Contact: Jon Pittam, ext 7400

1. Introduction

1.1 The Education Act:

· introduces a new system of school inspection

· extends the competition arrangements for secondary schools from additional secondary schools to all replacement secondary schools

· allows schools to receive three year budgets

· clarifies the Secretary of State's current power under Section 14 of the Education Act 2002 to make grants to local education authorities, including the power to make a grant to cover the core funding of schools

· allows the Secretary of State to make regulations to give specified decision making powers to Schools Forums in relation to central expenditure.

1.2 Linked to the Act the Department for Education and Skills (DfES) is also consulting on the detailed proposals related to the introduction of the Dedicated Schools Grant and three year budgets for schools on an academic year basis.

1.3 The comments of members of the Education Policy Review Committee on the proposals in the Act and in particular those relating to the new School Funding Arrangements 2006/07 were invited by 1 April 2005. The County Education Officer has drafted responses for the County Council and for the Schools Forum.

The Leader and Cabinet may wish to endorse the County Council submission and consider the funding arrangements and this report concentrates on those issues.

2. Consultation on school funding

2.1 The lengthy consultation document is available at www.dfes.gov.uk/consultations . Responses are required by 13 May 2005. The Executive Summary is attached at Appendix 1.

2.2 The original Government intention to create a dedicated schools grant to fund schools was reported to Cabinet on 26 July 2004. Cabinet expressed its considerable concern at the further significant erosion of local authority control as a result of the proposals.

2.3 The key issues arising from the consultation for the County Council include:

· the introduction of the dedicated schools budget (DSB) which will be funded by a ring fenced grant - dedicated schools grant (DSG)

· three year budgets for schools

· academic and financial year budgets for schools

· consolidation of standards fund and schools standards grant into a separate, single specific grant.

3. Dedicated Schools Grant - How will it work?

3.1 The proposal aims to provide more certainty for schools funding from:

· dedicated schools budget (which covers the current School Budget - the delegated individual schools budget plus central items such as special educational needs, early years and pupil referral units)

· 100% dedicated schools grant - ring-fenced to Schools Budget

· Three year allocations

· but with the same distribution as Schools Formula Spending Share (SFSS) via the County Council and its local formula distribution to individual schools

· small or no formula change in schools FSS in 2006/07 (apart from potential data changes on early years)

· with a continuing minimum funding guarantee per pupil for schools.

Grant shortfall

3.2 But nationally Schools FSS is more than education authorities' Revenue Support Grant (RSG) as shown below:

Table 1: Comparison of Schools FSS with RSG

	2005/06
	£m
Revenue Support Grant	26,663
Schools Formula Spending Share	24,706
RSG to education authorities	23,091

3.3 So transferring Schools FSS to dedicated schools grant would eliminate local education authorities (LEAs) RSG on a national basis leaving the Government with a grant shortfall of £1,615m and 77 out of 150 LEAs with more Government support than required to equalise resources and needs.

Business rates

3.4 This shortfall could come from business rates:

· in order to achieve this the Government plan to combine revenue support grant (RSG) and national non domestic rates (NNDR) into a single formula grant with the introduction of the dedicated schools grant (DSG)

· this would eliminate the problem of the RSG shortfall for individual authorities

· and still enables the Government to equalise needs and resources

· without any negative grant for any local education authority.

3.5 But what happens to return of business rates to local control in those circumstances?

Proportion of spending met by council tax

3.6 The introduction of DSG will:

· increase the proportion of net budget met by council tax

· which for England nationally, and assuming spending at FSS, would rise from 30% to 49%, and which would appear to solve the balance of funding problem

· nationally each 1% spending above FSS currently requires a 3.3% increase in council tax and this gearing ratio will reduce from 3.3% to 2%

· but each £1m increase in spending still has the same percentage impact on council tax (as there is no change to the size of the local tax base)

Balance of funding - Hampshire example

3.7 For Hampshire the percentage of FSS met by council tax would increase from 36% to 77%, so that the County Council will collect a much higher share of net spending from council tax than the other local authorities in Hampshire as shown next:

Table 2: Council tax share

	2005/06	2006/07
	%	%
County Council	36	77
Police	43	43
Fire	46	46
Districts	55	55

3.8 The Government could solve this problem:

· by adjusting the split of assumed national council tax (ANCT) between tiers

· which would reduce the County Council's council tax

· but increase the council taxes of Police, Fire and Districts which is unlikely to be popular or easily understood.

What does the three year projection look like?

3.9 For the County Council the position will appear as reported in the forward financial projection included in the Cabinet budget report in February:

Table 3: County Council projection of FSS, budget, grant and council tax

	2005/06	2006/07	2007/08
	%	%	%
FSS	5.3	4.0	3.8
Budget	4.7	4.0	4.6
Grant	5.0	-6.8	-0.9
Council tax	3.5	6.7	5.3

3.10 Table 3 shows that:

· the FSS increase declines with the reduction in spending plans for social care (children's and adult services)

· budget increase remains fairly consistent, but assumes increased social care spending in line with Government spending plans and base budget increases for other services

· grant reduces because the 100% DSG means that Government will need to divert part of the planned increase in RSG in its spending review plans

· but this has no effect on the amount to be financed locally and the increases in council tax rises for 2006/07 and 2007/08 reflect the one-off Government grant to keep council tax below 5% in 2005/06.

Spending above Schools FSS

3.11 Finally the introduction of DSG will need to take account of about £200m nationally in 2005/06 spent above Schools FSS, which it is argued by local authorities should be funded by additional grant.

Issues to be resolved

3.12 There are therefore significant issues arising from the introduction of DSG which affect overall Government grant distribution, and the balance of funding between grant and council tax and between different types of local authority.

3.13 These further issues include:

· the size of the transfer made from FSS and formula grant into DSG - and whether this includes the £200m, or not - and when the amount will be announced to aid budget planning for 2006/07

· the base year figures to be used for `damping' the changes moving from the current to the proposed system. Usually FSS adjustments are made in the base year when funding is moved into or out of specific grant. LEAs spending less than Schools FSS will lose more grant than spending on schools, and LEAs spending more than Schools FSS will lose less grant than spending on schools. It is therefore likely that budgeted spend, pro-rata to total FSS will be used as the base

· notional amounts based on School Budgets will also need to be determined to set any capping limits on budget increases

· damping arrangements will be required for

- floors from the 2003/04 grant distribution formula changes (the County Council has lost £12m over the last two years as the floor has been wound-out, but still receives schools damping of £10m)

- the LEA floor to support schools budgets

- the move to DSG on top of the existing arrangements to cover the current budgeted schools spending above or below SFSS (£6m above for the County Council - which will eventually be removed from Hampshire's schools funding together with the existing damping of £10m).

4. Three-year and academic year budgets

4.1 Three year budgets are proposed to enhance certainty; and Government is also consulting on moving to both financial and academic year settlements for schools (but not other spending).

4.2 Although three-year budgets can be supported, always assuming Government can stick to its grant figures, the County Council has responded that it cannot be tied into three year council tax levels.

4.3 Three year budgets for schools depend upon:

· continued three year pay settlements

· moving to much more accurate projections of pupil numbers at individual school level with the ability to make agreed and certain adjustments from projected to actual pupil numbers to drive per pupil funding at school level

· providing three year budgets for central expenditure items such as early years, special educational needs and education otherwise than at school as well as in delegated schools budgets; setting central expenditure limits for two to three years ahead; and agreeing the local fair funding formula for schools without any changes over that two to three year period

· but accounting has to remain on a financial year basis (to match central and local Government tax years and budgets for all other spending areas, not least Children's Services, and to meet international requirements for the whole of Government accounts).

4.4 Therefore the introduction of academic year budgets, whilst superficially attractive, will increase complexity and bureaucracy by duplicating year end processes, requiring changes in financial systems, and causing practical workload issues for schools in August - when on holiday and just before the influx of new staff and pupils.

4.5 There is no need to move to academic year three year settlements providing there is a better longer term financial planning covering more than one year ahead as this will provide the predictability and certainty requested by schools.

5. Other specific grants

5.1 The proposals also include from 2006/07

· merging all the various standards fund grants into one standard fund, dropping the requirement to have LEA match funding which is required for some grants at present

· changing the schools standard grant (which is allocated directly to individual schools) from an amount depending upon the size of the school, to a lump sum per school, plus a per pupil amount.

5.2 Then from 2008 it is proposed to

· merge the two grants into a new single standards grant

· provide these grants on a three year basis using a new distribution formula

5.3 Again this raises a number of issues over

· what is the intended purpose of the new single grant

· which existing grants go into the new single grant pot (eg from within the standards fund) or get integrated into the dedicated schools grant (eg teachers threshold payments)

· whether the grant is allocated directly to schools by a national formula, or via LEAs.

· what the formula criteria will be (an amount per school, with basic per pupil amounts with top ups for additional needs, deprivation etc)

· how to introduce even further damping to smooth out the transition from many existing grants to one new grant with a new grant distribution formula.

· the extent to which the grant is integrated with, or separate from, the existing specific grants for children's social care (eg safeguarded children, children's fund)

· the overlap or not with pre-school grants (eg Sure Start) and post-16 activity (Learning and Skills Council, Connexions).

5.4 The most fundamental question is why is it necessary to continue with the existing schools standard grant direct to schools when it could now be included within the new dedicated schools grant.

6. Conclusions

6.1 There will be further extensive upheaval in Education funding in 2006/07 which will have knock-on effects into the rest of the grant system and understanding of council tax. There will be further grant distributional changes that require more damping mechanisms to smooth out the transition. In the longer run it is possible that the Government will attempt to direct future funding directly to schools through the development of a new national formula for the new single standards grant.

6.2 These changes do not help to integrate children's services with schools funding, and even further autonomy for schools, including recently suggested foundation status for primary schools, creates further difficulties whilst they remain the only local bodies without a statutory duty as a partner under the Children Act.

6.3 The most fundamental change is the removal of local democratic control over total schools budgets.

6.4 As far as the new system itself is concerned it will provide more certainty, predictability and stability - but that can be achieved through three year settlements and the minimum funding guarantee. Academic year budgets are not required to achieve those objectives. Similarly it does not require a new specific grant and the turbulence of its introduction to achieve those goals. The reverse side of this coin is that even more damping is required to smooth out the changes.

6.5 Everything will become fossilised around the current assessment and distribution of Schools FSS - which is no better than local budget decisions. Indeed Hampshire schools will lose £10m of funding from the continuation of 2003/04 formula changes and a further £6m currently provided over Schools FSS by the County Council.

6.6 Greater risks are placed on the County Council dealing with the demand risks generated by special educational needs and excluded pupils, and there is every likelihood that schools balances will go up rather than down, as schools cope with the transition.

6.7 Cabinet may wish to take these views into account in considering the draft response to the consultation which is attached as Appendix 2, in the prescribed format.

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:

Published works.

Documents which disclose exempt or confidential information as defined in the Act.

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