Contact: Sarah Pook, ext 7045, Thomas Whiffen ext 6287

1 Introduction

1.1 The Government published a consultation paper on 8 July 2002 "Local Government Finance: Formula Grant Distribution" setting out proposals for changes to the funding for Local Government from April 2003 onwards. Chapter 2 of the consultation is on the proposed changes for education. Responses were required by 30 September 2002 and a report setting out the proposed response in full was presented to Cabinet on 23 September 2002.

1.2 During September headteacher representatives were briefed on the implications for education funding in Hampshire.

1.3 The indications are that the proposed changes could be very detrimental to the County Council unless they are modified.

1.4 This report summarises the options proposed in the consultation paper, sets out the preferred outcomes for the County Council and advises members on the response submitted by to the Cabinet. As the implications of this are considered so significant for the Education service members then it is important that members of this committee have the opportunity to discuss them in detail.

2 Overall summary

2.1 Taking the overall impact of the proposals the consultation generally favoured

· the North East, West Midlands, North West, East Midlands, Yorkshire and Humber at the expense of other regions but particularly the South East

· Metropolitan authorities as opposed to counties

· counties outside the south east at the expense of the south east..

2.2 There were a large number of options. For Hampshire

· best case options would result in an increase of £18.5m (1.8%) including gains of £7.6m on education and £8.4m on Social Services

· worst case options would result in a loss of £80m (9.3%)

· no details are available of any transitional arrangements which would affect how long gains and losses would take to be fully effective

· as expected the Council will also have to mount a further campaign in defence of existing area cost adjustment or identify more appropriate options.

3 Education summary

3.1 The education options drew on work of a DfES convened working party, which included teachers' and employers' representatives, the Education Funding Strategy group. The proposals all used the existing standard spending assessment (SSA) control totals and the effect was therefore redistributive. It is not clear whether any significant amount from the 2002 Spending Review will be used to ease the changes. All four options shown had a similar structure

· Education funding assessment consists of two blocks; Schools' block and LEA block. Only one formula for the LEA block was exemplified which was presented as common to all four options

· The Schools' block was divided into four sub blocks covering under 5s, primary, secondary, and high cost Special Educational Need (SEN) pupils. Only one option for high cost SEN pupils was exemplified and it was common to all four options

· The formulae for the primary, secondary and under 5 sub-blocks all had a similar structure; a basic pupil entitlement with top ups for significant deprivation (additional education needs or AEN) and for areas where it costs more to recruit and retain teachers (area cost adjustment or ACA). The primary sub-block also had a top up for the effects of sparsity on the cost of providing small schools.

· All options contained a measure of English as an additional language (EAL) in the primary sub-block and an ethnicity measure in the secondary sub-block.

3.2 The four options differed as to

· The incidence of deprivation - whether income support alone was used as an indicator or also working families tax credit (WFTC)

· The cost of the AEN component and whether or not it catered for unmet needs (AEN which are currently not funded through the formula, paras 4.6 - 4.7)

· The level of AEN "threshold" below which it was assumed that authorities are able to meet AEN costs from within their basic per pupil allocations

· Whether education uses the same ACA as for other blocks or a variant which reflects house price differentials between areas as they affect the average teacher.

3.3 The four options are:

EDU1 : Income support only for deprivation, met and unmet needs for AEN; low AEN threshold (bottom five authorities); current ACA	-£20.7m	Worst
EDU2 : Income support and WFTC for deprivation; met needs only for AEN, higher AEN threshold (50 authorities) current ACA	+£7.6m	Best
EDU3 : Income support and WFTC for deprivation; met and unmet needs for AEN; medium threshold (30 authorities); current ACA	-£6.4m
EDU4 : income support only for deprivation, met needs only for AEN, low AEN threshold; house prices for ACA	-£2.9m

3.4 These options all exclude the impact on education funding of the issues addressed authority wide related to ACA and redistribution of the council tax burden which all could have a further significant and largely adverse effect on Hampshire education funding.

3.5 It has been made clear through the Education Funding Strategy Group and elsewhere that these options were put forward for illustrative purposes to show the impact of the variables and didn't indicate any ministerial or departmental preferences. As such there was scope to respond fully to the consultation in terms of principles, proposing variations where appropriate. It was not necessary or desirable to indicate a preference for one of the four exemplified options.

4 Issues arising

Basic entitlement

4.1 The Local Government Finance Green Paper originally stated ...

"Schools funding could be based on a simpler and more transparent formula. This might comprise a basic entitlement per primary or secondary school pupil, plus enhancements for schools and pupils in authorities where significant deprivation adds to education costs; and a separate enhancement for areas where schools need to pay more to recruit and retain staff. .... . The advantages of such an approach would be greatly increased transparency compared with the existing SSA system; and a system which would be acknowledged as fairer."

4.2 This put forward a vision of a simpler system starting with the basic entitlement per pupil common to all authorities, a vision aimed at addressing the current wide spread of per pupil funding.

4.3 The exemplifications in the consultation are based on current SSA control totals for 2002/03. 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 each authority's home to school transport costs which are part of the LEA block.

4.4 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 sub-block is less than its share of the primary sub-block. The Government needs to revisit these calculations and detailed technical arguments will be forwarded to the DfES.

4.5 The per pupil basic entitlement, instead of being the starting point to build funding on, is what is left over after taking off other sums based on expenditure evidence. This is very disappointing, particularly as there is work underway as part of this review on Activity Led Funding. This work has not progressed through the DfES to a timetable which enables it to feed into the process yet but it is still possible that it can be used as the key factor in deriving basic entitlement figures.

Met and unmet AEN

4.6 Met and unmet AEN is a concept which has arisen following consultancy work for the DfES on AEN for this review. The consultants carried out a survey of AEN in schools, met needs were those school and opportunity costs of provision for pupils with AEN which were provided within their resources. Unmet needs were the additional support that schools felt that pupils needed but were unable to provide within their resources.

4.7 The consultants estimated cost for needs that are already being met to be £1,150 per AEN pupil. The figure of £1,150 per AEN pupil for met needs 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.

4.8 It seems inappropriate to propose unmet needs as a funding factor in this exercise as it is assuming a higher priority for unmet AEN than for other unmet needs which exist throughout the education system and which are likely to be highlighted, in particular, through the activity led funding approach outlined above. It is also inappropriate to include it at this stage when there is no new money going into the formula as it is then redistributing money from basic entitlement for all pupils into AEN. As such it is a properly an issue for priority decisions for future additional education funding but not one for a review of grant distribution methodology such as this.

Deprivation measures

4.9 Inclusion of the WFTC as well as income support ensures a more comprehensive data set on deprivation. It recognises more fully the deprivation associated with those in low wage employment often found in rural and military employments. It is also more relevant as a deprivation measure for parents with school aged pupils than income support alone.

Deprivation thresholds

4.10 This issue links with the underlying principle of maximising funding for the basic entitlement and the underlying principle should be to set any threshold at a high level to address significant deprivation. Hampshire benefits from a high threshold because of its relatively low position in the ranking of deprivation. A high threshold targets deprivation funding to those authorities above the threshold because they have significant problems. Authorities below the threshold are expected to fund their deprivation costs from within their basic amounts per pupil - but because with a high threshold less funding is being top-sliced for deprivation, those basic amounts are higher, to the overall benefit of low deprivation LEAs such as Hampshire. 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 from the distribution of the deprivation indicators across the 150 LEAs nationally to support a threshold of 70 LEAs .

Protection - floors and ceilings

4.11 Protection mechanisms are proposed at authority level to alleviate any significant redistribution effects of this review. Such floors and ceilings, which will act against excessive gains and losses, will be important for Hampshire. However there is a separate requirement to ensure that the guarantee given to schools in the original Green Paper is delivered. This could be by way of floors and ceiling at Schools' block or at education level. However this will become complex. An alternative which should be considered is to work with existing data and targets and extend the Age Weighted Pupil Unit (AWPU) increase target using the existing per pupil delegation figures. The guarantee for schools could then be delivered by extending the target increase in line with previous years. This approach has been put forward for further work.

Area cost adjustment

4.11 The DfES has chosen to exemplify a different method 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.

4.12 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 saw some merit in the inclusion of a house price element as part of the ACA but, on balance, the County Council opposed the use of house prices and supported better methods.

LEA block

4.13 Further work has been requested to produce exemplifications for the LEA block using in particular the WFTC in addition to income support. It has been proposed that the indicators applied to the primary and secondary sub-blocks should also be used for the LEA block.

5 Response from Cabinet to the Government's questions

5.1 Which of the above options for education formulae do you prefer?

5.2 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.

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

5.4 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 Government's 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 suspect

· 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 when there are other areas of need not currently being funded, but consider AEN amongst the priorities if additional funding is provided by the Government in future

· reduce the funding for met AEN needs from the proposed level of £1,150 per AEN pupil as this figure is not justified by the underlying research

· set a high threshold for the number of LEAs assumed to be able to meet AEN costs from within their basic entitlements, in order to target funding at those LEAs with significant needs. The threshold should be set at 70 LEAs, given the pattern of LEAs' deprivation indicators, which is higher than the highest threshold exemplified of 50 LEAs

· use Working Families Tax Credit data to reflect low earners, as well as Income Support data, in both the schools 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 ensure that the demand-led and price-led costs of home to school transport are properly funded particularly if additional resources become available for education

· increase the proportion of the LEA block that is allocated via the basic amounts per pupil from the proposed 70% to a level closer to the proportions for the schools blocks of around 90%, by reducing the proportion of the LEA block that is intended to reflect the additional needs of deprived areas

· make sure that additional funding is found within 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

· meet the Government's commitment that no authority's schools should lose out in real terms 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).

Recommendation

1 That the Policy Review Committee notes the response submitted by the Cabinet and the significant implications the proposed changes could have for education funding.

Section 100 D - Local Government Act 1972 - Background Documents

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.

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