File No:
SF0490
MJT
Your Ref:
CGC 2012-013
1 March 2013
The Secretary
Commonwealth Grants Commission
1st Floor, Phoenix House
86-88 Northbourne Avenue
BRADDON ACT 2612
By email: [email protected]
Dear Secretary
Improving the Impact of Financial Assistance Grants
Commonwealth Grants Commission (CGC 2012-13)
Thank you for the opportunity to participate in the "Review into improving the
impact of Financial Assistance Grants on Local Government Financial
Sustainability".
The Launceston City Council has over many years actively engaged with the
Tasmanian State Grants Commission in the ongoing review of its allocation
model with the overriding objective of producing optimal regional and State
outcomes for the Tasmanian community.
The Council's submission is attached and we look forward to the opportunity
to meet with the Review Committee on 10 April 2013.
Yours sincerely
Robert Dobrzynski
GENERAL MANAGER
Improving the Impact of Financial Assistance Grants
Commonwealth Grants Commission (CGC 2012 - 13)
Overview
The Council submission is:

That, while conceptually valid, the current application of some of the National
Principles can result in sub optimal outcomes for the regional communities that
local government represent and administer.

The importance of regional cities as economic drivers is being lost in the
Grants Commission processes to the detriment of the local community, the
region and the State.

The application of the National Principles should facilitate positioning for a
sustainable future by supporting and assisting natural change rather than
subsidising unsustainable arrangements.

The return of a share of Australian Government taxation revenue through the
minimum grant principle is fundamental to the equity of the system. This
assists with urgently needed investment in infrastructure renewal which is
currently the highest social and economic priority, particularly in regional
Australia.
The Council is very much cognisant of the need for this review process to consider
the higher level legislative objectives and national principles. The Council
submission includes specific comments about what the current interpretation of the
grant allocation framework means for Launceston with the aim of providing a practical
case study against which the achievement of the overall objectives and principles can
be understood and assessed by the Commission.
Launceston is the seventeenth largest city within the nation. Launceston City Council
has a population of 66,000 and provides regional facilities and services to a greater
urban population of 107,000 and a regional population of 141,000.
The Council receives the minimum per capita grant. Within the Greater Launceston
area, (based on the SEIFA regional analysis) there are 10 of the 17 suburbs of
greatest socio-economic disadvantage located within in the Launceston City Council
boundaries.
The current grant allocation process that supports an outcome where the Council
does not participate in funding from the relative needs pool is not achieving optimal
regional positioning or reflecting the relative needs of regional Councils within the
State.
The Council has been supported by the State and Australian Governments through
the provision of tied capital grants that have enabled the establishment of a range of
regional facilities and essential infrastructure. However with the current Financial
Assistance Grants there is insufficient recurrent funding available to sustain these
facilities in the medium to long term.
Submission by Launceston City Council
February 2013
Page 1
Improving the Impact of Financial Assistance Grants
Commonwealth Grants Commission (CGC 2012 - 13)
The importance of cities to national productivity, and consequently the importance of
productivity improvement to city economies is arguably of greater relevance in
Tasmania than any other Australian State.
Below is an excerpt from an address made by Dr Ken Henry AC, the then Secretary
to the Australian Government Treasury at a conference entitled Economics of
Infrastructure in a Globalised World.
Cities have emerged as the dominant form of social organisation…
Getting it right with cities and infrastructure has significant potential, not
just from a pure economic perspective, but also from a social and
environmental sustainability perspective.
Getting it wrong is likely to be very costly socially and environmentally.
What is the relevance of this comment to Financial Assistance Grants? The extent to
which the current application of the Horizontal Fiscal Equalisation principle supports
the allocation of funds away from Councils that could provide the greatest economic
and social benefit for regions must be a concern to the Commission.
The Council appreciates that the review is not about interstate relativitieses nor
overall grant funding and so by noting that Launceston, as compared to interstate
urban regional councils, receives significantly less (ie the minimum grant) the Council
is only intending to show the actual grant outcomes. Further that the current
Tasmanian intrastate grant allocation actually works to the disadvantage of the State
and the northern region by not recognising the importance of cities as stated by Dr
Henry.
The Council's contention is that application of the State Grants Commission financial
methodology and particularly the determination of standardised expenditure based
on the average of total expenditure, does not reflect the different regional roles that
exist between Councils across the State. From a Commonwealth Grants Commission
perspective this strongly suggests that the review must find a means to address the
shortcoming in the current process.
A scenario where the Council continues to receive the minimum grant or worse
where the minimum grant ceased will inevitably lead to reductions in expenditure that
will be to the detriment of the region, in social and economic terms. It is ironic that by
actually reducing expenditure (and the consequent State average expenditure) the
Council in theory could put itself in a position where it would receive grant funding.
The Council respectful submits that the current the interpretation of the national
principles is not achieving legislative objectives or the optimal regional outcomes that
are in the State and national interest.
Submission by Launceston City Council
February 2013
Page 2
Improving the Impact of Financial Assistance Grants
Commonwealth Grants Commission (CGC 2012 - 13)
Commission Review Points
This part of the Council's submission is structured around the specific points made in
the Commission's Issues Paper.
Point 9 - Analysis on a cash paid grant basis
The timing difference between the financial year to which a grant relates and the year
in which the cash instalment is actually received significantly distorts the year on year
accounting results at a Council level. This is particularly the case in the 2011 - 2012
year where the additional prepayment of part of the 2012 - 2013 grant was included.
Validity of National Principles
21 We seek views on:
 what changes have occurred in local government circumstances in the last 10
years
 whether there are inconsistencies in the national principles and which national
principles remain valid
 whether changes might be made to the national principles to make them more
relevant to the objectives of the Act and current circumstances, and
 whether inconsistencies in the national principles requiring trade-offs are
appropriate.
The six national principles are consistent with the objectives of the legislation.
However the application of these principles through the Tasmanian State Grants
Commission allocation model is considered to be inconsistent in part with the intent
of the legislation. Specifically the use of average calculations across total
expenditure does not result in the determination of the expenditure required by every
Council in the State to deliver a "standard" range of services.
Case Study
The Launceston City Council spends significantly above the "inflated" (by the
inclusion of its own expenditure on regional facilities) average expenditure as
calculated through the allocation model to provide regional facilities and support
economic activity.
The calculation model shows the Council to be in a theoretical surplus position the
actual audited financial results show it to be in deficit.
Another Council spends less than the" inflated" average expenditure (it doesn't
provide regional facilities) and has expenditure increased through the averaging
process to show it to be in a deficit position when its operating position is more
favourable than the model.
The Launceston City Council receives the minimum grant the other Council receives
relative needs grant funding.
Submission by Launceston City Council
February 2013
Page 3
Improving the Impact of Financial Assistance Grants
Commonwealth Grants Commission (CGC 2012 - 13)
The infrastructure and facility requirements are not the same for all Councils nor
should they be if governments are to maximise the use of scarce public capital and
avoid the duplication of facilities. As community expectations for the standard of
facilities increases and the community benefit of some activities are realised it is
important to recognise the needs of regions and States and not just individual
municipalities.
Horizontal fiscal equalisation seeks to ensure that every Council is able to meet the
reasonable needs of its community. This does not necessitate every Council
replicating every facility. Disadvantage should not be measured against average
expenditure if this expenditure includes the costs of "special" facilities that only a few
Councils should provide.
A submission by the Launceston City Council to the State Grants Commission
showed that $8.07m of the $16.05m spent by the Council on recreation and culture in
2009, was on special (national standard) facilities that should not have formed part of
the average calculation process.
The process of average calculations used to meet the national principles has not kept
pace with the changes in Local Government roles, structures and responsibilities.
Minimum Grant
While appreciating the comments about a perceived conflict between the minimum
grant principle and the horizontal fiscal equalisation principle, the Council view is that
every Council is entitled to a per capita grant as a share of Commonwealth taxation
revenue. The option considered in a previous review of having a separate per capita
pool may be the most effective way of addressing this issue.
Case Study (hypothetical)
A. A number of Councils amalgamate and achieve savings and move to the
minimum grant.
B. A Council disaggregates into a number of Councils that increase costs and move
from minimum grants to relative needs funding.
Which scenario should the grant allocation system encourage and support?
A scenario where there is potentially no minimum grant to the communities
represented by those Councils that have taken steps to achieve savings would be
unfair. The national principle on amalgamation does not address this outcome
adequately.
The situation would be particularly inequitable to a regional centre such as
Launceston City Council, which gains inadequate recognition of its regional economic
Submission by Launceston City Council
February 2013
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Improving the Impact of Financial Assistance Grants
Commonwealth Grants Commission (CGC 2012 - 13)
and social role and would be doubly disadvantaged by not receiving a per capita
grant.
Accountability
Should the level of accountability by Local Government to the Australian and State
Government for Financial Assistance Grants be any different than the accountability
to the rate paying (and resident) community? Local Government seeks to be a
constitutionally recognised semi-autonomous level of government that is accountable
to the community it serves. Standard minimum reporting and disclosure requirements
are reasonable.
Case Study
Launceston City Council receives Financial Assistance Grant of $3.9m (Base Grant
$1.3m and Road Grant $2.6m) and has Rate Revenue of $54.0m.
A system that creates an expensive compliance system of reporting to the Australian
Government for Financial Assistance Grants of $3.9m rather than requiring and
supporting accountability to the local community for all revenue, including rates of
$54.0m, would appear to be misconceived.
State Governments have the power to replace an elected Council they may also have
the power to withhold or defer grants in exceptional circumstances. The challenge
with withholding funds is that those directly affected (such as the residents,
employees and creditors) will have very little ability to address the concern that has
prompted the action by the State Government.
Financial Capacity
The Commission process of standardised revenue and expenditure calculations
which is intended to give effect to the principles of horizontal fiscal equalisation and
effort neutrality does not reflect actual financial needs or capacity.
There needs to be recognition of expenditure for some Councils that is not part of the
normal or standard service level so that it can be excluded from the averaging
calculations. The failure to do this distorts the calculations (understates average
expenditure for those that have a regional role and overstates average expenditure
for those that do not) and produces standardised results which do not reflect relative
needs. The application of cost adjustors as a second step in the calculation process
can only work effectively if the first step produces an appropriate baseline supporting
access to the relative needs funding pool.
Conclusion
The community expectations for facilities and services provided by Local Government
have changed significantly over the last 10 years.
Submission by Launceston City Council
February 2013
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Improving the Impact of Financial Assistance Grants
Commonwealth Grants Commission (CGC 2012 - 13)
The presumption that optimal local, regional and State outcomes can be achieved by:
 all Councils within a State providing all facilities to the same standard, (as
implied by the averaging process) is no longer valid;
 reducing the financial and organisational capacity of (some) regional cities to
fulfil an essential role as economic drivers is counter-productive.
The communities and regions that local government represents operate in a
competitive environment. The measures of this competition include population
trends, social and economic indicators and ultimately whether the community
prospers or declines. The grants allocation process in attempting to be fair to all
Councils will not achieve outcomes that are fair to all residents if the methodolgy
does not also support regional social and economic outcomes.
While the principles remain valid the interpretation of those principles has not kept
pace with changes in communities and the economy.
Untied vs tied funding
27 (Paraphrased) We would like information on:
 cost to distribute untied Financial Assistance Grants
 tied funding provided to local government
 compliance cost incurred by Commonwealth, State and Local Government in
tied programs
 deficiencies in accountability in untied programs that would be overcome by
tied programs
 which levels of government are best place to determine service levels for
which service
 if Financial Assistance Grants where tied how might the process work
 what are the likely compliance costs of tied funding
Local Government should be a semi-autonomous level of government primarily
responsible for and accountable to the local community for its performance and the
services it provides. In demonstrating its accountability to the local community there
is no reason why reporting mechanisms cannot exist that provide information to other
levels of government on the activities undertaken, the services provided, the
outcomes achieved and performance against benchmarks. This accountability
framework does not require Financial Assistance Grants to be tied grants.
Where a grant is provided to achieve a specific agreed outcome (for example, build a
facility) then specific purpose grant programs are appropriate. Financial Assistance
Grants are provided to support the overall viability of Local Government; each
individual Council that be responsible for this.
Compliance costs from a Local Government perspective have the potential to
become quite significant, the reporting process and any analysis by other tiers of
government is likely to lag the actual performance by months if not a year.
Accountability requires a more timely reporting system than is likely to be produced
by a system of reporting that would be required if Financial Assistance Grants were
tied.
Submission by Launceston City Council
February 2013
Page 6
Improving the Impact of Financial Assistance Grants
Commonwealth Grants Commission (CGC 2012 - 13)
As noted in the Committee's discussion paper if Financial Assistance Grants where
to be tied what would they be tied to - a percentage of this expenditure and a
percentage of another category of expenditure.
Conclusion
Systems of reporting and measurement can be put in place (that may need to vary
for different local government entities) that meets accountability requirements.
Changing Financial Assistance Grants into tied grants is not the most appropriate
way to achieving accountability for expenditure funded by these grants.
The impact of the minimum grant principle on the intrastate distribution of
Financial Assistance Grants
33 We seek views and analysis of how the minimum grant impacts the effectiveness
of local government and its ability to deliver services, and what, if any, changes to the
minimum grant would increase local government effectiveness.
The comments in paragraph 31 quoted below are not correct and are based on a
misunderstanding of the accuracy and validity of the calculation methodology in
determining expenditure requirements through the average process.
31 Given the methods … those local governments have fiscal capacities which
exceed those of non-minimum grant local governments - they generally have higher
revenue raising capacities and often have lower costs of providing services. After the
distribution of FAGs, minimum grant local governments are over equalised and nonminimum grants local governments are under equalised.
There are valid reasons (as discussed separately in this submission) for the retention
for a minimum grant or a separate per capita pool as a share of Australian
Government revenue.
The commentary in clause 31 is not supported in all cases by an analysis of the
actual financial capacity of some Councils. For this reason alone the minimum grant
provides a safety net for unintended outcomes of the grant allocation model.
Conclusion
The Council's position is that the minimum grant is enhancing the effectiveness of
local government service delivery as without it (given that there is already a high
rating effort) there would be a significant cut in regional services and economic
activity.
Assessing the relative need of local governments in each State
38 (Paraphrased) We seek information and views on:
 spending of and revenue raised by different groups of local governments
Submission by Launceston City Council
February 2013
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Improving the Impact of Financial Assistance Grants
Commonwealth Grants Commission (CGC 2012 - 13)



factors affecting sustainability, effectiveness and ability to deliver services
factors differ across groups … in regional and remote areas
how changes would affect differences in sustainability effectiveness and ability
to deliver services
While in no way wishing to deny the challenges of remote communities it is worth
considering separately the issue of regional communities. There are a couple of
regional models that commonly exist:
 a number of similarly sized communities that collectively support each other;
 a larger city that provides a central economic focus for a number of smaller
communities.
Depending on the particular regional model this may mean there is a preponderance
of facilities in one municipality or a spread across a number of centres.
The optimal result for the community is to achieve a range of regional social and
economic outcomes such that the totality for the region is greater than sum of the
individual communities. This process is not about denigrating the role or contribution
of any individual Council but recognising that each has strengths and weaknesses
and we need to collectively build on the strengths and mitigate the weaknesses if we
are to enhance and grow the region.
Strong diverse regional economies are in the national interest. The concentration of
population and economic activity into a few large capital cities has the potential for
adverse long term consequences. The challenge for the nation is to sustain regional
communities with a range of facilities and services such that they are an attractive
viable alternative to the large cities.
Health and education facilities must be able to be provided at a scale that is cost
effective, recreational and cultural facilities must support community diversity and
social cohesion. Regional cities fulfil this important role. The challenge in the
Tasmanian context, with the changes that are occurring in the commercial and
industrial base of the economy, is that the viability of city Councils, such as
Launceston, is being diminished by the Financial Assistance Grants process such
that the Councils that are currently the beneficiary of a relative needs grant allocation
will be adversely impacted more by the demise of the economic capacity of the City
than they would be by receiving a lesser annual relative needs grant.
The region will lose in the medium term because of a lack of a regional strategy that
is supported by an equitable (in terms of the services provided and the population
served) allocation of recurrent grant funding. The following table taken from the
Local Government National Report illustrates the range of outcomes for regional
cities across the nation.
Average general purpose grant per capita 2009-2010
Urban Regional
Medium (URM)
Large (URL)
NSW
VIC
QLD
$89.12 $128.10 $131.36
$71.89 $102.51 $50.95
Submission by Launceston City Council
February 2013
SA
N/A
N/A
TAS
$18.95
N/A
NT
Average
N/A
$98.36
N/A
$71.62
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Improving the Impact of Financial Assistance Grants
Commonwealth Grants Commission (CGC 2012 - 13)
These comments may also apply to regional and remote communities but we are not
in a position to offer an informed comment, in relation to the truly remote
communities.
Conclusion
Regional communities are an important part of Australia. These communities face
significant challenges as the local and national economy undergoes structural
change. Regional cites are critical to regional economies. Within the Tasmanian
State context we need to consider whether the current allocation grant process is
undermining key strengths such that the capacity of regional community outcomes is
reduced.
It is the Council's submission that the current interpretation and application of the
national principles (in Tasmania) does not address regional outcomes.
Concluding Comments
The Council understands and appreciates the legislative objectives and the role of
the Commonwealth and State Grants Commissions within this framework. The
Council hopes that the Grant Commissions are able to recognise the importance of a
process that positions local communities for the future that reflect the changes that
are occurring and assists with the changes that need to occur.
The Commission can hopefully adapt the models to recognise the financial support
that is required for the municipalities that can deliver these regional outcomes.
Submission by Launceston City Council
February 2013
Page 9
Improving the Impact of Financial Assistance Grants
Commonwealth Grants Commission (CGC 2012 - 13)
Appendix
Comparative Analysis
This appendix contains some comparative information on the outcomes of grant
allocation processes between and within States. The Council understands that the
scope of this review does not extend to interstate analysis and the purpose of
including this attachment is not to raise that issue.
Tasmanian Councils - 2012/2013
Launceston
Meander Valley
Northern Midlands
West Tamar
Population
2011 est
66,029
19,747
12,726
22,699
121,201
Per
Capita
1,332,696
398,563
256,855
458,145
2,446,259
Relative
Needs
1,548,243
1,291,873
890,757
3,730,873
Total
1,332,696
1,946,806
1,548,728
1,348,902
6,177,132
Per
Capita
20.18
98.59
121.70
59.43
50.97
Suburban Councils adjacent to an urban council.
Source: (Tasmanian) State Grants Commission Annual Report 2012-13.
Average general purpose grant per capita 2009-2010
Regional Councils
NSW
Urban Regional
Medium (URM)
Large
VIC
QLD
SA
TAS
NT
Average
89.12 128.10 131.36
N/A
18.95
N/A
98.36
71.89 102.51
N/A
N/A
N/A
71.62
50.95
Australian Councils - 2010/2011
Launceston
Coffs Harbour
Maitland
Port Stephens
Shell Harbour
Ballarat
Greater Bendigo
Latrobe
Bundaberg
TAS
NSW
NSW
NSW
NSW
VIC
VIC
VIC
QLD
URM
URL
URM
URM
URM
URL
URL
URL
URL
Population
65,222
70,371
67,621
65,464
65,587
91,787
100,054
73,982
89,988
Base
Grant
1,267,674
4,836,613
5,170,777
4,051,123
3,784,169
8,474,308
11,024,351
8,805,428
5,335,395
Per
Capita
19.44
68.73
76.47
61.88
57.70
92.33
110.18
119.02
59.29
Urban Regional Councils from four States
Source: 2009-10 Local Government National Report
Submission by Launceston City Council
February 2013
Page 10