Andrew Lock

Communities and Local Government

Zone 5/J2

Eland House

Bressenden Place

London SW1E 5DU

Dear Mr Lock

1

Consultation Response: Local Government Finance Settlement 2009/10

Hampshire County Council as a floor authority has an inadequately low grant increase of 1.75% for 2009/10. The County Council has set its plans around this increase and although too low, appreciates the stability and predictability that results from fixed grant amounts for the three year period 2008/09 to 2010/11.

The County Council is however concerned that no firm assurances have been given in respect of the grant figure for 2010/11 and would not expect a reduction in that very low increase of 1.5%, despite any pressure from Government for higher efficiency savings in that year.

The County Council also thinks that an opportunity has been lost to aid the local economy by investing in local infrastructure - continued lack of Government grant aid towards "supported borrowing" for floor authorities is a major inhibitor and the opportunity should have been taken to help.

This response

· reiterates points made in the 2008/09 response on the three year settlement

· raises concerns about efficiency savings

· expresses concern about the economic crisis and the immediate and longer-term impacts

· draws attention to the problems of supported borrowing and the private finance initiative

· suggests a way forward in seeking support to stimulate the local economy.

Representations made last year

These still remain and are summarised as follows:

· insufficient grant increases to meet rising costs

- pay award in arbitration at 2.45% compared with a 1.75% grant increase

- energy, transport and other inflation costs far in excess of 1.75%

- waste management cost increases also exceeding this figure

- demographic pressures arising from more elderly, particularly those requiring nursing care or suffering from dementia

- more adults with disabilities requiring expensive long-term care, and more children at risk

· despite above average efficiency savings this still puts unacceptable pressure on council tax rises as a consequence

· the lack of transparency of the four block model

· the lack of grant support towards the County Council's long-term waste management contract with the private sector. As you know this pre-dated the private finance initiative and the waste contract is the exemplar for waste management with far and away the lowest proportion of waste sent to landfill. Later private sector waste contracts have benefited from PFI credit support towards their major infrastructure investment schemes, but the County Council has not

· the continued inclusion of the Isle of Wight in the area cost adjustment calculation for Hampshire. This resulted in a major loss of grant for the County Council when the geography was in our view mistakenly extended to the Isle of Wight. That decision to give more grant to the Isle of Wight should have been shared nationally, not just at the expense of the County Council.

The County Council is however grateful that action was taken in response to last year's consultation on the student support services transfer.

Efficiency savings in the council tax bill

· despite the response to the consultation the Government has still decided to go ahead with the proposal but it is a nonsense - 2008/09 is used on the bill for 2009/10 and the Police Authority is excluded despite its precept being included in the bill with the County Council, relevant District Council and Fire Authority being required to show the efficiency savings on the bill

· more fundamentally the analysis is technically flawed by using an amount per Band D. That does not measure the true extent of efficiency savings made in absolute terms as the calculation penalises "low need, high resource" authorities - in other words the lower the spend (or greater efficiency?) and the higher the local taxbase (which is subject to resource equalisation) the lower the Band D equivalent efficiency saving per head. This means that the same 3% efficiency savings target is expressed in Band D per head as

- £35 in Surrey

- £40 in Hampshire

- But £61 in North Yorkshire

Other efficiency implications

The County Council is concerned about the longer-term outlook and the likely constraints on public spending in the future. It is concerned that local authorities do not bear the brunt of the search for greater efficiency savings. It does not expect its grant allocation for 2010/11 to be revised downwards despite what might emerge from the Bichard Review.

It does support the Bichard Review and the concept of looking at local incentives and empowerment to analyse how best to facilitate front line innovation. It does not believe that future budget gaps can be bridged by efficiency savings alone. Savings from shared services and back office functions are not material enough to close the budget gap. It also envisages that Local Government cannot just shrink into a commissioning role and there is a need for it to influence the market through its own direct delivery as well as setting quality standards in the improvement of services within tight financial constraints. The time proposed for the Bichard review, if reporting by Budget 2009, appears inadequate.

The County Council is prepared to submit evidence to the Bichard Review and would like to advance its Commission of Inquiry into the future of adult social care (Getting personal: a fair deal for better care and support) as an example of how to transform and modernise services to meet new demands. Adult social care still requires shared and increased resources in partnership between Government, Local Government and Health.

Economic crisis and its impact

There are a number of examples here where grant support is also inadequate and Government needs to be aware of the limited room for manoeuvre as a result:

· the County Council will have an average 70% increase in electricity prices from its contract arrangements from October 2008. This will largely fall on the winter of 2008/09 and impact payments in 2008/09 and 2009/10. The extra cost increase of this alone is estimated at £1.35m (outside schools budgets)

· the reduction in interest rates will lose about £3m of income net of savings in interest costs

· the inability to sell surplus assets and reinvest this in schemes already committed (most works have to be done in advance of replacing one asset with another). This results in a further increase in prudential borrowing to cover that gap until the market recovers, which may take at least 3-4 years. The County Council's budgeted level of capital receipts has fallen by 93% (from £46.6m to £3.3m for 2008/09)

· there is an even greater need to invest in skills and training but a lack of resources to do so. Changes in funding arrangements for 14-19 vocational activities needs urgent clarification

· there is also evidence locally that loss of income is affecting district councils to an even greater extent, so that they are beginning to pull out of local partnerships and withdrawing funding for activities such as community transport and community safety.

Supported borrowing

The County Council supports the Government's commitment to investment in capital infrastructure. However the Government's `supported borrowing' allocations do not provide Hampshire with an appropriate grant share at the margin for capital financing costs. This results from `judgements', within the four block model, not the inherent soundness of the underlying formula changes. These changes have redistributed grant money away from Hampshire towards areas with perceived higher `needs' and lower `resources'.

In total the County Council is unable to square the circle and will not be able to afford the full take up of the so called `supported borrowing' allocations over the three year period from 2008/09 to 2010/11. This is about £28m or 32% of the nominal Government allocation. This is done with great reluctance at any time, but is especially galling in this current economic crisis, especially when Government is suggesting that other capital expenditure should be brought forward (on schools and housing) to help mitigate the impact of the recession.

The capital financing system is not on a level playing field, not only because of the floor arrangements but also because of the haphazard incidence of capital grant or private finance initiative schemes which are separately supported outside the formula grant calculation. Supported borrowing is the major issue on which the Council wishes to make further representations in the light of the economic recession and the need to support the local economy and infrastructure investment.

The Government's abolition of the capital adjustment in the general grant floor damping calculation in 2006/07 resulted in the County Council, as a floor authority, receiving no additional revenue grant towards capital financing charges arising from `Government supported' borrowing allocations. Without additional revenue grant, the cost of servicing such borrowing at the margin falls directly on the council tax payers. For 2009/10 this means that the County Council should restrict its net increase in financing costs to 1.75%. In practice the general price inflation assumption of 2.5% is used so that marginal borrowing costs are treated in the same way as pressures on other revenue spending. The Government argues that the Council's floor is so far above the grant derived from the formula that the Council is funded for this. But that is a flawed argument - floors are there because of the volatility of the grant formula, to prevent the need for immediate cuts in services. Requiring the floor grant to finance the cost of additional supported borrowing prevents the floor from operating in this way.

In the long run these anomalies require clearer analysis and treatment so that schemes with Government support but financed by different methods are treated equally in future as far as marginal increases in Government grant or credits are concerned.

The Government's approach to capital support is therefore inconsistent. There is one approach in respect of capital grant which is to grant aid approved schemes irrespective of whether the authority is receiving more formula grant than it is entitled to under the formula i.e. is receiving damping grant. However if the scheme is supported by means of supported borrowing, the grant towards the extra borrowing costs has to be offset against damping grant or in the case of a non floor authority is partly clawed back to pay for damping. This situation results in a clamour from local authorities for capital projects to be supported by capital grant, when it was intended that the means of capital support should have a broadly neutral effect. A change is therefore required to level the playing field - this could be dealt with by:

· a capital financing grant entirely separate from formula grant

· a five block model with capital financing as the fifth element (taken out of the main needs block), and damping just applying to the other three blocks.

Private Finance Initiative

The County Council is also concerned about the future viability of the Private Finance Initiative (PFI) schemes, because of the impact of the recession and the inability of the banking system either to provide credit at all, or at such excessive margins that the costs would become unaffordable.

PFI schemes will in future be on the `balance sheet'. In those circumstances the County Council can raise the required finances at very low, almost unprecedented interest rates, which could be used to finance such private finance initiatives in lieu of scarce and expensive banking facilities.

Proposal

The County Council would therefore appreciate a dialogue with Government in the current economic circumstances about:

· levelling the playing field on the treatment of capital financing, so that supported borrowing is not the poor relation of PFI schemes and capital grant, but receives the same level of marginal grant support

· improving the flexibility of PFI schemes if credit facilities for the banking sector become scarce and too expensive.

Conclusion

This is of necessity a long response. The Government needs to be fully aware of the changed circumstances affecting local authorities since the economic crisis and the three year grant settlement.

It could work better with Local Government and Health to help some of these problems, especially around adult social care and it could do more to help Hampshire reinvigorate its local economy by changing its limitations around supported borrowing.

The County Council hopes you will give the response careful consideration.

In particular it asks that the Government does take up its proposals:

· to contribute to the Bichard Review

· to help implement the findings of the Adults Commission

· to help find a way around the current restrictions on supported borrowing and to keep alive the private finance initiative during the credit crunch.

Yours sincerely

Jon Pittam

County Treasurer