The process of fiscal decentralization in Croatia started in 2001. The goal of decentralization policy is to meet the public needs of the residents in accordance with their needs and encouraging local and regional development. Croatia's administrative and territorial decentralization, but this state is not accompanied by funding based on regional differences in fiscal capacities and capabilities of the fiscal sustainability of local and regional governments. Using grant to adjust differences in funding opportunities of basic public service samonglocalandregionalunits. According the newlaw on regional development, criteria for the allocation of grants from the state budget is index of development of local government units (LGU). The index of development is the only official indicator is calculated for eachcity, municipality and the county so that they could be ranked and grouped. The index is calculated on the basis of five indicators to standardize, weigh to the Croatian national average and are weighted. This article aimed to analyze the empirical parameters of the development index and examine the objectivity of the same . In the empirical part of the paper examined if there is a difference in development index indicators between municipalities that are categorized into five groups according to development index as well as differences in each indicator individually considering the membership of a group. The conclusion is that the development index generally successfully divided the municipality according to the level of development, but that there is still a discrepancy between the observed indicators of the development index, at least in the observed sample of 50 municipalities of Sibenik-Knin county and Split-dalmatia county. The research results provide a basis for review and possible revision of existing development index and its modification for the best image of the real state of development in certain municipalities, and thereby regulate state budget grants to municipalities. Proposal modification goes in the direction of creating a single index for each component of development index with the corresponding indicators which in the current index are not taken into consideration, which could affect the index of development of individual municipalities. Also, on this basis, modification would take place in weights correction of individual components of the index of development in order to improve the quality of the development index.