Archived decisions

Hampshire Fire and Rescue Authority

Item 6

5 February 2003

The implications of precepting for Combined Fire Authorities

Report of the Chief Fire Officer and Treasurer

Contacts:

David Howells

Director of Corporate Services - 023 8064 4000 ext 203

Paul Carey-Kent

Deputy Treasurer to the Authority - 01962 847525

1

Summary

1.1

This report alerts Members to the issues that could arise for Combined Fire Authorities (CFAs) when they become precepting local authorities. In particular, the report raises concerns about the whether the transitional arrangements will include mechanisms for the Authority to establish adequate levels of reserves and balances from 1 April 2004.

1.2

The Authority is asked to support the Local Government Association in lobbying the Government for transitional funding to help smooth the process; and to emphasise, in particular, the potential inequitable impact that current differences in accounting practices regarding the use and definition of `provisions' may have in the transition.

2

Background

2.1

The Local Government Bill makes provision for CFAs to become precepting authorities as defined under the Local Government Finance Act 1992. In very simple terms, CFAs will be granted powers to raise their own Council Tax. Latest information suggests that CFAs will become precepting authorities from as early as 1 April 2004.

2.2

Whilst precepting is not new, it will make a significant change to the way CFAs are funded and mark a further step towards independence from the constituent authorities they currently serve.

2.3

The change will further complicate the already diverse range of types of fire authorities that exist in the United Kingdom - each with different constitutional and funding arrangements. This makes it difficult for the public to understand and confuses accountability.

2.4

Coming at a time when the fire service is facing significant change in the wake of the Independent Review of the Fire Service (the Bain Report), the move to precepting will add to the significant workload facing CFA members and officers.

3

New financial arrangements

3.1

CFAs will be allocated their own Formula Spending Share (FSS) - which currently forms part of the constituent authorities' total FSS. FSS replaced the former Standard Spending Assessment (SSA) formula; and, at a superficial level at least, the new formula appears to have recognised and reduced the gap between what fire authorities actually spend and their SSA. Unfortunately - as will be evident from the report on the Budget for 2003/04 also on this agenda - this has not resulted in any direct or tangible increase in central government funding for the fire service within constituent authorities' overall Revenue Support Grants. The result of increasing FSS for the fire service - but well above the actual level of grant - is that higher spending authorities benefit from a greater proportion of the available grant. The use of past expenditure trends in formulating the new local government finance system is one of the reasons for the shift in funding from the south-east to the northern and metropolitan areas.

3.2

Precepting will mean that CFAs will receive their Revenue Support Grant (RSG) directly from central government. This will require CFAs to have a detailed understanding of grant calculations including the application of any financial `ceilings', `floors' and any capping rules that might apply in determining the levels of budget and precept.

3.3

Two factors will be critical in determining the future level of precept which a CFA would have to set:

· the level of Government Grant - in particular whether it will directly reflect the enhanced level of FSS, or not; and

· the need to establish a sufficient level of reserves to operate a financially fully independent local authority.

3.4

Depending on the stance taken by the Government, both factors could impact on constituent authorities' own financial positions during the first year of operation. Early advice is essential to enable constituent authorities and CFAs to plan their budget strategies.

3.5

It will be especially important to know the position to be taken over reserves, balances and provisions. Under the Combination Orders, CFAs are expressly prohibited from holding general reserves and balances. However, some CFAs have taken steps - apparently with the support of their external auditors - to make `provisions' within their accounts for such significant items as future pensions liabilities. In some CFAs these provisions are in excess of £2m. Other CFAs, including Hampshire, have established contingency arrangements for the risk of any funding shortfalls due to unplanned/unexpected funding needs to met by the constituent authorities.

3.6

The definition of what constitutes a `provision', and in which circumstances and at what level this becomes a general `reserve' or `balance', seems to be vague and variable amongst CFAs and their external auditors. The implications of this are that the financial position for some CFAs, including Hampshire, may well be compromised unless the transitional arrangements specifically take into account the legacy effect of the different practices.

3.7

When police authorities were set up as separate precepting bodies, they transferred with a pro-rata share of county council reserves. Should the same rule be applied to CFA's then, because expenditure on fire is a relatively very small proportion of local authorities' budgets, the transfer sum is likely to be insufficient to form the basis of a sound operating reserve. On the other hand, if the Government determine that a CFAs need reserves equivalent to, say, 3% of total expenditure, then this could have a significant impact on those constituent authorities that have very low reserves and/or have not specifically earmarked a contingency sum for that eventuality.

3.8

It is to be hoped that the Government will produce guidance for the transfer of reserves from constituent authorities to CFAs. As this may have an impact on constituent authorities' budgetary positions, such guidance should ideally be made available sufficiently in advance for constituent authorities to take this into account in their own decisions about the level of Council Tax, ie by January 2003 if precepting is to be introduced from 1 April 2004 (constituent authorities could perhaps make any transfer at the end of 2003/04 and recover it from their 2004/05 council tax, but that would be less satisfactory).

3.9

To illustrate the potential impact, if this authority were to set its own Council Tax at the 2003/04 base budget level of £51.2m with the current levels of grant attributed to fire, then this would lead to a Council Tax of £42 per year for a Band D property. This would increase by £1.68 (4%) for every £1m extra needed in order to build up balances. Alternatively, of course, if guidance required additional transfers from constituent authorities, such amounts would be added to their council tax.

3.10

There will be some set-up and continuing costs associated with changing from a levying to a precepting funding arrangement. These ought not to be underestimated. While it is hoped that existing administrative and financial systems will be able to cope well with most the arrangements (e.g. to ensure the smooth collection and management of funds) some changes may well be necessary to ensure that sound audit trails are in place. If the police authority model of a separate Treasurer and Director of Finance was adopted, this could result in additional costs. Similarly, there could be cost implications if greater independence from a lead authority that currently provides corporate support services became a more favoured policy under precepting arrangements (the County Council in HFRA's case). A particular costly issue would be a direction to set up a separate bank account. It is unlikely that this will be a requirement - given the current desire for more collaboration between authorities - but it needs to be borne in mind.

3.11

There will also be the additional direct cost of preparing a Council Tax leaflet each year. It is hoped that a common-sense position can be reached on this particular matter - e.g. perhaps by incorporating the Authority's information in other local authorities' leaflets, but until the guidance/regulations are known, it has to be assumed that an additional cost will first occur during 2003/04.

4

The potential problem for HFRA

4.1

It is worth reminding Members of the situation so far as the Authority's current position is concerned. When the Authority has underspent its budget in the past, balances have been handed back to the constituent authorities. In 1998/99, for example, there was a large underspend - mostly in the pensions budget - of £1.4m and this was transferred back to the constituent authorities with the recommendation that it be held as an earmarked provision within constituent authorities' own reserves to meet any future shortfall in the Authority's budget for pensions or any other unforeseen expenditure. The Authority was not able to insist on this, of course, it could only suggest that it would be prudent for them to take account of the HFRA's position and vulnerability to potential volatile changes in expenditure on pensions and operational activity. The alternative would be for the Authority to issue a supplementary levy on the constituent authorities to cover any shortfall.

4.2

Depending on the final accounts position for 2003/04, the Authority is likely to face precepting with no `provisions' within its accounts to deal with these particularly volatile areas of expenditure; nor is it likely that the Authority will be able to point to any `earmarked' share of constituent authorities' reserves that should be transferred back to the Authority. Any previous balances handed back are most likely to have been used by the constituent authorities to offset general increases in the levy.

4.3

It remains to be seen whether the transitional arrangements will ensure that an appropriate share of constituent authorities' reserves and balances will be transferred to the Authority on 1 April 2004. Even if such provision was made in the Act, it is difficult to see how an equitable (across the country) arrangement would be achieved given the different practices that exist concerning the use of provisions.

4.4

Further, advice seems to vary on what would constitute a prudent level of reserves for a combined fire authority from a corporate financial health perspective. Experience of budgeting since 1997/98 would suggest that, for Hampshire, this is unlikely to be less than £1.5m, and some similar-sized CFAs are already known to have made `provisions' within their accounts in excess of £2m.

4.5

If sufficient transitional funding is not made available through the RSG to cover the increased operating costs and to establish a sound level of reserves, then it is most likely that the shortfall will have to be met from the precept (Council Tax). Given the particularly poor RSG settlements for the constituent authorities for 2003/04 and the likely severe impact on Hampshire residents, it is particularly worrying that that with the new arrangements the Authority is likely to add to the impact on Hampshire Council Tax payers from 2004/05.

4.6

Members will note that a provisional growth bid of £50,000 has been recommended in the draft budget for next year. This is to cover the cost of producing a Council Tax leaflet and contribute to any increase in support services costs involved in modifying systems and procedures. Constituent authorities largely meet expenses/allowances incurred by Members on HFRA business. In future, these will need to be borne directly by CFAs. It is assumed that this will be covered by an appropriate adjustments in RSG - but it may easily be overlooked.

5

Constitutional arrangements

5.1

Very little is known about plans for future constitutional arrangements. Whether democratic representation will remain as now with the constituent authorities nominating all members of the Authority, or whether membership will be extended to include (as in the police model) representatives from district councils and independent members remains to be seen.

5.2

On the positive side, the new arrangements will ease the undoubted tension that exists for Members who have the unenviable task of looking after both the financial interests of the fire authority as the levying body, and also those of their constituent authority as a major funding stakeholder. Members will, however, still be concerned about the impact that inadequate central government funding for the fire service and/or the budget set by the Authority will have on overall local Council Tax levels in their areas.

6

European Convention on Human Rights and the Human Rights Act 1998

6.1

The proposals within this report are compatible with the provisions of the European Convention on Human Rights and the Human Rights Act 1998 and considered in the light of the Race Relations (amendment) Act 2000.

Recommendations

1

That this first report on the potential impact of becoming a precepting authority be noted.

2

That the Finance and General Purposes Committee consider the financial implications as soon as more details about transitional arrangements are made known by the Office of the Deputy Prime Minister.

3

That a copy of this report be sent to the Local Government Association (for information) with a letter supporting the need to lobby the Government strongly and urgently for:

· clear guidance on the transfer of reserves from constituent authorities

· adequate transitional and future funding arrangements

· a preferred start date of 1 April 2005

in order to ensure an equitable move to precepting status for all Combined Fire Authorities.

Section 100D - Local Government Act 1972 - background papers

The following documents disclose the 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 the report.

None

NB The list excludes:

1 Published works

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

Dir.fin: HFRA 5 2 2003 Precepting DCH/JMW/24/1/2003