What does the funding of the National School Chaplaincy Program have in common with local government? While on a cursory view, one may think they have nothing to do with each other — the recent High Court decisions in Williams v Commonwealth [2012] HCA 23 (Williams No.1) andWilliams v Commonwealth [2014] HCA 23 (Williams No.2) suggest otherwise.

The link stems from the question marks these decisions place over the constitutional validity of Commonwealth expenditure on local government initiatives and projects.

Both decisions raise questions as to the validity of Commonwealth grants to local government. The decisions are about the exercise of Commonwealth executive power rather than the legitimacy of school chaplaincy programs.

In summary, we recommend that:

  • in negotiating and accepting funding arrangements with the Commonwealth, you ensure the arrangements come within the rules established by the Minister for Finance under the Public Governance, Performance and Accountability Act 2013 and the Financial Framework (Supplementary Powers) Act 1997
  • specific advice and assurances should be sought on this from the Commonwealth
  • funding agreements should be drafted in a way that clearly calls on the relevant rules and heads of power, and with appropriate assurances from the funding agency that it has the powers to enter into the agreement.

Williams No.1

The range of the powers of the Commonwealth are set out in the Constitution. Relevantly, the legislative power of the Commonwealth Parliament is limited to those 'heads of power' enumerated in the Constitution.

In Williams No.1, the High Court upheld a challenge by Mr Williams against the Commonwealth school chaplaincy program. The Commonwealth was funding an organisation called 'Scripture Union Queensland', through an agreement which used the funding to engage individual school chaplains in public schools.

The agreement, which provided the funding for the scheme, was entered into by the Commonwealth on the basis of the Commonwealth's general executive power, without any specific legislation authorising the funding. The High Court found that the Commonwealth did not have the power to enter into funding agreements on the basis of the executive power alone, stressing the importance of the Commonwealth Executive being held to account by Parliament particularly when it came to the expenditure of public money. The Court said that if the Commonwealth wanted to expend money through direct funding programs, this must be done through validly enacted legislation supported by a Constitutional head of power.

Williams No.2

Williams No.2 was decided in June 2014.

As is often the case, the Commonwealth quickly legislated to fix the issues from Williams No.1 by passing the  Financial Framework Legislation Amendment Act (No.3) 2012 (Cth) (FFLA Act). This Act inserted s32B into the Financial Management and Accountability Act 1997 (FMA Act) and purported to give the Commonwealth a general power to spend money for any purpose specified in Regulations.

The Regulations specified a list of more than 400 grants already committed to by the Commonwealth which were made by the Executive rather than by Parliament. That is, the FMA Act attempted to retrospectively validate any direct funding agreement entered into by the Commonwealth by listing all the agreements in the Regulations. As one commentator put it, the FFLA Act represented the Parliament's 'act of hara-kiri' as it purported to provide the Commonwealth with the power to "spend money on whatever it wished without the need for further legislation of parliamentary scrutiny".1

Mr Williams challenged the validity of the FFLA Act provisions and the Regulations in Williams No.2. He argued that they were not supported by any legislative head of power under the Constitution.

The Commonwealth argued that the provisions were supported by heads of power, including the corporations power, laws for the provision of benefit to students, and laws incidental to the Commonwealth’s power of appropriation.

The High Court unanimously upheld Mr Williams' challenge holding that the relevant FFLA Act and Regulations were invalid as they were not authorised by any of the head of powers identified by the Commonwealth.

In respect of the corporations power, the Court found the laws did not authorise or regulate the activities, functions and relationships of corporations. In this regard, legislation providing for the funding was for a number of programs without specifying or regulating the activities carried out under these programs. In any event, many of those receiving funding were not even corporations.

The Court also did not accept that the laws could be said to be for the provision of benefits to students. This was because the chaplaincy services did not meet the long established test of providing material aid directly to students. Instead, the Court found the payments were used as wages provided to chaplains to support the wellbeing of students, and this did not constitute 'benefits' to students within the meaning of section 51(xxiiiA) [at 47].

The Court did not accept that the provisions were incidental to the Commonwealth's power to spend and enter into contracts, since any law of appropriation providing the appropriation of money needs to be grounded in another independent head of legislative power.

Summary of the decisions

In Williams No.1, the High Court decided that the chaplaincy program was invalid because it was not authorised by statute. In Williams No.2, the High Court decided that the statute and regulations purporting to authorise the program were also invalid because they did not fall within any of the Commonwealth's powers to legislate under the Constitution.

The High Court's judgments are fundamentally grounded in the principles of accountability of the executive to Parliament, and Parliament's control over supply and expenditure. In turn, the Commonwealth Parliament's powers are limited by the Constitution.

The Court said [at 83]:

'This assumption, which underpinned the arguments advanced by the Commonwealth parties about executive power, denies the "basal consideration"[36] that the Constitution effects a distribution of powers and functions between the Commonwealth and the States. The polity which, as the Commonwealth parties rightly submitted, must "possess all the powers that it needs in order to function as a polity" is the central polity of a federation in which independent governments exist in the one area and exercise powers in different fields of action carefully defined by law[37]. It is not a polity organised and operating under a unitary system or under a flexible constitution where the Parliament is supreme.'

New spending regime

A new Commonwealth spending regime has been in force since July 2014 under the Public Governance, Performance and Accountability Act 2013 (PGPA Act) and the Financial Framework (Supplementary Powers) Act 1997 (FFSP Act). Critically, section 32B of the FMA Act has been preserved together with the associated Regulations, by inserting these provisions into the new FFSP Act. Overall, the new scheme enables the authorisation of expenditure through rules prescribed by the Minister for Finance rather than through direct parliamentary authorisation.

No doubt the Commonwealth has given deep thought to this response and it is presumably the intention that by specifying rules for expenditures, the Commonwealth is seeking to bring the expenditures within the general executive power or the express incidental power.

The place of Commonwealth grants to local government following Williams

The Williams decisions place a real question mark over local government programs which receive Commonwealth funding without specific legislative support founded on an identifiable head of power in the Constitution. Whether the Commonwealth's response to the Williams decisions is adequate remains to be seen.

One concern about the response is that local government is everywhere in Australia — a creature of State legislation. The circumstances in which the Commonwealth and the States can cooperate together or in which the Commonwealth can provide direct funding to an entity established by State legislation are no doubt not closed. However, given the history of the Williams cases, direct grants to local government are likely to remain legally contentious until the High Court actually determines that the Commonwealth's current scheme is valid.

The specific practical consequences of Williams No.2 are not yet resolved with the remedies in the litigation to be determined. Whether monies will need to be repaid may be debateable but clearly further funding under the impugned scheme is not possible.

The alternatives are few where there is no head of power to authorise Commonwealth legislation. For example, theoretically grants could be made to the States and then by the States to local government. This is likely to open up its own set of legal, political and interpersonal issues. Any arrangement that involves the State acting as a 'middle man' in directing Commonwealth funding will create tensions both between the State and the Commonwealth, and the State and local government. It is also inefficient given the bureaucracy that would be required to support this channel for funding.

The other alternative is for the Constitution itself to be amended to enable the making of laws with respect to local governments. However, it seems unlikely that the Commonwealth will reintroduce a referendum on local government given the last minute ‘scratching’ of the local government referendum from the 2013 elections.

Although Commonwealth assistance only makes up around eight per cent of local government operating revenue, the receipt of Commonwealth financial assistance varies from council to council.The significance of this form of revenue to local government varies in accordance with each council's ability to source revenue from other means. Despite the uncertainties created by the Williams decisions, local governments have little choice but to act on the basis that the current funding regime is valid until the Court holds otherwise. However, in negotiating and accepting funding arrangements it will be important to ensure that the arrangements come within the rules established by the Minister for Finance. Specific advice and assurances should be sought on this from the Commonwealth. Further, the funding agreements should be drafted in a way that clearly call on the relevant rules and heads of power with appropriate assurances from the funding agency that it has the powers to enter into the agreement.