does not adjust Local Government funds on this basis. This has not always been
the practice.

The Department of Regional Australia, Regional Development and Local Government
describes the process of funds distribution as follows “The quantum of the grants pool
changes annually in line with changes in population and the Consumer Price Index, so as to
maintain its real per capita value. (The Act provides discretion to the Treasurer to alter this
annual indexation)”. The following presents the distribution to the various states, which
amounts to an equal amount of $65 per capita in each state.




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Table 2: Distribution of Funds to Local Government by State


         Jurisdiction     General Purpose               Local Roads            Total
         NSW              $469,107,296                  $185,709,665           $654,816,961
         Vic              $357,665,003                  $131,963,031           $489,628,034
         Qld              $290,980,790                  $119,929,073           $410,909,863
         WA               $147,565,047                  $97,870,423            $245,435,470
         SA               $106,329,898                  $35,177,180            $141,507,078
         Tas              $32,947,160                   $33,920,150            $66,867,310
         NT               $14,833,353                   $14,993,953            $29,827,306
         ACT              $23,090,553                   $20,524,704            $43,615,257
         Total            $1,442,519,100                $640,088,179           $2,082,607,279
               Source: Commonwealth Government Budget Papers, 2011-12

Table 3: GST Relativities by State




               (a) Treasury projection.
               Source: Commonwealth Government Budget Papers, 2011-12

A point often raised by Councils with the LGA is that the methodology of the LGGC is sound
but that the relevance (and materially) of some of disability functions need to be questioned
as well as the accuracy of the data being provided by many Councils to the LGGC

Indexation
The lack of relevance of CPI (which is a measure of household costs) as an indicator of
changes of Council costs has been noted by many in the Local Government sector over a
number of years.

Unlike most households, Local Councils spend a large proportion of their budgets on road
construction materials; other construction costs (ie drains, environmental projects, footpaths
etc), salaries for staff who provide services such as librarians and inspectors, contractors
(such as for recycling and waste management) and on governance / administration. The
prices of these items move in different ways to how average household prices move and this
will be reflected in Council budgets, along with changes in standards, efficiency gains,
expansion of services, cuts in services, new services and major projects.

Most State LGAs have now developed a Local Government Cost Index as a useful reference
regarding the inflationary effect of price changes of goods and services consumed by Local
Government. The South Australian Local Government Price Index model reflects, over time,
the movement in prices for a number of cost components as well as the aggregate spends
on these components. It includes both operating and capital expenditure on a state average
basis.


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It is suggested that consideration of development and subsequent application of a national
Local Government Cost index to the annual indexation of Financial Assistance Grants be
considered.

The table below reflects the movement of the South Australian Local Government Price
Index against the South Australian (Adelaide) Consumer price Index

Local Government Price Index, Annual Series – South Australian Centre for Economic Studies
                     Local Government Price Index                         Adelaide Consumer Price index

                                                %         change   from                              %         change   from
 Year                     Index                                               Index
                                                previous year                                        previous year

2000/01               100.0                     na                        100.0                      na

2001/02               102.9                     2.9                       102.7                      2.7

2002/03               107.0                     4.0                       106.8                      4.0

2003/04               111.6                     4.3                       110.0                      3.0

2004/05               115.1                     3.1                       112.7                      2.4

2005/06               119.1                     3.5                       116.2                      3.1

2006/07               123.7                     3.9                       119.3                      2.6

2007/08               128.5                     3.8                       123.2                      3.3

2008/09               134.3                     4.5                       127.1                      3.2

2009/10               138.1                     2.8                       129.8                      2.2

2010/11               142.9                     3.5                       134.0                      3.2

2011/12               148.2                     3.7                       137.5                      2.6




Administration (efficiency) of the current process
From the South Australian Local Government Grants Commission annual report, the process
for administering the grants allocation process has running costs which amount to almost
$500,000 per annum – or 0.36% of value of grants distributed. This does not consider the
costs incurred as follows:
    • costs in Commonwealth Government. While the direct costs for Commonwealth
        Government are relatively low, there are considerable indirect costs in trying to
        resolve the issues that have been discussed. The Commonwealth has funded the
        various ineffective reviews;
    • there are costs in the State Government – the Office of Local Government and
        Ministerial oversight; and
    • costs in Local Government – the time taken in debate and oversight and
        management on these issues.

Overall, while the direct costs can be considered to be relatively low of achieving the
required outcomes there are the possibility of substantial indirect costs. These costs are
largely driven by the debate and division about the adequacy of funding and the processes
involved. As such, if this review can achieve real results (unlike the reviews of the last
decade) then these costs can be significantly reduced. Certainty and fairness in the process
will provide important administrative improvements.

It is the current policy position of the LGA SA that distribution of financial assistance grants
should be a function of the South Australian Local Government Grants Commission. The
Grants Commission must remain an independent Statutory Authority. State or Federal
Governments should not have the power to override allocation decisions by the Commission,
providing that the Commission is complying with the national principles.

The LGA SA agrees with the findings of the 2001 CGC review that the objective in the Act
(Section 3(2)(d)) of improving efficiency and effectiveness appears to be inconsistent with

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the effort neutrality national principle. At the same time, while the objective is worthwhile, the
LGA SA question whether it is relevant for an Act that distributes untied grants through what
is largely a needs based process.

The LGA SA suggests that, despite the considerable efforts of the SA LGGC, few people in
the South Australian Local Government sector have a good understanding of the LGGC’s
methodology and most importantly, fiscal equalisation principles. More should be done to
ensure that all stakeholders better understand the national principles and how the LGGC’s
interprets them.

A better understanding would result in the LGGC’s processes of distributing grants between
Councils being more widely supported. The LGA SA intends to explore with the SA LGGC
how it might be able to work together collaboratively in the future to address the existing
shortcomings. More fundamental is the consideration whether it might be better if the LGGC
published all of its calculations so that all stakeholders can see how the grants of individual
Councils are determined relative to other Councils. Such an approach certainly would help
improve the accountability and scrutiny of LGGC’s recommendations.

CGC Issues Paper
There are several technical aspects of the CGC Issues Paper about which LGA SA has
different views.

1.     In Attachment D of the CGC Issues Paper in which the CGC summarises the findings
       of other relevant inquiries, LGA SA notes several references to the “viability” of
       Council. In South Australia and other jurisdictions in recent years, the focus has been
       on the long-term financial “sustainability” of Councils. In South Australia, the Local
       Government sector has adopted the following definition of financial sustainability:
       A council’s long-term financial performance and position is sustainable where
       planned long-term service and infrastructure levels and standards are met without
       unplanned increases in rates or disruptive cuts to services.

       In our view, viability in a council context is when the interests of creditors are
       jeopardised. Our point here is that, if a Council’s existing policies are assessed as
       being financially “unsustainable”, the council’s viability or creditworthiness is not
       being called into question. Because South Australian Councils possess the power to
       impose a tax in the form of annual property rates and ratepayers ultimately are
       legally bound to meet all outstanding debt service obligations under Section 135 of
       the Local Government Act 1999, there can be no doubt that South Australian
       councils will always be viable - in the sense that they will always be able to meet their
       debt servicing obligations to creditors.

       Accordingly, it is asserted that financial sustainability represents a higher hurdle than
       viability. Being financially sustainable means that the relative stability and
       predictability of the Council’s property rates, fees and charges are not at risk and that
       the Council’s rating burden is being shared fairly between current and future
       ratepayers (ie today’s problems are not being left largely for future ratepayers to fix).
       More fundamentally, it means that on average over time, a Council’s annual
       operating income is at least equal to its annual operating expenses (the latter, in an
       accrual accounting regime, representing the cost of providing services).

2.     Attachment D also highlights an analysis around the ‘current ratio’ of the Local
       Government sector nationally (ie the ratio of current assets to current liabilities).
       Unlike the analysis in the inquiries referred to, LGA SA asserts that the current ratio
       is irrelevant to councils’ financial sustainability.


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