Archived decisions

HAMPSHIRE COUNTY COUNCIL

Decision Report

1. Executive Summary

1.1. The purpose of this paper is to:

· set out the context and background for the development of the Single Early Years Funding Formula (SEYFF)

· explain the proposed formula

· evaluate the values options

· assess the impact on providers.

1.2. This report also highlights the significant funding problems associated with this area and the pressures beyond 2010/11.

2. Contextual information

2.1. The Department for Children, Schools and Families (DCSF) requires all local authorities to have a SEYFF in operation from 1 April 2010. There are currently 673 Hampshire County Council (HCC) approved private, voluntary and independent (PVI) providers, 11 primary schools with nursery classes and three maintained nursery schools who all fall under the requirement of this legislation.

2.2. The DCSF is also extending the free entitlement for three and four year olds from 12.5 hours free education to 15 hours from September 2010. In 2006 HCC became part of the Extended Flexible Entitlement pathfinder, which became operational from April 2007. This is being rolled out across Hampshire in stages and, at the start of the 2009 autumn term, there were 556 settings offering the extended entitlement. Settings on the pathfinder (i.e. offering 15 hours flexibly) are currently paid £4.10 an hour per pupil and for those settings not on the pathfinder (i.e. offering 12.5 hours of sessional care) the hourly rate is £3.60.

2.3. The DCSF guidance `Implementing the Early Years Single Funding Formula - Practical Guidance July 2009' states that the formula must contain a base rate and a deprivation factor. It also recommends incentives to improve quality and flexibility of provision.

2.4. The Extended Flexible Entitlement Partnership Advisory Group (PAG), which acts as a sub-committee of Schools Forum, has been tasked with developing the SEYFF. PAG includes representative from all types of early years provider as well as Hampshire County Council Early Years and Finance officers. Throughout the process decisions made by PAG and option recommendations have been reported to Schools Forum for ratification.

3. The Single Early Years Funding Formula

3.1. The proposed formula was reported to Schools Forum on 10 July 2009 and contains a Base amount (a basic hourly rate for settings) plus additions, where appropriate, for the following elements:

· Flexibility - based on the flexibility of the provision offered at the setting

· Quality - qualification levels of the staff providing the free entitlement

· Deprivation - based on the deprivation level of the children attending the setting (as required by the DCSF)

· Sustainability - to allow a factor to ensure sustainability and to enable the authority to ensure sufficient and diverse provision.

3.2. Within each element there will be different bandings. In advance of each year, settings will be assessed as to their levels of flexibility, quality and deprivation and placed onto a band within each element. These assessments will apply for the whole financial year.

3.3. The proposed formula and bandings are as follows:

			Band
		Base Rate
Elements	Flexibility	Inflexible	F1
		Standard	F2
		Moderate	F3
		Fully flexible	F4
	Quality	Standard	Q1
		Ratio 1.5 - 2.49	Q2
		Ratio 2.5 - 3.49	Q3
		Ratio 3.5 and over	Q4
	Deprivation	Standard	D1
		Fairly deprived (20-49.9%)	D2
		Deprived (50-99.9%)	D3
		Very deprived (100-149.9%)	D4
		Most deprived (≥150%)	D5
Sufficiency

Flexibility

3.4. Schools Forum agreed to assess a setting's flexibility in terms of how many drop off and collection times the setting has compared to the hours it is open in a day. This method is used to reflect the fact that those open for a short time have less scope to be flexible.

Quality

3.5. The qualification levels of the staff at the setting will be used as the best proxy for quality. To assess each setting a ratio will be calculated which will take the number of hours worked by staff multiplied by their qualification level, if NVQ 3 or above with NVQ 6 as the maximum, compared to the number of total staff working hours.

Deprivation

3.6. To identify children in deprived areas the Index of Multiple Deprivation 2007 (IMD) will be used. The greatest weighting will be given to the children from the most deprived areas. This funding will be similar to that used for the additional deprivation funding in mainstream schools.

Maintained schools flat rate

3.7. To account for the statutory costs of being a maintained school, the formula will include a flat rate for Maintained Nursery Schools and a flat rate for Maintained Nursery Units (see section 10).

4. Funding

4.1. The majority of the funding for three and four year olds comes from the Dedicated Schools Grant (DSG). The total funding from DSG for 2009/10 is £30.12m, which includes £0.63m carried forward from 2008/09.

4.2. The Extended Flexible Entitlement (EFE) Standards Fund was introduced with the start of the Extended Flexible Entitlement Pathfinder. The allocation for 2009/10 was announced in June 2009 and is £5,122,665 which is £2.5m lower than the provisional allocation as notified in July 2008. However, there was also one off funding of £2.157m that has been brought forward from 2008/09, which mitigates the Standards Fund reduction and gives a total of £7,279,665 for 2009/10.

4.3. Although paid as one allocation, this grant comprises of two parts: the additional cost of 2.5 hours a week provision and funding for increased flexibility. Nationally there is a fixed amount available for the EFE Standards Fund. When allocating the money available between the two parts, the DCSF derives a total cost of funding the hours increase and the money remaining is then allocated for flexibility. This means that, as the cost of the additional hours increases, the amount available for flexibility decreases.

4.4. At the end of 2009/10 it is projected that there will be a planned DSG underspend for early years provision of £2.541m. This report proposes that this amount is spread over the following five years to help support the additional cost of the formula over that time. This would mean the budget available in 2010/11 would be £36.108m. Based on a projected number of hours to be funded in 2010/11 of 8,970,000, this would only equate to an average hourly rate of £4.03, whereas pathfinder settings are currently receiving a rate of £4.10.

4.5. In order to be able to maintain an average rate of £4.10 an additional £669,000 per annum would be needed.

4.6. In addition to this, it has been agreed by Schools Forum (10 July 2009) that funding for deprivation should come from new money (as it did for maintained schools) and be gradually built up. It is estimated that this will ultimately cost £570,000 per annum but should be introduced at £190,000 a year over a three year period. If this funding were not found from additional headroom, the only alternative would be to take it from currently available funding, which would mean the amount of money available for flexibility and quality would have to be reduced. Based on the projected 8,970,000 hours, £570,000 would equate to a reduction on the average hourly amount of £0.06. This funding would then be allocated out to only 34% of providers who are expected to receive any additional funding for deprivation.

5. Medium Term Financial Pressures

5.1. The use of the 2009/10 carry forward over five years will slightly offset the EFE Standards Fund reduction (see 4.4 above). However, this will lead to a budget pressure of £508,000 in 2015/16 that will either need to be met from additional funding (potentially from headroom) or it will result in a decrease in the average hourly rate of nearly 6p.

5.2. There will also be a pressure on settings who have been on the pathfinder rate of £4.10 (some since Summer term in 2007) who may now be receiving significantly less than this, as the average hourly rate will be £4.03. In order to be able to maintain an average funding rate of £4.10 an additional £669,000 would be needed. PAG is concerned about this funding drop but recognises it as one of the consequences of the limited overall specific grant funding for the roll out of the new entitlement.

6. Formula Values Options

6.1. Four different formula options have been developed looking at the different weightings within the elements and how the formula would need to change to move with the future strategies of the Early Education and Childcare Unit (EECU). These are summarised in the table below:

6.2. Six evaluation criteria were set, each weighted according to the priorities of the EECU. The outcome of this exercise was that Option B was the most suitable.

6.3. For the development of the 2010/11 formula Option A and Option B were considered in more detail by PAG and providers.

Option A

6.4. The values attached to the bandings within the elements are highly differentiated so that there is a large monetary increase when a setting increases either its flexibility or its quality and therefore moves up a banding. This option would best support the long-term aim of encouraging settings to improve by keeping the formula element values high. This would be offset by reductions in the base rate to ensure affordability.

Option B

6.5. The values attached to the bandings within the elements are more consistent with more gradual increases in-between the bands. This option would help to support the long-term aims of predictability and stability, as changes would be less volatile.

6.6. The table below shows the different potential values for options A and B (deprivation values are the same for both). It should be noted that these values are for indication only and are not final values. The column headed `percentage of providers' shows, based on the samples used, the percentage of providers expected to be on each banding:

6.7. At its meeting on 4 September 2009 PAG considered the advantages and disadvantages of Options A and B. Although a number of members recognised the advantages that option A would have to their own setting's circumstances it was unanimously agreed that Option B was the best for the market as a whole and is more sustainable.

6.8. As part of the consultation process (detailed in section 8) providers were also asked which funding option they preferred and 78% opted for option B.

7. Formula sensitivity analysis

7.1. The 422 providers that were on the pathfinder for summer 2009 were sent a form requesting data relating to the flexibility of their provision and the qualification levels of their staff. These results were then used to assess the percentage of providers that would be in each band, so that values and sensitivities could be modelled.

7.2. Modelling was undertaken to show how increases in the number of settings on each band would affect the cost of the formula or the values for the elements, assuming a fixed budget. This analysis demonstrated what would happen if the final data were different from the sample used and how changes over time might impact.

7.3. The modelling showed that, as Option B has the flatter increases, changes in the number of settings in each band had less impact on the overall cost. This means that less additional funding would be needed or, if this were not available, only a small adjustment to the values would be needed.

7.4. The sensitivity analysis also highlighted that there is expected to be a increase in the number of settings that are achieving high levels of flexibility and quality. Flexibility is expected to level off in the first couple of years once local market needs have been met. Quality, on the other hand, is expected to carry on increasing over at least the next five years as new Government initiatives to improve the level of qualifications of staff are introduced.

7.5. It is recognised that, if additional funding were not available to help support the cost of improving flexibility and quality, then there would have to be reductions in the banding values. Option B values would have less impact if reductions were needed.

8. Provider Consultation

8.1. At the end of September 2009 papers outlining the proposals for the SEYFF and consultation questions were distributed to all settings registered to provide early years education. There were also nine consultation briefings held at five locations across the county at the beginning of October. During these briefings the distinction between the standard rate and the higher rate (£4.10) during the pathfinder process was re-stated. The consultation period for the private, voluntary and independent (PVI) settings ran for two weeks from 28 September 2009.

8.2. 325 providers (48%) responded to the consultation by the 12 October deadline. The table below summarises the questions and the responses received:

Questions		% Yes	% No
1	Do you agree with the way flexibility has been defined?	85.5	14.5
2	Do you agree with the way the number of different qualified hours define each quality band?	70.7	29.3
3	Do you agree with the way the deprivation weighting has been defined?	87.3	12.7
4	Do you agree that 92% of the proposed budget should be used for the base rate and 8% for the elements?	90	10
5	Do you agree that keeping the base rate at the same level as the current standard rate (£3.60) with inflation will help settings to be sustainable?	64.5	35.5
6	Do you agree that the initial balance should be 60% flexibility and 40% quality?	69	31
7	Do you agree that over time the weighting for quality should be increased?	81.4	18.6
8	Which of the formula options do you support?	B= 78.4	A= 21.6

8.3. The majority of respondents were in favour of each of the proposals in the consultation. The three areas that attracted the least support were: the base rate (question 5), the use of staff qualifications (question 2) and the initial balance between funding for flexibility and quality (question 6).

8.4. Base rate - 35.5% of respondents disagreed with the proposed base rate of £3.70 preferring a higher base rate to aid stability and predictability in business planning.

8.5. Staff qualifications - 29.3% of respondents did not agree with using staff qualifications as a proxy for quality. Length of experience, Ofsted inspection outcomes and/or local setting annual review outcomes were suggested as alternatives. However, these all have difficulties in terms of verification, moderation and integrity.

8.6. Initial funding balance between flexibility and quality - 31% of respondents disagreed with the proposed 60/40 split but there was no consensus as to what the split should be.

8.7. It was recognised that school governing bodies would need a longer consultation period. A consultation meeting was held with maintained schools on 10 November 2009 and the final stage of consultation is now being entered into which will focus particularly on the application of the maintained sector flat rates. Formula details with exemplifications will be sent to all affected school for response by 31 January 2010. The feedback from this will be reported to Schools Forum and the Executive Lead Member for Children's Services in March 2010.

9. Maintained settings

9.1. Throughout the development of the SEYFF the view of both the DCSF and the County Council has been that, although there are changes in the funding method, there is a presumption against the closure of maintained nursery schools and classes.

9.2. In its supplementary guidance entitled `The Early Years Single Funding Formula (EYSFF) for maintained nursery schools (MNSs)' released on 29 October 2009 the DCSF recognised that maintained schools have statutory costs that are higher than for other providers (for example):

· the statutory requirement for a Head Teacher to lead the school

· in some instances a strong need for other senior staff members

· teachers that are paid using the teacher pay scales

· other non teaching staff paid using local authority pay scales

· support staff costs will include on costs such as the local government pension scheme which can determine higher employer contributions.

9.3. As a result of these additional costs the DCSF recognises that, while the Maintained settings have to be funded on the same formula basis, the values within that formula do not have to be the same. To address these issues it is proposed that the SEYFF in Hampshire will include an additional flat rate of £70,000 for the three Maintained Nursery Schools and £9,500 for the 11 Maintained Schools with Nursery Units.

9.4. Transition funding to support the move from place funding to per pupil funding was agreed at Schools Forum on 14 October 2008 and included in the 2009/10 budget, and will also apply for 2010/11.

9.5. The flat rates have been provisionally calculated on the assumption that maintained settings will be assessed as high quality but only standard flexibility. The hourly rate that is would attract has then been compared to the current hourly rate for maintained settings. The flat rate has been derived from the difference between the two hourly rates.

9.6. Full data for maintained schools has still not been received. Once this has been collated it may be necessary to review the flat rates or the detailed transition workings.

10. Impact assessment

10.1. The impact of the loss of EFE Standards Fund is that the affordable average hourly rate is now £4.03 compared to the pathfinder rate of £4.10.

10.2. At the beginning of the autumn term 2009 83% of providers were on the pathfinder rate of £4.10 this is expected to increasing to 90% in January 2010. This means that when the formula takes effect in April 2010, based on the current 2010/11 average rate of £4.03, a large number of settings will be receiving less funding than they were previously. This is likely to be received negatively and, for many providers, may threaten their sustainability.

10.3. Of the 17% of settings that have not joined the pathfinder there are four key types of provider:

· A - pre-schools for children aged 2-5, open part of the day (less than 4 hours), term time only, generally in community facilities

· B - private providers offering full day care (between 7 and 10 hours a day) all the year round but most also including children 0-3

· C - private providers operating as nursery schools (generally 6 hours a day), just for three and four year olds and term time only

· D - independent schools - kindergarten and year R classes and mostly also for children through to 8, 11 or 13.

10.4. The majority of settings falling under groups A and B will be able to adjust to the requirements of the EFE.

10.5. The independent schools have a relatively low reliance on grant funding and will have to decide whether the business as a whole needs to attract children at the youngest stage to sustain the business overall in the future. Some may withdraw from the scheme but this may not have a heavy impact on sufficiency, as parents may chose to use them without the benefit of external funding (as some currently do), however it would shrink the range of choice and possibly bring adverse comment.

10.6. The group most impacted are group C. They consider they have a particular, specialist, well established and valued service of high quality and are finding it difficult to consider and/or plan for adaptation. A high proportion of their income is from EYE grant funding and the SEYFF will fall short of their current scale of fees. Although highlighted by the move to the single formula, this problem on the whole arises as a result of the move from sessional provision to flexible provision. The amount that they were previously able to charge for time in excess of the 2.5 hour free entitlement in each session is in excess of the maximum funding amount of the SEYFF.

10.7. It is estimated that there are between 30 and 40 of these settings currently not on the pathfinder, which equates to approximately 5% of provision overall. A number of settings who are already on the pathfinder are also affected by this and are trying to make the new flexible provision work for them. These settings are likely to experience the heaviest impact and carry a greater risk of closure (with potential impacts on sufficiency in local areas).

10.8. Intensive business support may bring an amelioration but localised risk assessments will be undertaken if closure or withdrawal from the scheme is likely.

10.9. The pathfinder pilot status of the County Council has meant that providers taking early steps to implement 15 hours and flexibility have had the benefit of a "pump priming" rate. Many have anticipated this being a permanent feature whilst others have used it in ways that do not generate permanent commitments. EECU staff are taking a look at providers who consider there will be an adverse impact to their business model and are providing support and assistance including business advice.

10.10. Ultimately the EECU have regard to the duty to deliver sufficient child care and where providers may withdraw provision of free entitlement and, in areas where withdrawal creates challenges to the sufficiency duty, EECU can stimulate provision through the use of Sure Start Early Years and Childcare grant. However, this funding is committed and limited and using it will divert from other Early Years statutory provision

10.11. Any financial support would need a sound business case based on childcare sufficiency need, linked to flexibility and quality improvements, and would be subject to review by the business support team.

10.12. The impact on maintained providers has been hard to quantify due to the move from place led funding to pupil led and the transition funding that has been put in place for 2009/10 and 2010/11 to help support the change. As a result of the transition funding the 14 maintained settings will not be fully on the formula in 2010/11. A review of the flat rates will be undertaken before the start of the 2011/12 funding year once the impact of the removal of the transition funding and pupil up take is known.

11. Recommendation(s)

11.1. It is recommended that the SEYFF, as proposed in paragraph three, including the application of flat rates for maintained Nursery Schools and classes, is agreed.

11.2. It is recommended that the Option B approach to the formula values is agreed.

11.3. To note the impact assessment on different types of providers.

CORPORATE OR LEGAL INFORMATION:

Links to the Corporate Strategy

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Other Significant Links

IMPACT ASSESSMENTS:

1. Equalities Impact Assessment:

1.1. A full impact assessment has taken place in relation to the Early Years Education and Childcare service plan. The development of a single funding formula has taken place as part of that plan. No adverse effect has been identified. One of the aims of the single funding formula is to enhance quality of provision for all children and specifically improve outcome for children in vulnerable groups. The deprivation element of the formula recognises that additional resources are needed to enhance outcomes for children accessing provision in these areas.

2. Impact on Crime and Disorder:

2.1. The Single funding formula incentives high quality provision which leads to improved social and emotional development of children. This enhances children's longer term ability to make a positive contribution to society.

3. Climate Change:

a) How does what is being proposed impact on our carbon footprint / energy consumption?

The Single Funding formula aims to support sustainability of provision in local communities therefore reducing the need to travel to access provision.

b) How does what is being proposed consider the need to adapt to climate change, and be resilient to its longer term impacts?

n/a