Hampshire County Council
	Cabinet		Item 4
	23 September 2002
	Response to the Government's Consultation on Revenue Grant Distribution
	Report of the County Treasurer

Contact: Jon Pittam, ext 7400

1 Summary

1.1 The Cabinet considered a report at its meeting in July 2002 on the Government's consultation paper on its proposals for changes to the system for distributing revenue grant, which had just been published.

1.2 Responses to the consultation are required by the Office of the Deputy Prime Minister by 30 September 2002.

1.3 The following decisions are sought:

· That the County Council submits representations to the Government on the issues raised in the recommendation in the accompanying report, together with any comments the Cabinet wishes to make following discussion at its meeting

· That copies of the report are sent to Hampshire MPs.

2 Reason

2.1 The County Council needs to safeguard its interest by influencing the Government in reaching its decisions on the revenue grant distribution system.

3 Other options considered and rejected

3.1 Not applicable.

4 Conflicts of interest declared by the decision maker or a member or officer consulted

4.1 Not applicable.

5 Dispensation granted by the Standards Committee

5.1 Not applicable.

6 Reason for the matter being dealt with if urgent

6.1 Not applicable.

Approved by: Date:

Councillor T K Thornber

	Hampshire County Council
	Cabinet		Item 4
	23 September 2002
	Response to the Government's Consultation on Revenue Grant Distribution
	Report of the County Treasurer

Contact: Jon Pittam, ext 7400 or Ian Howell, ext 7540

1 Introduction

1.1 At its meeting in July 2002, the Cabinet asked for a further report on the Government's consultation paper on Local Government Finance: Formula Grant Distribution. Responses to the consultation are required by the Office of the Deputy Prime Minister (ODPM) by 30 September 2002.

1.2 The consultation paper proposes new formulae to replace each of the existing service Standard Spending Assessments (SSAs). The report to the July meeting summarised the proposals and indicated the best (often least worst) and worst cases for the Council over the 47 options proposed. The consultation includes exemplifications of a number of options for each service based on re-running the 2002/03 grant settlement, with details of the impact on each local authority. Further exemplifications have been issued by the ODPM subsequently.

2 Summary

2.1 The best case options would result in an increase of £15.8m (1.8%) and the worst case a loss of £80m (9.3%). The implications of grant loss and potential impact on the council tax are dealt with in the next report on the agenda dealing with the budget outlook for 2003/04. Ignoring the damping effect of floors, the council tax would need to increase by about 23% to recover a grant loss of £80m in addition to the normal budget increases. The effect of the floor mechanism will be to phase the grant loss over more than one year.

2.2 As highlighted in July the main concerns are over proposals for:

· resource equalisation - to reflect spending over SSA by increasing grant support to `high need, low resource' areas at the expense of `low need, high resource' areas. Council taxpayers in Hampshire will foot an even higher bill to underwrite existing spending elsewhere in the country (mainly the north and metropolitan areas) without the Government increasing its share of support through central taxation

· changes to the area cost adjustment - by amending both the formulae and the geographical boundaries. Hampshire and the South East have successfully defeated previous proposals, but the new options detach Hampshire from the rest of the South East in terms of options and geographical boundaries

· increasing weight being given to deprivation and apparent double counting with the existing formula components and specific and other grants.

2.3 The Council will therefore wish to argue for:

· as high a basic entitlement as possible

· no double funding of deprivation, especially on education where additional education needs are not necessarily synonymous with deprivation

· no detrimental change to area cost adjustment because of the higher costs in Hampshire, the difficulties of recruitment and retention of staff and procuring services, especially in the social care market

· no resource equalisation for spending above SSA

· a separate formula block for waste management

· continued separation of revenue support grant from national non-domestic rates (business rates) instead of a merged `formula grant' which underpins the assumptions in the consultation paper (the Council has already objected to this in its response to the Local Government Bill).

2.4 This report:

· analyses the proposals - broad themes are covered in the main report, with more detailed analysis of each of the service formulae in the Appendix

· suggests a response to the paper, including answers to the specific questions asked by the ODPM in the consultation paper.

3 Timetable

3.1 Despite the fundamental importance for local government of the revenue grant distribution system, the Government has left itself very little time to develop a workable system that can be introduced for 2003/04. Allocations to individual local authorities should be announced by the Government in late November 2002. The Government does not have a workable system at present, just a series of over 40 options, none of which may form part of the final system. If the consultation is not a pretence, the Government will not start to develop the final system until after the consultation period ends on 30 September 2002. The consultation period itself has been rushed, largely covering the summer holiday period (for the civil servants concerned as well as local government).

3.2 Whilst the Government has published detailed exemplifications of the effects of its options for individual local authorities, it has been unable or unwilling to make available to local government the models and detailed information used to prepare some of the options. (Models are available from the Government for the formulae for education, personal social services and environmental, protective and cultural services (EPCS) but not for police, fire, highways maintenance, capital finance, the area cost adjustment, or the population change and resource equalisation adjustments).

3.3 This lack of detailed information has made it difficult to interpret the exemplifications fully. In some cases, it is not clear what elements within a formula have caused individual or groups of local authorities to gain or lose.

3.4 Given this level of uncertainty, it seems likely that there will be significant impacts on local authorities' budgets and council tax levels if these proposals are introduced in 2003/04. It is suggested that the County Council points out to the Government the effect on public perceptions of large cuts in services and increases in the council tax as a result of these proposals, particularly in the context of the Government's commitment to improve public services.

3.5 The Government has not yet announced clear details of its floors and ceilings to phase the impact over more than one year for those authorities worst affected by the new system. It has also to explain how it will meet its commitment that no authority's schools will lose out in real terms. Real terms may just mean a 2.5% cash increase, not the 6% increase in Spending Review 2002 for Education SSA. Local authorities are finding it difficult to plan with any certainty and the Government should be urged to announce the basis for the floors in advance of the RSG settlement in late November 2002.

4 A fairer, simpler, more intelligible and more stable system?

4.1 The Government's aims for the new grant distribution system are to make it fairer, simpler, more intelligible and more stable than the existing SSA system. Some of these aims are likely to be incompatible: fairer and simpler, for example. It also wants to improve transparency and accountability to make the new system more easily understood.

4.2 The Government proposes three basic factors:

· the extent to which it makes sense to distribute grants as a basic amount per head of population (or other unit relevant to cost)

· giving an appropriate emphasis to the need to tackle deprivation

· how to reflect the variation in pay costs between different areas of the country.

4.3 It proposes new formulae which follow the basic structure of:

· basic allocation

· plus deprivation top-up

· plus pay cost top-up

· plus other top-ups.

4.4 Is the new system fairer? Any changes to the grant distribution system will result in winners and losers. The options exemplified so far suggest that the County Council will probably be amongst the losers, possibly to a significant degree. There was no evidence to suggest that the existing system was particularly unfair. The switch of resources from the South East to other parts of the country in some of the proposals will make it difficult for the Government to defend itself against arguments that politics have influenced the proposals.

4.5 Is it simpler? Most of the new formulae have a standard structure of a basic amount calculated per head of population, pupil, kilometre of road, etc. This is supplemented by top-ups for deprivation and other measures of need such as sparsity and density, together with a top-up for pay costs equivalent to the area cost adjustment. This structure is superficially simpler, but the underlying calculations to arrive at the amount of grant per head of population or deprivation factor still use complicated statistical techniques that few understand. An increasing use is made of judgment, particularly in deciding how much should be allocated for particular functions or by particular factors. Judgment increases the scope for political interference in the formulae.

4.6 Is it more intelligible? Superficially, the basic amount plus top-up approach may be easier for people to understand. But it is inevitable that, when stakeholders and the public want to understand why grant allocations have increased or decreased, the complexities of the underlying techniques will become apparent. It is also likely that there will be an overlay of transitional arrangements that will confuse matters, as will the Government's proposals for `resource equalisation' (covered in section 9). Few will also understand the why so-called basic amounts per child and elderly person account for such low proportions of the available funding in the personal social services formulae.

4.7 Will it be more stable? Leaving aside the effects of the transitional arrangements, particularly as they unwind, the Government's main proposal to achieve stability is to continue the recent policy of freezing methodology changes for two years (2004/05 and 2005/06, after the new system is introduced in 2003/04). It will also average earnings data in the area cost adjustment over three years to reduce volatility. These proposals are sensible but stability of the system would be improved further if local government was less dependent on such a small local taxbase as the council tax. The Government has made no proposals for widening the taxbase, however.

5 Principles, not options

5.1 The Government has emphasised that the final grant distribution system will not necessarily be chosen from the options it has exemplified. They are just an illustration of the possibilities. Other combinations of factors in the formulae could be adopted by the Government, or even completely different formulae. So whilst the Government has specifically asked for comments on the exemplified options, it is suggested that the County Council's response should look further than just which of the published options are best or worst for the Council. It should also be based on sound principles for a grant distribution system. The Government would also welcome any alternative proposals.

5.2 The Government has said it plans to reduce specific (earmarked) grants, which have increased from 3% of the County Council's share of total standard spending in 1997/98 to 12% in 2002/03. Despite this assurance, direct grants to schools have already been increased as reported in July. The Council should press for a substantial reduction in specific grants and limits on targeted grants.

5.3 Data used in the formulae should be robust, timely and stable. In some cases, such as the comparatively volatile earnings data used in the area cost adjustment, it may be necessary to smooth data by averaging figures for more than one year, typically three years.

5.4 It is also essential that Government funding is sufficient to meet the need for spending on local services, for example, on waste management and to eliminate the underfunding of social services. No new formula, no matter how fair or simple, will succeed if the spending pot is inadequate.

6 Basic is best

6.1 The Government had indicated its desire to see more of the grant allocated through the basic amount. This would help to simplify the system and make it more transparent. As the following table shows, arguably only the Education proposals are approaching that aim and even they fall short.

Proportion allocated nationally as Basic Amounts in proposed formulae
		Lowest	Highest
Education
Under 5s	per pupil	87.4%	92.6%
Primary	per pupil	84.5%	91.1%
Secondary	per pupil	88.1%	93.4%
LEA block	per pupil	70.1%	78.4%
Personal Social Services
Children	per head	31.6%	34.0%
Elderly (combined formulae)	per head	51.1%	53.3%
Younger Adults	per head	68.2%	71.5%
Fire	per head	52.1%	68.8%
Highway Maintenance	per km	17.6%	58.2%
Environmental, Protective & Cultural	per head	37.6%	76.9%

6.2 Allocations per head of population or pupil, etc, are simple and easy for all to understand. They also benefit the County Council more than allocations that include deprivation or other top-up factors (other than the area cost adjustment). This is because Hampshire's share of the population of England is greater than its share of the national total for most of the factors used in the formulae for top-ups.

6.3 This is a significant issue to raise with the Government. The basic amount necessary to fund each service should the first call on the available resources, with any residue used to meet deprivation. Techniques such as activity led funding can be used to determine the appropriate level for the basic amounts. This would reverse the approach that appears to have been taken by the Government in the proposed formulae of treating deprivation as the first call on resources.

7 Deprivation

7.1 Factors for deprivation are used in the education, personal social services, fire, and EPCS formula. They include data for income support claimants, ethnicity, data, unemployment, lone parent families, etc. Data from the Index of Multiple Deprivation (IMD) has also been used in some options. The IMD was developed for use in allocating the Government's specific grants for regeneration in the Neighbourhood Renewal Fund. It is not suitable for general grant formulae.

7.2 The Government approach to allocating the available resources between deprivation and the basic amount per person appears to take the form of providing for deprivation first on a judgmental basis, with the balance of the resources allocated as the basic amount. This bottom-up approach leaves insufficient resources for the basic amount which is effectively treated as a residual. It is particularly striking in the case of the personal social services formulae, where the basic amounts per child distribute less than 35% of the funding available. The formulae should provide adequate funding for the basic amounts, with any remaining resources used for fund deprivation.

7.3 There are already a number of specific grants targeted by the Government on deprivation. In addition to the Neighbourhood Renewal Fund, support for deprived areas is allocated through the Education Standards Fund. Including deprivation factors in the general grant formulae will duplicate these specific grants, leading to double funding of these `deprived' areas.

7.4 Another aspect of double funding is the inclusion in some formulae of factors that benefit deprived areas two or three times. For example, income support factors are duplicated by the use of data on English as a second language or ethnicity.

7.5 The methodology for reflecting deprivation does not fully recognise small pockets of high deprivation in large authorities, such as Hampshire, to the same extent as smaller authorities with larger areas of deprivation such as the London boroughs.

7.6 The `resource equalisation' proposals, dealt with in section 9, will also favour areas that are assessed as high need. The County Council should argue for the minimum weight to be given to deprivation factors within the formulae with, instead, as much as possible allocated by means of the basic amount.

8 Area cost adjustment

8.1 Changes to the area cost adjustment (ACA) could potentially be very damaging to the County Council. The worst of the five ACA options exemplified by the Government would result in a loss of £22m for the Council. One of the options is broadly neutral, with the other three resulting in losses of £12m, £14m or £16m.

8.2 The Government has agreed that there is a need to reflect differences in pay (and other) costs between areas of the country. It has rejected arguments for a `specific cost' approach that would attempt to identify actual differences in costs. This could have been particularly disadvantageous for Hampshire and can be welcomed. Instead, the Government has exemplified options for the ACA that are based on surveys of wage costs in the wider economy.

8.3 The key elements within the options exemplified are:

· smoothing the earnings data over three years to reduce some of the volatility of the existing practice of updating the earnings data every year.

This is sensible but it has added £1.8m to the `losses' for the County Council in the ODPM's exemplifications. However, unfavourable data from the first of the three years in the exemplifications should drop out when the data is rolled forward from 2002/03 to 2003/04, restoring the loss of £1.8m.

· using the Labour Force Survey (LFS) as a source of earnings data, instead of the New Earnings Survey (NES) currently used in SSAs.

This would benefit Hampshire and the South East as the NES excludes low paid workers and so artificially understates the differential between costs in the South East and the rest of the country. Supplementary exemplifications from the Government suggest that the County Council would gain £33.1m if the LFS was used, but this figure looks too high.

· using earnings data from the private sector only, instead of both the private and public sectors

This change should also be supported as private sector data gives a better reflection of the market within which local authorities have to compete. Exemplifications suggest that Hampshire would gain £13.9m.

· extending the geographical area covered by the ACA, either:

(i) to counties on the fringe of the South East (Wiltshire, Avon, Gloucestershire, Warwickshire, Northamptonshire and Cambridgeshire), or

(ii) to all parts of the country.

This can be combined with calculating ACA factors for individual areas (such as counties) instead of grouping them into categories such as the `Outer South East', as at present.

Exemplifications suggest that extending the geographical spread of the ACA to cover the whole country would benefit Hampshire as its pay costs are above the national average. Losers would be those areas with the lowest costs who are protected at the moment.

Calculating separate ACA factors for each authority has thrown up some anomalies, with Wiltshire assessed in some options as having higher costs than Hampshire. This may be caused by the use of the Labour Force Survey for earnings data. It may reflect costs in the M4 corridor as Berkshire authorities are also assessed to have higher costs than Hampshire. In fact, there is a significant cliff edge apparent in the figures between north and north east Hampshire and neighbouring authorities in Berkshire and Surrey. There are grounds for asking the Government to set separate ACA factors for north and north east Hampshire instead of a single combined factor covering the area from Farnborough to Ringwood. That possibility has not been exemplified but the gains in the North East may offset the probable losses from having lower ACA factors for the remainder of the county.

· combining the Inner and Outer London fringe, and splitting the combined fringe into East and West London areas.

This would appear to have no direct impact on Hampshire beyond heightening the cliff edge between Hampshire and its North East neighbours, some of which are in the fringe.

8.4 It has been suggested that South East counties should support the option that involves the least change to the ACA methodology. This is the second worst option for Hampshire, resulting in a loss of £16m. The argument appears to be that the Government is unlikely to implement options that rely on private sector pay data only or which would result in extensive redistribution of resources from the current position. That would rule out the most favourable option for Hampshire (a minor gain of £0.2m). It would also be contrary to the arguments on the ACA put forward by the South East county councils only a matter of months ago. It would be difficult for the County Council to support an option that led to such large losses when other options are still under discussion. It is instead better for all South East counties to stick to their principles and not opt collectively for the least worst option.

8.5 From the County Council's point of view, none of the exemplified options for the ACA include all the elements that the Council could support. Given the volatility of the possible outcomes, the Council may wish to argue for the retention of the existing methodology and geography, allowing time for the development of a more robust general labour market approach.

9 Resource equalisation

9.1 The council tax system has proven reasonably robust but there is one aspect that has worsened as the years have gone by. Local authorities with the highest needs as measured by SSAs are often, but not always, the authorities with the lowest resources as measured by their council tax base. This is reflected in the `gearing ratio'. Authorities with high needs and low resources have to raise more from the council tax payer for each additional £1m of spending than authorities with lower needs and higher resources. Most local authorities are now spending more than their SSA but, because of the gearing ratio, council tax payers in high need/low resource areas have suffered higher council tax increases as a result.

9.2 The Government proposes to rectify these effects by a one-off redistribution of resources from lower need/higher resources authorities such as Hampshire to high need/low resources authorities such as most London boroughs, metropolitan districts and northern unitary authorities. Hampshire could lose grant of between £8m and £15m depending on the option used. In effect, the Government is taking millions of pounds out of the pockets of council tax payers in shire areas, particularly in the South East, and giving it to authorities elsewhere in the country to fund their above SSA spending.

9.3 The County Council should argue strongly against these proposals. Some, if not all, of the higher spending results from local policy decisions and this should not be funded from a redistribution of general grant. If the Government wants to reduce council taxes in other parts of the country, it should increase the overall level of its grant for local government spending. It also conflicts with a general principle that grant should not be based on past spending, although this is not directly linked to each individual authority.

9.4 If large council tax increases are to be avoided in the areas adversely affected, these proposals would lead to severe service cuts for many authorities at a time when the Government's priority is to improve public services. There would be no guarantee that authorities that gain from these proposals will use those gains to reduce their council taxes. The result could be an unplanned increase in public spending.

10 Waste management

10.1 The Government has asked if there should be a separate formula for waste management costs. At present, these costs are covered by the EPCS formula. Waste management is by far the largest element within the EPCS block and is similar in size to the fire service which does have a separate SSA. Waste costs have been rising much higher than recent increases in the EPCS SSA and it is thought that a separate block would make it more difficult for the Government to ignore the need for increased funding. Work commissioned from PricewaterhouseCoopers by the County Treasurer on behalf of the Society of County Treasurers shows that population is the main determinant of need to spend on waste management. Therefore, waste management costs are not significantly affected by deprivation and a separate formula for waste management should not include the deprivation factors used in the Government's proposals for the EPCS formula. As a result, a separate waste formula should be beneficial for the County Council. Exemplifications of a separate formula have not yet been provided by the Government.

11 Combining revenue support grant and non domestic rates

11.1 The Government has continued to resist pressure to restore the national non-domestic rate (NDR) to local control. Instead it has proposed subsuming the amounts that it redistributes back to local authorities from the NDR into the revenue support grant (RSG) and naming the result `the formula grant'. The Government argues that this will be easier for all stakeholders to understand. It will stop critics from focussing on reductions in RSG in years when the yield from NDR is buoyant.

11.2 This move should be opposed as it is important to retain the visibility of NDR in the local government finance system, in support of the aim of returning NDR to local control. Despite the imposition of a national rate in the pound, NDR is still fundamentally a local tax earmarked for local authority services. If it is subsumed within the formula grant, it will simply be another national tax alongside income tax, VAT, etc. It also provides an important link between councils and their local business communities.

11.3 The Government's consultation on revenue grant distribution does not include any proposals for expanding local government's tax base. The White Paper on Local Government proposed that senior central and local government representatives should review the balance of funding of local government services. No progress has been made in setting up that review.

12 Impact on the council tax

12.1 The worst case scenario from the options exemplified by the Government could see the County Council losing grant of £80m. The Government proposes to apply floors and ceilings to grant losses and gains but these transitional arrangements will only apply for a limited number of years, as yet unspecified. They will delay the full impact but, eventually, service levels would have to be cut or council tax levels increased.

12.2 As the report on budget prospects elsewhere on this Agenda (item 5) indicates, the Government's spending review announcement in July 2002 implies council tax increases of 6% per annum over the next three years to help fund the Government's plans for increased spending. Together with the latest estimates of the County Council's current policies, the council tax increase in 2003/04 could be between 20% and 30% before the effects of any floors arrangements are taken into account. After floors, the best estimate of the council tax increase next year is about 15%.

12.3 The scale and consequences of these increases should be brought to the Government's attention in the response to the consultation.

13 Detailed analyses

13.1 The detailed commentary on the Government's proposals for each service are attached in Appendix 1. These include the key issues and responses to the specific questions raised by the Government in the consultation paper, which are highlighted in bold to identify the conclusions from what is inherently a detailed and technical analysis of 47 options and their advantages and disadvantages. The full analysis is included for reference - it is not expected that this needs to be read in total and fully understood!

Recommendations

1. That the County Council makes representations to the Government on its proposals for the revenue grant distribution system

(i) pointing out the implications for public perceptions of the large cuts in services and increases in council tax for many authorities as a result of these proposals at a time when the Government is committed to improving public services

(ii) setting out the principles that should be adopted in a revenue grant distribution system, rather than nominating preferences for the options exemplified by the Government, including

· a substantial reduction in specific grants and limits on targeted grants

· data used in formulae should be robust, timely and stable

· Government spending plans should provide adequate funding for local services.

(iii) requesting that the basic amounts within each formula should be funded in full and assessed on an objective basis using such techniques as activity led funding, with any remaining resources in the available funding used for top-ups for deprivation

(iv) pointing out the need for the area cost adjustment to continue to reflect the higher costs in the South East of recruitment, retention, the procurement of social care and the contracting of other services

(v) welcoming the retention of a general labour market approach to the area cost adjustment

(vi) recognising that the Government's options for the area cost adjustment require further development to produce a robust general labour market approach and, in the meantime, proposing that the existing methodology and geographical boundaries be retained.

(vii) objecting to the proposals for resource equalisation and arguing that the Government should provide additional grant if it wishes to pursue them, particularly for social services and waste management where there is clear evidence of underfunding by the Government

(viii) requesting an early announcement of the basis for the floors mechanism

(ix) urging the Government to return non-domestic rates to local control

(x) arguing that the amount returned to local authorities from non-domestic rates should continue to be kept separate from the revenue support grant

(xi) requesting that there should be a separate formula for waste management costs

(xii) responding to the specific questions on the individual formulae 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.

TITLE FILE

Local Government Finance Formula Grant Distribution - A consultation paper published by the Office of the Deputy Prime Minister.

i:\ . . . . \ian\docs\RGD Cabinet 230702 report2.doc 20 September 2002

Appendix

Detailed Analyses of the Government's Proposals for Each Service

Education page 14

Personal Social Services page 21

Police page 32

Fire page 34

Highways Maintenance page 41

Environmental, Protective and Cultural Services page 45

Capital Finance page 49

Area Cost Adjustment page 51

Fixed Costs page 53

Population Change page 54

Resource Equalisation page 56

Floors and Ceilings page 58

Smoothing Data page 59

Simpler Presentation of the New System page 60

Merging RSG and NDR into a Single Formula Grant page 61

Education

1 Proposals

1.1 The Government has split the education funding formula into a schools block and a Local Education Authority block (LEA), in line with commitments to ring-fence expenditure on schools. The schools block includes sub-blocks for under 5s, primary and secondary education with a new sub-block for `high cost pupils' (those with special needs). The existing SSA sub-block for post 16 education has been deleted.

1.2 Four options for each sub-block have been exemplified in the consultation paper. In total, the County Council loses under three options and makes a small gain under the fourth. As a percentage of the County Council's total SSA, the worst position is a loss of -2.4% and the best is a gain of +0.9%.

2 Dividing the education block between schools and LEA

2.1 The Government has split the education control total between the schools and LEA blocks in the ratio of 88:12, based on an overall analysis of local authorities' budgets nationally. The actual split at LEA level will vary, largely dependent upon the size of its home to school transport costs which are part of the LEA block.

2.2 The schools block has been sub-divided by deducting provision for high cost pupils and under 5s, again using information on local authorities' spending as a basis. As the level of service provision for under 5s has been undergoing radical changes in recent years, the Government has had to estimate the appropriate level of provision and, in doing so, has arguably overstated the amount. This has left less available for the primary and secondary education. The effect is disadvantageous for Hampshire, as the County Council's share of the under 5s block is less than its share of the primary block. The Government needs to revisit these calculations and detailed technical arguments will be forwarded to the DfES.

2.3 The division between primary and secondary follows the existing SSA split. It does not reflect any policy-led judgement by the Government or the results of `activity-led funding' analysis. The split is:

Under 5s	11%
Primary	33%
Secondary	35%
High cost pupils	9%
	--------
Schools total	88%
LEA block	12%
	--------
Total	100%
	--------

2.4 A better method of sub-dividing the schools block would be to determine the level of the primary and secondary sub-blocks first. Activity-led funding techniques should be used to identify the appropriate level of basic entitlements per pupil. Priority should be given to making sure that these basic per pupil allocations are fully funded, with deprivation and other top-ups met from whatever then remains from the national funding that the Government is prepared to allocate to schools from its spending plans.

3 The options

3.1 Four options have been exemplified by the Government for each of the sub-blocks, although the DfES has emphasised that these are just examples. It should not be assumed that the final formula will be one of these four options and responses to the consultation that propose other solutions are welcome.

3.2 Each of the schools sub-blocks has a similar structure of a basic entitlement per pupil plus top-ups for significant deprivation (ie, Additional Educational Needs) and pay costs (the area cost adjustment). The primary sub-block also has a top-up for the effects of sparsity on the cost of providing small schools.

3.3 The differences between the options mainly concern the treatment of Additional Educational Needs (AEN) and are summarised in the following table.

	Option	Option	Option	Option
	EDU1	EDU2	EDU3	EDU4
AEN top-up uses data on:
- Income Support	Yes	Yes	Yes	Yes
- Working Families Tax Credit	No	Yes	Yes	No
AEN funding covers:
- Met needs	Yes	Yes	Yes	Yes
- Unmet needs	Yes	No	Yes	No
Threshold for AEN funding:	Low	Higher	Medium	Low
- number of LEAs excluded	5	50	30	5
Area cost adjustment:
- existing methodology	Yes	Yes	Yes	No
- based on house prices	No	No	No	Yes

3.4 The impact of the options is shown below. the percentages are the change in authorities' total SSAs (not their education SSAs).

	Option	Option	Option	Option
	EDU1	EDU2	EDU3	EDU4
Hampshire	-2.4%	+0.9%	-0.7%	-0.3%
South East counties	-1.9%	-0.1%	-1.4%	-1.8%
All shire counties	-1.5%	+0.3%	-0.8%	-0.7%

3.5 The proportion of the national totals that is allocated as basic entitlement per pupil varies between 84% and 93% for the under 5s, primary and secondary sub-blocks, depending on the level of funding for AEN, as the following table shows.

	Option	Option	Option	Option
	EDU1	EDU2	EDU3	EDU4
Under 5s
Basic entitlement per pupil	87.4%	92.5%	90.1%	89.9%
AEN	8.1%	3.1%	5.4%	5.5%
Area cost adjustment	4.5%	4.4%	4.5%	4.6%
Total	100.0%	100.0%	100.0%	100.0%
Primary
Basic entitlement per pupil	84.5%	91.0%	88.0%	87.8%
AEN	10.1%	3.7%	6.7%	6.8%
Sparsity	1.2%	1.2%	1.2%	1.2%
Area cost adjustment	4.2%	4.1%	4.1%	4.2%
Total	100.0%	100.0%	100.0%	100.0%
Secondary
Basic entitlement per pupil	88.1%	93.3%	91.2%	90.7%
AEN	7.9%	2.8%	4.9%	5.4%
Area cost adjustment	4.0%	3.9%	3.9%	3.9%
Total	100.0%	100.0%	100.0%	100.0%

3.6 Option EDU2 has the highest basic entitlement per pupil. As well as being the most favourable for the County Council, the range of authorities' total amounts per pupil is the narrowest out of the four options. This would meet the aim of providing similar levels of funding for pupils across the country.

3.7 The amount allocated via the basic entitlement should be maximised. Within the options exemplified by the Government, this can be achieved by:

· not funding `unmet' AEN needs - the resources released would be added back to the basic entitlement under the proposed formula. The DfES's consultants asked teachers how much more they would like to spend on children with additional needs and derived a figure of £550 per AEN pupil to add to the estimated cost for needs that are already being met of £1,150 per AEN pupil. In addition to concerns about the consultants' methodology, the Government should provide additional resources if it wishes to fund AEN needs that are not currently being met, instead of diverting resources from basic entitlements.

· reducing the figure of £1,150 per AEN pupil for met needs. This figure is not justified by the underlying research. It has also been calculated by deducting specific grants for AEN from the gross costs of AEN in a way that ignores the targeting of the specific grants at deprived areas. There is also a possibility that these AEN needs will be double-funded by the Government through targeted grants in the Standards Fund.

· setting a high threshold for the number of LEAs who are assessed as being able to meet their AEN needs from within their basic entitlement. The resources released by funding fewer LEAs for AEN costs would be added back to the basic entitlement under the proposed formula. A high threshold targets funding for AEN at those LEAs with significant levels of AEN. The highest threshold that the Government has illustrated is 50 LEAs (out of 150) in option EDU2. This should be the minimum level and there is evidence to support a threshold of 70 LEAs . Hampshire's ranking is the 9th lowest LEA for primary and 8th lowest for secondary.

3.8 Hampshire's position is also improved by including the Working Families Tax Credit (WFTC) as well as Income Support data in the indicators used to measure AEN. Its inclusion can be justified because it helps to give a fuller picture of deprivation and AEN, which applies to low earners as much as the unemployed.

3.9 The inclusion of sparsity in the primary formula slightly improves Hampshire's share of the national control total.

4 High cost pupils

4.1 This separate sub-block within the schools block is intended to cover pupils with special needs including those in special schools and pupil referral units and those with statements. The proportion of such pupils is estimated using the population of children aged 3 to 15, weighted by Income Support and Low Birth Weight statistics. Hampshire's share of the national control total for this sub-block at 2.0% is much lower than its share of the other schools sub-blocks (which varies from 2.3% to 2.4% depending on the option). This reflects Hampshire's low score on Income Support and Low Birth Weight statistics. Adding WFTC data to the Income Support statistics would marginally improve the position.

5 LEA block

5.1 The LEA block is intended to cover costs that are the responsibility of the LEA, including home to school transport. The formula allocates funding as follows:

Number of pupils in each LEA's schools	26%
Number of pupils resident in each LEA's area	37%
Sparsity	10%
Income support and English as an Additional Language	27%
	100%

5.2 These weights have been set by the DfES on a judgmental basis, informed by recent patterns of spending .

5.3 The formula includes similar thresholds as the schools formulae for the number of LEAs funded for Income Support and English as an Additional Language.

5.4 Hampshire's share of the national total varies from 2.2% to 2.3% for the four options, marginally lower than its share of the schools sub-blocks.

5.5 It is essential that LEA functions are properly funded and there is a concern that any future increases in resources will be focused by the Government on the schools block, despite the rising costs of, for example, home to school transport.

6 Area cost adjustment

6.1 The DfES has chosen to exemplify a different methodology for the area cost adjustment (ACA) in option EDU4. This uses house prices as a measure of differing pay costs in some parts of the country, instead of the labour market evidence used in the existing ACA. House prices are thought by the DfES to be the biggest barrier to the recruitment and retention of teachers. The existing ACA methodology has been applied in options EDU1 to EDU3.

6.2 The result is marginally beneficial to Hampshire but there are serious doubts about the logic behind using house prices as a proxy for pay costs. House prices are also likely to be more volatile than pay costs, even though the data could be averaged over three years. House prices do fall, sometimes, but pay costs are unlikely to follow them down. There are also doubts about the reliability of the data used in the exemplifications, including anomalies concerning the relative prices of flats and houses, and between values for neighbouring areas. Head teachers in Hampshire see some merit in the inclusion of a house price element as part of the ACA but, on balance, it is suggested the County Council oppose the use of house prices.

7 Floors and ceilings

7.1 The Government gave a guarantee in the recent Green Paper on Local Government that no authority's schools should lose out in real terms as a result of the new system. The DfES has not yet worked out how to meet that commitment and has asked for suggestions. Issues that need to be resolved include:

· the interaction with any proposals for applying floors and ceilings to local authorities' overall funding position

· the link to any `passporting' requirements

· the interaction with the Government's resource equalisation proposals

· whether the guarantee applies for more than one year.

7.2 It is essential that any additional funding necessary for this guarantee is provided as new money by the Government and is not top-sliced from the funding for schools in authorities that are above the guaranteed level.

7.3 The guarantee could be delivered by extending the Age Weighted Pupil Unit (AWPU) increase target by adding a minimum increase (for inflation) of 2.5% to the existing per pupil delegation figures. Further work would be required on the practical implementation of this suggestion.

8 Summary of suggested responses to the Government's questions

8.1 Question: which of the above options for education formulae do you prefer?

8.2 The County Council does not have a preference for any of the four options as they do not meet the key principles of fairness and simplicity.

8.3 Question: are there any alternative or additional changes you would wish to see made?

8.4 The education formula should:

· provide for the basic entitlement per pupil as a first call on the available resources and not as a balancing figure after deprivation has been funded

· use activity led funding analysis to determine the appropriate level for the basic entitlements per pupil in accordance with the principles set out in the Local Government Green Paper in 2000

· reduce the proportion of the national control total allocated to the under 5s sub-block as the calculations appear to be technically incorrect

· allocate as much as possible via the basic entitlement per pupil

· limit the top-ups for deprivation to directly identified additional educational needs (AEN), which is not necessarily synonymous with deprivation

· not introduce unmet AEN to the formula, but consider AEN as a priority for future additional funding that may be provided by the Government

· include funding for AEN met needs of less than the proposed £1,150 per AEN pupil

· set a high threshold for the number of LEAs assumed able to meet AEN costs from within their basic entitlements (50 LEAs as a minimum, but 70 LEAs would be a more appropriate threshold given the pattern of LEAs' deprivation indicators)

· use Working Families Tax Credit data to reflect low earners, as well as Income Support data, in the schools block including the high cost pupils sub-block and the LEA block

· include a sparsity top-up in the primary formula, as proposed, and also in the formula for under 5s which are affected by similar cost pressures in rural areas

· use the same labour market basis for the area cost adjustment as applied to other services, in preference to a house price basis as there is no evidence that house prices would be a better measure

· provide adequate funding for LEAs' own functions now and in the future, and if additional funding becomes available for education, that the demand-led and price-led costs of home to school transport are fully included

· make sure that additional funding is found with the SR2002 plans to ensure that education funding is levelled up and to reduce losses from redistribution

· not require other authorities to fund any floors applied to authorities whose schools would otherwise lose in real terms under the new formula

· apply the real terms increase guarantee by extending the Age Weighted Pupil Unit (AWPU) increase target by adding a minimum increase for inflation of 2.5% to the existing per pupil delegation figures (subject to further analysis).

Personal Social Services

1 Proposals

1.1 Three sub-blocks are proposed, as at present, for Children, Elderly and Other Social Services (now called Younger Adults).

1.2 In total, eleven options have been exemplified in the consultation paper, with two further variants exemplified by the Government subsequently. Unlike other service blocks, Hampshire gains in total from the social services exemplifications, even under the worst case. As a percentage of the County Council's total SSA, the worst position is a gain of +0.1% and the best is a gain of +1.0%.

2 Children

2.1 Three options have been exemplified, with the a structure of:

· a basic amount per child aged 0-17 receivable by all authorities

· a deprivation top-up

· a fostering cost top-up

· the area cost adjustment top-up.

2.2 The factors used in the deprivation top-up are similar to those currently used in the existing Children's SSA which was revised as recently as 1999/00. The main difference between the three options in the consultation paper is on the fostering cost top-up, as follows:

· option SSC1 retains the existing methodology for the fostering cost adjustment but increases the weight given to it from 17.5% to 19.4% to reflect the level of spend on fostering in the latest expenditure return

· option SSC2 uses the same factors as SSC1 and also increases the weight for the fostering cost adjustment to 19.4%, but the expenditure data used in the regression analysis to calculate the weights of the deprivation factors have been updated from 1995/96 to 2000/01

· option SSC3 uses a new fostering cost adjustment from research that showed that social class and ethnicity are better explanations of the variations in fostering costs.

2.3 The differences between the options are summarised in the following table:

Children	Existing SSA	Option SSC1	Option SSC2	Option SSC3
Fostering cost top-up
- weighting	17.5 %	19.4 %	19.4 %	19.4 %
- regression on spend in	1995/96	1995/96	2000/01	2000/01
- factors	deprivation & married females in work	deprivation & married females in work	deprivation & married females in work	social class & ethnicity

2.4 The impact of the options exemplified in the consultation paper are shown below. The Government has also published the effect of deleting the fostering cost top-up:

Children	No fostering cost top-up	Option SSC1	Option SSC2	Option SSC3
Impact on:
Hampshire	+ 0.2%	- 0.0%	+ 0.1%	+ 0.2%
South East counties	+ 0.1%	- 0.0%	+ 0.1%	+ 0.2%
All shire counties	+ 0.1%	- 0.0%	+ 0.1%	+ 0.1%
Note: variations are from authorities' total SSAs, not from their personal social services SSAs.

2.5 The basic amount within each of the three options only allocates about 30% of the children's sub-block, with the deprivation and fostering cost top-ups responsible for most of the rest, as the following table shows.

Children		Option SSC1	Option SSC2	Option SSC3
Basic amount per child		31.6%	34.0%	33.7%
Deprivation top-up		88.8%	95.6%	94.7%
less threshold		-36.8%	-39.6%	-39.2%
Deprivation - net		52.0%	56.0%	55.5%
Fostering cost top-up		10.8%	4.7%	5.4%
Area cost top-up		5.6%	5.3%	5.4%
Total		100.0%	100.0%	100.0%

2.6 The deprivation top-up accounts for over 88% of the formula before the threshold is applied. All authorities are expected to fund a minimum level of deprivation from their basic amount per child. That minimum is set as a threshold in the formula at the level of the least deprived social services authority (Wokingham in the case of the children's formula).

2.7 Whilst children from deprived backgrounds may be more likely to require social services than, say, younger adults from similar circumstances, this analysis suggests that the proportion allocated according to deprivation is too high given the amount of resources currently available within the Children's SSA block.

2.8 The above table suggests that the Government has decided the level of funding that it wants to provide for deprivation and then allocated the balance of the available resources as the basic amount. The level of funding for deprivation may or may not be correct, but what is left for the basic amount per child is clearly inadequate at less than 35% of the available funds. A top-down approach should be adopted instead in the which the Government would set an appropriate level for the basic amount per child as a first call on the available resources, with any remaining funding being used for the top-up for deprivation.

2.9 Hampshire has spent significantly more on Children's PSS than the existing SSA, which suggests that the County Council should have concerns about a new formula that is largely similar to the existing SSA formula. Hampshire's share of the national totals for factors used in the deprivation top-up is much lower than its share of the general population of children, as the table below shows.

Hampshire's share of the total for England
Children aged 0-17	2.51%
Deprivation top-up factors
Children:
- living in flats	1.24%
- with limiting long term illness	2.04%
- of Income Support Claimants	1.27%
- in One Adult Households	1.73%
Population density	0.46%
Deprivation - net of threshold	0.88%
Children's formula in total	1.42%	for option SSC1

2.10 The County Council's higher spending than the existing SSA for children suggests that the Government's allocation for children's services is inadequate. A reallocation between the national control totals for social services, from elderly and younger adults to children, would not necessarily benefit Hampshire, as the County Council's share of the children's formula is less than its share of the other two. Instead, the Government should be pressed to increase its funding of children's services with new money to be allocated through the basic amount per child.

2.11 Looking at the proposed formulae, it is sensible to update the expenditure data used in the regression analysis for the fostering care adjustment, as in the two options under which Hampshire gains, SSC2 and SSC3.

2.12 Intuitively, social class as used in SSC3 may be a better indicator of the availability and willingness of people to become foster parents than the proportion of married females in work. Ethnicity is also used as an indicator in SSC3 and this may be less likely to favour Hampshire. Option SSC3 is better overall for Hampshire and it is suggested that the County Council indicate a preference for SSC3 but without ethnicity as an indicator.

3 Younger Adults

3.1 Three options have been exemplified. All three have the same basic structure of:

· a basic amount per person aged 18-64 receivable by all authorities

· a deprivation top-up

· the area cost adjustment top-up.

3.2 The differences between the options and the existing SSA are:

· Option SSO1 updates the regression analysis on past spending, used to determine the weights for the deprivation factors from 1990/91 to 2000/01. It reduces the 12 indicators in the existing SSA formula to three.

· Option SSO2 is similar to SSO1 but retains the 12 indicators.

· Option SSO3 adds a new top-up for Mental Health following research sponsored by the County Council Network (CCN).

Younger Adults	Existing SSA	Option SSO1	Option SSO2	Option SSO3
Regression on spend in	1990/91	2000/01	2000/01	2000/01
Number of deprivation factors	12	3	12	12
Additional Mental Health top-up	No	No	No	Yes

3.3 Hampshire gains from all three options, as shown by the exemplifications below:

Younger Adults		Option SSO1	Option SSO2	Option SSO3
Impact on:
Hampshire		+ 0.3%	+ 0.4%	+ 0.4%
South East counties		+ 0.3%	+ 0.3%	+ 0.3%
All shire counties		+ 0.3%	+ 0.3%	+ 0.4%

3.4 As for the proposed children's formulae, a relatively low proportion is allocated via the basic amount per head of population.

Younger adults		Option SSO1	Option SSO2	Option SSO3
Basic amount per person 18-64		68.2%	71.5%	68.7%
Deprivation top-up		54.8%	0.0%	38.5%
less threshold		-27.6%	23.9%	-11.5%
Deprivation - net of threshold		27.2%	23.9%	27.0%
Area cost top-up		4.6%	4.6%	4.3%
Total		100.0%	100.0%	100.0%

3.5 The County Council's share of the national totals highlights that a greater allocation via the basic amount would be beneficial for the County Council.

Hampshire's share of the total for England
Adults aged 18-64	2.50%
Deprivation top-up factors
Income Support Claimants etc	1.16%
Households containing no family	2.08%
Households in public purpose-built flats	2.04%
Deprivation - net of threshold	0.87%
Younger adults formula in total	2.05%	for option SSO1

3.6 The education formula also uses data for Income Support Claimants and the Government has proposed adding data for recipients of the Working Families Tax Credit (WFTC) as such families are likely to have similar needs to the unemployed. This proposal is advantageous for the County Council in the education formula and that is also likely to be the case for the younger adults formula.

3.7 Hampshire gains most from option SSO3 which includes the additional Mental Health top-up proposed by the CCN. Option SSO3 is also best for all county councils outside the South East but not for seven of the other nine South East counties, or for Portsmouth and Southampton.

3.8 Nevertheless, option SSO3 should be supported.

4 Elderly

4.1 Five options have been exemplified. Two continue the split in the existing SSA between Elderly Residential and Elderly Domiciliary. The other three combine residential and domiciliary services into a single formula. In each case the structure of the formula is:

· a basic amount per elderly person receivable by all authorities

· an age top-up to reflect the higher costs of people aged over 75

· a deprivation top-up

· a sparsity top-up to reflect the costs of providing domiciliary services in rural areas

· a low-income top-up to reflect authorities' scope to levy charges

· the area cost adjustment top-up.

4.2 In the two options with separate formulae for residential and domiciliary services, only the residential formula differs between the two options.

· Option SSR1 is based on the existing formula for the elderly residential SSA which was revised relatively recently. It updates the data for residential admissions and uses an estimate of potential fee income instead of actual fee income. The population used to calculate the basic amount is the number of elderly people living in households, as in the existing formula. It excludes people already in residential care.

· Option SSR2 is the same as SSR1 except that the population statistic for each authority also includes the number of elderly in residential care that are supported by that authority who are in homes located both inside and outside its boundaries. It does not include people funding their own residential care (self-funders).

· Option SSD1 is the only separate option exemplified for domiciliary care. It is based on the existing formula, with the household and income data updated. The weighting for sparsity has been doubled from 0.5% to 1%. Recent CCN research argued for a ten-fold increase in the sparsity weighting.

4.3 As the distinction between residential and domiciliary care has become increasingly blurred, the Government has exemplified three combined formulae:

· Option SSE1 uses total residential population to calculate the basic amount. As a result, it includes all people in residential care whether or not they are self-funded or supported by other local authorities. It excludes residents supported by the County Council in other authorities' homes. The deprivation factors do not include ethnicity.

· Option SSE2 is the same as SSE1 except that the basic amount is calculated using household population plus the number of elderly in residential care who are supported by the authority in homes that are either inside and outside its boundaries.

· Option SSE3 is the same as SSE2 except that ethnicity is used in the deprivation factors.

4.4 The differences between the five options are summarized below:

Elderly	Existing SSA	Option SSR1& SSD1	Option SSR2 & SSD1	Option SSE1	Option SSE2	Option SSE3
Combined Residential & Domiciliary	No	No	No	Yes	Yes	Yes
General Household Survey	1994	1998	1998	1998	1998	1998
Fee income	actuals to 1992/93	estimated 2000/01	estimated 2000/01	estimated 2000/01	estimated 2000/01	estimated 2000/01
Population basis:
- people in households	Yes	Yes	Yes	Yes	Yes	Yes
- in residential care within LA's own boundaries, supported by the LA	No	No	Yes	Yes	Yes	Yes
- in residential care within LA's own boundaries, supported by other LAs	No	No	No	Yes	No	No
- in residential care outside LA's own boundaries, supported by the LA	No	No	Yes	No	Yes	Yes
- in residential care within LA's own boundaries, self-funded	No	No	No	Yes	No	No
- ie, total resident elderly population	Yes, for residential	Yes, for residential	No	Yes	No	No
Sparsity weight in residential element	0.5%	1.0%	1.0%	1.0%	1.0%	1.0%
Ethnicity factor in combined formula	-	-	-	No	No	Yes

4.5 Hampshire gains from four of the five options, as the exemplifications below show:

Elderly

Option SSR1 & SSD1

Option SSR2 & SSD1

Option SSE1

Option SSE2

Option SSE3

Impact on:

Hampshire

- 0.1%

+ 0.2%

+ 0.4%

+ 0.3%

+ 0.0%

South East counties

- 0.0%

+ 0.2%

+ 0.4%

+ 0.2%

+ 0.1%

All shire counties

- 0.0%

+ 0.1%

+ 0.3%

+ 0.2%

+ 0.0%

4.6 The following table shows that only around 50% of the combined formulae is allocated via the basic amount per person aged 65 or over. As under the children's formula, this suggests that the Government has funded deprivation as a first call on the available resources, leaving the residue for an inadequate basic amount for elderly person. That process should be reversed with the priority given to funding an appropriate level for the basic amount.

Elderly		Option SSE1	Option SSE2	Option SSE3
Basic amount per elderly person		53.3%	53.2%	51.1%
Age top-up		39.6%	39.6%	41.7%
less threshold		-29.0%	-29.0%	-30.5%
Age - net		10.6%	10.6%	11.2%
Deprivation top-up		92.5%	92.5%	97.5%
less threshold		-66.4%	-66.3%	-69.8%
Deprivation - net		26.1%	26.2%	27.7%
Sparsity top-up		0.3%	0.3%	0.3%
Low income top-up		5.7%	5.7%	5.7%
Area cost top-up		4.0%	4.0%	4.0%
Total		100.0%	100.0%	100.0%

4.7 Hampshire's share of the national totals for the deprivation factors used in the elderly formulae, as shown in the following table, is not quite so low as for those used in the children's formulae. To an extent, they are indicators of vulnerability rather than deprivation which makes them a little more universal.

Hampshire's share of the total for England
Adults aged 65+	2.54%
Age top-up
- elderly 75-84	2.52%
- elderly 85+	2.49%
Deprivation top-up factors
Pensioners:
- not in couple or head of h'hold	2.51%
- in rented accommodation	2.01%
- living alone	2.30%
Hampshire's share of the total for England /continued
Elderly:
- with limiting long-term illness	2.28%
- on Income Support etc	1.45%
- on Attendance/Disability Living Allows	1.68%
Deprivation - net of threshold	0.61%
Sparsity top-up	2.34%
Low income top-up	1.37%
Elderly formula in total	1.97%	for option SSE1

4.8 Combining the two separate formulae for residential and domiciliary care into a single formula would be consistent with modern service delivery practices. The County Council's biggest gains are from two of the combined options, SSE1 and SSE2.

4.9 The other combined option SSE3 gives Hampshire only a marginal gain. It includes ethnicity in its deprivation factors. The consultation paper admits that this is based on research that involved a very small number of individuals (around 40). It is not immediately obvious that ethnicity would increase the need for services for the elderly. It is suggested that the County Council argues that option SSE3 should not be adopted until more extensive research into the case for including ethnicity has been completed. It should be noted, however, that option SSE3 is the least redistributive of the three combined options compared with the present position and may be favoured by the Government on those grounds.

4.10 The only difference between options SSE1 and SSE2 is the basis for the population statistic. The most logical population statistic for both the residential and domiciliary parts of the formula would be:

· elderly people living in their own homes, plus

· residents in Hampshire homes supported by the County Council, plus

· residents in Hampshire homes who are self-funding their stays - on the basis that these represent potential clients for County Council support, plus

· residents in homes in other local authorities' areas supported by the County Council.

4.11 Option SSE2 is closest to this basis, with the only difference being that option SSE2 omits self-funders. It is difficult to justify the basis used for option SSE1 (total resident population), even though it provides the largest gains for Hampshire. It includes self-funding residents, which is argably correct as they are potential local authority clients, but ignores the impact of cross-boundary placements. This is a particular issue for authorities around London.

4.12 Increasing the sparsity factor by the full ten-fold increase recommended by the CCN, instead of the doubling proposed by the Government, is likely to benefit Hampshire marginally. This has not been exemplified by the Government, but may add about £0.3m to each of the five options for Hampshire. This is a relatively modest increase but it suggests that the County Council should support the CCN in arguing for a higher weight for sparsity.

4.13 It is suggested that the County Council should argue for option SSE2 but with self-funders included in the population count.

5 Summary of suggested responses to the Government's questions

5.1 Question: which of the above options for social services formulae do you prefer?

5.2 The County Council's preferences from the options described in the consultation paper are listed below.

Children: option SSC3

Younger adults: option SSO3

Elderly: option SSE2

5.3 However, there are some variations to these options which would be preferable, as described in the response to the second question, below.

5.4 Question: are there any alternative or additional changes you would wish to see made?

5.5 Government funding for social services should be increased to close the gap nationally between SSAs and budgets, particularly for children's services, over and above that required to fund transfer in function from central government or new responsibilities, with the additional funding allocated via the basic amount per child.

5.6 The amount allocated in the formulae for all three service sub-blocks via the basic amount per head of population should be determined at an appropriate level as a first call on the available resources, with the balance of funding used for the deprivation top-ups.

5.7 For the children's formula, ethnicity should be deleted as a factor in the fostering cost adjustment in the County Council's preferred option of SSC3, as it duplicates existing deprivation measures.

5.8 For the younger adults formula, data for recipients of the Working Families Tax Credit should be included in the deprivation calculation along with Income Support Claimants, as the inclusion of the lower paid in addition to the unemployed would give a better indication of need.

5.9 For the elderly, a combined formula for residential and domiciliary services should be adopted, as in the Council's preferred option of SSE2. That option does not include ethnicity, unlike SSE3, and it should not be introduced as the current evidence in its favour is inadequate. The basis for the population statistic used in the basic amount calculation should be calculated as:

· elderly people living in their own homes, plus

· residents supported by the Council in homes in the Council's area, plus

· residents in homes in the Council's area who are self-funding their stays - on the basis that these represent potential clients for Council support, plus

· residents supported by the Council in homes in other local authorities' areas.

5.10 This is the population basis used in option SSE2, with the addition of self-funders.

5.11 The County Council supports the increase in weight given to sparsity in the elderly formula and would also support a further increase as outlined in research by the CCN.

Police

1 Proposals

1.1 For completeness, the Government's proposals for the Police formula and the recommended response of the Hampshire Police Authority are summarised here, but will not be included in the County Council's response.

1.2 All five options specific to Police keep the structure of the formula essentially the same as at present. The table below summarises the options, together with the impact in terms of change in grant support upon the Hampshire Police Authority.

·	update the activity analysis used to set weights and increase the weighting on sparsity to 1% to incorporate the Rural Policing Fund, previously a specific grant outside the main formula (option POL1)	-£1.6m (0.7%)
·	as above but reduce the establishment factor to zero (option POL2)	+£0.3m (0.1%)	Best
·	as for option 1, increasing the weighting for `personal crime' by 5% (option POL3)	-£2.1m (-1.0%)
·	as for option 1, increasing the weighting for `public order' by 5% (option POL4)	-£3.0m (-1.4%)	Worst
·	as for option 1, including a new `deprivation' component at 2% (option POL5)	-£2.5m (-1.1%)

1.3 As can be seen the Authority will lose grant under four of these options, gaining marginally (£300,000) in option POL2. The options all use updated activity analysis and increase the weighting for sparsity from 0.5% to 1.0%. Option POL2 removes the establishment component and options POL3 to 5 introduce weightings for the Government's priorities on street crime and deprivation.

1.4 The suggested response of the Hampshire Police Authority is summarised below.

Activity analysis

· support the updating of the activity analysis data using force returns based on 2001/02 activity analysed through the agreed activity based costing methodology.

Rural policing fund

· support the integration of the rural policing fund into the police funding formula with a sparsity component of 1.4% instead of 1% to prevent an unexplained redistribution of funding for rural policing.

Removing the remaining 10% establishment damping factor

· strongly support the reduction in the establishment factor to zero as it has consistently argued in its response to recent revenue support grant consultations.

Increasing the weighting for "personal crime" by 5%

· do not support this major shift in policy and principle, and the additional subjectivity it would bring to the formula.

Including a new deprivation component into the formula at 2%

· no case for a separate deprivation indicator in addition to existing components of the formula. The Government should present further explanation and evidence to support the arbitrary percentage component and demonstrate how it interacts with other components in the overall formula for grant distribution. There are significant pockets of deprivation within the policing area, especially within the cities of Southampton and Portsmouth and their fringe areas, which would not be recognised by such an additional component over the whole area of the Authority.

Preferred specific police option

· preference for option POL2 of those issued for consultation, in the context of its overall response above.

Fire

1 Introduction

1.1 A response has been prepared for the Hampshire Fire and Rescue Authority which is summarised below. In this case, as the County Council has to meet the cost of the levy for the foreseeable future (until proposals in the Local Government Bill give combined fire authorities direct precepting power), similar points are suggested in response.

2 Proposals

2.1 Four options have been exemplified by the Government.

2.2 The Hampshire Fire and Rescue Authority via its constituent authorities loses under three of the options (option FIR1 -£800,000; FIR4 -£450,000; FIR3 -£144,000) and makes a minimal gain of £3,000 under the other option, FIR2. (Figures are for the Hampshire combined fire authority area).

2.3 Three of the four options adopt a similar format to those proposed for other local authority services of a basic amount per head of population plus top-ups. The other option uplifts fire authorities' budgets in line with changes in national funding allocations for fire. The options are:

· option FIR1: top-up factors are similar to the factors used in the existing Standard Spending Assessment (SSA) formula except that the `perverse' indicator of fire calls is replaced by a fire risk index calculated from deprivation factors. The "A" Risk Area indicator is also replaced by a weighted Risk Area indicator covering all categories of risk

· option FIR2: as FIR1, except the "A" Risk Area indicator is retained and not replaced by the weighted Risk Area indicator

· option FIR3: the radical option of assuming that existing spending patterns reflect need, rolling them forward with uplifts for increases in national funding allocations for fire

· option FIR4: as FIR1 but with the addition of a sparsity top-up, a larger allocation for fire safety education and a technical change in the basis for the allocation for pensions (for which no details are available as yet).

2.4 The options are compared in the following table.

Comparison of options
	Existing SSA	Option FIR1	Option FIR2	Option FIR3	Option FIR4
Resident population	Yes	Yes	Yes	-	Yes
Population density	Yes	Yes	Yes	-	Yes
Coastline (metres per head)	Yes	Yes	Yes	-	Yes
Fire Calls per head of popn	Yes	-	-	-	-
Fire Risk Index	-	Yes	Yes	-	Yes
Weighted Risk Area	-	Yes	-	-	Yes
"A" Risk Area	Yes	-	Yes	-	-
Ward Sparsity	-	-	-	-	Yes
Fire Safety Enforcement	Yes	Yes	Yes	-	Yes
Fire Safety Education	Yes	Yes	Yes	-	Yes, but higher weight
Area Cost Adjustment	Yes	Yes	Yes	-	Yes
Fire Pensions	Yes	Yes	Yes	-	Yes, revised basis
Budgets for the current year scaled back to the national fire control total for the current year, uplifted by next year's increase in the control total	-	-	-	Yes	-

2.5 The impact of the options for this Authority are summarised in the table below. The percentages shown are the changes in the Fire SSA. They are identical for the County Council, Portsmouth and Southampton.

Percentage change in Fire SSA
		Option FIR1	Option FIR2	Option FIR3	Option FIR4
Impact on:
Hampshire		-1.9%	+0.0%	-0.3%	-1.1%
South East counties		-3.4%	-1.3%	-2.4%	-2.5%
All shire counties		+4.8%	+3.1%	+3.7%	+5.8%

2.6 Some authorities, particularly those in rural areas, are affected by the proposals to a much greater extent than Hampshire. Norfolk, North Yorkshire and Shropshire could all gain over 20% under some options, and Lincolnshire over 30%. Surrey and Oxfordshire could lose more than 10%.

3 Commentary on the Options

3.1 Option FIR3 takes fire authorities' existing spending levels and rolls them forward, uplifted by the increase in the national control total for fire funding. As fire authorities are currently spending 11% more than the SSA, the Government proposes to scale back each authority's starting point by 11%. Even so, this option would reward authorities that currently exceed their SSAs, irrespective of whether that excess reflected unrecognised needs or inefficiency. It would penalise authorities that budgeted for fire at the level of their SSAs such as Oxfordshire and Leicestershire. They would see their allocation reduced to 11% below their existing SSAs. To the extent that current levels of spending above SSA reflect needs, the Government's proposals do not recognise the underfunding of the fire service. The option would also be incompatible with the Government's proposals for Resource Equalisation (see below). This approach would also not recognise changes in need for fire spending over time, such as changes in population or fire risk areas, or provide an incentive for efficiency. Whilst option FIR3 is not the worst of the four options for Hampshire, it should be strongly opposed, as a matter of principle.

3.2 On the other three options, the County Councils Network has argued that a significant element of fire service costs are driven by population and that a greater weighting should be given to population within the formula. The components of the three options nationally are summarised in the following table.

Component analysis
	FIR1	FIR2	FIR4
England	%	%	%
Basic entitlement per head of population	57.8%	68.8%	52.1%
Density	5.5%	2.2%	7.5%
Coastline	0.6%	1.1%	0.6%
Fire Risk Index	0.0%	0.0%	0.0%
Sparsity	-	-	1.3%
A Risk Area	-	1.4%	-
Weighted Risk Areas	9.7%	-	9.7%
Fire Safety Enforcement	6.2%	6.2%	6.2%
Fire Safety Education	0.5%	0.5%	2.8%
Area Cost Adjustment	3.7%	3.8%	3.8%
Fire Pensions	16.0%	16.0%	16.0%
Total	100.0%	100.0%	100.0%

3.3 Hampshire's best option is FIR2 which has the highest allocation as a basic amount per head of population. This is because Hampshire's share of the population of England is higher than its share of any of the other indicators used in the three options as the following table shows.

Hampshire's share of indicators
	Hampshire's share of England total	Used in Options
	%
Population - as used in basic entitlement	3.31%	1, 2, 3
Density	2.94%	1, 2, 3
Coastline	2.37%	1, 2, 3
Fire Risk Index (see para 3.5 below)	-133,123%	1, 2, 3
Sparsity	3.21%	3
A Risk Area	0.00%	2
Weighted Risk Areas	2.98%	1, 2
Fire Safety Enforcement	2.43%	1, 2, 3
Fire Safety Education	2.66%	1, 2, 3
Area Cost Adjustment	3.90%	1, 2, 3
Fire Pensions	2.41%	1, 2, 3
Total formula allocation
- FIR1	2.74%
- FIR2	2.79%
- FIR3	2.78%
- FIR4	2.76%

3.4 Even on Sparsity, Hampshire is below the national average, because of the inclusion of the two cities in the HFRA's area. The particular definition of density also leaves Hampshire below the average.

3.5 No details are available about the composition of the Fire Risk Index beyond that it includes measures of deprivation. The Index itself ranges from +6.8086 for Merseyside to -7.412 for the Isles of Scilly. Hampshire's Index is -3.5837. The Index is negative for 35 of the 47 fire authorities, although those authorities with positive Index results include some the larger urban authorities. Nationally, the inclusion of the Index is redistributive between authorities. In total, only about £4,000 of the England control total for fire of £1,521,000,000 is distributed by the Fire Risk Index but this low net total hides large redistributive amounts for individual authorities. For example, under option FIR1 the Greater London Authority receives £17m as a result of the Fire Risk Index, whilst it reduces Surrey's allocation by £6.4m. Hampshire's reduction is £5.1m (which is the -133,123% of the national total of £4,000 shown in the table above).

3.6 Whilst a redistributive factor like the Fire Risk Index may make perfect sense to statisticians, it is difficult to accept that Hampshire should lose £5m of grant because of the level of its fire risk, as the following table shows. Nor does it aid simplicity and intelligibility in the formula.

Hampshire's allocation
	Option FIR1	Option FIR2	Option FIR4
	£m	£m	£m
Basic entitlement	29.1	34.7	26.3
Density	2.5	1.0	3.4
Coastline	0.2	0.4	0.2
Fire Risk Index	-5.1	-4.2	-4.4
Sparsity	-	-	0.6
A Risk Area	-	0.0	-
Weighted Risk Areas	4.4	-	4.4
Fire Safety Enforcement	2.3	2.3	2.3
Fire Safety Education	0.2	0.2	1.1
Area Cost Adjustment	2.2	2.2	2.2
Fire Pensions	5.9	5.9	5.9
Total	41.7	42.5	42.0

3.7 The key differences between the existing SSA formula and options FIR1, FIR2 and FIR4 centre on the treatment of:

· the replacement of the existing fire calls indicator with the Fire Risk Index in all three options

· the use of Weighted Risk Areas instead of just "A" Risk Areas in options FIR1 and FIR4

· the inclusion of Ward Sparsity in option FIR4

· the increased allocation to Fire Safety Education in option FIR4

· the technical adjustment to the basis for Fire Pensions in option FIR4.

3.8 The fire calls indicator has been criticised as providing a perverse incentive. Fire authorities that succeed in reducing fire calls face a reduction in their grant allocation. Its replacement should be welcomed. The proposed Fire Risk Index includes a number of deprivation factors which are thought to be strongly correlated with the number of calls experienced by fire authorities. Deprivation factors tend not to favour Hampshire but as the Government has not published its model for the fire options it has not been possible to analyse the impact of the individual components of the Fire Risk Index.

3.9 The existing SSA formula includes a factor for "A" Risk Areas, and this is retained in option FIR2. Options FIR1 and FIR4 include proposals to replace this with a Weighted Risk Area factor to reflect all risk categories from A to D to `remote-rural'. The categories below "A" are self-assessed by each fire authority and are not independently validated by the Fire Safety Inspectorate, for example. There are concerns about the robustness of the data, its comparability between authorities and the scope for manipulation. The Government appears not to have attempted to use proxies for these categories. The basis for the weightings between the categories has not been published in the consultation paper.

3.10 Hampshire does not have any "A" Risk Areas so its replacement by the Weighted Risk Areas factor in option FIR1 and FIR4 benefits Hampshire when this element of the formula is considered in isolation. However, Hampshire is below the national average for Weighted Risk Areas and, as the share of the national control total allocated to the Risk Area factor has been increased by the Government from 1.4% for option FIR2 when it is based on "A" Risk Areas only, to 9.7% when the Weighted Risk Areas factor is used in options FIR1 and FIR4, the use of the Weighted Risk Areas factor has worked to Hampshire's disadvantage. Thus arguing on principle that the Weighted Risk Areas factor is not robust enough for use in the formula coincides with Hampshire's best interest financially.

3.11 Hampshire loses marginally from the inclusion of sparsity in the formula. It could be argued that a sparsity factor may duplicate the Weighted Risk Area factor as "D" Risk and "remote-rural" areas may also be sparse. The CCN are likely to press for the inclusion of sparsity in the formula.

3.12 Option FIR4 increases the top-slice for fire safety education. Whilst there may be good grounds for encouraging fire safety education, increasing the top-slice diverts resources away from Hampshire because of the factors used to distribute the top-slice between authorities. It would be better for Hampshire if the top-slice was eliminated and the resources added back to the main formula for distribution within the basic amount per head of population.

3.13 No information has been provided about the technical adjustment in option FIR4 on fire pensions and so it is not possible to comment on it. The model of the formula used for this analysis appears to ignore this adjustment. (The model has been prepared by the Association of London Government as the ODPM has not released its official model).

4 Summary of suggested responses to the Government's questions

4.1 Question: which of the options for the fire proposals do you prefer?

4.2 Option FIR2 is preferred as it is simplest and most firmly founded in current well-established arrangements for risk assessment. The County Council considers option FIR3 in particular to be wrong on principle, as it rewards past spending rather than being based on objective measures of need, and this option is strongly opposed.

4.3 Question: are there any alternative or additional changes you would wish to see?

4.4 The Council believes that fire service costs are largely driven by population. In the interests of simplicity and the most readily understandable link to the need to provide fire cover, the Council would therefore expect more of the funding to be allocated via the basic amount per head of population and less via the top-ups to that.

4.5 Question: how far should the formula rely on weighted risk area?

4.6 If the formula does include an allocation according to risk area, it should be limited to `A' risk areas only, as the data is more robust, with the balance allocated via the basic amount for population.

4.7 Question: which variants, if any, that are within option FIR4 should be included?

4.8 Again in the interests of simplicity, comprehensibility and the preference for concentrating funding on the proven factors of population and `A' risk, the Council believes that sparsity should not be included and that the Fire Safety top-up should be reduced to zero and not increased (this is consistent with the use of the revised formula funding and captures the relevant factors). It is not possible to comment on the technical change to Pensions without further information.

4.9 Question: should provision for Fire Safety be rolled back into the main formula?

4.10 Yes, as is consistent with the Council's views above.

Highways Maintenance

1 Proposals

1.1 The Government has exemplified two options that have similar components to the existing SSA formula. Both include a basic amount per kilometre of road with top-ups for traffic flow, winter maintenance and pay costs. One option also includes a top-up for population density.

1.2 The County Council loses marginally under the first option (less than 0.1% of its total SSA) and gains under the other option (+0.1%).

2 The options

2.1 The differences between the two options are summarised below:

	Option	Option
	HM1	HM2
Basic amount per kilometre of road	Yes	Yes
Traffic flow top-up
- weighting for HGVs increased from 12 to 100	Yes	Yes
- threshold applied to traffic flow data	No	No
Population density top-up	Yes	No
- threshold for population density	Yes	No
Impact (percentage change in total SSA):
Hampshire	-0.0%	+0.1%
South East counties	-0.1%	+0.1%
All shire counties	-0.1%	+0.3%

2.2 The basic entitlement per kilometre of road accounts for only about 20% of the formula nationally. The traffic flow element is far more significant as the following table shows.

	Option	Option
	HM1	HM2
Basic amount per kilometres of road	17.6%	20.8%
Traffic flow top-up	46.2%	71.0%
Winter maintenance top-up	5.3%	5.3%
Population top-up	27.8%	0.0%
Area cost adjustment	3.1%	2.8%
Total	100.0%	100.0%

2.3 The County Council's share of the national totals for each element of the formulae are shown below.

	Option	Option
	HM1	HM2
Basic amount per kilometres of road	2.80%	2.80%
Traffic flow top-up	2.27%	2.27%
Winter maintenance top-up	1.63%	1.63%
Population top-up	2.19%	n/a
Highways maintenance formula in total	2.35%	2.40%

3 Basic amount per kilometre

3.1 Hampshire would fare better if the formula allocated a higher proportion of the total funding via the basic amount per kilometre. The existing SSA formula allocates nearly 60% on that basis and the County Council should press for a similar level in the new formula.

4 Traffic flow

4.1 Traffic flow data tends to be relatively volatile from year-to-year and there is a strong case for it to be smoothed by averaging over three years to improve stability in the formula.

4.2 The Government has increased the weight attributed to heavy goods vehicles (HGVs), buses and coaches from 12 in the existing formula to 100 in the two options. Hampshire's flow of such vehicles is below the national average and so it loses from this increase in weighting. That is not the case for shire counties as a whole, who gain from the increase in the HGV weighting.

4.3 The existing SSA formula includes a threshold for the level of traffic flows so that no funding is allocated for flows below the threshold. Both of the new options delete this threshold. Hampshire gains from the deletion as its traffic flows are well below the national average.

5 Population density

5.1 The existing SSA formula includes an element for population density which has been retained in option HM1 but deleted from option HM2. Population density duplicates the higher weight given to built-up roads in the calculation of road lengths used in the basic amount per kilometre. Hampshire benefits from the deletion of the population density top-up. The funding released should be allocated via the basic amount per kilometre and not via the traffic flow top-up.

5.2 The calculation of population density in the existing SSA formula includes a threshold below which no funding is allocated. Hampshire's density is below average and so it benefits from the deletion of this threshold in option HM1.

6 Winter maintenance top-up

6.1 The existing SSA formula uses the number of days that snow is lying as an indicator of the need for winter maintenance. As gritting and salting is frequently required on other days, the Government proposes to use average temperatures as the measure of when winter maintenance may be required. As snow is relatively infrequent in Hampshire, this may prove to be beneficial to the County Council, as will the location of the weather stations in Hampshire that the Government plans to use to collect the temperature data. It reflects more accurately the need for additional costs for winter maintenance than snow lying days.

7 Summary of suggested responses to the Government's questions

7.1 Question: which of the options for highways maintenance formulae do you prefer?

7.2 Of the options exemplified in the consultation paper, HM2 is preferred - but see the responses to the questions below.

7.3 Question: are there any alternative or additional changes you would wish to see made?

7.4 The amount allocated via the basic amount per kilometre should be much higher than under either of the exemplified options. As a proportion of the total funding for highways maintenance, it should be at least as high as the 60% in the current SSA formula. The top-ups for traffic flows and population density should be reduced or deleted.

7.5 Traffic flow data should be smoothed over three years to improve the stability of the results.

7.6 The weight for HGVs, buses and coaches should revert to 12, as in the existing SSA formula, and should not be increased to 100.

7.7 The population density top-up should be deleted as it duplicates the higher weighting given to roads in built-up areas in the road length calculation.

7.8 Question: do you agree that we should remove thresholds from the formula?

7.9 The traffic flow threshold should be deleted as all levels of traffic generate a need for highway maintenance.

7.10 If the top-up for population density is retained, there should be no threshold.

7.11 Question: do you agree that we should use average temperature instead of days with snow lying (for the winter maintenance top-up)?

7.12 Yes, as it better reflects the frequency of winter maintenance and gritting activity.

Environmental, Protective and Cultural Services (EPCS)

1 Proposals

1.1 The Government has exemplified four options for the EPCS formula. The options have been chosen by the Government to illustrate the effects of changing the components of the formula and so could be considered to be at the extreme end of the range of possibilities.

1.2 The options focus on the EPCS formulae for services provided by upper tier authorities, such as the County Council, and lower tier authorities, such as district councils. The existing SSA formulae for EPCS includes an adjustment between upper and lower tier authorities for the cost of services that can be provided by either tier. All four of the exemplified options abolish this `concurrent services adjustment'.

1.3 No changes have been proposed at this stage for the EPCS sub-blocks for flood defence, coast protection, rent allowances, housing benefit administration and national parks. Some are the subject of separate reviews.

1.4 All four proposed options for upper tier authorities have a basic amount per head of population and a top-up for the area cost adjustment. The differences between the options lie in the top-ups for deprivation, population density, day visitors, commuters and ethnicity.

1.5 The County Council loses under three of the options, ranging from 0.2% to 1.2% of its total SSA, and makes a small gain, +0.1%, under the other option.

2 The options

2.1 The differences between the four options are highlighted in the following table which shows how much of the national total is allocated by the various components of the formulae. A dash indicates that the component is not used in the formula for that option.

	Option	Option	Option	Option
	EPCS1	EPCS2	EPCS3	EPCS4
Basic amount per head of population	40.2%	76.9%	57.9%	37.6%
Top ups for:
Incoming commuters	2.0%	-	2.0%	-
Day visitors	2.4%	-	5.9%	-
Population density	13.3%	9.1%	6.1%	8.4%
Index of multiple deprivation	14.0%	-	-	18.7%
Benefits	11.5%	5.2%	11.5%	14.7%
Income support	14.2%	6.4%	14.2%	18.2%
Ethnicity	2.4%	2.4%	2.4%	2.4%
Total	100.0%	100.0%	100.0%	100.0%

2.2 The County Council's share of the national totals for each element of the formulae is shown below.

Basic amount per head of population	2.51%
Top ups for:
Incoming commuters	0.00%
Day visitors	1.53%
Population density pre-threshold	1.81%
Index of multiple deprivation	1.25%
Benefits	1.04%
Income support	1.27%
Ethnicity	1.37%
Total	1.75% to 2.20% depending on option

2.3 This shows that it is better for the County Council if as much as possible is allocated via the basic amount per head of population, which is why option EPC2 is best for Hampshire. Few of the services covered by the EPCS block - such as waste management, libraries, recreation and heritage, and planning - are obviously affected by deprivation factors.

2.4 Comments on the components of the proposed formulae are included below in the suggestions for the response to the Government's questions on the EPCS options.

3 Summary of suggested responses to the Government's questions

3.1 Question: which of the options for the EPCS formulae do you prefer?

3.2 Of the options exemplified in the consultation paper, EPCS2 is preferred - but see the responses to the questions below.

3.3 Question: are there any alternative or additional changes you would wish to see made?

3.4 As much as possible should be allocated via the basic amount per head of population. Less than 50% of options EPC1 and EPC4 are distributed by the basic amount. This is not be consistent with the nature of services covered by the EPCS block which are not likely to be significantly affected by deprivation and the other top-up factors, and where population is the major determinant.

3.5 There should be no top-ups for incoming commuters or day visitors, as exemplified in options EPCS2 and EPCS4, in the interests of improving the transparency and simplicity of the formula.

3.6 It is questionable whether population density has a more significant effect on the costs of EPCS than sparsity. The County Council would favour a low weight for density if the top-up is not deleted completely. A sparsity factor is included in the existing SSA formula for upper tier authorities and should be included in the new formula.

3.7 The Index for Multiple Deprivation was developed for allocating Government support for regeneration. It is not suitable for use in the EPCS formula and should be deleted.

3.8 If a top-up based on Income Support data is included in the EPCS formula, information from the Working Families Tax Credit should also be used to give a wider reflection of deprivation covering the low paid as well as the unemployed. This would be consistent with proposals for the Education formula.

3.9 An ethnicity top-up is likely to duplicate the top-ups for deprivation. Its inclusion in the formula appears to be judgmental and not based on evidence that ethnicity affects the costs of EPCS services. The top-up should be deleted.

3.10 Question: how should concurrent services in two-tier areas be handled?

3.11 Deleting the concurrent services adjustment between the upper tier and lower tier blocks would simplify the formula. But it is essential that the one-off rebasing of the control totals properly reflects the costs incurred by upper tier authorities such as the County Council. This has been assessed by the County Councils Network at between £650m and £700m, much more than the transfer of £500m proposed by the Government.

3.12 The concurrent services adjustment should not be abolished unless the rebasing of the control totals is at least £650m.

3.13 Question: how should the adjustments for transport in London and the Greater London Authority be made?

3.14 No comments. Does not directly affect Hampshire.

3.15 Question: are there any structural changes you would wish to see, such as a separate block for waste management?

3.16 The County Council supports a separate block for waste management. The cost of waste management is now greater than some services, such as fire, which already have a separate formula. In addition, the existing and proposed EPCS formulae are not appropriate for waste costs. Research by PricewaterhouseCoopers for the County Council Network shows that funding for waste costs should be allocated according to resident population, with no top-ups other than the area cost adjustment.

3.17 The revenue grant distribution system should also recognise and support the capital financing costs of waste management contracts entered into before the Private Finance Initiative (PFI) was introduced. In Hampshire's case, waste management arrangements operate through the Beacon Status Project Integra. Investment of £200m in waste facilities will be incurred under a contract which has many of the hallmarks of PFI. The capital financing costs will be recovered from the County Council by the contractor through revenue charges for which the Council currently receives no funding support from the Government.

Capital Finance

1 Proposals

1.1 The existing SSA for capital financing costs includes three sub-blocks:

· debt charges

· interest on capital receipts (a negative amount as the interest represents income to local authorities)

· other interest receipts (also a negative amount).

1.2 The Government intends to review separately how it should provide support in future for local authorities' capital programmes. If it decides to continue to use the revenue grant system (as opposed to capital grants, for example), the debt charges sub-block will continue in its current form but the Government proposes to abolish the two interest receipts sub-blocks. Together, the income from interest receipts was assumed to be £799m in the SSAs for 2002/03. This is known as the `control total' for the two interest receipts sub-blocks. The four options now exemplified in the consultation paper illustrate different ways of allocating this control total across the control totals for the other SSA blocks and sub-blocks:

· option CF1 simply combines the interest receipts control total with that for debt charges. All the service blocks, for education etc, are unaffected.

· option CF2 apportions the interest receipts control total across all the services that contribute to local authorities' ability to earn interest receipts.

· option CF3 is similar to option CF2 but gives a higher weight to the EPCS lower tier authorities as they are considered more able to earn interest, as housing authorities. The higher weights are 10 : 1 for interest on capital receipts and 5 : 1 for other interest.

· option CF4 allocates the whole of the interest receipts control total to lower tier EPCS.

1.3 The County Council loses under options CF1 and CF2 (-0.5% and -0.6% of the Council's total SSA) but gains under options CF3 and CF4 (+0.1% and +0.8%).

1.4 Commentary on the options is included in the following responses to the Government's questions in the consultation paper.

2 Summary of suggested responses to the Government's questions

2.1 Question: which of the options for the capital finance formulae do you prefer?

2.2 It is likely that further changes to the formula for capital finance will be required when the proposed prudential system for capital controls is introduced. It may be sensible to retain the existing formula until then.

2.3 If the interest receipts sub-blocks are to be abolished, the ability of lower tier authorities to earn higher levels of interest should be reflected in the revised formula. On this basis, options CF3 and CF4 are preferred. Whether the assumption in option CF4 that only lower tier authorities are able to earn interest is justified may be questionable.

2.4 Question: are there any alternative or additional changes you would wish to see made?

2.5 The exemplified options use the current basis for the level of authorities' debt. Prior to 1998/99 the formula added debt arising each year from authorities' credit approvals to their notional debt in 1990/91 when the SSA system was introduced. This basis was amended in 1998/99 so that authorities whose actual debt in 1990/01 was greater than their notional debt were rewarded for their higher level of borrowing. This benefited authorities such as Sheffield and Birmingham at the expense of those who had been prudent in their capital financing strategies, such as Hampshire. The formula to be used for 2003/04 should revert to the pre-1989/99 basis of notional debt only.

Area Cost Adjustment

1 Suggested response to the Government's questions

1.1 The proposals for the area cost adjustment (ACA) are described in detail in section 8 of the main report. The Government's questions are:

1.2 Question: which of the options for the area cost adjustment do you prefer?

1.3 The County Council considers that the existing methodology is as sound as that proposed in the five exemplified options and should be retained along with the existing geographical boundaries. If a preference has to be nominated from the five options, it would be ACA5 subject to the sore thumb of north and north east Hampshire being rectified.

1.4 Question: are there any alternative or additional changes you would wish to see made?

1.5 In terms of the components of the proposed options, the County Council:

· welcomes the Government's confirmation that a labour market approach will be used for the ACA, and not a specific cost approach

· believes that the same methodology should be used for all services, including education which should not the subject of a separate house price methodology

· supports the smoothing of earnings data over three years

· supports the use of the Labour Force Survey as a source of earnings data, in preference to the New Earnings Survey, because the LFS covers low paid workers

· supports the use of private sector data only, as this gives a better reflection of the labour market within which local authorities have to compete

· supports the extension of the ACA methodology so that separate factors are calculated for all areas of the country

· points out that there are anomalies in the treatment of north and north east Hampshire compared with the surrounding areas of Berkshire and Surrey as a result of changes to the fringe areas around London. This suggests that separate ACA factors should be calculated for those parts of Hampshire that align them more closely to the outer fringe areas of Berkshire and Surrey. The Council also points out the less than credible results of options ACA2 and ACA3 that imply that the rural parts of Salisbury district in Wiltshire have higher costs than urban and commuter centres of Farnborough and Basingstoke.

1.6 None of the options exemplified include all of the above components and as there are so many alternatives and scope for potential volatility, the County Council believes that the existing methodology and geographical boundaries should be retained.

Fixed Costs

1 Proposals

1.1 The consultation paper suggests that the existing grant system does not reflect the fixed costs of "being in business", such as preparing best value performance plans, auditing accounts and holding elections. These costs are said to fall disproportionately on small authorities.

1.2 The Government proposes allocating a lump sum of £300,000 to each authority to cover these fixed costs. In option FC1, this amount would be given to county councils, London boroughs, metropolitan districts and shire districts, but not to police authorities or metropolitan fire authorities. Option FC2 adds police and metropolitan fire authorities. In both options, the cost of lump sum is met by top-slicing existing funding.

1.3 The County Council loses under both options. Its lump sum of £300,000 is more than offset by its share of the top-slice. In effect, these proposals transfer grant from large authorities to small authorities.

2 Suggested response to the Government's questions

2.1 Question: which of the options for fixed costs do you prefer?

2.2 No provision should be made within the revenue grant system to support fixed costs. The arguments justifying the need for such support for smaller authorities have been overstated and have not taken account of partnership and joint working.

2.3 Are there any alternative or additional changes you would wish to see made?

2.4 If the Government is insistent on introducing a fixed costs formula, it should be restricted to district councils with the cost top-sliced from the lower tier EPCS control total. Larger district councils would then be supporting smaller districts. If necessary, the scheme could be extended to the smaller unitary authorities such as Rutland that are too small to accommodate the costs of being in business.

Population Change

1 Proposals

1.1 The Government has put forward options to support authorities that are experiencing either a decline in their population or a rapid increase. This support would be in the form of targeted grants and not via the formula grant system itself.

2 Declining population

2.1 Areas with declining populations have argued that they are unable to reduce their costs as quickly as their population reduces, for example, by rationalising schools. Declining areas are also said to suffer more social problems.

2.2 The Government proposes giving an additional grant to authorities whose population reduces by more than a threshold of 0.5% over the previous two years. The grant per head would be based on the total formula grant for each class of authority. The cost would be met by top-slicing the formula grant available for all authorities, so those authorities whose populations are not declining will pay for the grant given to those that are declining.

2.3 Hampshire's population is increasing and it is unlikely that the County Council would be a direct beneficiary of this grant. The exemplification shows that the effects on the County Council would be relatively small if it was introduced. The loss through having to contribute to the top-slice would be £0.2m. The Government has subsequently published an exemplification showing the effect of reducing the threshold to 0.0% so that all authorities whose population is declining receive grant. This increases the County Council's loss to £0.9m.

2.4 The grant formulae already include a time-lag because the data used is inevitably a little out-of-date. This should enable authorities to adjust their service delivery arrangements. Authorities that suffer exceptional losses are also likely to be protected by the proposed floors and ceilings.

3 Rapidly growing population

3.1 The time-lag in data used in the formulae means that authorities with growing populations have to serve larger populations than reflected in the formulae. The Government proposes giving an additional grant to those authorities whose population has grown by more than a threshold of 1.5% over the previous two years. The threshold is just over twice the national average population increase of 0.7%. It is worth noting that this measure of rapidly growing population still suffers from a time-lag. It assumes that recent growth will continue at a similar level. As with the grant for declining population, the grant would be top-sliced from the total formula grant.

3.2 Hampshire's population increase over the two years is currently 1.4% so it would just miss out on this grant and, instead, will have to contribute to the top-slice. The loss of grant would be £0.8m. Reducing the threshold to 0.0%, so that all growing authorities benefit, gives the County Council a gain of £1.3m.

4 Suggested response to the Government's questions

4.1 Question: should the Government provide additional support to areas of rapidly increasing and/or decreasing population?

4.2 Authorities with declining population already benefit from the time-lag of data and are protected by the floors arrangements. There is no case for providing additional support.

4.3 In contrast, authorities with rapidly increasing population suffer from the time-lag of data. Although the proposal adds to the complexity of the grant system, on balance, the additional grant for growing areas should be supported.

4.4 The need for additional support for rapidly growing areas highlights that it is inappropriate to apply ceilings to authorities' grant entitlements.

4.5 Question: if the Government should provide such grants, which options do you prefer?

4.6 As explained above, the proposal for rapidly growing areas is supported, whilst that for declining areas is not.

4.7 Question: what are the appropriate threshold rates of population change to use?

4.8 The threshold for the growing population grant should be set at the national average for population growth, currently 0.7%.

4.9 Question: are there any alternative or additional changes you would wish to see made?

4.10 No.

Resource Equalisation

1 Proposals

1.1 The existing grant system provides sufficient grant to each local authority so that, if they spend at the level of their SSA, they would all be able to set the same council tax as other authorities of a similar class.

1.2 If authorities spend above their SSA, the impact on council tax payers can be quite different. An authority with a low taxbase has to increase its council tax by a much larger percentage for each £1m of spending above its SSA than an authority of similar size that has a high taxbase.

1.3 Local authorities have increased their spending more rapidly over the years since the council tax system was introduced than the Government has been prepared to increase its SSA and grant. Nationally, the total excess of spending over the SSA for all services is now 6.6%, with only the highway maintenance and capital financing SSAs underspent.

1.4 This additional spending has been financed solely by council tax payers and, whilst tax payers throughout the country will have noticed large increases in their council taxes, the biggest impact has been on council tax payers in `high need/low resource' areas, such as the more deprived London boroughs, metropolitan districts and mainly northern unitary authorities.

1.5 The Government wants to make a one-off adjustment to restore the balance between council tax payers in `high need/low resource' areas and those in `low need/high resource' areas. It proposes increasing the existing national control totals for SSAs to match the actual level of local authorities' spending. But, as the Government does not intend to increase its grant to match this increase in the control totals for spending, the proportions met by the council tax payer in different parts of the country will change, benefiting `high need/low resource' areas at the expense of `low need/high resource' areas such as Hampshire.

1.6 The Government has exemplified three options for the increase to the national control totals:

· in option RE1, the control totals for all service blocks are increased by the national average of 6.6% to eliminate the overall gap between total SSA and spending

· in option RE2, the control totals for each service block are changed to eliminate the gap for individual services

· in option RE3, only the personal social services (PSS) and EPCS blocks are increased so that part of the gap for these services is closed. The gap is largest on these two service blocks. The probability that some of the excess is discretionary is recognised by increasing the PSS control total by only half the spending gap of 10% and the EPCS control total by 15% against a spending gap of 25%.

1.7 The County Council loses significantly on all three options. RE3 limits the extent of the re-basing and so the loss is only £8.4m or 1.5% of the County Council's total grant. The losses for option RE1 is £15.3m (2.7%) and for option RE2, £21.1m (3.7%).

2 Suggested response to the Government's questions

2.1 Question: do you favour any of the options for changing resource equalisation, or a retention of the status quo?

2.2 The County Council strongly objects to the proposals for resource equalisation which will unfairly transfer millions of pounds of resources away from council taxpayers in Hampshire.

2.3 Many of the areas that benefit from these proposals already receive higher funding towards their needs in the SSA formulae and through specific grants including the Neighbourhood Renewal Fund and regeneration grants. Many of the Government's proposals in the consultation paper benefit such areas through further increases in the weight given to deprivation factors. These resource equalisation factors will divert yet more resources to these areas.

2.4 If the Government now accepts that actual spending levels reflect authorities need to spend on services better than SSAs, it should provide additional grant support to meet the difference.

2.5 Otherwise, the status quo should be retained.

Question: are there any alternative or additional changes you would wish to see made?

2.6 No, the status quo should be retained. Any alternative must be fully funded by the Government with additional grants.

2.7 Education authorities nationally are currently spending only 1.5% more than the national total for SSAs. Option RE1 would increase SSAs by 6.6% leaving most education authorities spending significantly below their re-based SSAs. The interactions of this with the requirement to passport SSA increases and the Government's guarantee of real terms increases in schools' budgets has not been explained by the Government. It may well create pressures for higher increases in public spending than the Government has planned.

Floors and Ceilings

1 Proposals

1.1 The Government intends to continue its recent practice of applying floors and ceilings to limit the size of the changes to individual local authorities' grant allocations.

1.2 The Government has described three options for the method of calculating the base level of grant support to be used in the floor and ceilings calculations, but it has not provided any exemplifications.

2 Suggested response to the Government's questions

2.1 Question: which of the options for calculating the baseline for floors and ceilings do you prefer?

2.2 Not enough detail has been provided in the description of the options to enable a preference to be identified.

2.3 Question: are there any alternative or additional changes you would wish to see made?

2.4 Floors should be applied to grant allocations for a limited period only.

2.5 There should not be any ceiling to grant allocations as this penalises growing authorities. There is potential for a perverse interaction with the proposed targeted grant for rapidly growing authorities.

2.6 Floors should be funded by additional Government grant and not by applying a ceiling or a top-slice to those authorities that lie between the floor and the ceiling.

2.7 Stability and predictability would be enhanced if the basis for floors are announced in advance for the three-year spending review period. If the Government insists on implementing the new formulae for 2003/04, it is particularly important for authorities planning their financial strategy for 2003/04 that the basis for floors is announced in advance of the RSG settlement in late November 2002.

2.8 The Government has already committed itself to guaranteeing that schools in each local authority's area do not suffer a reduction in their funding in real terms. Any proposals for an overall floors scheme will need to take into account this guarantee and the mechanisms to implement it.

Smoothing Data

1 Proposals

1.1 In most cases, the existing SSA system uses only one year's data in its formulae. This has the advantage of keeping the results up-to-date and benefits growing authorities. Some data is volatile and the Government is considering whether it should be smoothed over more than one year, typically three years.

2 Suggested response to the Government's questions

2.1 Question: whether the ACA data should be smoothed?

2.2 It would be sensible to smooth the earnings data used in the ACA calculations over three years as it has caused significant swings in grant distribution from year-to-year.

2.3 Question: whether interest rates should be smoothed?

2.4 Interest rates have been relatively stable in recent months but can be subject to rapid movements up or down as economic conditions change. However, local authorities' actual ability to earn interest changes immediately as base rates change. and so there is a less obvious need to smooth the interest rates used in the debt charges formula.

2.5 Question: whether any other data should be smoothed in the new system?

2.6 Smoothing data which is used as the primary factor in the formulae to allocate resources, such as population, pupils, road lengths etc should be avoided on principle. Less robust data used as indicators within top-ups could be considered for smoothing if it is volatile but, in principle, data used should always be robust and timely. An example is income support data and, when more than one year's data is available, the Working Families Tax Credit.

2.7 Smoothing should not be over more than three years.

Simpler Presentation of the New System

1 Proposals

1.1 The Government wants its new system to be simpler and more intelligible. One of the ways in which it has sought to achieve that is the proposed standard structure for each of the proposed formulae of:

Basic allocation + deprivation top-up + pay cost top-up + other top-ups.

1.2 This can be used to present the results of each formula in the following format:

Basic amount	£20.47	per head
Deprivation top-up	£6.12	per head
Area cost top up	£3.17	per head
	-----------
Total	£29.76	per head
multiplied by	x
Population	1,252,570
Formula result	£37.3m

2 Suggested response to the Government's question

2.1 Question: whether it would be helpful to present the system in this way, even if the underlying formulae are more complex?

2.2 This is a reasonable way of presenting the results but an enquiry from the public or stakeholders about the results will reveal the complex calculations and assumptions underlying the results.

2.3 Simplicity and intelligibility would be improved by increasing the proportion of each formula that is allocated via the basic amount per head of population or pupil etc. That is what the public will understand, not complex formulae to derive proxies for `deprivation' or minimal basic amounts per head of population as in the proposed personal social services formulae.

Merging RSG and NDR into a Single Formula Grant

1 Proposals

1.1 The Government's proposals to merge the revenue support grant and its redistribution of the non-domestic rates back to local authorities into a single `formula grant' are dealt with in section 11 of the main report.

2 Suggested response to the Government's question

2.1 Question: do you consider that merging RSG and NDR into a single grant stream would be helpful in improving transparency and intelligibility?

2.2 The County Council strongly opposes this proposal as it will not improve transparency and it destroys the link between local business rates and the funding of local authority services. The business rates should be returned to local control as a step towards widening the local taxbase.

2.3 The Council urges the Government to progress the review of the balance of local funding, outlined in the recent White Paper on Local Government.

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