Consultation on grant formula changes

Report: 11
Date: 27 September 2002
By: Treasurer

Summary

The report provides information on the review of grant distribution system which has led to the publication of a consultation paper. The merits of the various options for change are considered and a draft response to the consultation presented.

A. Recommendation

Members are recommended to consider the options in the consultation paper on formula grant distribution and agree or amend the MPA’s response. 

B. Supporting information

Introduction

1. In July 2001 the Government announced that there was to be a review of grant distribution arrangements so that agreed changes could be implemented at the same time that new public spending plans under SR2002 came on stream. The review has culminated in a consultation paper published in July 2002 with a deadline for comments of 30 September.

Review process

2. The review of the police allocation formula has been conducted through the Home Office’s Allocation Formula Working Group (AFWG). This group includes representation at officer level from APA and ACPO. Keith Luck and I are members representing the MPS and MPA respectively. There is also representation from the GLA and the ALG.

3. The group agreed to pursue two strands of work. The first was to update the police activity analysis which is at the heart of the formula. The second was to pick up unfinished business from the last time the formula was under review around the effective representation of density and sparsity in the formula. Density and sparsity can be taken as shorthand for urban and rural policing issues respectively.

Activity analysis

4. An exercise was mounted to collect activity data from as many forces as possible. It was considered that this could be done on the back of the development of activity based costing (ABC). In practice it became clear that police forces were at different stages of development of ABC and a number were unable to participate in the exercise. This included the MPS partly because they were not ready in the required timescale, but also partly because officer deployment in London in November 2001 when the information was to be collected was distorted by the exceptional circumstances post-11 September.

5. However when the collection exercise had been completed it was agreed by the AFWG that the number and spread of forces participating meant that the information was sufficiently robust for incorporation in the formula and the group recommended accordingly. By comparison with the previous exercise in 1995 the review revealed an increase in police time spent on crime management with particular emphasis on personal and other crime, an increase in public order/reassurance policing and a reduction in patrol. The results of incorporating the revised activity data are considered in relation to the consultation options at paragraph 14 below.

Density and sparsity

6. Consultants had reviewed the issues of density and sparsity three years previously. In the case of sparsity a connexion between rural circumstances and additional policing costs had been identified. This had been used to justify the creation of a rural policing fund of £30 million in 2000 which had been allocated to forces in relation to population sparsity. The Home Office brought forward proposals to integrate this funding into the general allocation formula. It proved impossible to replicate exactly the allocation currently being made through the earmarked fund. If this funding were incorporated within the formula therefore either some rural forces would receive less additional funding than they do at present or forces not in receipt of rural funding, eg the MPS, would see their current funding reduced.

7. The consultants’ conclusions in relation to density, or more accurately the intensity of policing needs in certain urban conditions, were more ambiguous. They considered that there was an effect but they were unable to quantify it. As part of the current review a questionnaire was circulated to all forces to collect cost data relating to specific police units or activities which the consultants had identified as probably being associated with police responses to ‘intense’ urban conditions. When the information was received it did not support the hypothesis that these costs would be higher in dense urban areas. It was agreed that this did not disprove the original contention that areas of intense need required higher policing costs, but it did not take the issue any further.

8. As part of this exercise I had argued that the requirements of diversity in London might represent a particular dimension of this issue. However the group did not feel able to pursue this at this time.

9. Members will recall that work was commissioned from KPMG in 2001, jointly with the Mayor, to review the grant funding for the Metropolitan Police. Specific proposals were developed as a second stage of that work for changes which could be made to the current allocation formula. Following the completion of the activity analysis review I submitted one of these proposals which we considered was still relevant. This involved replacing residential population with daytime population as a more appropriate indicator in a number of component parts of the formula. However the exemplification that has been carried out by the Home Office shows that this approach actually disadvantages the MPA and I do not propose to pursue it any further.

Consultation paper

10. The conclusions of the Allocation Formula Working Group were reported within Government in May 2002. A consultation paper covering proposals for change in respect of all local government services was published by the Office of the Deputy Prime Minister (ODPM) in July 2002. Chapter 4 which relates specifically to the police allocation formula is attached at appendix 1. There are a number of cross-service issues relevant to police authorities and a summary of proposals in chapters 8-14 of the consultation paper is attached at appendix 2. 

11. The Association of Police Authorities has produced a framework of principles to guide consideration of options for change and a corporate response which seeks to apply those principles without fettering individual authorities’ responses. I have been able to input to these two documents which are attached at appendix 3.

12. The following paragraphs identify issues in the consultation paper for the MPA’s own response. There is a further meeting of the AFWG scheduled for 19 September and an oral report will be provided to the Committee on any issues arising.
Options for change to the police allocation formula.

13. Five options for change are exemplified in chapter 4. Of these three have had no prior consideration in the working group. Further exemplifications were requested to clarify the statement in chapter 4 that the options could be combined in any permutation and also to show the effect of an alternative indicator in the proposed new deprivation component.

Option POL1

14. This option incorporates the result of the revised activity analysis. This represents a better view of the allocation of police resources to meet current demands on the service and its incorporation was recommended by the AFWG and is supported by the APA. The impact of this change alone is to increase MPA resources by £41.5 million. Clearly the Authority will support this change. However the information on which it is based is not comprehensive and the Metropolitan Police in particular was not able to participate, as explained in paragraph 4 above. Activity analysis should be regularly available in future with the implementation of activity based costing throughout the service thereby allowing a complete collection of activity data. The Authority may therefore want to propose that the formula should be re-based periodically and certainly at the next methodology review in two years time.

15. POL1 also integrates the rural policing money into the general formula. This has been achieved by increasing the sparsity weight from 0.5% to 1%. This has minimal impact on authorities, such as the MPA, which did not receive any allocation from the rural policing fund but fails to match the actual allocations that were received by rural forces. The Authority could support the view of the APA that the rural policing fund should not be integrated into the police funding formula in a manner which results in any redistribution between authorities. Alternative exemplifications were provided previously to the AFWG including one where the sparsity weighting was increased to 1.4% at which point no rural force received less than their entitlement under the rural policing fund. However the MPA would lose £7-8 million if such a proposal were to go forward. The Authority should strongly resist increasing the sparsity weighting beyond 1%.

16. All the remaining options repeat POL1 together with a further proposed formula change. This is a misleading presentation since it masks the effect of the new change proposal included in each option. The following table shows each option exemplification as a variation from the POL1 result which therefore represents the effect of each new change.

Option POL2

17. The new variation reflected in POL2 is the final elimination of the establishment factor which was introduced to damp changes when the new police formula was introduced in 1996. The weighting of this factor has been reducing on a yearly basis except during the moratorium on formula changes. Although the progressive reduction of the establishment factor has always disadvantaged the Metropolitan Police the Authority has to accept its final elimination as inevitable. The loss reflected in the exemplification (£12.9m) can be absorbed in a situation where the updated activity analysis has generated a significant gain to the Authority. In the future floors and ceilings provide an alternative means of smoothing grant losses (and gains).

18. Option POL2, incorporating as it does POL1, effectively represents a position supported by all sides in the AFWG apart from reservations about the treatment of the rural policing fund. The net effect is an increase of £27.3 million for the MPA.

Options POL3 and POL4

19. These options can be considered together. They seek to reflect in the formula the Government’s current policing priorities in relation to street crime, POL3 by increasing the weight of the personal crime component of the formula by 5%, POL4 by increasing the public order component weight by 5%. The results illustrate the folly of such an approach. It is perverse that the MPA should gain £5.2 million on one option and lose £4.4 million on the other. However in principle this is an inappropriate use of a general grant. The distribution of general grant should be based on objective indicators of local policing need. If the Government wishes to allocate resources towards specific policy objectives this should be done by way of earmarked funding outside the general grant system. The Authority should therefore oppose options POL3 and POL4.

Option POL5

20. This option adds a new ‘deprivation’ component to the police allocation formula exemplified with a weight of 2%. The result appears counter-intuitive in that the MPA allocation thereby reduces by £4.4 million. However on examination there were serious doubts about the relevance of the indicator, labelled striving population, which the Home Office have used to represent deprivation. Accordingly ODPM have provided an alternative exemplification using supplementary benefit claimants. This shows little change with a reduction in the MPA allocation of £3.6 million.

21. It can be legitimate to add factors into the formula on a judgmental basis provided there is a credible rationale. For example a deprivation component may provide a means of addressing the issue of density and intense urban need for which no satisfactory solution has been found through the objective formula. In other words a judgmental approach may be able to deal with residual need unmet by the formula. However the results do not suggest that the options exemplified achieve this and they should therefore not be supported.

Cross-service options and issues

22. The cross-service issues are summarised in appendix 2. Exemplifications are shown in relation to the GLA as a whole. Only a proportion of the resulting gain or loss will impact on the MPA. As a rule of thumb the MPA’s share of total GLA SSA is 85%. The following paragraphs suggest appropriate responses from the MPA.

Capital financing SSA

23. Options for change relate to a proposal to eliminate the interest receipt sub blocks in the capital financing SSA. There is no compelling case for change. There are large swings between the different options. The Authority may wish to support ‘no change’ in this case.

Area cost adjustment

24. The most important point here is what is not exemplified. There is no option for a specific cost approach to the area cost adjustment. The Authority should welcome this and indicate that it would oppose any move to develop a specific cost approach in the future.

25. All the options exemplified are therefore based on the continued use of a general labour market approach. They are all neutral or slightly favourable to the GLA. There is no need for the MPA to express any strong preferences among them.

Fixed costs, population change, etc

26. The proposal in relation to a fixed cost element seems relevant only to small district councils. There appears little point in applying it to police authorities.

27. In principle the timing of grant changes should match as closely as possible changes of need on the ground. However again the MPA is largely unaffected and may not feel strongly enough to express specific preferences.

Resource equalisation

28. These options attempt to address the mis-match between the council tax income assumed within the grant distribution system and actual council tax levels. In effect all parts of local government have been making up for perceived shortfalls in grant funding by raising council tax. The scale of redistribution implied in these options must give Ministers pause before adopting any of them. However if such an adjustment is seriously contemplated then option RE2 complies with the principle enunciated by the APA that changes should be contained within service blocks.

Floors and ceilings

29. The subject of the consultation relates to a relatively technical issue about calculating baselines for the purposes of floors and ceilings. However there are two points that the MPA may want to support. First is to rehearse the argument that there should be floors but not ceilings, ie gaining authorities should not have their gain restricted to finance floors for losing authorities. Secondly there is a suggestion that police and fire gains and losses would be taken together in the floors and ceilings process. Given that LFEPA are looking at substantial potential grant losses out of the review this could mean MPA’s gain being limited to offset LFEPA’s loss. Again following one of the APA’s principles it could be argued that the operation of floors and ceilings should be contained within service blocks.

Simpler presentation

30. There is a proposal to present the allocation formulae in a simplified form. However there is a real risk of departing from reality. In the case of the police formula its construction is actually quite understandable.

Merging RSG and NDR

31. The Government’s proposal is to combine RSG and NDR into a single Formula Grant. Although this may represent a simplification it may also pre-empt any future consideration of restoring the business rate to local determination as part of redressing the balance of funding. A more even funding balance between government grant and locally determined taxation would alleviate the high council tax gearing which is particularly acute with police authorities. The Authority may therefore wish to enter a reservation along those lines. 

MPA response

32. A draft response picking up the suggestions is attached as Appendix 4. 

C. Equality and diversity implications

There are no equality and diversity implications arising from this report.

D. Financial implications

Any additional financial implications will be provided at the meeting.

E. Background papers

• Local Government Finance Formula Grant Distribution - a Consultation Paper

F. Contact details

Report author: Peter Martin 020 7202 0206.

For more information contact:

MPA general: 020 7202 0202
Media enquiries: 020 7202 0217/18

Appendix 1

See Supporting material.

Appendix 2: Local government finance

Formula grant distribution - a consultation paper

Formula change options in chapters 8-11

This appendix briefly describes options for change to the grant formula outside the formula components specific to Police which will impact on the resources distributed to individual police authorities. The impact on the ‘GLA – all functions’ as exemplified in the consultation paper is shown in the attached summary. The MPA’s share of total GLA SSA is about 85%.

Chapter 8 - capital finance

The capital financing part of the SSA system allocates resources relating to the cost of local authorities’ capital borrowing. The current methodology assumes that debt charges costs are offset by interest receipts. The treatment of interest receipts is considered to produce complexity and volatility.

Four options all reflect different ways of removing the interest receipt element of the capital financing SSA. 

Chapter 9 - area cost adjustment

The area cost adjustment currently compensates for the high costs faced by authorities in London and the south east.

Options for change do not include any based on a specific cost approach. All options therefore continue to reflect a general labour market model for the area cost adjustment.

Option ACA1 is a variant of the existing approach which:

• Incorporates smoothed data
• Changes the categorisation into inner, outer and fringe areas
• Extends the geographic coverage

Option ACA2-5 are all based on an alternative approach originally recommended by the Elliott review in 1996. This is based on a more detailed, and economically robust, analysis of the labour market structure.

ACA2 applies to the same authorities as at present but with separate factors for each authority. It differentiates between east and west London. It draws data from the more detailed Labour Force Survey rather than the New Earnings Survey.

ACA3 is as ACA2 but based only on private sector wages data.

ACA4 is as ACA2 except that it applies the area cost adjustment across the whole country.

ACA5 is as ACA4 but based only on private sector wages.

Chapter 10 - fixed costs, sluggish costs and population change

There are two options which build the idea that there is a fixed cost of ‘being in business’ which ought to be recognised in the formula.

Option FC1 applies only to the Environmental, Protective and Cultural Services (EPCS) block and does not therefore affect police authorities.

Option FC2 extends the application to include police and fire.

Areas with decreasing populations are unable to reduce costs at the same rate as the decline in their population. A similar effect applies in reverse to areas with increasing populations where the respective formula adjustments lag behind the increase in needs on the ground.

Option PC1 seeks to address the first situation through a targeted grant.

Option PC2 Applies a targeted grant to address the second situation.

Chapter 11 - resource equalisation

The grant distribution system incorporates an assumption of local tax resources in relation to a council tax for standard spending. This notional figure is fixed in relation to the totals in the Government’s spending plans. In practice local authorities, including police authorities, generally spend more than would be implied by the Government’s plan figures by raising more money from council tax. Options under this chapter seek to bring the local tax assumption underlying the grant distribution arrangements into line with actual levels of council tax.

Option RE1 uprates all spending blocks by a fixed national percentage.

Option RE2 uprates each spending block separately to bring it into line with current spending for that block.

Option RE3 uprates the Personal Social Services (PSS) and EPCS blocks only.

Chapter 12 - predictability and stability

The Government proposes to continue to operate a system of floors and ceilings to limit year-on-year grant losses and gains. This is effectively a self-financing system. For 2003/04 alternative approaches are being considered for calculating the base year grant amounts against which the annual changes are measured.

The consultation paper also raises questions about whether data used in the formula should be smoothed by using more than one year’s data. This could apply to ACA data, interest rates in the capital financing SSA, and socio-economic indicators.

Chapter 13 - a simpler presentation of the new system

There is a proposal to present the formulae as:
Basic allocation + deprivation top-up + pay cost top-up + other top-ups x client group (eg population).

Chapter 14 - merging RSG and NDR into a single grant stream

The proposal in this chapter is to merge RSG and redistributed NDR into a single grant to be known as Formula Grant. This is put forward in the interest of simplicity and transparency.

Attachment to Appendix 2

Formula change options in chapters 8-11

Impact on GLA - all functions (2002/03 total SSA: £1168.6m; 2002-03 total grant: £928.4m)

Chapter 8 - Capital financing (Change from 2002-03 total SSA)

Chapter 9 - Area cost adjustment (Change from 2002-03 total SSA)

Chapter 10 Fixed costs, sluggish costs and population change (Change from 2002-03 total SSA)

Chapter 11 - Resource equalisation (Change from 2002-03 total grant)

Appendix 3

See Supporting material.

Appendix 4: Local government finance

Formula grant distribution - a consultation paper

Draft MPA response

Dear

Consultation on Formula Grant Distribution

This is the response of the Metropolitan Police Authority (MPA) to the Consultation Paper on Formula Grant Distribution published in July 2002.

The MPA came into being in July 2000 and inherited a financial position where government grant for the Metropolitan Police had been reducing as a proportion of total resources available nationally for police authorities progressively over a period of five years. As a result police officer numbers had fallen from above 28,000 to around 25,500.

The Authority therefore welcomes the review of the grant distribution formula as an opportunity to ensure that the formula better reflects the policing needs and demands in London.

However consideration of grant distribution cannot be wholly divorced from the total of resources available for distribution. The Authority is concerned firstly at the lack of detailed information following the announcement of the result of SR2002 and secondly at what appears to be a very inadequate settlement for the police service. Any improvement arising from the formula review could be nullified if the national total of grant fails to match the increasing financial pressures on police authorities.

The Authority’s officers have been involved in the review over the last year through the Home Office’s Allocation Formula Working Group. However it is disturbing that three of the five options for change to the police allocation formula itself were not considered at all by the working group prior to their publication in the consultation paper. Furthermore there are a number of options in the consultation paper which do not impact on the police allocation formula as such but which could potentially have significant effects on police authority resources. Consideration of these options within the working group has been limited at best and more often non-existent. Involvement of police authority and service representatives in the development of proposals which could significantly impact their resources has therefore been seriously deficient.

The presentation of options in relation to the police allocation formula has been confusing and actually misleading. Further exemplifications were required in order to clarify aspects of the consultation.

The following comments relate to the five options for change to the police allocation formula put forward in the consultation.

Option POL1
This option incorporates the result of the revised activity analysis. This represents a better view of the allocation of police resources to meet current demands on the service. The Authority therefore supports the implementation of the updated analysis. However the information on which it is based is not comprehensive. The Authority is especially conscious that the Metropolitan Police was not able to participate, partly because of the significant distortion to officer deployment in London at the time of the review as a result of the exceptional circumstances pertaining post-11 September. Activity analysis should be regularly available in future with the implementation of activity based costing throughout the service and it is suggested that the formula should be re-based periodically and certainly at the next methodology review in two years time.

POL1 also integrates the rural policing money into the general formula. This has been achieved by increasing the sparsity weight from 0.5% to 1%. This has minimal impact on authorities, such as the MPA, which did not receive any allocation from the rural policing fund but fails to match the actual allocations that were received by rural forces. The Authority supports the view of the APA that the rural policing fund should not be integrated into the police funding formula in a manner which results in any redistribution between authorities. Alternative exemplifications have been provided previously to the working group including one where the sparsity weighting was increased to 1.4% at which point no rural force received less than their entitlement under the rural policing fund. However the MPA would lose £7-8 million if such a proposal were to go forward. The Authority would strongly resist increasing the sparsity weighting beyond 1%.

Option POL2
As with all the remaining options POL2 repeats POL1 together with a further proposed formula change. This continued repetition of the effect of POL1 has been a source of some of the confusion surrounding the police options. The new variation reflected in POL2 is the elimination of the establishment factor. Although the progressive reduction of the establishment factor has always disadvantaged the Metropolitan Police the Authority accepts its final elimination as inevitable in a situation where the activity analysis has been updated and where floors and ceilings provide an alternative means of smoothing grant losses (and gains).

Options POL3 and POL4
These options can be considered together. They seek to reflect in the formula the Government’s current policing priorities in relation to street crime. The Authority’s view is that this is an inappropriate use of a general grant. The distribution of general grant should be based on objective indicators of local policing need. This does not rule out the use of judgment, for example where there is evidence that the objective formula is deficient in representing a significant element of need. However if the Government wishes to allocate resources towards specific policy objectives this should be done by way of earmarked funding outside the general grant system.

Option POL5
This option introduces a specific deprivation component into the formula. No rationale has been offered to justify a specific deprivation component in addition to all the deprivation indicators that are already used in the main formula. The MPA could not support this option which distorts the distribution resulting from the objective formula without any sound evidence to support it. In fact the results are on the face of it perverse since they appear not to recognize the obvious incidence of deprivation in the capital.

There are a number of options outside the police allocation formula itself on which the MPA wishes to comment as set out in the following paragraphs.

Capital financing SSA
Options for change here relate to a suggestion that the interest receipts sub blocks in the formula could be eliminated. The Authority has not been directly involved in discussions of these proposals. However on the information available in the consultation paper the Authority sees no compelling case for change and therefore cannot support any of the options put forward.

Area cost adjustment (ACA)
Discussion of the ACA in the allocation formula working group has been limited. The Authority supports a general labour market approach to the ACA in principle and is therefore pleased to note that there are no options involving a specific cost approach. It would strongly resist any attempt to go down that road in future.

Fixed costs, population change, etc
The Authority sees no merit in introducing a marginal fixed cost element into the police allocation formula.

The Authority would support in principle proposals to ensure that the timing of grant changes matches more closely changes of need on the ground.

Resource equalization
It is ultimately a choice for Government as to whether assumptions underlying the grant distribution system should be brought into line with actual circumstances rather than representing some notion of a ‘standard’ position however far removed from reality. The Authority would agree with the APA that if such an adjustment is to be made then it should be contained within service blocks as applies in option RE2.

Floors and ceilings
The MPA would support an option for deriving the baseline grant which does not affect authorities not subject to the change in function or funding requiring the adjustment.

The Authority is concerned about another issue in relation to the operation of floors and ceilings. It sees no logic in the arbitrary coupling of services for this purpose. In particular police and fire gains and losses should not be set off against each other in setting floors and ceilings.

Simpler presentation
Whilst it may be possible to re-present some other service formulae in the simplified way proposed in the consultation paper it is difficult to see how this would be done for police without serious distortion. The shape of the police formula is actually quite understandable as it is and this particular ‘simplification’ seems unnecessary.

Merging RSG and NDR
The Authority is concerned that this proposal could erode the separate nature of NDR and pre-empt any future options to restore it to local control. 

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