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This essay aims to theoretically examine intergovernmental
transfer from central government to local government, especially to
municipality and city. It focuses on government considerations of transfer,
types of transfer, modes for determining transfer, and criteria to determine
effective transfer. It finds that a country chooses a type of transfer based on
its typical purposes. Indonesia only recognizes two types of transfers;
specific grants and block grants. The basis for determining fund through intergovernmental
fiscal transfer can be in form of; 1) based on fixed percentage from income
originating from central government; 2) following an ad hoc basis; and 3) based
on formula mechanism. This third variant is found widely around the world.
Indonesia uses percentage and formula method. There are some requirements for
effective transfer system. The first demands that local government must fund
its own expenses for public services using its own financial resources. The
second system uses the formula discouraging
the occurrence of financial deficit. The third states that the formula of
financial transfer should be equal with the need of local fiscal and it should
be in reverse comparison with the capacity of local fiscal. The fourth stresses
the transparency and stability.
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