Interim Submission to the Commonwealth
Grants Commission
Review of Financial Assistance Grants
March 2013
Contact: Paul Schollum
Western Australian Local Government Association
15 Altona Street, West Perth, WA 6005
P.O. Box 1544, West Perth, WA 6872
T: (08) 9213 2096
E: pschollum@walga.asn.au
Interim WALGA submission to the FAGs review
Contents
Executive Summary .............................................................................................................. 2
1.
Introduction ................................................................................................................ 4
1.1
2.
Background ................................................................................................................ 5
2.1
3.
4.
5.
Outline of the submission .................................................................................... 4
Summary of results from the WALGA FAGs survey ............................................ 7
Addressing the FAGs review terms of reference......................................................... 9
3.1
Validity and consistency of the GPG National Principles ..................................... 9
3.2
Untied and tied funding...................................................................................... 11
3.3
Impact of the Minimum Grants principle on intra-state distribution ..................... 12
3.4
The Relative need of Local Governments in each State and Territory ............... 14
Other issues ............................................................................................................. 19
4.1
The escalation methodology applied to the FAGs pool ...................................... 19
4.2
The quantum of FAGs funding........................................................................... 21
4.3
The interstate distribution of FAGs .................................................................... 22
Conclusions .............................................................................................................. 24
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Interim WALGA submission to the FAGs review
Executive Summary
Financial Assistance Grants (FAGs) make a significant contribution to Local Governments’
financial sustainability. In 2010-11, FAGs accounted for 7.2% of total revenue for WA Local
Governments. FAGs are particularly important to rural and remote Local Governments,
which generally have a low capacity to raise their own revenue.
However, while FAGs are an essential source of income, their contribution to Local
Government revenue is decreasing over time. The Commonwealth Grants Commission’s
(CGC) review of FAGs therefore represents a timely opportunity to identify reforms that
would improve the effectiveness and financial capacity of Local Governments.
The Western Australian Local Government Association (the Association) has taken the
following positions on the review’s terms of reference:
Validity and consistency of the General Purpose Grant (GPG) National Principles
Improved service provision to indigenous communities could be more appropriately
addressed through tied funding grants. This tied funding should be provided in addition to
the current FAGs pool, so that no Local Government is disadvantaged by a potential
reduction in their GPG if this National Principle is removed.
Untied and tied funding
FAGs should remain an untied source of funding for Local Governments. Untied funding is
an effective way of addressing the vertical fiscal imbalance that results from Local
Government’s limited fiscal capacity. This is because untied funding, such as FAGs, allows
Local Governments to allocate expenditure according to the conditions and the preferences
of their community. Furthermore, untied funding arrangements have lower administration
costs for both Local Government and the Commonwealth Government.
Impact of the Minimum Grants principle on intrastate distribution
The Association is not in favour of removing the Minimum Grant principle, because of the
significant negative impact on the Local Governments currently receiving the minimum grant.
Adjusting the distribution of FAGs within the current quantum of funding can only achieve
one group of Local Governments gaining at the expense of another group. The Association
believes the key problem with FAGs is the inadequacy of the funding, not the distribution
model.
The relative need of Local Governments (particularly in regional and remote communities)
A number of factors contribute to regional and remote Local Governments having greater
relative need than their urban counterparts. In WA, these factors include:




high costs associated with remoteness;
the costs associated with servicing a non-resident population;
the need to provide additional services such as aged care and medical services; and
low fiscal capacity, usually due to a small rates base.
Urban Local Governments in WA also faced a number of challenges to their financial
sustainability. Outer Metropolitan Local Governments, in particular, experienced very high
population growth and subsequently had difficulty with the timely delivery of infrastructure.
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Interim WALGA submission to the FAGs review
Other matters (outside the review’s terms of reference)
The Association also believes there are further changes, albeit outside the current review’s
terms of reference, that could be made to the FAGs arrangements to increase Local
Governments’ effectiveness and financial capacity. A particularly important change would be
to review the escalation methodology applied to the FAGs pool. The CPI component of
FAGs does not adequately reflect the cost increases faced by Local Governments. A more
appropriate approach would involve the development of a national Local Government Cost
Index. Alternatively, if a simpler approach is preferred, the escalation methodology could use
the national Wage Price Index.
Increasing the quantum of FAGs would help to address their diminishing contribution to
Local Government revenue. It would also recognise the increased demands that have been
placed on Local Governments due to increased infrastructure requirements, increased
community expectations and the need to provide a greater range of services.
The current State per capita based distribution of GPGs should be retained, because it has
the advantage of simplicity and low administration costs. The Identified Road Grants (IRGs)
component of FAGs should be allocated on a needs based model, but only if a reliable
distribution model can be implemented.
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Interim WALGA submission to the FAGs review
1. Introduction
The Western Australian Local Government Association (WALGA) is the united voice of Local
Government in Western Australia. The Association is an independent, membership-based
group representing and supporting the work and interests of all 141 Local Governments in
Western Australia.
The Association provides an essential voice for 1,249 elected members and approximately
14,500 Local Government employees as well as over 2 million constituents of Local
Governments in Western Australia. The Association also provides professional advice and
offers services that provide financial benefits to the Local Governments and the communities
they serve.
The Association welcomes the review of Financial Assistance Grants (FAGs) and is grateful
for the opportunity to provide a submission to the Commonwealth Grants Commission
(CGC). The Association anticipates that this review will highlight a number opportunities to
improve the effectiveness and equity of the current FAG arrangements.
Due to meeting schedules, this submission has not yet been endorsed by WALGA’s State
Council. The Commission will be informed of any changes to the Association’s submission
following consideration by the State Council.
1.1 Outline of the submission
Section 2 of this submission provides background information on the significance of FAGs to
WA Local Governments. This section also presents the results of a survey the Association
used to compile the views of its members.
Section 3 addresses each aspect of the FAGs review terms of reference. Section 4
discusses aspects of FAGs, not contained in the CGC’s terms of reference, that the
Association believes should also be considered. Section 5 presents the submission’s
conclusions.
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Interim WALGA submission to the FAGs review
2. Background
Local Governments generally do not have sufficient fiscal capacity to raise enough revenue
to cover their expenditure. In contrast, the Commonwealth Government collects more
taxation revenue than it spends. This situation is known as a ‘vertical fiscal imbalance’ and
can be addressed though transfer payments from one level of government to another. FAGs
are one example of such arrangements within the Australian public sector.
Grants and subsidies, such as FAGs, are an important source of income for WA Local
Governments. In 2010-11, grants and subsidies made up $385 million (11.5%) of WA Local
Government revenue:
Figure 2.1 WA Local Government operating revenue by source, 2010-11
Other
19.3%
Taxation
revenue
42.3%
Interest
income
3.9%
Sales of
goods and
services
23.0%
Current
grants and
subsidies
11.5%
Source: ABS, 5512.0
The total level of FAGs in 2010-11 was $243 million, which was comprised of $146 million in
General Purpose Grants (GPGs) and $97 million in Identified Road Grants (IRGs). Table 2.1
below shows the contribution of FAGs to Local Government grants and subsidies and total
revenue.
Table 2.1 GPGs and IRGs in 2010-11
$ (million)
Proportion of
grants and
subsidies
Proportion of total
LG revenue
FAGs
GPGs
146
37.9%
4.4%
IRGs
97
25.2%
2.9%
Total FAGs
243
63.1%
7.2%
Other grants and subsidies
142
36.9%
4.2%
Total grants and subsidies
385
100.0%
11.5%
Source: ABS, 5512.0; WALGGC Annual Report 2010-11; author calculations.
The importance of FAGS as a source of revenue is particularly variable among the different
types of Local Governments in WA. The following table shows FAGs as a proportion of total
revenue by Australian Classification of Local Governments (ACLG). The FAGs proportion
ranges from 0.4% in the Urban Capital City category to 36.7% in the Rural Remote Extra
Small category.
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Interim WALGA submission to the FAGs review
Table 2.2 FAGs as a proportion of WA Local Government revenue by ACLG, 2010-11
ACLG description
ACLG code
Urban Capital City
Urban Developed Small
Urban Developed Medium
Urban Developed Large
Urban Developed Very Large
Urban Regional Small
Urban Regional Medium
Urban Regional Large
Urban Regional Very Large
Urban Fringe Small
Urban Fringe Medium
Urban Fringe Large
Urban Fringe Very Large
Rural Significant Growth
Rural Agricultural Small
Rural Agricultural Medium
Rural Agricultural Large
Rural Agricultural Very Large
Rural Remote Extra Small
Rural Remote Small
Rural Remote Medium
Rural Remote Large
All ACLG categories
UCC
UDS
UDM
UDL
UDV
URS
URM
URL
URV
UFS
UFM
UFL
UFV
RSG
RAS
RAM
RAL
RAV
RTX
RTS
RTM
RTL
-
FAGs as a proportion
of total revenue (%)
0.4
2.1
2.6
3.1
3.6
5.8
4.6
n/a
n/a
n/a
4.2
2.4
2.4
9.1
21.0
13.3
12.3
12.5
36.7
22.3
25.5
19.6
7.2
Source: WALGGC 2010-11 data
Rural Local Governments are likely to remain dependent on FAGs and other grants for some
time. In 2008, the Productivity Commission found that rural and remote Local Governments
were already drawing heavily on their fiscal capacities and had little potential to increase
their own-source revenue1.
1
Productivity Commission 2008, Assessing Local Government Revenue Raising Capacity.
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Interim WALGA submission to the FAGs review
2.1 Summary of results from the WALGA FAGs survey
The Association recently conducted a survey to canvass the views of WA Local
Governments on FAGs and to inform the content of this submission. The survey questions
covered a number of topics including the minimum grant, tied and untied funding, and the
adequacy of FAGs funding. Fifty-eight Local Governments responded to the survey, this
represented a response rate of 41.1%.
A key sequence of questions in the survey asked Local Governments what they thought
should happen with the minimum grant that applies to GPGs. The results are presented in
figure 2.2 below:
Figure 2.2 Reviewing the minimum grant
Completely
remove
minimum
grant
34.5%
Reduce
minimum
grant
12.1%
Increase
minimum
grant
15.5%
Retain
minimum
grant at
current
level
37.9%
The most common option, selected by 37.9% of Local Governments, was to retain the
minimum grant at its current level. The next most common option (34.5%) was to completely
remove the minimum grant arrangements.
Local Governments’ perspectives on the minimum tended to vary according to whether or
not they received the minimum grant. The next figure contrasts the responses of ‘minimum
grant‘ recipients2 with the remainder of Local Governments.
Figure 2.3 Reviewing the minimum grant (comparison)
Completely
remove
minimum
grant
6.3%
Increase
minimum
grant
43.8%
Retain
minimum
grant at
current
level
50.0%
Min grant LGs
2
Completely
remove
minimum
grant
45.2%
Non min grant LGs
Increase
minimum
grant
4.8%
Retain
minimum
grant at
current
level
33.3%
Reduce
minimum
grant
16.7%
These were Local Governments that received the minimum grant in the 2012-13 financial year.
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Interim WALGA submission to the FAGs review
WA Local Governments were also asked if FAGs were adequate for the purpose of enabling
Local Governments ‘to provide a level of service equivalent to the average level of service
provided by Councils across the State’. The following table summarises the results for this
question:
Table 2.3 Adequacy of FAGs funding
Response
Not adequate
Adequate
More than adequate
Did not respond
Total
Minimum grant
LGs (%)
68.8
25.0
0.0
6.3
100.0
Non minimum
grant LGs (%)
85.7
14.3
0.0
0.0
100.0
All LGs (%)
81.0
17.2
0.0
1.7
100.0
The majority of Local Governments (81.0%) thought the current level of FAGs funding was
inadequate. The table also shows that non-minimum grant Local Governments (85.7%) were
more likely to suggest that FAGs funding was inadequate than minimum grant Local
Governments (68.8%).
The survey also asked a number of other FAGs related questions. These are relevant to
specific aspects of the FAGs review and, as such, the results of these questions are
presented in the relevant parts of this submission.
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Interim WALGA submission to the FAGs review
3. Addressing the FAGs review terms of reference
The FAGs review’s terms of reference are as follows:
Box 3.1 FAGs Review Terms of Reference
The Commission should examine the impacts of FAGSs 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 vs 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
FAGSs; 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.
The terms of reference are addressed below in sections 3.1, 3.2, 3.3 and 3.4 of the
Association’s submission.
3.1 Validity and consistency of the GPG National Principles
The National Principles are outlined in the Local Government (Financial Assistance) Act
1995 and are as follows:
Box 3.2 National Principles
1. Horizontal equalisation
General purpose grants will be allocated to local governing bodies, as far as practicable, on a full
horizontal equalisation basis as defined by the Act. This is a basis that ensures each local governing
body in the state or territory is able to function, by reasonable effort, at a standard not lower than the
average standard of other local governing bodies in the state or territory. It takes account of
differences in the expenditure required by those local governing bodies in the performance of their
functions and in the capacity of those local governing bodies to raise revenue.
2. Effort neutrality
An effort or policy neutral approach will be used in assessing the expenditure requirements and
revenue-raising capacity of each local governing body. This means as far as practicable, that policies
of individual local governing bodies in terms of expenditure and revenue effort will not affect grant
determination.
3. Minimum grant
The minimum general purpose grant allocation for a local governing body in a year will be not less
than the amount to which the local governing body would be entitled if 30 per cent of the total amount
of general purpose grants to which the state or territory is entitled under section 9 of the Act in respect
of the year were allocated among local governing bodies in the state or territory on a per capita basis.
4. Other grant support
Other relevant grant support provided to local governing bodies to meet any of the expenditure needs
assessed should be taken into account using an inclusion approach.
5. Aboriginal peoples and Torres Strait Islanders
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Interim WALGA submission to the FAGs review
Financial assistance shall be allocated to councils in a way which recognises the needs of Aboriginal
peoples and Torres Strait Islanders within their boundaries.
6. Council amalgamation
Where two or more local governing bodies are amalgamated into a single body, the general purpose
grant provided to the new body for each of the four years following amalgamation should be the total
of the amounts that would have been provided to the former bodies in each of those years if they had
remained separate entities.
National Principles 1 and 3 are conceptually inconsistent with each other. Full horizontal
equalisation is not possible if there are Local Governments that receive the Minimum Grant
(since the existence of a Minimum Grant reduces the pool of funds available for equalisation
payments).
Nonetheless, the inconsistency of these two principles is not an argument in itself that one of
the principles should be removed. It simply means an appropriate balance must be found
between the opposing aspects of the principles. Taxation provides an analogous example of
a trade-off between potentially opposing principles. Designing a taxation system involves
both the principles of efficiency and equity. A flat income tax rate for all tax payers would be
efficient; however, it would not satisfy the equity principle because those with a greater
capacity to pay would not have a greater share of the taxation burden. Instead, taxation
usually involves a compromise between the two principles, with a small number of
progressive tax rates applied at various income thresholds.
Furthermore, the Minimum Grant principle could be considered valid because it improves
‘the certainty of funding for local governing bodies’ and ‘the efficiency and effectiveness of
local governing bodies’ (objectives (c) and (d) of the Local Government (Financial
Assistance) Act 1995). However, arguments could be made against the validity of the
Minimum Grant principle on equity grounds – see section 3.3.2 of this submission.
National Principle 5 is valid in that it is consistent with objective (e) of the Act: improving ‘the
provision by local governing bodies of services to Aboriginal and Torres Strait Islander
communities’. Most Local Government Grants Commissions (LGGCs) recognise this
National Principle by including an assessment of a Local Government’s indigenous
population in determining its GPG allocations. All else being equal, a Local Government with
a higher indigenous population will receive a greater GPG. However, as with any factor
assessed by the LGGCs, a Local Government will not necessarily spend the funding on an
area related to the source of disadvantage.
Objective (e), and its associated National Principle, could be considered invalid because
they relate to a specific objective. Because GPGs are a source of general revenue for Local
Governments, they are not effective at achieving specific policy outcomes. Instead, the
Association believes that improved service provision to indigenous communities could be
more appropriately addressed through tied funding grants. This tied funding should be
provided in addition to the current FAGs pool, so that no Local Government is disadvantaged
by a potential reduction in their GPG if this National Principle is removed.
Overall, other than the concerns noted above, the Association is satisfied with the
consistency and validity of the National Principles. However, the Association also believes
there may be a case for greater consistency in the application of the principles by the State
LGGCs. This could be achieved through greater clarification of the principles as well as
guidance from the CGC on how they should be applied by the State LGGCs.
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Interim WALGA submission to the FAGs review
Clarifying the ‘full horizontal equalisation’ principle would be particularly important. Currently,
the LGGCs each use different methodologies and consider different factors when allocating
their State’s GPG pool. In theory, otherwise identical Local Governments in different States
would experience different outcomes due to differences in LGGC methodologies. This
inconsistent treatment is not a desirable feature of a system that should treat Local
Governments equitably. Greater harmonisation of the LGGC’s methodologies would help
address this inconsistency. The CGC could compare approaches across the States and
identify leading practices to inform the development of a model methodology.
3.2 Untied and tied funding
The Association’s position on FAGs is that they should remain untied, but it acknowledges
that there are situations where tied funding is effective. Where the Commonwealth has a
clear policy objective that needs to be achieved through Local Government, tied funding may
be appropriate. The Commonwealth Treasury particularly supports this idea3:
Payments to local government for specific purposes — either from the Australian
government or State governments — are likely to have an ongoing role, as
intergovernmental cooperation involving local government is often necessary to
deliver reforms of national or State significance. Other levels of government can
use these payments to purchase the delivery of goods and services from local
government. Given the expertise that local governments have in the delivery of
some goods and services, these payments can represent value for money for
higher levels of government.
If the Commonwealth Government wishes to make greater use of tied funding, the
Association’s position is that this should not come at the expense of the current FAGs pool.
Additionally, where tied funding is provided, acquittal arrangements should be relatively
simple, as with the Roads to Recovery program. This would help to minimise administrative
costs for Local Governments.
Although tied funding has some advantages, untied funding is more appropriate for
increasing the effectiveness of Local Governments. The Association would argue that Local
Governments are in the best position to judge their expenditure needs due to their familiarity
with local conditions and the preferences of their community. Deciding Local Government
spending priorities at a higher level of government could lead to an inefficient allocation of
resources. Tied funding grants also tend to have high administrative costs due to reporting
and acquittal requirements. Conversely, untied funding arrangements, such as FAGs, have
lower administration costs for both Local Government and the Commonwealth Government.
The WALGA FAGs survey asked respondents whether they thought the Commonwealth
should make greater use of tied funding in providing financial assistance to Local
Governments. Most Local Governments (69%) were opposed to more funding being
allocated under tied arrangements.
FAGs should also remain untied because of their role in addressing the vertical fiscal
imbalance among the levels of government in Australia. Local Governments, like State
Governments, do not raise enough revenue to finance the expenditures for which they are
responsible. In contrast the Commonwealth collects more revenue than it spends. Therefore,
Treasury 2010, Australia’s Future Tax System: Report to the Treasurer, Part Two: Detailed Analysis,
Vol. 2,
<http://www.taxreview.treasury.gov.au/content/downloads/final_report_part_2/AFTS_Final_Report_Pa
rt_2_Vol_2_Consolidated.pdf>, accessed 14 February 2013.
3
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Interim WALGA submission to the FAGs review
the primary purpose of FAGs is to address the vertical fiscal imbalance that results from
Local Government’s relatively narrow revenue base. In this way, FAGs could be considered
similar to the revenue raised by the Goods and Services Tax (GST), which the
Commonwealth distributes to the States to address the shortfall in their taxation revenue.
Local Governments generally have a great deal of autonomy in spending their own source
revenue. Because FAGs are essentially a replacement for, or supplement to, own source
revenue, the Association believes Local Governments should have the discretion to decide
how this funding is used. That is, FAGs should remain an untied source of funding for Local
Governments.
3.3 Impact of the Minimum Grants principle on intra-state distribution
The Minimum Grant principle prevents ‘full’ horizontal fiscal equalisation from occurring (to
the extent that full equalisation is possible within the limits of the current GPG pool).
Additionally, the minimum grants principle ensures that the highest fiscal capacity Local
Governments still receive some GPG funding.
The graph below compares the impact of the minimum grant on WA and Australia:
Figure 3.1 Comparison of WA and Australian Minimum Grant Local Governments
WA 2000-01
WA 2010-11
Australia 2000-01
Australia 2010-11
Proportion of population in mimimum grant
Councils
Minimum grants as a proportion of total grants
Proportion of Councils receiving the minimum
grant
0
10
20
30
40
50
60
70
80
Source: Department of Regional Australia, Local Government National Reports
In 2010-11, the proportion of the population living in a Minimum Grant Council was greater in
WA (75%) than in Australia (34%). Furthermore, the minimum grant proportion of the GPG
was also higher in WA: 23%, compared to 11% for Australia. Therefore, it is important to
note that any potential changes to the Minimum Grant principle will have a greater effect on
WA Local Governments than those in other jurisdictions.
The following sections discuss the arguments for and against retaining the Minimum Grant
principle and the Association’s position.
3.3.1 Arguments for the Minimum Grant Principle
The following arguments can be made in favour of retaining the Minimum Grant principle:
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Interim WALGA submission to the FAGs review

Accessing some GPG funding is important for all Local Governments due to the
narrowness of the sector’s tax base. Local Governments have fewer sources of
revenue than State and Commonwealth Governments. GPGs help address this
situation by providing an additional source of revenue for Local Governments.
Furthermore, in the case of minimum grant Councils, GPGs have the advantage of
providing a stable and predictable source of revenue.

All taxpayers contribute to Commonwealth consolidated revenue through taxes such
as income tax and GST. Therefore, the Local Government of every taxpayer should
be entitled to a share of the GPG funding.

The State LGGCs have different methodologies for assessing fiscal capacity.
Therefore, otherwise identical Local Governments in different states may experience
different GPG outcomes. The minimum grant mitigates this effect by providing a
‘floor’ that ensures all Local Governments will receive at least some GPG funding,
regardless of the LGGC’s assessment.

Minimum grant Local Governments comprise a substantial proportion of the
population in WA (75.3% in 2010-11). Removing the minimum grant would cause a
financial shortfall for these Local Governments that would have to be met by
increased rates or reduced service levels.
3.3.2 Arguments against the Minimum Grant Principle
The Minimum Grant principle appears to have been established so that all Local
Governments receive a share of GPGs. However, this intention is not consistent with the
idea that GPGs should be distributed according to need, i.e., on a full horizontal equalisation
basis. Therefore, the Minimum Grant principle is essentially a compromise between a per
capita (at the Local Government level) distribution and a fully needs based model.
The continued existence and level of the minimum grant involve value judgements on the
extent to which lower capacity Local Governments should be supported at the expense of
higher capacity Local Governments. The following arguments suggest that the minimum
grant should be removed:

FAGs are largely intended to address vertical fiscal imbalance so the funding should
be used for this purpose to the greatest extent possible. If a Council is assessed by
an LGGC as having sufficient own source revenue capacity that it does not need
GPG funding, then it should not receive any.

A number of Commonwealth and State Government policies suggest Australia places
a high value on rural communities. These include subsidised prices on essential
services and funding programs such as ‘Investing in Australia’s Regions’ and
‘Royalties for Regions’. Removal of the minimum grant may be more consistent with
these policies.
3.3.3 The Association’s position on the Minimum Grant principle
The Association believes the key problem with FAGs is the inadequacy of the funding.
Adjusting the distribution of FAGs within the current quantum of funding can only achieve
one group of Local Governments gaining at the expense of another group. Removing the
Minimum Grant principle would also worsen the financial sustainability of some Local
Governments because it would remove a source of stable and predictable revenue.
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Interim WALGA submission to the FAGs review
Therefore, the Association is not in favour of removing the Minimum Grant principle,
because of the significant negative impact on the Local Governments currently receiving the
minimum grant. Furthermore, the Association’s FAGs survey indicated that only a minority of
Councils (34.5%) felt the minimum grant should be removed completely.
3.4 The Relative need of Local Governments in each State and Territory
In considering this aspect of the terms of reference, the CGC has asked for information and
views on:




the services delivered by, the spending of, and the revenue raised by different groups
of local governments in each State;
the factors which affect the sustainability, effectiveness and ability to deliver services
of local governments;
how these factors differ across groups of local governments, including those in
regional and remote areas, within a State; and
how changes to the FAG arrangements and principles would affect differences in the
sustainability, effectiveness and ability to deliver services of local governments
3.4.1 Services Delivered by Local Government
Local Governments in WA are providing an increasing range of services to their
communities. This includes services often regarded as outside the core functions of Local
Government, such as: aged care, medical services, fire and emergency services, and
environmental management.
Figure 3.2 below compares expenditure by purpose between WA and Australian Local
Governments.
Figure 3.2 Proportion of Local Government expenditure by purpose
WA 2010-11
Australia 2010-11
General public services
Public order and safety
Education
Health
Social security and welfare
Housing and community amenities
Recreation and culture
Fuel and energy
Agriculture, forestry and fishing
Mining, manufacturing and construction
Transport and communications
Other economic affairs
Public debt transactions
Other
0%
5%
10%
15%
20%
25%
30%
Source: ABS, 5512.0
The above figure shows the WA Local Government sector has a higher than average
proportion of expenditure directed to the following purposes: Public order and safety, Health,
Recreation and culture, and Transport and communications. The greater proportion of
expenditure on these purposes can be at least partly attributed to WA’s large and sparsely
populated land mass. For human services such as Health and Public order and safety, rural
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Interim WALGA submission to the FAGs review
Local Governments are often the service provider of last resort and must fill the gaps left by
other levels of government. WA’s high Transport and communications expenditure is due to
the costs of servicing a vast, and often very remote, local road network.
Local Government’s regulatory role has also increased over time, as highlighted by a recent
Productivity Commission (PC) report4. The PC found that Local Government’s workload was
dominated by implementing and enforcing State laws, but there was not a commensurate
level of support from State Governments. In many cases, State Governments have allocated
extra regulatory responsibilities to Local Governments, without first ensuring the sector has
the capability to administer them.
3.4.2 Factors Affecting Local Government Service Provision
The WALGA FAGs survey identified a number of factors which affected Local Governments’
sustainability and ability to deliver services. Common factors identified by non-metropolitan
Local Governments included:









costs of providing services to a large non-resident population (either due to tourism
or the presence of a large fly-in, fly-out workforce)
higher costs of service provision due to remoteness
difficulties in attracting and retaining staff
difficulty in supplying infrastructure due to high population growth (mainly an issue for
regional centres and neighbouring Local Governments)
increasing environmental responsibilities
the costs of providing aged care and medical services
costs for Local Governments with a large proportion of heritage buildings
low capacity to raise rates revenue due to low population and high socio-economic
disadvantage
low capacity to raise rates revenue due to land owned by State Government or
covered by State Agreement Acts
Common factors identified by metropolitan Local Governments included:




high population growth
low capacity to raise rates revenue due to high socio-economic disadvantage
increasing environmental responsibilities
the provision of services that are funded by ratepayers but also used by other Local
Governments’ residents
3.4.3 Variation in the Factors Affecting Service Provision
Local Governments in remote areas are disadvantaged by the distances, and resulting
transport costs, involved in service provision. In remote areas that are also experiencing the
effects of the mining boom, these costs can also be compounded by the effects of high
demand and labour shortages. For example, building costs in Broome and Derby can be
45%-50% higher than in Perth5.
4
Productivity Commission 2012, Performance Benchmarking of Australian Business Regulation: The
Role of Local Government as Regulator.
5
Master Builders Association of Western Australia website,
<http://www.mbawa.com/custom/mba_directory.asp?SID=35>, accessed 15 February 2013.
15
Interim WALGA submission to the FAGs review
In 2011, the WA Department of Regional Development and Lands produced a Regional
Price Index (RPI). The RPI compared the cost of ‘a common basket of goods and services
across a number of regional locations and Perth’6. The figure below shows the main results
of the RPI:
Figure 3.3 WA Regional Price Index, 2011
Peel
99.9
Perth
100.0
Great Southern
100.2
South West
100.2
Wheatbelt
101.0
Mid West
102.2
Goldfields-Esperance
105.1
Gascoyne
109.3
Kimberley
120.0
Pilbara
137.1
0
50
100
150
Regional Price Index (Perth = 100)
The RPI found that prices tended to be lower in the more densely populated and less
isolated regions in the south-west of the State. Prices were highest in the Pilbara and
Kimberley regions (37.1% and 20% higher than in Perth, respectively).
Local Governments in remote areas also often have to contend with ‘service populations’
that are larger than their resident populations. It is difficult to have a definitive picture of
service populations across Australia due to the lack of appropriate statistics. Nonetheless,
comparing Census data on resident populations and ‘place of enumeration’7 provides some
indication of the Local Governments that are most affected:
Table 3.1 Top five WA LGAs by difference in POE count and RP (2011 Census)
Local
Government
Area
Perth (C)
Broome (S)
Roebourne (S)
East Pilbara (S)
Ashburton (S)
Place of
enumeration
count (POE)
24,670
22,350
29,968
17,148
15,057
Resident
Population
(RP)
16,715
14,998
22,899
11,950
10,001
Difference
between POE
and RP
7,955
7,352
7,069
5,198
5,056
Table 3.3 above suggests a number of WA Local Governments have a service population
that greatly exceeds the resident population. In the mining areas of Roebourne, East Pilbara
and Ashburton, this is due to the impact of the large fly-in, fly-out (FIFO) workforce. The
recent Parliamentary Inquiry into the use of FIFO received a number of Local Government
submissions regarding the economic impact of FIFO workers. Local Governments pointed
6
Department of Regional Development and Lands 2011, Regional Price Index 2011,
<http://www.rdl.wa.gov.au/publications/Documents/Regional-Price-Index-2011.pdf>, accessed 14
February 2013.
7 The Census place of enumeration count is based on where people are located on Census night. The
resident population count is based on where people usually live.
16
Interim WALGA submission to the FAGs review
out that infrastructure such as roads, airports, water and sewerage services, and community
facilities were provided to the non-resident population, without adequate compensation for
these costs8.
Another factor that varies across the State is the impact of population growth. Between the
2006 and 2011 Censuses, the WA population grew by 14.3%, while the Australian
population grew by 8.3%. In the WALGA FAGs survey a number of Local Governments
indicated population growth was outstripping their capacity to adequately invest in
infrastructure.
In Metropolitan Perth a number of Local Governments covering the outer suburbs have
absorbed a substantial proportion of this population growth. For example, the City of
Wanneroo’s population increased by 41,136 (37.1%) between the 2006 and 2011 Censuses.
Other outer Metropolitan Local Government Areas including Rockingham, Stirling, Cockburn,
Swan and Gosnells had population increases of between 15,000 and 20,000. With such
large increases in population, it can be difficult for Local Governments to provide the
required infrastructure in the timeframes desired by the community.
While the effects of population growth in WA are most obvious in Perth, a number of rural
and regional Local Governments had a proportionally high rate of growth. Table 3.4 below
shows that of the top ten Local Government Areas in terms of percentage increase in
resident population, nine were located in regional WA.
Table 3.2 Top ten WA LGAs by population growth 2006-2011
Local
Government
Area
East Pilbara (S)
Leonora (S)
Menzies (S)
Wiluna (S)
Perenjori (S)
Laverton (S)
Yalgoo (S)
Ashburton (S)
Boddington (S)
Perth (C)
Population
2006
Population
2011
6,544
1,410
217
678
533
727
244
6,080
1,381
11,573
11,950
2,512
385
1,159
905
1,226
402
10,001
2,228
16,715
Population
increase
5,406
1,102
168
481
372
499
158
3,921
847
5,142
Percentage
increase (%)
82.6
78.2
77.4
70.9
69.8
68.6
64.8
64.5
61.3
44.4
A number of rural Local Governments in WA have a low fiscal capacity due to the combined
effects of a low population, low incomes and high levels of socio-economic disadvantage. Of
the 139 Local Government Areas in WA, 85 have a population of less than 2,000. And of
these 85 Local Governments, 52 have a median household income of less than $1,000 a
week. In contrast, there are 54 Local Governments with a population greater than 2,000 and
only four of those have a median household income of less than $1,0009.
Local Governments’ capacity to raise revenue can also be compromised by the proportion of
non-rateable land in their area. For example, a number of WA Local Governments have a
significant proportion of land taken up by non-rateable State forests. The problem of
8
The Parliament of the Commonwealth of Australia 2013, Cancer of the bush or salvation for our
cities? Fly-in, fly-out and drive-in, drive-out workforce practices in Regional Australia, p.58.
9 Source: ABS, Census 2011. Note that the Median household income for WA was $1,415.
17
Interim WALGA submission to the FAGs review
diminished rates capacity for these Local Governments is compounded by the need to
maintain public roads through the forests10.
State Agreement Acts are another impediment to rates revenue for some, usually remote,
Local Governments. State Agreements are essentially contracts, between the State
Government and developers of resource projects, that have been ratified by an act of the
WA Parliament. State Agreements typically restrict Local Governments to rating the
Unimproved Value of land used for these projects. Although recent State Government policy
changes allow Local Governments to use Gross Rental Valuation, this only applies to new
resource projects and State Agreements that are about to be renewed. However, most
current State Agreements have relatively long terms and therefore constrain the fiscal
capacity of the affected Local Governments.
3.4.4 Impact of Changes to the FAGs Arrangements and Principles
The main changes to the FAG arrangements that would benefit Local Governments in WA
would be introducing a new escalation methodology and increasing the quantum of the
FAGs pool. Since these changes are outside the scope of the review’s terms of reference,
they are discussed in Section 4 of this submission.
10
WALGA 2007, Systemic Sustainability Study Revenue Expert Team, <
http://walga.asn.au/Portals/0/Templates/LGReform/working_Group_Reports/revenue.pdf>, accessed
22 February 22 2013.
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Interim WALGA submission to the FAGs review
4. Other issues
This section discusses aspects of FAGs, not contained in the CGC’s terms of reference, that
the Association believes should also be considered. A number of potential changes to the
current FAGs arrangements are presented. These changes are consistent with the
objectives of FAGs, particularly the need to improve Local Governments’ effectiveness and
financial capacity.
The Association understands the CGC’s examination of the FAGs arrangements in 2013 is
the first stage of a comprehensive review. The Association hopes, if there is no scope to
consider these issues in the review’s current activities, they could be considered in the
review’s second stage.
The issues discussed below are:



the escalation methodology applied to the FAGs pool;
the quantum of FAGs funding; and
the interstate distribution of FAGs.
4.1 The escalation methodology applied to the FAGs pool
The FAGs funding pool is currently escalated by a combination of population growth and the
consumer price index (CPI). Using the CPI in the escalation process maintains the real per
capita value of FAGs. Presumably, this is intended to account for the rising costs of Local
Governments; however, the CPI is not appropriate for this task.
The CPI measures changes in the price level of consumer goods and services used by
households. This means it may be appropriate to use the CPI for purposes such as
escalating government welfare payments to recipient households. Local Governments, on
the other hand, purchase a very different set of goods and services than households. Key
outlays for Local Governments include:





wages and salaries;
superannuation;
road, bridge and building construction costs;
machinery and equipment purchases; and
utilities costs.
The Association produces a measure of cost pressures for WA Councils: the Local
Government Cost Index (LGCI). The LGCI is a composite indicator that is a weighted
average of relevant ABS indexes for WA such as the Wage Price Index and the Road and
Bridge Construction Index. Some of the other Local Government Associations use a similar
methodology to calculate indexes for their States. The graph below compares changes over
time in the CPI and the WA LGCI.
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Interim WALGA submission to the FAGs review
Figure 4.1 Comparison of Australian CPI and WA LGCI
March qtr 2002 = 100
160
Index
150
140
WA LGCI
130
120
Australia CPI
110
100
Mar-2012
Mar-2011
Mar-2010
Mar-2009
Mar-2008
Mar-2007
Mar-2006
Mar-2005
Mar-2004
Mar-2003
Mar-2002
90
Source: ABS, 6401.0; WALGA LGCI data.
Figure 4.2 shows growth in the LGCI has generally been significantly greater than the CPI.
From the March quarter 2002 to the September quarter 2012, the CPI increased by 33.8%.
Over the same period, the LGCI increased by 53.1%. As a result of the indexation
methodology used, FAGs have failed to keep up with the actual costs faced by WA Local
Governments. This can be further demonstrated by assessing the FAGs contribution to total
Local Government revenue over time:
Figure 4.2 FAGs as a proportion of total WA Local Government revenue
GPGs
Percentage of total revenue
12.00
IRGs
Total FAGs
10.00
8.00
6.00
4.00
2.00
2010-11
2009-10
2008-09
2007-08
2006-07
2005-06
2004-05
2003-04
2002-03
2001-02
0.00
Source: ABS, 5512.0; WALGGC Annual Reports; author calculations.
In 2001-02, FAGs made up 9.5% of Local Government revenue in WA. By 2011-12, the
FAGs proportion had decreased to 7.2%. The steadily decreasing proportion of FAGs
revenue means that Local Governments must rely more on other revenue sources,
especially rates. This is particularly problematic for communities with a low rates base.
The above analysis suggests a new escalation methodology should be adopted by the CGC.
The CGC could potentially calculate an Australian LGCI for escalation purposes.
Alternatively, the CGC could simply use the ABS’s Wage Price Index. This approach would
have a number of advantages:


Administrative simplicity, since it would eliminate the need to compile multiple
indexes.
The index generally increases at a higher rate than the CPI, which makes it more
appropriate to use for the Local Government sector.
20
Interim WALGA submission to the FAGs review

Wages and salaries are typically Local Governments largest expense (35.1% of the
sector’s expenditure in WA).
4.2 The quantum of FAGs funding
The Association believes there is a strong case for an increase in the quantum of FAGs.
Under the current escalation methodology, FAGs have essentially stayed constant in real
per capita terms. Over the short term, particularly in times of moderate economic growth, this
may be appropriate and acceptable to Local Governments. However, over longer periods the
current escalation methodology has clearly been detrimental to the sector, because it does
not account for circumstances when Local Governments must increase their quality or
quantity of services. Such circumstances include:




Periods of high economic growth and the subsequent increased use of Local
Government infrastructure, particularly roads and waste services.
The need to provide essential services to communities when these are withdrawn by
other levels of government.
Taking on additional responsibilities imposed by other levels of government.
The need to improve services and provide additional services due to increased
expectations from the community, particularly during periods of increasing household
incomes.
The following figure shows that as a proportion of GDP, FAGs have steadily decreased over
the last decade. The decreasing trend is still apparent even when Roads to Recovery
funding is included in the total.
Figure 4.3 FAGs as a proportion of nominal Australian GDP
FAGs
0.25
FAGs + Roads to Recovery
Percentage of GDP
0.20
0.15
0.10
0.05
2010-11
2009-10
2008-09
2007-08
2006-07
2005-06
2004-05
2003-04
2002-03
2001-02
0.00
Source: Department of Regional Australia, Local Government National Reports; ABS, 5204.0; BITRE Public
Road Related Expenditure Information Sheet; Author calculations.
This decreasing trend means FAGs are an increasingly ineffective method of addressing
vertical fiscal imbalance. Increases in revenue from most Commonwealth and State taxes
are generally driven by the same factors that increase nominal GDP. That is, these taxes
grow according to increases in inflation, population and economic activity. Since FAGs only
grow according to population and CPI increases, the current arrangements can only
continue to worsen the vertical fiscal imbalance.
The Association suggests this situation should be addressed by increasing the total FAGs
pool to a level of 0.18% of nominal GDP. This would be slightly below the equivalent
proportion in 2001-02 and would help to recognise the impact of increased infrastructure
21
Interim WALGA submission to the FAGs review
demands, community expectations and the need for Local Governments to provide a greater
range of services.
4.3 The interstate distribution of FAGs
4.3.1 The interstate distribution of GPGs
The Horizontal equalisation principle relating to the allocation of GPGs only applies to the
intrastate distribution. At the interstate level, the GPG component of FAGs is distributed on
an equal per capita basis. This represents an inconsistency in the current arrangements,
since they consider the different fiscal capacities of Local Governments within States, but not
the different fiscal capacities between States.
Therefore, the distribution of FAGs could be more equitable if the differing fiscal capacities
across each State were also considered. This would involve an extra horizontal equalisation
process, which would need to be carried out by the CGC, to adjust each State’s per capita
grant according to the fiscal capacity of the Local Government sector in that State. The
LGGCs would then distribute their State’s GPG allocation using another horizontal
equalisation process based on the distribution methodology they currently use.
However, this approach would have a number of disadvantages. It would be more complex
than the current approach and would have higher administration costs. Additionally,
assessing Local Government fiscal capacity across States may be contentious, just as the
allocation of GST revenues is a divisive issue for State Governments.
An alternative approach would be for the CGC to assess the fiscal capacity of Local
Governments at a national level, as suggested by a parliamentary inquiry in 2003 (the
‘Hawker Report’)11. Although this approach appears to deliver significant administrative
efficiencies, since the State LGGCs would have a reduced role, the Association believes this
would not be an effective methodology for the following reasons:



Differences in Local Government roles and functions across the States would be
difficult to incorporate and consider in a national distribution model.
The WALGGC has the discretion to consider the subjective ‘special needs’ of each
Local Government in addition to the objective data in its equalisation model. It is
more appropriate for State LGGCs, rather than the CGC, to make such value
judgments.
The WALGGC is able to regularly visit WA Local Governments and assess the
challenges they face in delivering services to their communities. It is unlikely that this
program of visits would be possible for the CGC.
The WALGA FAGs survey asked Local Governments if they thought GPGs should continue
to be distributed to the States on an equal per capita basis. Most Local Governments
(56.1%) were in favour of retaining the per capita distribution. The Local Governments that
were not in favour were asked how they thought GPGs should be distributed to the States.
Many thought there should be a horizontal equalisation process employed at the State level
and felt there was a need to equalise for aspects such as remoteness, high costs, growth
and infrastructure needs. Some respondents thought WA should be entitled to a greater
share of the GPG funding due to the State’s disproportionate contribution to Commonwealth
taxes.
11
The Parliament of the Commonwealth of Australia 2003, Rates and Taxes: A Fair Share for
Responsible Local Government.
22
Interim WALGA submission to the FAGs review
The Association believes adding an additional layer of horizontal equalisation would make
the GPG arrangements unwieldy and complex. While the current arrangements are not
necessarily equitable across States, they are simple and have low administrative costs.
However, there may be a case for a compromise model that distributes most of the GPG
pool on a per capita basis and then distributes the remaining funding in a simple horizontal
equalisation process based on a few broad disability categories. If the CGC believes such an
approach would deliver better outcomes, it should develop potential models and research
their possible outcomes. But in the absence of such information, the Association’s position is
that the status quo should be maintained.
4.3.2 The interstate distribution of IRGs
The IRG pool is distributed to the States according to fixed proportions that have been used
since 1991-92. The exact basis for these proportions is not known, though it is believed that
population and local road length were taken into account.
The State distribution shares of the IRG have become increasingly out of date. This has
been partially recognised by the Commonwealth, which began providing supplementary
funding to South Australia from 2004-05 onwards.
The IRGs should be allocated according to each State’s need using a distribution
methodology based on variables such as the relative lengths of different road types, relative
use of those roads and their maintenance costs. A CGC inquiry in 2006 found that road data
across the jurisdictions was not consistent or comparable and this would prevent the
development of an effective need based methodology12. The Association believes that the
Commonwealth should develop a strategy to improve road data across Australia so that an
appropriate IRG distribution methodology can be developed. However, until such a strategy
is initiated, the Association would be in favour of retaining the historical shares that are
currently used.
12
CGC 2006, Report on the review of the interstate distribution of local roads grants.
23
Interim WALGA submission to the FAGs review
5. Conclusions
The limited terms of reference for this stage of the FAGs review appear to preclude
identifying the reforms that would most benefit the Local Government sector and deliver
positive outcomes for Australian communities. The Association believes there is a need for a
comprehensive review of the fiscal capacities of all levels of government and the transfers
that occur between them. Only such a holistic review could identify the reforms that are
needed to properly address the fiscal imbalances (both horizontal and vertical) throughout
government in Australia.
Nonetheless, within the terms of reference of the current review, there are some
improvements that could be made to the existing FAGs arrangements.
The Association believes that improved service provision to indigenous communities could
be more appropriately addressed through tied funding grants. This tied funding should be
provided in addition to the current FAGs pool, so that no Local Government is disadvantaged
by a potential reduction in their GPG if this National Principle is removed.
The Association’s position on FAGs is that they should remain untied. Untied funding is an
effective way of addressing the vertical fiscal imbalance that results from Local
Government’s limited fiscal capacity. This is because untied funding, such as FAGs, allows
Local Governments to allocate expenditure according to the conditions and the preferences
of their community. Furthermore, untied funding arrangements have lower administration
costs for both Local Government and the Commonwealth Government.
The Association is not in favour of removing the Minimum Grant principle, because of the
significant negative impact on the Local Governments currently receiving the minimum grant.
Adjusting the distribution of FAGs within the current quantum of funding can only achieve
one group of Local Governments gaining at the expense of another group. The Association
believes the key problem with FAGs is the inadequacy of the funding, not the distribution
model.
A number of factors contribute to regional and remote Local Governments having greater
relative need than their urban counterparts. In WA, these factors include:




high costs associated with remoteness;
the costs associated with servicing a non-resident population;
the need to provide additional services such as aged care and medical services; and
low fiscal capacity, usually due to a small rates base.
Urban Local Governments in WA also faced a number of challenges to their financial
sustainability. Outer Metropolitan Local Governments, in particular, experienced very high
population growth and subsequently had difficulty with the timely delivery of infrastructure.
The Association also believes there are further changes, outside the current review’s terms
of reference, that could be made to the FAGs arrangements to increase Local Governments’
effectiveness and financial capacity. A particularly important change would be to review the
escalation methodology applied to the FAGs pool. The CPI component of FAGs does not
adequately reflect the cost increases faced by Local Governments. A more appropriate
approach would involve the development of a national Local Government Cost Index.
Alternatively, if a simpler approach is preferred, the escalation methodology could use the
national Wage Price Index.
Increasing the quantum of FAGs would help to address their diminishing contribution to
Local Government revenue. It would also recognise the increased demands that have been
24
Interim WALGA submission to the FAGs review
placed on Local Governments due to increased infrastructure requirements, increased
community expectations and the need to provide a greater range of services.
The Association believes that the current State per capita based distribution of GPGs should
be retained because it has the advantage of simplicity and low administration costs. The
Identified Road Grants (IRGs) component of FAGs should be allocated on a needs based
model, but only if a reliable distribution model can be implemented.
25