Finance Minister K N Balagopal on Thursday effected a nominal increase in the allocation for local bodies in Kerala. However, to significantly augment the income of local bodies and to gradually reduce its dependence on state funds, the finance minister said the government had approved the creation of Local Government Board of Finance.

The minor hike in transfers to local bodies and the Board of Finance are part of the recommendations of the First Report of the 7th State Finance Commission, which was tabled in the Assembly along with other Budget documents.

Statutory bodies like the Kerala Local Government Development Fund (2010) and the State's Property Tax Board (2011) were earlier attempts to improve the revenue of local bodies. But both had failed to take off. "It is of immediate policy concern that local bodies are empowered in all possible ways to realise the revenue potential. We recommend that a Board of Finance for Local Governments is established in the state," the 7th Finance Commission Report says.

As a first step, the Board of Finance will recommend the mechanisms to be put in place for efficient mobilisation of resources at the local level. Here are some of the existing imperfections. One, there is no dedicated administrative wing of well-trained, properly equipped and empowered officers with quasi-judicial powers. Two, there is no periodic revision of tax data at the local body level.

Ringing in such changes would require amendments of certain acts, changes in rules and procedures and an overhauling of the collection machinery. The Finance Commission itself will submit a detailed policy note on the Board's powers and functions.

At a fundamental level, the Finance Commission wants the Board of Finance to explore the possibility of innovative and modern fund-mobilisation tool. Municipal bonds, for instance. "The window of bonds or borrowings may be opened to the local governments on a project-to-project basis, ensuring that the selected projects generate a reasonable return for meeting the repayment obligations. The union government has schemes to support the municipalities that issue Municipal bonds," the Commission report says.

The Board of Finance is also expected to regulate and monitor local governments when they mobilise funds from the lenders or the capital market. "It is important to ensure that the local bodies do not borrow beyond their capacity to absorb such funds and that they honour the repayment obligations," the Commission said.

The finance minister gave the green signal to the concept of municipal bonds. "Permission will be granted to municipalities and Corporations to issue municipal bonds for implementing major projects which are profitable as well as beneficial to the public," Balagopal said in his Budget speech on Thursday.

Meantime, the General Purpose fund (GPF) and the Maintenance fund for Local Self-government Institutions in 2026-27 have been enhanced to ₹3236.76 crore and ₹4315.69 crore respectively. "This allocation is ₹786.96 crore more than that of previous year," the finance minister said in his speech.

A bigger devolution to local bodies is under 'development funds'. In 2026-27, it will be ₹10,189 crore, which is 28.5% of the State Plan.

All three funds had been stagnant for the last two fiscals. The state government has also not been able to devolve the funds promised in the Budget.

In 2024-25 and the ongoing 2025-26 fiscals, the GPF transfers were Rs 2513.15 crore and Rs 2533.61 crore, respectively. The maintenance fund transfers - for non-road and road assets - were Rs 3123.55 crore and Rs 3175.05 crore.

The development fund devolutions in the last two fiscals were Rs 8399.56 crore and Rs 8548.91 crore.

Besides, Rs 160 crore has been set apart as a grant for urban local bodies under the Kerala Solid Waste Management Programme (KSWMP). This is ₹45 crore more than the allocation of the previous year.