Contact: Jon Pittam, ext 7400

1 Summary

1.1 The following decisions are sought:

1 that the Cabinet authorise the County Treasurer to respond to the Government's consultation on Amending Reports for 2003/04 and 2004/05 as set out in the main report subject to any comments by Cabinet.

2 Reason

2.1 To enable the Cabinet to consider the proposed response to the Government's consultation on the Amending Reports for 2003/04 and 2004/05.

2.2 This report supports Aim 5 (Improving Services) of the County Council's Corporate Strategy.

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(s) for the matter being dealt with if urgent

6.1 Not applicable.

Approved by: ................................... ... Date: .........................

Councillor T K Thornber

Contact: Jon Pittam, ext 7400

1 Introduction

1.1 The Government has issued a consultation paper on proposed changes to the Local Government Finance Settlements for 2003/04 and 2004/05 affecting local authorities' grant entitlement for these years. The changes are due to revisions by the Office of National Statistics to population data used in the 2003/04 and 2004/05 settlements mainly Westminster and Manchester but also 13 other urban authorities outside Hampshire. The deadline for response to the consultation is 10 August 2004.

1.2 This report sets out the principles behind the Government's options for amending the Local Government Finance Settlements for 2003/04 and 2004/05 and summarises the proposed response to the consultation.

2 Background

2.1 Amending Reports are used by the Government to make retrospective changes to Local Government Finance Settlements. They are usually required to address the effect of an error found in data used in the calculation of a local authority's grant entitlement. Typically Amending Reports increase grant for the local authority affected by the error, funded by a minor reduction for all other local authorities.

2.2 On this occasion Amending Reports will be issued for 2003/04 and 2004/05 following revisions made to the mid-2001 population estimate due to errors being found by the Office of National Statistics (ONS) in their 2001 census data. The largest errors were found in Manchester and Westminster but data analysis in a further 13 urban areas (not in Hampshire) revealed additional discrepancies. The ONS have confirmed increases of 104,000 to population figures for these 15 authorities. The effect of the changes could be more significant than in previous Amending Reports, although as some of the authorities affected were at the grant floor, the impact overall may be mitigated.

2.3 No exemplifications of the effect of the proposed changes have been issued by the Government. Revised mid-2001 population estimates will not be published by the ONS until September 2004. The Government claims it will not have time to consult on exemplified proposals before the provisional settlement for 2005/06 is announced in late November 2004. Legislation prevents it from issuing a consultation on a 2003/04 Amending Report any later than this, so the Government has asked local authorities to consider for 2003/04 the principles behind the options for incorporating the revised population figures.

2.4 Whilst it is not possible to say for certain without worked examples, the County Council is likely to lose grant as a result of the Amending Reports prior to the application of the floors and ceilings regime. No further loss is expected in 2003/04 unless the floors and ceilings criteria are amended. The County Council's grant allocation in 2004/05 could be affected though the loss is not expected to be substantial.

3 Consultation issues

3.1 The issues raised in the Government's consultation paper are largely technical. The detail of the Government's options and a proposed response are set out in Appendix 1. The principles behind the options and the proposed response are outlined below.

3.2 As errors by a Government agency, the ONS, have led to the need to revise the population data used in the settlements for 2003/04 and 2004/05, it is suggested that the Government should provide additional grant to compensate Manchester and Westminster and the other local authorities that have lost grant. The funding should not be taken from authorities unaffected by the population errors, such as Hampshire, which would be the case if the corrections are achieved through the Amending Reports mechanism. This is particularly important as the Government is unable to exemplify the impact in advance. This would help to preserve the stability and predictability of local authorities grant allocations, which is one of the Government's aims.

3.3 Formulae used to determine grant entitlements in 2003/04 and 2004/05 used (non-population) data from the 1991 census. The Government claims that 2001 census data was not available in time for the 2004/05 settlement and that it would not be technically correct to use non-population 2001 census data in the Amending Reports. The Government estimate that Hampshire County Council lost £7.5m in 2003/04 and 2004/05 as a result of 1991 data being used in the settlements in these years. The Government should incorporate 2001 non-population census data in the grant settlement at the earliest opportunity, but it is unlikely that the Government will change its mind about using it in the Amending Report for 2004/05. The Government should be urged to progress the technical work required to incorporate the changes in the 2005/06 grant settlement.

3.4 The remaining issues are technical matters explored in detail in Appendix 1.

4 Response of County Councils Network (CCN)

4.1 The County Councils Network's (CCN) draft response to the consultation is largely in accord with the County Council's proposed response. However the CCN argues that (non-population) 2001 census data should be incorporated into the Amending Report for 2004/05. This is based on their belief that 2001 census data was available prior to the 2004/05 settlement and should therefore have been used in this settlement. The Government denies that this is the case on the basis of there being inadequate time to review the regression factors used in the formulae to reflect the new data. It seems unlikely that the Government will change its stance on this issue.

4.2 The CCN have produced a briefing paper for MPs with constituencies in county council areas to lobby for the inclusion of 2001 census data in the Amending Reports and future settlements. The briefing paper is attached in Appendix 2.

5 Recommendations

5.1 The recommendations are contained in the decision sheet summary which precedes this main 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

Government Consultation on Amending Reports for 2003/04 and 2004/05

Appendix 1

1 Changes to the FSS Formulae due to revised population data

The Office of the Deputy Prime Minister (ODPM) has outlined three options for changing the Formula Spending Share (FSS) formulae to take account of revised population data:

1) Replace the population data in the existing formulae without changing the regressions

2) Change the FSS formulae depending on regressions but leave the judgmental formulae unchanged (ODPM preferred option)

3) Change the judgmental FSS formulae used for the 2003/04 settlement, as well as those depending on regressions.

Proposed response

Hampshire County Council shares the ODPM's view that it would be technically incorrect to change the population data without changing the regressions and therefore rejects option 1. The County Council also believes making changes to the judgemental FSS formulae would be inappropriate without consulting on exemplifications and therefore supports the ODPM proposal to adopt option 2 above.

2 Changes to the FSS formulae due to other data errors

In addition to the changes resulting from the changes in population data the ODPM also intends to amend other data errors.

There are no changes likely to have a significant financial impact on the County Council. No comments are proposed on this issue.

3 Inclusion of the 2001 Census data in FSS formulae

The ODPM has received suggestions that 2001 census data should be used in the Amending Reports as well as the revised population data. The 2001 census data differs considerably from the 1991 census data as a result of changes in the demographic make-up of the English population over the last decade.

The ODPM claims that use of the new Census data would require the existing formulae to be revised which is a lengthy process. It proposes not to use 1991 census data for the Amending Reports.

The CCN believes South East Counties will benefit from the use of 2001 census data and have argued that this data should be used for the Amending Reports. However the ODPM is very unlikely to concede on this issue.

Proposed response

Whilst the County Council supports the principle of using the most up-to-date information available in settlements, it accepts the Government argument that it would be inappropriate to use 2001 census data in an Amending Report for a settlement that used 1991 census data. The County Council urges the ODPM to do the work necessary to allow 2001 census data to be used in the 2005/06 settlement.

4 Changes to the shares of Assumed National Council Tax (ANCT)

Shares of ANCT are used to divide the national total of grant between classes of local authorities that provide different services, e.g. counties, unitaries, districts, police and fire authorities. The ODPM claim that shares of ANCT are set for each group of authorities so that the increase in grant broadly reflects the increase in FSS and has said that the changes to population data may cause the grant increases to not reflect changes in FSS. It is proposing to change the shares of ANCT if necessary.

Proposed response

The County Council considers that the lack of transparency in how ANCT shares are determined prevents an informed judgement from being taken and believes it is critical to the legitimacy of the settlement process that the way in which they are determined is made clear in future settlements.

5 Floors and ceilings

Changes to formulae and ANCT as a result of incorporating the revised population data will affect the `floors and ceilings' calculations for grant. The ODPM proposes to revise the floors and ceilings calculations accordingly.

Proposed response

The County Council accepts that it might be necessary to change the criteria for floors and ceilings if Amending Reports are issued for 2003/04 and 2004/05. In this instance however the County Council believes that additional Government grant should be provided to any authorities that were disadvantaged by population errors in the 2003/04 and 2004/05 settlements.

6 Timing of the 2004/05 Amending Report

An Amending Report for 2004/05 could be issued with either the 2005/06 or 2006/07 settlements. However, if the 2004/05 Amending Report has not been agreed by Parliament by the time the 2005/06 settlement is approved, the ODPM would then need to issue an Amending Report for 2005/06. Floors and ceilings needed to calculate grant entitlements for 2005/06 are based on 2004/05 grant levels

As the ODPM only has legal powers to issue one Amending Report for 2004/05, they will not be able to take into account any changes to the mid-2002 population estimates made after the beginning of January 2005, or any other errors that may subsequently be discovered. The ODPM has two choices:

1) Wait for possible further revisions that may be announced in 2005, amend the 2004/05 settlement with the 2006/07 settlement and then amend the 2005/06 settlement; or

2) Amend the 2004/05 settlement at the time of the 2005/06 settlement and run the risk of some corrections not being reflected.

The ODPM believes that the best option would be to issue the 2004/05 Amending Report at the same time as the 2005/06 settlement.

Any further changes to the population figures or as a result of errors in other data being discovered are very unlikely to benefit the County Council.

Proposed response

The County Council broadly supports the ODPM's view that option 2 is preferable in order to prevent the unpredictability of further Amending Reports.

7 The Floor and Ceiling Scheme in 2005/06

If the 2003/04 Amending Report, or the 2003/04 and 2004/05 Amending Reports are made at the same time as the 2005/06 settlement, then the financial affects will come through in 2005/06. The ODPM has identified three options for application of floors and ceilings in 2005/06:

1) Apply floors and ceiling damping without taking into account the financial effects of the Amending Reports

2) Reflect the financial effects in the floors and ceiling mechanism for 2005/06 ensuring that authorities which may need to pay back money from 2003/04, and 2004/05 if made at the time of the 2005/06 settlement, nonetheless receive a reasonable increase in grant in 2005/06. Operate floors and ceilings on grant before floors and ceilings for 2005/06, minus the sum of the changes to the 2003/04 (and 2004/05) RSG amounts under the Amending Reports.

3) Operate floors and ceilings on the larger of either the 2005/06 grant before floors and ceilings, or the amount of grant before floors and ceilings for 2005/06 minus the sum of changes to the 2003/04 and 2004/05 RSG amounts under the Amending Reports.

Proposed response

The County Council believes that this is a practical issue difficult to express a view on without exemplifications but one which would not arise if the Government put in more money to fund those authorities that have lost out as a result of their error. The Government will also need to ensure sufficient continued floor grant is allocated to passport the required levels of school funding.

Appendix 2

COUNTY COUNCILS NETWORK

COUNTY MP BRIEFING PAPER

Incorporating Census 2001 Data into the

Formula Spending Share (FSS) System

Introduction

The continuing use of 1991 Census data as a key component of the system for the distribution of funding to local Government is estimated to be depriving county councils of in excess of £116M annually. Data from the 2001 Census was available to update the system last year but was not used, and the Government still refuses to confirm that this will be rectified for the 2005/2006 Local Government Finance Settlement. This failure to use up to date data is totally unjustified and goes against the Governments own stated principle that "data to be used in the grant distribution should be the most up to date available".

Background

The FSS system currently distributes over £46bn of grant annually to local authorities and the current formula used to calculate this funding utilises a range of data from the 1991 Census for this purpose.

Issue

The key issue is that this is data now over 13 years old and is grossly out of date. Local authorities are delivering services now in 2004 based on the current needs of local communities. It is therefore completely unjustified that the funding for such services is being based on the demography and socio economic factors of the last decade, especially when more recent data is readily available from the 2001 Census.

This persistence with the use of 1991 Census data can only lead to inaccurate and inadequate funding being provided for services to the general public and ultimately council tax payers are penalised by this. It is time that this is rectified and the FSS system updated to incorporate fully the 2001 Census data.

Indeed this data was available for use in the 2004/2005 Settlement, however the Local Government Minister chose not to use it because in his words, "the ODPM might not have sufficient resources to conduct the analytical work with sufficient vigour without jeopardizing the overall timetable". Surely this excuse cannot be justified again for 2005/2006.

What are the implications for County Councils?

The implications are potentially extremely significant for County Councils because we estimate county councils are deprived of around £116m of funding that they are entitled to. This represents a considerable resource that is in effect being misdirected at a time when pressure on services is increasing and levels of Council Tax are under extreme scrutiny.

What are the views of the County Councils Network?

The CCN appreciates that the new census data must be incorporated in a technically correct way and acknowledges the work the ODPM will have to undertake to achieve this, however the CCN believes the incorporation of the Census 2001 data is now long overdue.

The County Councils Network strongly believes that this data must be included in the 2005/06 funding formulae. It is totally unacceptable to fund public services using a mechanism reliant on archaic data. Indeed, as this data was available for 2004/2005, any Amending Report issued by the Government for this period, should also incorporate this new data.

How Can You Help?

Since it is your constituents that are loosing out on this funding, we are seeking your help to get the 2001 Census data incorporated into the Local Government Finance Settlement as soon as possible. We would encourage you to speak or write to the Rt Hon Nick Raynsford - Minister for Local and Regional Government, to impress upon him the importance of getting this matter resolved. The Minister has two choices, he can either propose the 2001 Census is incorporated in any Amending Report issued in respect of the 2004/2005 Settlement, or alternatively he can ensure that the data is fully incorporated in the 2005/06 Settlement. Clearly, the earlier this data is incorporated, the sooner the authorities and communities concerned will benefit from the funding to which they are entitled.

CCN Technical Support Team

30 June 2004

If you require any further information on the contents of this briefing document, please contact Tim Richens, Assistant Director of Finance (Technical) at Somerset County Council on 01823 356021 or email: [email protected]