State Finance Commission Grants (SFC)
RECOMMENDATIONS OF STATE FINANCE COMMISSIONS
&
DEVOLUTION OF FUNDS TO URBAN LOCAL BODIES
First State Finance Commission:
               The 73rd and 74th Amendments to the Constitution of India require the state governments to appoint Finance Commissions under Article 243-I and 243-Y to recommend transfer of financial resources from the state governments to these local bodies in the form of tax shares, grant-in-aids, tax assignments as also measures needed to improve their financial position.

                 The First State Finance Commission in Karnataka was constituted vide Govt. order No. RDP-313 ZPS 93 dated 10-6-1994 .
The terms of reference of the Commission were;
1. The distribution of the net proceeds of the taxes, duties, tolls and fees levied by the government
         between the State Govt. and Rural Local Bodies and Urban Local Bodies. 
2. The determination of the taxes, duties, tolls and fees which may be assigned to or appropriated by the
         Local Bodies.
3. The Grant-in-aid to the Local Bodies from the consolidated fund of the state. 
4. The measures needed to improve the financial position of the Local Bodies. 
5. To examine and make suggestions on the extent to which and the manner in which the resources
        available to the local bodies could best be utilized for meeting the expenditure of these bodies; and
6. To make a detailed analysis of the repayment of loans and advances extended by the Govt. from time
        to time to the local bodies and make suitable recommendation for repayment of govt. dues and the
        possibility of adjusting these dues against future devolution of revenues from govt. to these bodies.
Highlights of the recommendations of the First SFC:
The First State Finance Commission submitted its report in 1996. Following are the highlights of the recommendations. 
1. Transfer of one consolidated share in the Non-loan Gross Own Revenue Receipts (NLGORR) of the
         State to the Local Bodies. 
2.  Replacing the system of a portion of some specific taxes of state Govt. by a share in the total NLGORR.
3. The share of Local Bodies in the divisible pool is 36% of NLGORR. 
4. 15% of 36% of the NLGORR is the Urban Local Bodies’ share (i.e., 5.4% of NLGORR). 
5. The inter-se allocation of SFC grant among ULBs shall be on the weightage given to population &
        illiteracy of each ULB and taken in the ratio of 67:33 respectively.
Second State Finance Commission:
The Second State Finance Commission was set up in October 2000 vide Notification No. FD 1 ZPA 2000, dated 25.10.2000 with the same terms of reference made to the First State Finance Commission.
Highlights of the recommendations of the Second SFC: 
1. Balanced financial allocation approach.
2. Period of implementation: 2003-04 to 2008-09
3. The concept of NLGORR was retained.
4. 5 Criteria are used for inter-se allocation between Panchayat Raj Institutions and Urban Local Bodies
5. The devolution rate enhanced from 36% to 40% of NLGORR. 
6. The share of ULBs is enhanced from 15% to 20% of the total share of Local Bodies in NLGORR. (The
        share ULBs enhanced from 5.4% to 8.0% of the NLGORR of the State)
7. Common purpose fund of Rs.5.00 crore to be set apart each year out of the total share of the ULBs as 
         per the devolution pattern.
NLGORR to NLNORR

The basis for devolution was changed from Non-Loan Gross Own Revenue Receipts (NLGORR) to Non-Loan Net Own Revenue Receipts (NLNORR) wherein the receipts from lotteries and cesses are taken off from NLGORR.

Period of implementation:

The period of implementation of Second State Finance Commission’s Recommendations is 2005-06 to 2009-10.

Amount of Devolution from State Government:

As against the recommendation of the Second State Finance Commission to devolve annually 8.0% of the NLGORR of the State Government to ULBs, the Government has taken a decision to start with 6.0% of NLNORR in 2005-06 and enhancing this rate by 0.5% every year so as to reach the devolution level to 8.0% of NLNORR by 2009-10. Accordingly, the total amount of annual devolution are arrived as under;
Year % on NLNORR Devolution Amount
(Rs. in Crores)
2005-06 6.0% 1160.00
2006-07 6.5% 1530.18
2007-08 7.0% 1904.39
2008-09 7.3% 2025.27
2009-10 7.5% 2419.68(Estimates)

Pattern in which SFC devolution is distributed to ULBs:

I. Global Level Protection:      
i. Municipalities Staff Salary; 
                      -100% for Municipalitie 
                      - less than 100% for Corporations 
ii. Pension Grant
iii. Deficit in repayment of loans
iv. Electricity Charges 
II. Global Level Provisioning: 
v. ULB share of project costs for water supply and sewerage. 
vi. Water scarcity fund. 
vii. Common Purpose Fund for general purpose – Rs.5.00 Crore.
 viii. Fund for special circumstances of special events connected to development in ULBs
ix. Incentive money to be distributed on Monitorable Matrix to be prepared by DMA based on the following criteria. 
  1.  Adoption of SAS 
    2.
  2. Actual increase in revenue recovery
    3.
  3. Adoption of double entry accounting (in suggested ULBs)
    4.
  4. Achievement in recovery of per capita tax & water rates
    5.
  5. Adoption of e-governance system (at ULBs selected by govt.) 
    6.
x. Rainwater Harvesting 
III. Total Grant – (G.L. Protection + G.L. Provisioning) = Untied Grants
Formula for inter-se allocation of SFC untied grant among ULBs 
xi. Population – 40%
xii. Area – 15% 
xiii. Road length – 15%
xiv. Illiteracy – 10%
xv. Demand of per capita Tax 
      – Maintenance Charges – 20%
Devolution of Funds by SFC envisages:

Global Protection: Salaries to Municipalities/corporations, pension contribution, power sector dues, repayment of water board loans & KREDL and DUDC establishment charges

Global Provision : Project share for water supply and sewerage, shortage in EAP’s, arrears of cess, water scarcity fund, common purpose fund, incentivisation fund, rain water harvesting and fund for special circumstances.

Untied funds : To take up infrastructural development & ULB share to to UIDSSMT scheme.
ANNUAL ALLOCATION                                                                              Rs in Crore
Component 2005-06 2006-07 2007-08 2008-09 2009-10
Global level Protection 839.88 839.27 884.19 1000.96 1035.60
Global Level Provision 130.87 198.25 142.00 220.25 296.07
Untied grant 189.25 492.77 878.18 1000.96 1088.00
1160.00 1530.29 1904.37 2025.27 2419.68

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