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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

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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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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.

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.


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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.

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)

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.


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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

Actual - adj for "Other Special Needs"

Modelled Result

Equal Per Capita

No minimum 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

Year Index % change from

previous year Index

% change from

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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Councils, unlike private sector firms, have the power to tax citizens to raise revenue. Their revenue raising capacity is therefore much more certain than organisations that must convince potential customers to buy their products or services in order to generate revenue. The uncertainty associated with revenue projections in the business world means lenders, shareholders and boards of management place considerable emphasis on the financial liquidity (available cash) of private firms. In these circumstances, a commonly utilised financial indicator is the ‘current ratio’. Such concepts and ratios are not regarded as relevant or appropriate assessment measures for South Australian councils because current legislation does not constrain their revenue raising or borrowing. Furthermore, South Australian councils have immediate access to stand-by borrowing facilities from the Local Government Finance Authority to cater for any unexpected cash requirement – thereby ensuring strong liquidity at all times. Councils in South Australia therefore are likely to be optimising their treasury management practices and financial sustainability, as well as avoiding credit risks, by having negligible cash and investments at most times and raising additional funds as required through borrowings only as cash flow needs necessitate.

3. Again in Attachment D, the CGC does not question the assertion made in several

inquiries referred to that many councils are unsustainable. It is suggested that such assertions should be qualified by adding the words “under current revenue and expenditure policy settings”.

In South Australia, following an independent inquiry it initiated in 2005, the LGA SA has encouraged Councils to adopt “financial sustainability” as one of their objectives. Later changes to the Local Government Act, supported by the LGA, sought to reinforce the need for Council Members to recognise that, collectively, they are accountable for the long-term financial sustainability of their council. As a result, many Councils which required adjustments to their revenue and expenditure policy settings to achieve financial sustainability embarked on a program of sustained increases in rates and charges and / or significant cuts in services to address fiscal imbalances. This presented weighty challenges in many cases. But it has demonstrated that financial sustainability is achievable if hard decisions are made. Of course, there is a limit to the extent which many Councils should be expected to reduce service levels and standards which reinforces the critical importance of fiscal equalisation arrangements.

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