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By The Searchlight Editorial Team / August 21, 2026

This is the third part of The Searchlight’s series on the trail of the money shared monthly from the Federation Account by the Federation Accounts Allocation Committee.

• What is public: Aggregate monthly totals and broad categorization in FAAC communiqués and NBS Excel/PDF reports. Specific large items (e.g., the ₦92.8 billion WHT reconciliation) are sometimes highlighted.
• What is limited: Exhaustive state-by-state, claim-by-claim, or original-period breakdowns are not routinely published in the monthly releases. Independent verification of the underlying calculations for each refund stream is constrained.
• NEITI and civil-society analyses have called for clearer notes explaining refunds, net-offs, and related transactions to improve traceability.

Fiscal Implications

Refunds transfer resources primarily to states, which can improve sub-national liquidity in the short term. However, because they reduce the size of the residual distributable pool (and are disproportionately charged against Statutory Revenue), they contribute to the observed compression of net FAAC shares, particularly for the Federal Government, relative to gross revenue growth. Once major historical claims are cleared, the category’s share has already begun to shrink, as seen in H1 2026 data.

In summary, FAAC refund categories are overwhelmingly corrective payments to states for past under-allocations, tax reconciliations, derivation adjustments, and historical debt-service over-deductions. They are formally approved and largely legitimate under the existing fiscal framework, but their large absolute size in 2024–2025 and relatively limited granular public disclosure make them a significant, if declining, component of first-line deductions.

Nigeria’s fiscal federalism is the system of assigning revenue-raising powers, expenditure responsibilities, and intergovernmental transfers among the three tiers of government: the Federal Government, 36 states (plus the Federal Capital Territory), and 774 local government areas. It is designed to balance national unity with regional diversity in a multi-ethnic federation, but in practice it has evolved into a highly centralized, redistribution-heavy model heavily dependent on federally collected revenues, especially oil rents historically and, more recently, non-oil taxes.

Historical Evolution

Fiscal federalism in Nigeria dates to the colonial period. The Richards Constitution (1946) introduced regional governments and the first formal revenue commissions (e.g., Phillipson). Early arrangements emphasized derivation (origin-based sharing), giving regions substantial control over resources generated within their territories.

Post-independence and especially during military rule (1966–1999), the system shifted toward a more centralized, “remedy-based” model that prioritized equality, population, and need over pure derivation. Successive commissions (Raisman, Binns, Dina, Aboyade, Okigbo, Danjuma) progressively pooled more revenues into a common Federation Account while retaining limited reward elements. The 1999 Constitution crystallised the current compromise under Section 162.

Constitutional and Institutional Framework

The 1999 Constitution (as amended) establishes:

• Federation Account (Section 162): All revenues accruing to the Federation (oil/gas, company income tax, customs, most major taxes, etc.) must be paid into this account and distributed among the three tiers.
• Exclusive and Concurrent Legislative Lists that largely assign major tax bases (petroleum, company tax, customs, VAT administration historically) to the centre.
• Recognition of local governments as a third tier, though states historically exercised significant control over them.
• The Revenue Mobilisation Allocation and Fiscal Commission (RMAFC): Constitutional body charged with monitoring Federation Account accruals and disbursements, reviewing the revenue allocation formula, and determining remuneration for political office holders.
• The Federation Account Allocation Committee (FAAC): Meets monthly to approve distributions.

Vertical formula (current, post-statutory deductions, excluding VAT):

• Federal Government: 52.68% (of which a portion is further earmarked for ecology, FCT, stabilization, natural resources development)
• States: 26.72%
• Local Governments: 20.60%

VAT has its own formula (historically FG 15%, States 50%, LGAs 35%; recent tax reforms have adjusted some parameters). A minimum of 13% derivation applies as a first-line charge on revenues accruing directly from natural resources, paid to the producing states.

Horizontal formula among states and LGAs uses principles including equality (often 40%), population (30%), land mass/terrain, internal revenue effort, and social development factors. RMAFC periodically reviews the formula; a comprehensive review was completed in 2026 and is expected to be transmitted for legislative consideration.

Revenue and Expenditure Assignment

Revenue side: The centre collects the bulk of high-yielding taxes. States control personal income tax (on individuals resident in the state), some property and consumption-related levies, and internally generated revenue (IGR). Local governments have limited tax powers (e.g., market fees, certain property rates). In practice, most states remain heavily dependent on FAAC transfers—often 70%+ of recurrent revenue for many states—while a few (notably Lagos and Ogun) generate substantial IGR.

Expenditure side: The Federal Government handles defence, foreign affairs, monetary policy, major infrastructure, and many concurrent functions. States and LGAs are primarily responsible for primary/secondary education, basic health, local infrastructure, and agriculture. In reality, overlaps, unfunded mandates, and weak capacity at subnational levels are common.

First-line deductions (costs of collection, interventions, refunds for past underpayments, savings, transfers) significantly reduce the distributable pool before the vertical formula is applied—absorbing roughly 37–45% of gross revenues in recent peak years. Refunds (largely to states) have been a major component.

Key Challenges

• Over-centralization and dependence: Sub-national governments have limited tax autonomy and weak incentives to grow IGR. Oil’s declining relative weight (from dominant shares historically to much lower percentages of Federation Account revenues by the mid-2020s) has exposed the system’s vulnerabilities.
• Vertical and horizontal imbalances: The formula is more “remedy” (need/equality) than “reward” (derivation/performance), leading to debates over fairness, especially from oil-producing states seeking higher derivation and from non-oil states defending equality principles.
• Local government weakness: Despite the 2024 Supreme Court ruling mandating direct payment of FAAC allocations to LGAs (ending joint state–local accounts in principle), implementation remains incomplete in many states. Service delivery at the grassroots is often poor.
• Transparency and accountability gaps: First-line deductions, inflow verification, and especially downstream spending outcomes (capital budget execution remains weak in many states despite higher nominal FAAC receipts) lack sufficient public scrutiny.
• Multiple taxation and fiscal competition: Businesses frequently complain of overlapping federal, state, and local levies.
• Volatility and debt: Heavy reliance on Federation Account flows transmits oil/price and exchange-rate shocks to all tiers; sub-national debt has risen.

Recent Developments (2023–2026)

Post-2023 reforms (subsidy removal, FX unification, tax administration overhaul including the creation of the Nigeria Revenue Service framework, Petroleum Industry Act implementation) dramatically increased nominal FAAC disbursements. States and LGAs have received substantially higher allocations. Executive actions have sought to protect petroleum remittances into the Federation Account. The Supreme Court strengthened formal LG financial autonomy. RMAFC completed a revenue formula review in 2026. Tax reforms aim to reduce multiple taxation and improve administration, though implementation challenges persist at subnational levels. Debates continue on state police, further devolution of powers (e.g., electricity already partially devolved), and moving toward greater tax assignment plus equalization rather than pure pooling and sharing.

Outlook

Nigeria’s fiscal federalism remains a hybrid: constitutionally federal but operationally highly redistributive and centre-dominated. The post-oil-rent era is forcing a gradual shift toward non-oil revenue mobilization and greater pressure for sub-national self-reliance. Sustainable progress requires restoring full integrity and transparency to the Federation Account, updating the allocation formula to better balance equity and incentives, completing LG autonomy in practice, strengthening state IGR capacity, and clarifying expenditure assignments with matching resources. Without these, higher nominal transfers risk financing consumption and governance costs rather than transformative development.

The system has managed political cohesion amid diversity but has struggled to deliver efficient, accountable public service delivery or strong growth incentives at the sub-national level. Ongoing constitutional and legislative processes will determine whether it evolves toward greater fiscal autonomy and performance orientation.

The Governors’ Grip: Why Nigeria’s Local Governments Remain Ghosts with Bank Accounts

Two years after the Supreme Court of Nigeria delivered a clear, unambiguous judgment on 11 July 2024 ordering that Federation Account allocations to the 774 local government councils must be paid directly into their own accounts — ending the long-abused State Joint Local Government Account system — the reality on the ground remains largely unchanged. Trillions of naira continue to flow in the name of local governments. Yet in most states, elected councils exist mainly on paper. They pay salaries (when they can), maintain skeletal offices, and execute almost no meaningful projects. Many chairmen and councillors spend more time in the state capital than in the communities they were elected to serve. The reason is neither complicated nor hidden: state governors refuse to relinquish control.

The Court Spoke. The Governors Did Not Listen

The 2024 judgment, secured by the Attorney-General of the Federation against all 36 state governors, declared the joint-account practice unconstitutional. It barred governors from dissolving elected councils or replacing them with caretaker committees, and directed the Accountant-General of the Federation to pay LG allocations directly. President Bola Tinubu publicly welcomed the ruling and has repeatedly warned governors — including with threats of an Executive Order as recently as December 2025 — that non-compliance would force federal intervention.

Yet implementation has been stalled by deliberate resistance, bureaucratic obstacles, and political calculation. Analyses show that in the first year after the ruling alone, governors retained effective control over roughly ₦4.5 trillion meant for councils. In 2025, local governments were allocated about ₦5.5 trillion — a sharp increase driven by higher overall FAAC inflows — yet underdevelopment at the grassroots remains entrenched. Funds still largely pass through state-controlled channels or are subject to heavy “deductions,” directives, and informal oversight that leave chairmen with little discretionary spending power.

Some states have been more compliant than others. Nasarawa amended its laws to abolish joint accounts. A few claim full direct payment. But across large parts of the federation — including major states in the North West, South East and elsewhere — joint or quasi-joint arrangements persist. Anambra passed legislation that effectively recreated state control under a new name. Other governors simply ignored the judgment while waiting out political pressure.

Why Governors Refuse to Let Go

The resistance is not about constitutional principle or administrative convenience. It is about power, patronage, and political survival.

First, the patronage reservoir. For decades, local government allocations have functioned as a ready pool from which governors draw to settle the wider political ecosystem that keeps them in power — party loyalists, traditional rulers, religious leaders, youth groups, and local power brokers. Full financial autonomy removes that reservoir from gubernatorial reach. A chairman with independent access to hundreds of millions of naira monthly is no longer a dependent client.

Second, structural insulation against opposition. Autonomous local government chairmen, armed with their own budgets, staff, and political standing, can become alternative centres of organisation. They can build independent networks capable of challenging a sitting governor in future elections or within the party. Governors who have spent years installing compliant, often handpicked leadership have every incentive to prevent that possibility. The closer 2027 approaches, the stronger this incentive becomes.

Third, fiscal leverage and diversion. Control of the joint account allows states to impose first-line charges (pensions, teacher salaries, traditional ruler stipends, “joint projects,” training levies, and various “contributions”) that often consume the bulk of the allocation. What remains is frequently directed toward state priorities or political spending rather than local needs. Chairmen in several states have reported receiving only enough to cover salaries and a small imprest after these deductions — sometimes as little as ₦4–70 million out of official allocations several times larger. Capital projects become almost impossible.

Fourth, the politics of 2027. Multiple reports indicate that the Federal Government has been reluctant to enforce the judgment aggressively because governors remain critical to the ruling party’s electoral machinery. Confronting them risks fracturing the coalition needed for re-election. The result is public threats matched by private accommodation.

Constitutional ambiguity is cynically exploited. While the Supreme Court ordered direct payment, Sections 162(5)–(8) of the 1999 Constitution still speak of allocation “to the State for the benefit of their Local Government Councils” and of the State Joint Local Government Account. Governors and their lawyers lean on these provisions and on state laws to maintain de facto control.

The Consequences: Councils in Name Only

The outcome is predictable and visible across Nigeria. Local governments, constitutionally responsible for primary education, basic healthcare, rural roads, markets, sanitation, and community development, are reduced to salary-paying entities. Many chairmen maintain residences or spend most of their time in state capitals, closer to the governor’s office than to their wards. Primary health centres remain understocked, rural roads deteriorate, markets decay, and refuse accumulates. Trillions allocated in the name of the grassroots produce little visible transformation at the grassroots.

Civil society organisations, the National Union of Local Government Employees (NULGE), and the Association of Local Governments of Nigeria (ALGON) have repeatedly documented the pattern: funds arrive in the name of councils, but effective control stays with the states. Capacity-building is stifled. Accountability is inverted — chairmen answer upward to governors rather than downward to citizens.

A System That Serves Governors, Not Citizens

Nigeria’s fiscal federalism already concentrates major revenue sources at the centre and redistributes them through FAAC. The additional layer of state capture of the local tier turns the third arm of government into an administrative fiction. The Supreme Court attempted to correct this. Governors, with the tacit or overt acquiescence of political actors at the centre who need their support, have largely refused.

Until direct allocation is fully enforced, accompanied by transparent accounting, independent audits, and genuine political autonomy (including free and fair local elections free of gubernatorial imposition), local governments will continue to exist as ghosts with bank accounts — paying salaries when possible, executing almost nothing of consequence, and leaving the ordinary Nigerian at the community level to wonder what, exactly, government is for.

The money is there. The law is clear. The political will at the state level remains the missing element. And the people at the grassroots continue to pay the price.