Contact: Jon Pittam (01962) 847400 [email protected]

1 Summary

1.1 The Government issued a consultation paper on 17 July 2007 setting out options for changing the methodology used to calculate and distribute the revenue formula grant to local authorities for the three years from 2008/09 to 2010/11. Formula grant includes revenue support grant, the redistributed non-domestic rates and, for police authorities, the police principal grant.

1.2 The deadline for responses to the consultation is 10 October 2007. The Government has provided a template for responding to the 29 questions included in the consultation paper. In addition to completing the template response, some further comments on the wider principles of revenue grant distribution should be included in a covering letter, as set out in this report and summarised in Appendix 1. The draft template response is attached as Appendix 2.

1.3 Most of the Government's proposed changes will not have a major impact on the County Council.

1.4 The full consultation paper is available on the Government's Communities and Local Government departmental website at: http://www.local.communities.gov.uk/finance/0809/sumcon/index.htm

2 Recommendation

Subject to any comments the Leader and Cabinet may have, to approve the response to the Government's consultation on the methodology to be used to distribute formula grant to local authorities in 2008/09 to 2010/11 as set out in this report.

3 Background

3.1 The methodology used to calculate revenue formula grant and distribute it to local authorities was frozen by the Government for 2006/07 and 2007/08. This followed the introduction of the `four-block model' in 2006/07. Since then, the Government has been discussing with representatives of local government a wide range of possible changes to the methodology. Some of these changes have been included in the consultation paper published on 17 July 2007. If agreed by ministers, changes to the methodology will be introduced in the three-year settlement covering 2008/09 to 2010/11 which will be published by the Government towards the end of 2007. The methodology will again be frozen during that three-year period.

3.2 Where technically possible, the Government has exemplified the effect of the consultation options using the formula grant settlement for 2007/08 as the base. However, the usefulness of these exemplifications as a guide to the real impact of the options in 2008/09 may be limited because the Government has applied controls to the model to make sure that there is no redistribution between the four main groups of authorities: upper tier, lower tier, police and fire. Those controls may not be applied in practice in the real settlement for 2008/09.

3.3 Most of the options have a relatively minor effect on Hampshire County Council's formula grant before floor damping and no effect whatsoever on the grant after the floor has been applied. The floor makes sure that every authority receives a minimum increase in grant each year. The County Council lost so much grant in the methodology changes in 2006/07, that its formula grant is likely to continue to be dominated by the floor damping top-up for the foreseeable future. Changes to the formulae are likely to be of academic interest to the County Council in the forthcoming three-year settlement from 2008/09 to 2010/11 unless the Government unwinds the damping arrangements. The possibility of tapering the floor downwards is one of the issues raised in the consultation paper.

4 The four-block model

4.1 The Government introduced the four-block model for calculating formula grant in 2006/07 in the face of almost universal criticism from local authorities. The four blocks cover:

· relative needs - to reflect differences in the needs of individual authorities as assessed by the Government using formulae for the main service headings

· relative resources - to reflect differences in the council tax resources of individual authorities. This block is negative and so authorities with higher resources suffer larger reductions in their grant than those with lower resources

· central allocation - to provide each class of authority with a basic amount of grant

· floor damping - to make sure each authority receives a minimum increase in grant, with the cost met by scaling back the increases of authorities with above-floor grant increases.

4.2 The four-block model is very complex, even by revenue support grant standards, and quite opaque. It is difficult to understand the reasons behind the results or to trace through the effect of changes in the input to the model. It also allows the Government to influence the results by the application of `ministerial judgment' to key parts of the model, including the extent to which needs and/or resources are equalised. In practice, the individual service needs formulae have become increasingly irrelevant to the overall formula grant results because of this ministerial manipulation and the heavy overlay of damping. The response to the consultation should register the County Council's continued objection to the four-block model and urge the Government to return to a more transparent system.

5 The consultation proposals

5.1 The consultation paper covers the following issues:

· calculation of formula grant for areas affected by local government reorganisation - this is not relevant to Hampshire County Council

· removal of the existing damping arrangements within the formulae for children's and younger adults' personal social services - see section 6 below for further comments

· minor changes to the data used in the formula for personal social services for older people - minimal impact on Hampshire

· changes to the formulae for police and fire - not relevant to Hampshire County Council

· updating the source data for the highways maintenance formula - a sensible proposal

· changes to the formula for environmental, protective and cultural services to distribute additional funding for concessionary fares - see section 7 below

· changes to the capital finance formula for sharing borrowing allocations for levying bodies such as the passenger transport authorities in metropolitan areas and the Lee Valley regional park authority - not relevant to Hampshire County Council

· changes to the geographical areas used in the area cost adjustment, including dividing the existing Hampshire area into two - see section 8 below

· further judgemental changes to the level of needs and resource equalisation - see section 9 below

· tapering the level of floor damping over the forthcoming three year settlement from 2008/09 to 2010/11 - see section 10 below

· changes to the basis of data for disability living allowance, income support, pension credit, day visitor numbers and council taxbase - sensible proposals.

6 Damping arrangements within the formulae for children's and younger adults' personal social services

6.1 The Government has asked whether the existing floor damping mechanisms within the formulae for children's and adults' personal social services should be removed. These floors were introduced in 2006/07 following changes to the formula methodology. For 2007/08, the floors were set so that all authorities received a minimum increase of 2.7% in their younger adults and children's formulae. The cost of each floor is met by scaling back the increases of above-floor authorities.

6.2 The County Council benefits significantly from the floor for younger adults and loses a smaller amount from being above the floor for children's services. The net effect in 2007/08 can be expressed as a retention of grant of £15m, part of the overall damping grant received by the County Council in 2007/08 of £38m. Despite this gain, the County Council has previously argued that there is little justification for including a floor mechanism in the formulae for individual services, as well as an overall grant floor. If the personal social services floors are removed, Hampshire's `raw' grant before damping would reduce. As a result, its floor damping grant would increase by an equivalent amount, leaving the overall level of grant unchanged. On this basis, it is proposed that the County Council should support the removal of the social services floors with effect from 2008/09, as one small step towards simplifying the formula grant distribution mechanism.

7 Concessionary fares

7.1 The Chancellor announced in the Budget for 2006 that the concessionary fares scheme would be extended in 2008/09 to enable people over 60 and disabled people to travel for free anywhere in England. The Government has yet to decide whether the extra funding for local authorities for this extension should be added to formula grant or distributed through a special grant.

7.2 If the Government decides to add the concessionary fares grant to formula grant, it plans to adjust the judgemental weights in the formula for environmental, protective and cultural services to try to direct the grant to the appropriate authorities. These would be the district councils in Hampshire, although the County Council has helped to co-ordinate a countywide approach.

7.3 The Government has exemplified three alternative adjustments to the `top-ups' within the current formula, based on giving increased weight to:

· the number of day visitors, or

· the numbers of day visitors and overnight visitors, or

· the numbers of day visitors, overnight visitors and incapacity benefit claimants.

7.4 As the additional free journeys generated by the extended scheme are either to enable journeys to extend beyond the local authority boundary or to be taken away from home, a top-up based on the numbers of day and overnight visitors would seem logical. This option is also the most favourable for Hampshire district councils according to the exemplifications in the Government's consultation paper.

7.5 The exemplifications result in changes to the grant entitlements for county councils, police and fire authorities which are unaffected by this lower tier change. There is no justification for this `side effect'. The complexity of the four-block model appears to make it difficult to deal with funding and formula changes without perverse outcomes and this is another argument for a more transparent system.

7.6 Given the difficulties when the national concessionary fares scheme was first introduced in finding a basis for adjusting formula grant which reflected the impact of the scheme at district council level, an alternative approach would be to incorporate the grant for the concessionary fares scheme within the local area agreement funding stream. If this cannot be achieved in 2008/09, a transitional specific grant could be introduced for 2008/09.

8 Area cost adjustment

8.1 The Government is consulting on proposals to revise the groupings of local authorities for the purposes of calculating the area cost adjustment (ACA), which is intended to reflect the varying costs of service delivery around the country.

8.2 The proposals include changes affecting three areas. These are London, primarily focusing on Greenwich, Lewisham and Wandsworth, Cambridgeshire and Hampshire.

8.3 The ACA was extended beyond the South East for the first time in 2003/04. In the consultations leading up to that change, Hampshire was treated separately from the Isle of Wight but in the final grant settlement for 2003/04, the two areas were combined by the Government without any consultation. The effect of including the relatively low wage area of the Isle of Wight was to reduce Hampshire's grant before floor damping by about £4m per annum. The County Council has repeatedly protested about this illogical linking of the two areas.

8.4 The proposals in the consultation paper do not deal with the Isle of Wight issue. Instead, the Government has noted that there is a wider range of labour costs across the Hampshire and Isle of Wight ACA area than in other areas grouped for ACA purposes. As a result, it has proposed splitting the area in two:

8.5 The North and South Hampshire ACA factors are then combined to calculate a factor for the County Council. The exemplifications show that this proposal would improve the County Council's grant before damping by about £1.2m per annum. This is because the lower labour costs of the Isle of Wight are dragging down a smaller proportion of the overall Hampshire area.

8.6 District councils in the North Hampshire area gain but the authorities in the South Hampshire area lose, including the two cities and the Isle of Wight.

8.7 It is suggested that the County Council reiterates its view that the Isle of Wight should not be included in any ACA grouping for Hampshire. If special funding is required for the Isle of Wight Council because of its position as island, a notional ACA factor should be applied similar to the factor already applied to the Isles of Scilly. The cost of the additional funding for the Isle of Wight would then be met by all authorities nationally, not just by Hampshire as at present.

8.8 If this argument is not accepted by the Government, the use of the North and South Hampshire ACA factors would be the second choice.

9 Needs and resource equalisation

9.1 The four-block model enables the Government to decide what proportion of its formula grant should be distributed in accordance with authorities' relative needs, their relative resources or as a basic amount per authority (the central allocation).

9.2 Increasing the amount allocated as relative needs grant, at the expense of the central allocation, increases the extent of needs equalisation. More grant is diverted to those authorities that are assessed by the formulae as having higher needs, at the expense of authorities such as Hampshire County Council.

9.3 Similarly, the Government can change the negative amount allocated as relative resources grant to divert grant away from authorities with higher council tax resources such as Hampshire.

9.4 Hampshire would benefit if the central allocation block is increased and the needs and resources blocks reduced.

9.5 Unsurprisingly, the options exemplified by the Government involve increased needs and resource equalisation. The extent of such equalisation is a matter of judgement and the Government has yet to respond to pressure from local government to set out the rationale behind the ministerial judgement used to set the existing levels and any future changes.

9.6 The County Council may wish to continue to support calls for a more principled approach by the Government to equalisation. In the meantime, there is no justification for any increase that will divert further grant away from Hampshire.

10 Floor damping

10.1 The damping arrangements for formula grant are intended by the Government to allow authorities suffering from losses of grant time to make the necessary changes to their financial arrangements to move to the lower grant base. The implication is that the floor would be phased out over time.

10.2 With the current scale of grant damping, the Government will find it difficult to remove damping completely in the foreseeable future without causing major dislocation of services in many local authorities. It has consulted, however, on whether the grant floor should be tapered downwards over the forthcoming three-year settlement period from 2008/09 to 2010/11.

10.3 The need for floor damping arises from the inadequacies of the underlying formulae. Until those formulae are improved, floor damping should remain stable to avoid further damage to authorities such as the County Council. There will never be a good time to remove the floors but, with the probability of a much tighter Comprehensive Spending Review settlement this autumn, it would be better to retain stability in the damping in the system for the next three years.

11 Response to the consultation

11.1 A draft response is attached to this report. Appendix 1 sets out some general points of principle about the formula grant distribution system that are not covered by the template response attached as Appendix 2.

12 Impact assessment

12.1 This analysis of the Government's consultation paper draws on the County Council's financial and asset management policies. These policies apply equally to all services and ensures consistent decisions across all services.

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.

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Appendix 1

Response to the Government's consultation on changes to the Formula Grant Distribution methodology

Points to be included in the covering letter to the Government in addition to the template response attached as Appendix 2, subject to any further comments the Leader and Cabinet may have.

1 The inadequacy of the four block model - its complexity, lack of transparency, and the scope for ministers to manipulate the results.

2 Formula grant should fund the basic cost of providing services, via the central allocation block, with the residue, only, being allocated towards the costs of deprivation. The allocation of formula grant towards deprivation costs should fully allow for the funding already directed towards deprivation costs through specific grants and allocations such as the Neighbourhood Renewal Fund.

3 The formulae for personal social services should be subject to a fundamental review.

4 Government support should be provided as far as possible as general formula grant, not as specific grants. The Dedicated Schools Grant should be reabsorbed into formula grant.

5 Government funding support for borrowing allocations should be restored, either through the revenue formula grant system or by replacing them with capital grants.

6 Control over non-domestic rates should revert to local authorities.

7 Hampshire County Council has one of the lowest formula grants per head, has lost substantial grant through resource equalisation and stands to lose further grant from the last formula changes if damping is removed. Services would be at risk and council tax rises would not be sustainable if the floor is unwound over the next three years of CSR 07 in a much tighter financial regime.