Hampshire Fire and Rescue Authority

 

14 September 2005

Item 12

 

Local Government Finance Formula Grant Distribution Consultation

 

Report of the Treasurer

Contact: Paul Carey-Kent, 01962 847525

1 Introduction

1.1 The Government has issued a consultation paper on proposed changes to the system of Formula Grant Distribution (FGD) to be implemented from 2006/07. The proposals mark the end of a three year period of a formula-freeze and no further changes are expected until 2008/09 at the earliest.

1.2 This report sets out the principles behind the proposals that will have the most significant effect on Hampshire Fire and Rescue Authority's formula grant allocation. The Appendix contains a suggested response to the questions in the consultation paper.

2 Background

2.1 The Government determines the national allocation of grant for fire authorities and other local authorities in (typically biennial) Spending Reviews. Each individual authority's share of formula grant is later calculated in local government finance grant settlements. The FGD consultation paper concerns changes to the formulae for allocating grant between local authorities in the grant settlements.

2.2 A firmly held principle of the grant allocation system is that the total national level of grant is fixed therefore any change that results in more grant for any individual authority or type of authority will mean less grant for all other authorities. Therefore the exemplifications provided with the proposed changes in the consultation paper are important for determining the impact of a particular change on an individual authority.

2.3 The most significant proposed changes affecting the Fire and Rescue Authority are changes to the formula for Fire FSS including the removal of fire pensions funding, capital financing and floors damping. Further proposals for changes to the Area Cost Adjustment geography and additional resource equalisation could also have a material impact on the level of the Fire and Rescue Authority's funding.

2.4 Overall, the changes are not likely to have a major impact on the grant received by this Authority, with a `worst case' equating to a 3.3% increase in the council tax, best case equating to a 7.7% reduction and a broadly neutral position most probable.

3 Fire FSS formula

3.1 The main determinants of the existing FSS for the Fire service block are resident population, Fire-fighters' pensions and fire safety. Cost adjustments are made for the length of coastline, deprivation and the area classified as `category A' risk in terms of fire cover.

3.2 There are a number of proposed changes to the formula for fire funding, the most significant of which are detailed below.

3.3 As previously reported to the 26 April 2005 meeting of the Finance and General Purposes Committee the Government is planning changes to the funding of fire pensions

3.4 Currently an authority's allocation for pensions (employers' contributions and pensions payments) is separately identified in the formula. In future the amount for employers contributions only will be part of the basic amount and top-ups. Under the new arrangements pensions payments would be funded from a local pensions account resourced by employee and employers' contributions. The Government would top-up the account, or recover any surplus as necessary.

3.5 An exemplification in the consultation paper shows the Fire and Rescue Authority could gain £0.6m from this change.

3.6 The data currently used in the fire safety enforcement indicator is no longer being collected due to a change in fire safety law which focuses more on risk assessment rather than the number of certifiable premises and plans examined.

3.7 The Government propose to use as a replacement a measure of property and societal risk. The indicator would be constructed using the number of different types of property in each authority multiplied by the risk frequency factors relating to both property loss and societal risk. Societal risk frequency relates to the likelihood of a large number of people who would require assistance by the fire and rescue service to escape from a fire.

3.8 An exemplification of this proposal shows the Fire and Rescue Authority could gain £0.4m from this change.

3.9 The fire risk index was introduced in the previous FGD review to replace a count of fire calls which could have created a perverse incentive for fire and rescue authorities not to minimize calls by investing effort into fire prevention and education. The index was determined by using variables that were well correlated to all types of service calls and not just calls to fire incidents.

3.10 The Government argue that two of the property-related variables are not "intuitively obvious" causal factors of service calls. These are the `Proportion of Households whose property is not a detached or bungalow' and `Proportion of households whose property was built between 1919 and 1944'.

3.11 The consultation suggests replacing these indicators with two indicators that were rejected in the previous review as being less statistically significant than some others. They are ACORN types 51 (Single parents and pensioners, council terraces) and 53 (Old people, many high-rise flats). Whilst the exemplifications show that the Fire and Rescue Authority would only lose £0.1m as a result of this decision it could gain £0.9m from the alternative proposal; a technical adjustment to use a five-year average of the data rather than a three-year average.

4 Capital Financing

4.1 The Government is proposing to remove the interest on reserved receipts and other interest receipts elements from the capital financing FSS formula in order to focus the formula solely on the financing of capital. The Government argues that the interest receipt elements have outlived their usefulness. The exemplifications show that this change would increase the Fire and Rescue Authority's FSS by £0.643m.

4.2 The consultation paper asks authorities for their views on whether a compensating adjustment should be made to the capital finance FSS or non-capital FSS totals. Under both of these options the Fire and Rescue Authority would receive less grant than if no compensating adjustment was made. If the Government chose to reduce the non-capital FSSs the Fire and Rescue Authority would receive £0.5m less grant than under the present arrangements.

5 Area Cost Adjustment

5.1 The Area Cost Adjustment (ACA) reflects differences in the cost of service delivery around the country, predominantly labour costs. The ODPM are proposing changes with a negligible grant impact to the labour cost data set and the smaller rates cost adjustment factor. More significant changes to the geography of the ACA are proposed.

5.2 At present all authorities in Hampshire and the Isle of Wight have the same ACA factor calculated using the combined labour cost data of all authorities in this area. Two alternative options are proposed under which each upper-tier authority would have its ACA calculated based on the labour cost data in its area alone. Since the labour cost data of Hampshire (including Portsmouth and Southampton) and the Isle of Wight were combined for ACA purposes in 2003/04 the Fire and Rescue Authority and Hampshire County Council have argued strongly for this change as it is known that that the much lower wage pressures in the Isle of Wight deflate the ACA for Hampshire.

5.3 The two options differ based on where the lower-limit is set, below which authorities receive no ACA top-up. The Fire and Rescue Authority stands to gain £0.4m if the lower limit is set at about where it is now and lose £0.3m if it is set so that only authorities with above average wage pressures receive the top-up.

5.4 The proposed response argues for the lower limit to be maintained at about where it is now. However it also makes the case for the Isle of Wight to be treated separately as a special case even if the option to treat all upper-tier authorities separately for ACA purposes is not endorsed by the Government.

6 Resource Equalisation

6.1 The Government takes into account the ability of a local authority to raise council tax in the grant system by applying its taxbase to an assumed average national council tax for the type of authority. The actual average council tax in 2005/06 was 10% above the assumed level of council tax.

6.2 The ODPM are proposing to increase the level of Assumed National Council Tax (ANCT) to bridge this gap. As they are not proposing to increase the level of grant they believe that this necessitates an increase in FSS. This distributes more grant towards high needs, low council tax base authorities and away from low needs, high council tax base authorities.

6.3 The ODPM have exemplified three possible options for additional resource equalisation. The Fire and Rescue Authority stands to lose under all options and potentially £0.3m under an option for `Full Resource Equalisation and the abolition of capital receipts'. The Fire and Rescue Authority argued in 2002 that it was fundamentally opposed to the principle of resource equalisation. These proposals for additional resource equalisation should be strongly opposed.

7 Floor damping

7.1 Floor damping provides all authorities that have an FSS determined percentage grant increase below a floor-level, with an additional grant increase to the level of the floor. This is paid for by scaling back the grant increases for authorities above the floor. The ODPM are consulting on changes to the way in which the floor is funded.

7.2 One option is to increase the level of Assumed National Council Tax meaning all authorities will receive less grant relative to the size of their taxbase. Whilst the exemplifications show this change would have had a negligible impact on the Fire and Rescue Authority's grant in 2005/06 it could set a dangerous precedent for the future. The consequence of the change is further resource equalisation away from relatively high taxbase low needs areas such as the Fire and Rescue Authority boundary area.

7.3 The Government's second option is to decrease the basic amount per head element of the formula equally across all authorities. This change would mean that local authorities just above the floor lose grant and local authorities that are a long way above the floor gain compared to the existing regime. There is no technical justification for changing the basis on which the floor is funded and both of these options could be seen as an attempt at further resource equalisation.

8 Alternative Grant System

8.1 The Government is proposing to change the way the grant system operates and move away from the current system based on notional spending needs and council taxes. However the Government maintains that this is simply a change in presentation as the consultation states that the proposed grant system will not necessarily produce a different outcome for individual authorities.

8.2 The change is intended to prevent the notional council taxes and notional spending needs figures being compared with local authority spending as they have been in the past for lobbying purposes related to local government efficiency and underfunding of grant. There is significant resistance to this change among local authorities as it would mean a move to a system much less transparent than the current system.

Recommendations

It is recommended that the Fire and Rescue Authority:

1 authorise the Treasurer to the Fire and Rescue Authority to respond to the Government's consultation on Formula Grant Distribution as set out in the Appendix to this report.

Section 100 D - Local Government Act 1972 - background papers

The following documents disclose facts or matters on which this report, or an important part of it, is based and has been relied upon to a material extent in the preparation of this report.

NB the list excludes:

1. Published works.

2. Documents which disclose exempt or confidential information as defined in the Act.