Contact: Sarah Pook, (01962) 84 7045; [email protected]

1 Introduction

1.1 Following a consultation in 2005, the Department for Education and Skills (DfES) introduced a new school funding system for 2006/07 including multi year budgets and the new Dedicated Schools Grant (DSG) - a ring fenced grant to cover all funding for schools' activities. This consultation and the outcomes were always seen as being transitional, with further changes and developments being required.

1.2 The first multi year budget ran from 2006/07 to 2007/08 and the next three year budget will start in 2008/09. The DfES have now issued a consultation on proposed arrangements for 2008-11. The proposals cover school funding both at local authority and school level and cover the implications of key government reforms:

· the extension to 15 hours per week and increasing flexibility of free entitlement to early years education and care

· the delivery of the entitlement to specialised diplomas at key stage 4

· the contribution of schools to the Every Child Matters (ECM) agenda.

1.3 The consultation is wide ranging and sets out changes to the operation of the funding system between the DfES and local authorities and between local authorities and schools, early years and 14-16 providers. None of the changes to formula have been modelled or exemplified as would have been the case in the past with changes to the local government funding system. The interactions between the changes proposed within the three year period, given the need for stability and predictability, have not been tested. The overriding concern is that the proposals are too ambitious and risk turbulence within the three year budget period.

1.4 Schools partners, including Early Years providers and the 14-19 consortium in particular, have been involved in developing the issues and responses, and Schools Forum will consider its response on 23 May 2007. They will also consider whether to make a separate response or respond jointly with the County Council.

1.5 Because of the tight timescales involved in developing the response to this complex and wide ranging consultation, this report sets out the current proposals for the response and attaches a draft response. Any further issues arising will be updated at the meeting. The response will be considered by the Executive Member for Children's Services and then Cabinet.

1 Recommendations

· To consider the draft response and make further comments.

· The Leader, County Treasurer and Director of Children's Services to make final amendments in the light of discussions in Cabinet and at Schools Forum and submit the final response to the DfES.

2 Summary of the consultation proposals

2.1 The Dedicated Schools Grant (DSG):

· making it easier for Schools Forums and local authorities to approve combined budgets in support of Every Child Matters outcomes

· for a choice in the distribution of DSG between the current spend plus methodology or a return to the formula used to distribute Schools Formula Spending Shares in 2005/06

· on how best to reflect deprivation in the DSG

· on whether to move to an autumn pupil number count.

2.2 School Funding 2008-2011:

· a radical simplification of the operation of the central expenditure limit

· action to ensure that deprivation funding distributed to local authorities through DSG is properly reflected in local funding formulas for schools

· a requirement to produce three years of school budget shares covering 2008/09 to 2010/2011 by 31 March 2008

· continuation of the minimum funding guarantee (MFG), and consideration of the level of the MFG in relation to cost pressures and the comprehensive spending review 2007 (CSR07) outcomes

· further proposals to reduce schools balances through a levy on balances

· further changes to the make up and powers of the Schools Forum.

2.3 Specialised diplomas for 14-16 year olds at Key Stage 4:

· three options for the delivery of grant funding to local providers from local authorities for take up of provision.

2.4 The extension to 15 hours of the early years free entitlement:

· proposals that local authorities should take a consistent approach to calculating the per pupil funding levels for early years provision in both private, voluntary and independent (PVI) and maintained settings, and a consistent counting methodology

· a more radical proposal for a single early years funding formula and whether this could be achieved in the time

· better representation on Schools Forum for early years.

2.5 Specific grants:

· Merging the Schools Standards Grant (SSG) and SSG (personalisation) into a single grant

· Giving local authorities more discretion over the distribution of Schools development grant (SDG) to move away from historical distribution and better reflect local need.

2.6 The draft consultation response form with suggested responses to the 37 questions is attached for consideration.

3 The Dedicated Schools Grant

Combined budgets

3.1 Local authorities must secure the approval of their Schools Forum to any use of DSG in a combined services budget, and they must demonstrate that the proposed service fulfils two criteria; the educational benefit test (that the service being proposed should bring educational benefit to pupils in the authority) and the proportionality test (that the contribution from the Schools Budget to the service should be roughly equivalent to the educational benefit that would be derived). Concern has been expressed that these arrangements don't give enough flexibility and in particular that the proportionality test is difficult to apply in practice. It is proposed that the proportionality test should be removed. This proposal is to be strongly welcomed in encouraging more partnership working for local authorities and their schools to deliver the ECM agenda.

Spend plus

3.2 Other key proposals relate to the distributional issues which impact on the total DSG funding for Hampshire County Council. The first issue is the choice in the distribution of DSG between the current spend plus or a return to the formula used for Schools Formula Spending Shares in 2005/06. The pros and cons of each are set out as follows:

· spend plus is good for stability; and allows earmarking for particular issues; but distribution is hard to explain against objective criteria;

· a formula is good for explaining distribution and identification of funding for deprivation is more transparent; but it makes it harder to mainstream specific grants and would require damping.

3.3 When the DfES consulted in 2005 on the creation of spend plus transitionally, the County Council rejected the proposal on the grounds that the timescale for implementation was too tight and there would be insufficient time available for agreeing the distribution criteria and later the formula itself, nor for modelling and exemplifying the impact. Clearly it would not benefit the County Council to move back to a formula distribution based around the Schools Formula Spending Shares in part because that formula distribution did not advantage Hampshire financially and partly because the methodology of FSS has now moved on for local government funding. However there are still significant concerns about the principles of spend plus where the formula is based on ministerial judgement; whilst experience suggests that this will lead to better outcomes for Hampshire as ministers don't want the level of variation in funding that came about in 2003/04, the formula is not consulted on and developed in an open fashion. None the less it is proposed that the pragmatic response is to agree with the Spend Plus approach, whilst recognising the concerns over a political distribution methodology, and to seek a clearer and more open approach which better represents the LGA principles for defining an appropriate distribution methodology for a specific grant.

Reflecting deprivation in DSG

3.4 The consultation then discusses how to reflect deprivation in the DSG. In the County Council's responses on the Review of Revenue Grant Distribution methodology it was argued that priority should be given to funding in full the "basic amount" per client for each service, with any residue of resources used to fund deprivation. The County Council's interpretation of the existing formula is that deprivation is funded first with only the residue allocated as the basic amount. It is also argued that deprivation is being double or treble funded - through the formula, through specific grants and through programmes such as the Neighbourhood Renewal Fund.

3.5 Hampshire is likely to lose from any increase in the proportion of funding distributed on the basis of deprivation factors, hence the wish to see the basic amount fully funded. Whether Hampshire would gain from better targeted deprivation factors is hard to say, it maybe that picking out pockets of deprivation in otherwise affluent areas would help. It is also not possible to say whether Hampshire would gain or lose from the indicators suggested in the consultation paper.

3.6 In terms of the deprivation indicators, they should meet the criteria set out in the consultation paper. The consultation asks if geographic indicators such as ACORN and MOSAIC should be used. ACORN and MOSAIC are both commercial products which use the Index of Multiple Deprivation and other data sets to produce measures of deprivation. There is some minor use of ACORN in the Police and Fire relative needs formulae (RNF), but it is not otherwise used in local government funding. Some of the data appears to require the use of judgement before it can be used (eg the ACORN data has to be put into a deprivation order before being correlated with GCSE results - which seems to run the risk of being self fulfilling). The full methodology for the ACORN and the other commercial data is not likely to be disclosed. On this basis its use can't be modelled or tested, it isn't tried in terms of its long term viability.

3.7 The Schools Forum Deprivation sub-group examined a comparison between IMD and MOSIAC indicators in respect of Hampshire schools. This showed no evidence that MOSIAC effectively addressed any of the low working income issues but rather it created new anomalies for other reasons. Since much of its data is derived from consumption information it is certainly no more relevant to some of the education issues than IMD is. Indeed for many of Hampshire's schools the range of deprivation brought together in the IMD seems to more closely reflect the factors causing social isolation, low levels of parental involvement (often caused by economic factors), a lack of an educationally stimulating environment and poor access to educationally enriching experiences which then affect attainment.

3.8 The consultation asks what further deprivation measures should be used. There was a meeting between local authority representatives and the DfES in September last year to look at measures and indicators of deprivation where both the County Council's Network (CCN) and SPARSE ( the special interest group for sparsely populated authorities) asked the DfES to develop measures of rural deprivation which pick up the issues of sparsity and pockets of deprivation which could work in a formula model. These issues have not been addressed in the consultation paper.

Targeting pockets of deprivation

3.9 The consultation explains that of the 1.1 million pupils in receipt of free school meals, around 18% are in authorities whose level of deprivation is in the bottom quartile (as measured by the proportion of their DSG distributed on deprivation indicators).  These pupils' results are often significantly worse than pupils from deprived backgrounds in authorities whose schools populations are more highly deprived. The poor results of deprived pupils in more affluent authorities suggest there may be a case for targeting some additional central funding towards these pockets of deprivation. Two options are put forward.

3.10 Both the options highlight Hampshire's view that it is key to ensure the basic amount per pupil is set at an appropriate level. As such the view that more needs to be done to recognise incidence of deprivation within affluent areas is supported. This should be done through a higher basic amount referred to in option two as the threshold basis, and earmarking should not be extended. Funding for deprivation at school level is for local authorities and their School Forums to address.

Exceptional circumstances grant

3.11 The DfES is proposing that alongside DSG, a small grant should be created, which would be paid in exceptional circumstances to an authority which experiences an influx of pupils of a particular type (for example children with English as an additional language), that were not taken into account at the start of the three year period, and where the increase in pupil numbers was above a given level. This runs counter to the concept of three year budgets and predictability and stability and introduces a further specific grant into the system. It should not be necessary. Exceptional circumstances should generally be predictable within a three year period for the overall pupil population. Where this is not the case, perhaps through an increase in children of asylum seekers, this should be addressed through a specific grant for that purpose.

Autumn pupil count

3.12 The proposal to move the pupil count for DSG allocations from the preceding January to the preceding autumn term has merit as it would increase certainty to local authorities as they plan budgets and add time to the critical path of the development of schools' budget shares. However, there are very significant implications of making the change. This is the first year that the data would be collected for these purposes from schools and to use it in the first year is considered a risk. The early years data will still be based on a January count as there is no autumn census, this means that the critical path is still lengthened by this time scale for data collection. Further a move to a September pupil number count for early years would be highly destabilising because Hampshire has one point of entry to reception in September and then termly increases in private, voluntary and independent (PVI) settings take up as children become three, as such a count in September will be the lowest pupil number point of the year. To implement this significant change alongside a move to three year budgets is considered to carry risks. The County Council response is to continue with the use of January pupil count data which better represents the pupils in school for the coming year, avoids the risk of using new and untested data collection in the first year and supports the continued use of January data for early years.

4 School Funding 2008-11

4.1 Although it is clear from the consultation that local authorities will be required to produce three year budgets shares for schools in advance, it is not clear what level of detail will be required or the precise timetable. In 2006/07, when two years of budget shares were issued, delivery of both (including the associated Government returns) by 31 March 2006 was challenging. It is proposed to respond to the DfES encouraging either a staggered issuing of budget shares or a simplification of the level of detail required.

4.2 The central expenditure limit was introduced by the DfES to restrict year on year increases in a local authority's centrally retained element from its Schools Budget. The operation of the limit from one year to the next has been extremely complex to calculate because of changes in what is included. Schools Forums have the power to approve local authority proposals to increase the limit, and our experience locally has been that the papers to them are extremely technical and complex in setting out the limit and the variations. The proposal is instead to turn the calculation round and place a minimum size on the budget and increases for Individual Schools Budgets (ISB). The simplicity is attractive.

4.3 There are a number of changes proposed to the operation of the minimum funding guarantee (MFG) which operates for school level funding guaranteeing a minimum increase per pupil. The key areas for consideration here relate to:

· the proposal to reduce the 1% margin between the MFG and the minimum DSG per pupil. The proposal is made because the CSR2007 outcome will deliver lower DSG increases for 2008-11 than for the last two years. The concern is that the impact is to lower the overall per pupil settlement for Hampshire. As a local authority that has been at the minimum level of DSG and had low levels of deprivation funding a lower minimum increase in DSG will be unacceptable. The headroom available should be maximised to deliver funding into local needs and priorities. The margin should be maintained at 1%.

· the proposal to set the MFG below the assessment of cost pressures for schools, to take account of efficiency savings in schools. Whilst the arguments for taking account of efficiency savings in the assessment of cost pressures are recognised, there is little linkage between efficiency and the areas covered by the MFG so it doesn't represent itself as an appropriate mechanism to deliver the anticipated outcome.

· the final proposal is to reduce MFG to below average cost pressures in the second and subsequent years of the Comprehensive Spending Review. This would mean that schools with significant MFG allocations in their current (2008-09) budget shares would not be getting increases in their budget share which would completely cover average cost pressures, but they would have 18 months notice to plan how to reduce their costs accordingly. Hampshire would like to be able to minimise the cost of MFG and maximise the headroom available to direct to local priorities. The MFG has created a new round of local anomalies without improving the basis of school funding. There should be a phased and planned reduction in the level of MFG leading ultimately to its removal. The proposal to set MFG below average cost pressures is supported.

4.4 The DfES has recently introduced new mechanisms to help local authorities control excessive surplus balances (including claw back), these came into effect for April 2007 and as such their effectiveness has not yet been tested. The DfES is proposing two further measures: a levy on all positive balances and further guidance on balances. In Hampshire, primary schools have for many years adopted such an approach with no interest paid to schools on surplus balances. At this stage it is considered that the measures are likely to have less impact than those introduced for April 2007 and if more needs to be done it will be through strengthening claw back rather than adding more approaches.

5 Specialised Diplomas at key stage 4

5.1 The proposal is that local authorities should be funded through a specific grant for the additional costs of 14-16 year olds taking up Specialised Diplomas at KS4 2008-2011 rather than through the Dedicated Schools Grant (DSG).

5.2 Three options are proposed for delivering funding, via the local authority, to providers of Specialised Diplomas. They have varying impacts on schools' delegated budgets through either deductions from budget shares or contributions from the school to the provider. The options are:

· a specific grant retained centrally from which additional funding for partnership provision is allocated by the local authority to Specialised Diploma providers. Age weighted pupil unit (AWPU) funding for each student taking up provision would be reduced and added to the centrally held pool of grant funding

· a specific grant retained centrally from which additional funding for partnership provision is allocated by the local authority to Specialised Diploma providers. No AWPU reduction but schools with students attending partnership provision would make a contribution to the cost of the provision from their delegated budget

· all funding delegated by the local authority to schools who would meet the whole cost of provision from their delegated budget.

5.3 The consultation questions are quite broad in this area and don't seek preferences from the options. It will be critical to maintain local decision making and flexibility given authorities' different stages in the process and different provision routes.

6 The extension to 15 hours of early years free entitlement

6.1 The consultation proposes some significant changes to the funding arrangements between local authorities and their providers that are not matched in the proposals for funding between the DfES and local authorities. The changes are proposed to address complexities in early years funding that have built up over recent years and become further exacerbated by the introduction, now underway, of extended hours of free part time early education for three and four year olds. The DfES's objective is to bring the funding systems for PVI (private voluntary and independent) and maintained provision (reception classes) into closer alignment, encouraging local authorities to use the same method to set the level of per pupil funding for maintained and PVI settings and a single formula for funding all free entitlement provision. Many of the proposals made would have a significant local impact. The two most significant are set out below.

6.2 The first is to standardise the method for setting the per pupil levels of funding across maintained and PVI settings. In Hampshire both PVI and maintained are funded on a headcount basis with only nursery provision funded on places. The funding levels for PVI and reception classes are very similar. Moving to a standardised method of funding for both will involve a complex process perhaps to achieve similar funding outcomes. The formula currently used for schools is complex and is calculated against a range of factors besides the number of children including for example special needs, deprivation, mobility and premises related factors. This range of data would be impractical to collect and verify for PVI providers and would need to be significantly enhanced to incorporate the much wider range of circumstances in the sector. There are approximately twice as many PVI settings in Hampshire as schools with children in nursery or year R classes. The alternative is a more straightforward and unsophisticated formula which would be a seen as a retrograde step in the maintained sector as it potentially, de- stabilises their budget. Such a process would take two years to develop, consult on and implement.

6.3 The DfES then seeks views on a change to the pupil number count for PVI and maintained settings, seeking to make the counting method consistent. This can't be achieved for the distribution from the DfES to local authorities in the next three year period because the data will not be available in time. As such it is not appropriate to seek to change the local funding arrangements mid three year budget period as it will have redistributional effects locally for schools and providers.

7 Specific Grants

7.1 The County Council would like to see the numbers of specific grants and the complexity of funding streams for schools being reduced. As such the proposal to combine the two SSG grants is welcomed, with SSG(P) only introduced in 2006. However, the proposals go nowhere near far enough and fail to address the key issue of the need for three separate ring fenced grants for schools. The problem, created and maintained by Government, is that of distribution. Any merging involves the cost of levelling every one up, of protection or of redistribution. The Government can't afford the first option and doesn't want the other two so the inefficiency and complexity will continue.

8 Legal implications

8.1 There are no legal implications in responding to the consultation.

9 Financial implications

9.1 These are set out in the report where they may arise.

10 Personnel implications

10.1 There are no personnel implications in responding to the consultation.

11 Impact assessment

11.1 No impact assessment has been carried out at this stage as this report is setting out the suggested response to a Government consultation. Once the outcome of the consultation is known with the new funding arrangements in place then an impact assessment will be considered.

Section 100 D - Local Government Act 1972 - background documents

The following documents discuss facts or matters on which this report, or an important part of it, is based and have 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.

DfES consultation on the school, early years and 14-16 funding 2008-11 published 7 March 2007 http://www.teachernet.gov.uk/management/schoolfunding/schoolfundingconsultation2007/