Appendix 1

Local Government Finance

Formula Grant Distribution Consultation July 2002

1 Proposals

1.1 Four options have been exemplified by the Government.

1.2 The 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).

1.3 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).

1.4 The options are compared in the following table.

Table 1 - 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	-

1.5 The impact of the options for this Authority are summarised in Table 2 below. The percentages shown are the changes in the Fire SSA. They are identical for the County Council, Portsmouth and Southampton.

Table 2 - 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%

1.6 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%.

2 Commentary on the Options

2.1 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.

2.2 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 Table 3.

Table 3 - 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%

2.3 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 Table 4 shows.

Table 4 - 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 2.5 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%

2.4 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.

2.5 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, as Appendix 2 shows. 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).

2.6 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.

Table 5 - 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

2.7 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.

2.8 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.

2.9 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.

2.10 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.

2.11 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 Risk areas D and remote-rural may also be sparse. The CCN are likely to press for the inclusion of sparsity in the formula.

2.12 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.

2.13 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).

3 Area Cost Adjustment

3.1 The Government has also consulted on separate proposals to change the Area Cost Adjustment (ACA). The exemplifications of the ACA proposals have not been broken down by service. That information has been requested from the ODPM but has not yet been provided. (The figures shown in the tables have been calculated using the existing ACA factors).

3.2 The Hampshire area loses significantly in four of the Government's five exemplifications of options for the Area Cost Adjustment and has a minimal gain on the fifth option.

4 Resource Equalisation

4.1 The Government has proposed three options for a one-off change to the revenue grant distribution system to close the gap between authorities' total budgets and SSAs. The effect is to redistribute grant from low need/high resource areas, such as Hampshire, to high need/low resource areas. Hampshire loses significantly under all three options. They would all result in council tax payers in Hampshire having to pay more than at present for the existing level of service. This would not directly affect the Hampshire Fire and Rescue Authority if Resource Equalisation is implemented in 2003/04. But if the HFRA subsequently becomes a precepting authority setting its own council tax, it is likely that it would have to levy a higher council tax than under the present grant distribution system. It is not possible to quantify the increase.

Appendix 2

Fire Risk Index