· other payments by Australian Government departments or agencies to the States for the provision of services that are normally the responsibility of State governments.

For convenience, the Commission refers to, and treats, all such payments as specific purpose payments (SPPs).

3 In the 2004 Review, the scope of the adjusted budget was restricted to transactions that had a direct impact on State budgets. Payments through the States or to non‑Government organisations were outside the scope of equalisation (referred to as 'out of scope').

4 In that review, the Commission expanded the scope of the adjusted budget to include capital SPPs. Table 1 summaries the coverage of SPPs.

Table 1 Coverage of specific purpose payments

	Included	Excluded
SPPs shown in Commonwealth of Australia Final Budget Outcome (FBO).	Recurrent and capital payments paid to the States for State type services.	Recurrent and capital payments paid through the States for State type services.
		Payments for services normally provided by the Australian Government or local governments.
Australian Government payments not shown in Commonwealth of Australia Final Budget Outcome.	Recurrent and capital payments paid to the States for State type services.	Recurrent and capital payments paid through the States or direct to non‑government organisations for State type services.
		Payments for services normally provided by the Australian Government or local governments.

TREATMENT OF SPECIFIC PURPOSE PAYMENTS

5 The Commission applied the SPP guidelines to decide the treatment of each SPP, unless the terms of reference directed otherwise. Figure 1 shows the SPP guidelines.

Out of Scope

6 This treatment was used if the payment:

· financed services that were not part of the adjusted budget, for example a service normally provided by the Australian Government; and/or

· did not have a direct impact on State budgets, for example payments made by the Australian Government through the States.

7 Under this treatment, the Commission excluded the payment from its SPP revenue and removed the expense financed by the SPP from its related expense category. Neither the payment nor the expense it financed was subject to equalisation.

Exclusion

8 This treatment was used if:

· the payment was reimbursement for services provided for the Australian Government;

· the payment was distributed consistently with the Commission's assessment of States' needs and it was simpler to exclude it;

· the payment was minor[2] and it was simpler to exclude it rather than introduce additional factors into the relevant assessment; and

· the use of inclusion would impose a constraint on States budgets that was not allowed for in the relevant assessment.

9 Under this treatment, the Commission excluded the payment from its SPP revenue and removed the expense financed by the SPP from its related expense category. The practical effect of exclusion and out of scope in State relativities was the same.

Figure 1 SPP Guidelines, 2007 Update

Inclusion

10 This treatment was used if the payment was made to the Statesfor a function within the adjusted budget for which needs were assessed.

11 Under this treatment, the Commission included the payment in its SPP revenue and the expense financed by the SPP in its related expense category. In this way, the expense financed from the payment was equalised in the relevant expense category and the payment was treated as revenue available to finance those services.

Backcasting

12 Where there is a major change in the Commonwealth‑State financial arrangements, the conditions likely to apply in the application year could be significantly different from those applying in the assessment years. In these circumstances, the Commission backcasts the new arrangement into its assessments. It does this by adjusting the assessment year expenses and revenues to reflect what they would have been had the new arrangements been in place in those years. Backcasting produces relativities that better reflect States' requirements for Australian Government assistance in the year of application.

13 The Commission has reviewed the SPPs that will commence in 2006‑07 and 2007‑08. Although these payments will affect the year in which the 2007 Update relativities will be applied, the Commission decided not to backcast them. Annually, they are relatively small programs and do not represent a major change in Commonwealth‑State relations.

SOURCE OF SPP DATA

14 The Commission sourced its SPP data from the Commonwealth of Australia Final Budget Outcome (FBO) and information collected from Australian Government agencies.

TREATMENT OF SPECIFIC PURPOSE PAYMENTS IN THE 2007 UPDATE

Treatment required by the terms of reference

15 Quarantine components of the Australian Health Care Grants. Clause 6 asked the Commission to treat some components of payments made under the Australian Health Care Agreements as part of the combined pool of GST Revenue and Health Care Grants (HCGs). Accordingly, the Commission quarantined the following components:

· payments in relation to mental health;

· payments in relation to the National Health Development Fund;

· payments in relation to the Pathways Home Initiative;

· all payments under an adjustment module, including those related to the Critical and Urgent Treatment (CUT) Waiting List Initiative;

· compliance payment arrangements (in this case including the maximum available compliance payments in the assessments);

· payments to South Australia for the administration and management of the hospital at Woomera; and

· payments to Queensland in recognition of the cost associated with the movement of Papua New Guinea's citizens across the Torres Strait.

16 The Commission applied the exclusion method to all components, except the compliance payment. It included the full amount of the compliance payment in its assessments. Table 2 shows the quarantined amounts.

Table 2 Quarantined Australian health care agreements payments 2001-02 to 2005-06

Source:The Commonwealth of Australia Final Budget Outcome, supplemented by data from the Department of Health and Aged Care.

17 Quarantine some SPPs. Clause 5 asked the Commission continue to quarantine those SPPs quarantined in previous terms of reference. Accordingly, the Commission quarantined the following payments:

· national competition payments;

· payments to the States to reimburse them for revenue lost as a result of the establishment of a national scheme of companies, securities and future regulation;

· payments which are funded from the Natural Heritage Trust of Australia and the Regional Telecommunications Infrastructure Fund;

· payments for the fringe benefit tax transitional grants for the public and not‑for‑profit hospitals;

· payments for building IT strengths — Tasmanian 'Intelligent Island';

· payments for the extension of the First Home Owners scheme;

· payments for the Roads to Recovery program;

· Australian Government payments made to the Sinking Fund on State Debt; and

· payments for the Victorian Cytology Service made under the Public Health Outcome Funding Agreements;

· Residual Adjustment Amounts;

· payments to Tasmania under the Supplementary Tasmanian Regional Forestry Agreement; and

· payments to the Northern Territory for Royal Darwin Hospital: Equipped, Prepared and Ready.

18 These payments have been treated by exclusion for all assessment years.

19 Non‑compliance with SPP conditions. Clause 9 instructed the Commission to ensure that the reduction in the level of an SPP paid to a State, due to its non‑compliance with the conditions of the SPP, should not influence its assessed relativity. It said additional guidance in relation to any actual reductions for non‑compliance would be provided to the Commission if and when the need arose. No guidance was provided to the Commission in the 2007 Update.

Treatment of other Australian Government payments

20 The Commission also included some Australian Government payments not shown in Commonwealth of Australia's Final Budget Outcome paid to the States for State type services. They were:

· payments for Indigenous purposes;

· payments for emergency services; and

· payments for National Action Plan on Salinity and Water Quality.

21 Payments for Indigenous purposes. The Commission included in its assessments Australian Government payments to the States for Indigenous purposes. These included:

· payments to the States administered by the former Aboriginal and Torres Strait Islander Services (ATSIS). After the closure of ATSIS, the programs were disseminated across various Australian Government departments or agencies. In the 2007 Update, we only included the payments for the Community Housing and Infrastructure Program (CHIP). These payments are now administered by the Department of Families, Community Services and Indigenous Affairs (FACSIA); and

· payments to the States for the Indigenous Health and Substance Abuse Program administered by Office of Aboriginal and Torres Strait Islander Health (OATSIH).

22 Table 3 shows the amounts.

Table 3 Payments for indigenous purposes treated by inclusion

Source:Information provided by ATSIS, FACSIA and OATSIH.

23 Payments for Emergency Services. The Commission included in its assessments payments made by Emergency Management Australia (EMA) for emergency services. Table 4 shows the amounts.

Table 4 Payments by Emergency Management Australia (EMA) for emergency services treated by inclusion

Source:Information provided by EMA.

24 Payments for National Action Plan on Salinity and Water Quality. The Commission included in its assessments payments made to the States to implement the National Action Plan for Salinity and Water Quality (NAPSWQ) Program. These payments were made as Commonwealth own‑purpose outlays (COPOs) in 2001‑02 and 2002‑03, and as a SPP from 2003‑04 onwards. Table 5 shows the payments for the period prior to 2003‑04 by the Department of Agriculture, Fisheries and Forestry.

Table 5 Payments for national action plan for salinity and water quality treated by inclusion, 2001‑02 and 2002‑03

Source:Information provided by the Department of Agriculture, Fisheries and Forestry.

INFORMATION ON THE PAYMENTS RELEVANT TO THE 2007 UPDATE

25 The following section provides information on the Australian Government revenue payments of relevance to the 2007 Update:

· Table 6 shows the total amounts of SPPs under each treatment — part of the pool, inclusion, exclusion and out of scope — and whether their treatment has been directed by the terms of reference or decided by the Commission.

· Table 7 shows the per capita SPPs treated by inclusion in each year of the 2007 Update. It also shows each State's per capita receipts relative to the average. Figure 2 illustrates the per capita receipts for the last assessment year (2005‑06).

· Table 8 provides a summary of the treatment accorded each SPP in this update. Those payments where treatments are prescribed by the terms of reference are marked with an asterisk.

· Table 9 provides details of each SPP program paid for recurrent purposes, its treatment, and reasons for the treatment where it is not inclusion.

· Table 10 provides details of each SPP program paid for capital purposes, its treatment, and reasons for the treatment where it is not inclusion.

This chapter was prepared by the Budget Analysis and Relativities section of the Commonwealth Grants Commission. If you have any questions about its content please contact Priscilla Kan on (02) 6229 8849 or priscilla.kan@cgc.gov.au.

Date: 23 February 2007

Table 6 Specific purpose payments^(a) 2001‑02 to 2005‑06 — method of treatment

(a) Excludes SPPs treated as State revenue

Table 7 Specific purpose payments treated by inclusion - average per capita and States' relative receipts, 2001‑02 to 2005‑06

(a) Calculated as the State's per capita receipts divided by average per capita receipts.

Figure 2 States' relative receipt of specific purpose payments treated by inclusion, 2005‑06

Table 8 Treatment of specific purpose payments^(a)

Table 8 Treatment of specific purpose payments^(a) (continued)

(a) Including SPPs and other Australian Government revenue payments not published in FBO.

(b) Paid as SPPs from 2002‑03.

(d) These payments were paid as other Australian Government revenue payments for 2001‑02 and 2002‑03 and paid as SPPs from 2003‑04.

* Method adopted as required by the terms of reference.

Payment	Program Description	Interstate Distribution	Conditions	Year of Payment in U2007	Treatment in U2007	Reason if the treatment not inclusion in U2007
Public order and safety
Legal Aid	To provide funding to State legal aid commission for the provision of legal assistance on the Australian Government matters.	Distributed according to needs planning model on an analysis of relevant demographics, and risk and cost factors.	Specified service levels and units included in the agreements.	2001‑02 to 2005‑06	Out of scope	Australian Government matter.
Gun Buyback Scheme	In accordance with the Handgun Buyback Act 2003, to compensate eligible persons for the surrender of handguns, parts and accessories and for money expended in direct connection with administration and awareness raising of the Council of Australian Government reforms.	Funding provided to States on a reimbursement basis.	No matching conditions.	2003-04 and 2004‑05	Exclusion	States act as agents for the Australian Government.
Film and Literature Classifications	Payments to States for participation in the new national cooperative censorship scheme as per the inter‑governmental agreement signed on 28 November 1995.	In first year of operation all jurisdictions received same base amount and adjusted by CPI movement in later years.	N/A	2001-02 to 2005-06	Exclusion	Minor payment where the introduction of additional factors into the assessment would not be warranted.
Commonwealth Heads of Government Meeting - Payment to Queensland Police	Payment to Queensland Police for security arrangements relating to the Commonwealth Heads of Government Meeting Brisbane 2002.	Payment to Queensland only.	N/A	2001-02	Out of scope	Australian Government matter.

Payment	Program Description	Interstate Distribution	Conditions	Year of Payment in U2007	Treatment in U2007	Reason if the treatment not inclusion in U2007
Education
Government Schools	To provide supplementary assistance to State education authorities through per capita general recurrent grants which can be applied to staff salaries, teacher professional development, curriculum development and maintenance and general operation provisions.	Calculated on per student basis and adjusted based on movements in average government school recurrent costs.	No matching conditions.	2001-02 to 2005-06	Inclusion
Non‑Government Schools (payment through the States)	To provide supplementary assistance to non‑government schools and systems through per capita general recurrent grants which can be applied to staff salaries, teacher professional development, curriculum development and maintenance and general operation provisions.	Funding to non‑government schools depends on number of eligible students enrolled in non‑government schools, their distribution among schools with varying funding levels and adjusted based on movements in average government school recurrent costs. Establishment grants are available in respect of newly commencing schools. From 2001, funding are available to distance education student in non‑government schools.	No input conditions. General recurrent funds payable in accordance with the objectives of the program and in the particular year for which funds have been allocated.	2001-02 to 2005-06	Out of scope	The payment is for on passing and does not have a direct impact on State budgets.
Vocational Education and Training Funding Act	To provide a nationally identifiable and consistent vocational education and training system. The funds are paid to Australian National Training Authority (ANTA) for allocation to the States.	The recurrent funding allocations are based on ANTA's recommendations in the annual 'Directors and Recourse Allocation' report to the Ministerial Council each year. The allocations are based on a population share (mix of historical and current).	Each State receives funding if it gives a commitment to increase the number of new apprentices. A State will receive additional funding if it gives a commitment to match the additional Australian Government funding in the year.	2001-02 to 2004-05	Inclusion

Payment	Program Description	Interstate Distribution	Conditions	Year of Payment in U2007	Treatment in U2007	Reason if the treatment not inclusion in U2007
Targeted Programs - Government Schools and Joint Initiatives (school programs - government schools)	To provide assistance to for the improvement of literacy, numeracy and educational outcomes for educationally disadvantaged students, to promote the study of other languages, and to assist in the transition from school to work.	N/A	No input conditions. Funds may be used at the discretion of the education authority.	2001-02 to 2005-06	Inclusion
Targeted Programs -Non‑Government Schools (joint school programs - non‑govt schools) (payment through States)	To provide assistance to non‑government schools and systems for the improvement of literacy, numeracy and education outcomes for educationally disadvantaged students, to promote the study of other languages, and to assist in the transition from school to work.	N/A	No input conditions. Funds may be used at the discretion of the education authority.	2001-02 to 2005-06	Out of scope	The payment is for on passing and does not have a direct impact on State budgets.
Indigenous Education Strategic Initiatives Program - Government	To provide supplementary recurrent funding to State education providers in the pre‑school, school and vocational education and training sectors, as well as project based funding aimed at improving indigenous education outcomes.	N/A	No input conditions. Recipients to use their best endeavours to reach performance targets annually.	2001-02 to 2005-06	Inclusion
Indigenous education strategic initiatives program - non‑government (payment through the States)	To provide supplementary recurrent funding to non‑government education providers in the pre‑school, school and vocational education and training sectors, as well as project based funding aimed at improving indigenous education outcomes.	N/A	No input conditions. Recipients to use their best endeavours to reach performance targets annually.	2001-02 to 2003-04	Out of scope	The payment is for on passing and does not have a direct impact on State budgets.

Payment

Program Description

Interstate Distribution

Conditions

Year of Payment in U2007

Treatment in U2007

Reason if the treatment not inclusion in U2007

Skilling Australia's Workforce

Funds are used to promote a national vocational education and training system.

The arrangements were previously set out and reported under the Vocational Education and Training Funding Act 1992. The Act has since been repealed and funding and reporting arrangements are not set out in the Skilling Australia's Workforce Act 2005 and subsequent agreements with the States and Territories.

2005‑06

Inclusion

Australian Technical Colleges

The Australian Government is establishing 24 Australian Technical Colleges over four years. Students will combine academic courses leading to Year 12 certificate with a School‑based New Apprenticeship in a trade, leading to a nationally endorsed Training Package qualification.

It is expected that the States will provide recurrent funding to each College at current per‑student rates.

Most of the funding is classified as Australian Government own purpose expenses (COPOs) and paid by private consortia. In addition to this funding, the Australian Government will fund each student at a College at the same rate as existing government and non‑government secondary school students.

2005‑06

Inclusion for SPPs and COPOs paid to State government colleges; and

Out of scope for SPPs and COPOs paid to non‑government colleges

The payment is for on passing to private consortia and does not have a direct impact on State budgets.

Payment	Program Description	Interstate Distribution	Conditions	Year of Payment in U2007	Treatment in U2007	Reason if the treatment not inclusion in U2007
Health
Blood Transfusion Services	To provide funds for the Australian Red Cross Service towards its recurrent costs in providing a national blood transfusion services.	Per annum each State and Territory provides an estimate (operating and capital grants) that they propose to pay the Aust Red Cross, this is used to determine the Australian Government contribution.	The Australian Government pays 40% of operating costs, the Red Cross contribute a small amount and State/Territory paying the balance.	2001-02 and 2002-03	Inclusion
Health Program Grants	To provide alternative funding to Medicare benefits, with the aim of improving access to approved health services and/or where fee for service is inappropriate, by reimbursing service costs to State government organisations for two types of services: pathology and medical/general practitioner services.	Organisations are funded at the discretion of the Minister (or delegate). Payments are made to give effect to specific health policy objectives and on the basis of how many services are provided in the years.	Program based on a financial year basis.	2001-02 to 2005-06	Exclusion	States act as Australian Government agents.
Health Care Grants	Grants under the Australian Health Care Agreements to assist States to provide public hospital services free of charge to eligible persons.	Distributed accordance with the Agreements and are subject to a determination by Minister of Health and Aged Care.	No matching requirements, however States and Territories are required to at least maintain a level of public patient services.	2001-02 to 2005-06	Exclusion and part of the pool^{^[3]}	As required by the terms of reference.
National Health Development Fund	Grants under the Australian Health Care Agreements to assist States to improve health system performance.	Allocations in accordance with the Agreements and are subject to a determination by Minister of Health and Aged Care.	N/A	2001-02 and 2002-03	Exclusion	As required by the terms of reference.

Payment	Program Description	Interstate Distribution	Conditions	Year of Payment in U2007	Treatment in U2007	Reason if the treatment not inclusion in U2007
Highly Specialised Drugs	To provide access to certain drugs under the Pharmaceutical Benefits Scheme which must be supplied through hospitals to outpatients, because of special need in clinical administration or monitoring.	The Australian Government funds all usage of highly specialised drugs by hospital outpatients.	States and Territories provide funding to in‑patient usage of specialised high cost medicine and Australian Government subsidises access for outpatients.	2001-02 to 2005-06	Out of scope	Australian Government responsibility.
Youth health services	To fund community based organisations to enable them to develop and implement innovative primary health care services for homeless and at‑risk youth.	Based on State and Territory population distributions with ACT and NT receiving a minimum percentage of the overall funding allocation.	States match the Australian Government contribution on a dollar for dollar basis.	2001-02 to 2005-06	Inclusion
National public health	Payments to the States, under the new broad banded arrangements for public health, for subsidies for health promotion and disease prevention. Agreement has five categories: Public Health Outcome Funding Agreement (PHOFAs), COAG Diversion Initiative, the (NGO) Non Government Treatment Grants (NSW only) for funding to NGOs for the purpose of expanding and upgrading existing NGO treatment services, Hepatitis C Education and Prevention Budget Initiative and COAG Illicit Drug Diversion Package.	PHOFAs based on a resource allocation formula, COAG Diversion and Illicit Drugs and Hepatitis C are based on weighted predicted population estimates each year. NSW is the only jurisdiction that received NGO treatment grant funds, outside of the PHOFA.	No matching requirements.	2001-02 to 2005-06	Payments for the Victorian Cytology Service (VCS) made under this SPP arrangement - Exclusion; Remainder of the SPP ‑ Inclusion	Exclusion of VCS — as required by the terms of reference.

Payment

Program Description

Interstate Distribution

Conditions