Interaction between the local government and the council serves as one of significant factors that endorse the effectiveness of decentralization pursuant to Law No. 22 of 1999 on Local Government in Indonesia. One of the arenas in which such interaction between the two district organizations takes place is the formulation of policies on Local Budget, as part of their regulatory function.Such formulation of policies on Local Budget is provided in the Government Regulation No. 105 of 2000 and Decree of Minister of Domestic Affairs No. 29 of 2002. These two legal bases reflect the interaction between local government and the council in the formulation of General Course and Policies, Local Budget Strategies-Policies and deliberation of Local Budget Proposal. However, in reality the process is smeared by conflict of interests among the incumbents that disregard local stakeholders' interests. As a consequence, the stipulated Local Budget is considered irrelevant to the needs of the local people and is likely to favor the interests of the incumbents both in the local government and in the council.A case study approach was employed to examine the above mentioned issues of Depok City. There are a number of reasons to study these issues in Depok City, i.e. (1) it already ratified Local Regulation No. 1 of 2003 on Management and Accountability of Local Finance as a follow-up of the Decree of Minister of Domestic Affairs No. 29 of 2002, (2) it has employed Communication Forum for Participative Development Planning as a major element in the formulation of General Course and Policies and (3) it fits the technical aspects of this study. This study focuses on the power and resources dependency approach and the state-centered approach. Based on these two approaches, emphasis is put on the interaction process, types of interaction, and dynamic elements that constitute such interaction.Based on the results of the study, it may be concluded that, (1) the interaction between the local government and the council is dominated by the local government due to its greater access to power and resources, (2) the imbalanced interaction is resulted from lack of access to resources by the Budget Committee of the council (3) imbalanced interaction in the formulation of the general course and policies and budget strategies-priorities has formed an anticipated reaction type of interaction due to weak position of the council on situational basis, (4) the interaction in the formulation of the general course and policies and budget strategies and priorities tend to be contravening, leading to disassociating process, (5) during the deliberation of Local Budget Proposal, the interaction inclined to a no decision making situation influenced by the interaction between offices/agencies/institutions and the faction-commission to urge the Budget Committee of the council that eliminates the contravening situation, leading to associative interaction and (6) the mayor direct election will strengthen the incumbent in the local government due to increasing political legitimacy of the local government, and on the contrary weakening the position of local legislators or the council in such interaction.Based on the above conclusion, the following recommendations might be taken into consideration: (1) to build a balanced interaction by improving both individual and institutional capacity of the local legislators or the council, (2) each faction requires its member to understand both the process and material of local budgeting, (3) to build balanced formality and informality by putting forward transparency and improving interaction frequency between the local government and the local legislators or the council on institutional basis, (4) the effort to improve institutional capacity of the council may be achieved by institutionalizing inter-faction interaction and to dissolve internal grouping, (5) institutionalizing the cross-faction lobbying mechanism in the council, regular reporting and joint discussion to moderate sheer interest of political parties and (6) the mayor direct election must be balanced by improving institutional capacity, guidelines for the council for formulating and monitoring the Local Budget and maintaining good interaction with the local government.