Amid anger from nationalist MLAs, particularly in west Belfast – home to the Province's biggest community festival – Mr Poots said he was handing responsibility for the distribution of the money to local councils.
The News Letter understands this may well lead to a more equitable delivery of cash which addresses the long-term imbalance that has seen nationalist events get three times as much as unionist counterparts.
Examples of festivals include: West Belfast Féile, Glasgowbury Music Festival, in the Sperrins; Country Comes to Town, held in Portadown; the Hillsborough Oyster Festival; the Lady of the Lake Festival, in Irvinestown and also a host of smaller events.
One source said: "There has been a recognised problem whereby the big festivals, like west Belfast and Ardoyne, have got more of the slice of the cake when the money has been distributed from a single pot.
"Originally DCAL (Department of Culture Arts and Leisure) looked after it, and then the Northern Ireland Events Company.
"And the bigger and more equipped long-running (nationalist) festivals have received more support. Now the money will be spread more evenly across the country to council areas, and based on size of population.
"It doesn't mean unionists will automatically get more than they have, but it means they will have a better chance if they get their act together and apply."
In Belfast, where most of the funding (around £250,000 of a £450,000 budget) has been attracted, there will be a big cut and under the new system, around £80,000 will be available.
Sinn Fein MLAs were furious.
Mr Poots, though, argued in the Assembly that the allocation would be fairer and that the West Belfast Festival had already proved it can attract private investment and generate funds to potentially support itself.
He noted that a recent evaluation of the fund found it "makes a significant contribution to community life" and "represents good value for money" as it is a relatively small amount from the public purse.
It also highlighted a number of areas where the administration of the fund could be improved, including the introduction of a less complex application process for smaller grant awards.
Mr Poots explained that after taking the Review of Public Administration into account, and plans to transfer more responsibilities to local government, it made sense to have local departments and officers specialising in community development, dealing more closely and directly with community festival organisers.
"It is therefore my intention to proceed with the transfer of the delivery of the Community Festivals Fund to local authorities from April 1, 2008," he said, noting that legal advice discovered no impediments to this happening.