Formula grant distribution: consultation

Report: 12
Date: 15 September 2005
By: Treasurer

Summary

The Government is consulting on the outcome of the review of the grant distribution formula. The report sets out the issues relevant to the MPA and proposes a response to the consultation.

A. Recommendation

Members are recommended to:

1. agree the MPA response to the consultation questions as set out in Appendix 2; and
2. agree to make specific representation for retention of the police staff pensions uplift (paragraphs 21-23).

B. Supporting information

Introduction

1. Police grant and the police service’s share of revenue support grant (RSG) and non domestic rates (NDR) are distributed to police authorities by way of a needs-based formula. This system was introduced in 1995. Since then data has been updated (where possible) on a regular basis and, three years ago, the analysis of police activity underlying the formula was revised. However, the basic formula is still largely based on work done over ten years ago. Furthermore, data derived from the Census (other than simple population statistics) have not yet been updated to reflect the 2001, as opposed to the 1991, Census.

2. Over the last year a review has been carried out, in the context of a general review of local government grant distribution, to develop options for modernising the police grant formula. This review has been lead by the Home Office together with the APA and ACPO in the Allocation Formula Working Group (AFWG). Representatives from the MPA, MPS, GLA and the Association of London Government have been actively involved throughout.

3. The Government has now published a consultation document setting out potential options for change to the grant distribution formula across all local government services including police. We are invited to respond by 10 October 2005. The consultation includes a series of questions and these are reproduced in Appendix 2 with the proposed MPA responses. The Government’s decisions will be reflected in the 2006/07 grant settlement when it is published in late November or early December.

General overview

4. Options relating to the individual service blocks within the complete local government grant distribution formula are covered in separate chapters of the consultation document. The police formula is dealt with in chapter 8 and this is reproduced in full as Appendix 1 to this report. There are other components of the overall formula and aspects of the distribution process which are generic and impact on all authorities including police. These are covered in other chapters. The consultation document also refers to issues affecting the general grant context which have relevance to police along with other classes of authority.

5. The consultation document includes exemplifications for most of the options showing what would have resulted in 2005/06. These are not always on the same basis and could also be affected by combination with other options. Furthermore, final results will inevitably be limited by damping. Therefore the absolute numbers must be treated with caution and the exemplifications should be regarded as illustrative of whether an option is favourable or not and indicative of the potential scale of variation.

6. This report focuses primarily on the proposals in relation to the police grant formula but then addresses each of the other matters relevant to police authorities.

7. The grant distribution formula is of major importance to the MPA. The Authority’s entitlement to formula police grant, RSG and NDR together totals £1711 million in 2005/06, representing 63% of total revenue resources. The impact of an adverse formula was clearly demonstrated in the period between 1995 and 2000 when the Metropolitan Police grant share fell by £175 million. This situation was corrected to a significant extent following the partial review in 2002 so that, although the effect has been damped by the operation of floors and ceilings, the long term prospect is for a continuing improvement in the MPA’s grant share. The Authority will want to ensure that this favourable position is not undermined by the current review.

Police formula

8. Chapter 8 of the consultation document attached to this report includes a description of the formula as it currently exists. In brief, the police formula relies firstly on an analysis of police activity over broad service components, such as crime management, traffic management, etc. For each of these service components a needs formula has been derived by means of regression analysis against a workload indicator. There are a small number of additional components which are dealt with on a different basis, principally police pensions and the provision for dedicated security posts (DSPs).

9. The essential stages of the current review have been:

1. to redefine the service components,
2. to reassess the weightings attached to each service component, and
3. to derive new formulae against updated workload indicators.

10. A number of elements of the revised approach can be highlighted. Firstly, the Home Office has insisted that the definition of service components should be reconcilable back to the service analysis reflected in the national police performance assessment framework (PPAF). This is demonstrated in paragraphs 143-144 in the attached chapter 8 (i.e. Appendix 1). At the moment this is no more than a presentational issue, but it does keep open an option at some time in the future to make an explicit link between PPAF data and grant distribution.

11. Secondly, use has been made of the results of the first comprehensive activity based costing exercise, relating to 2003/04 expenditure, to establish the relative weightings of each service component. Only the national totals derived from the ABC exercise have been used for this purpose, but it does indicate that ABC is seen as a significant new data source which will be drawn on more widely in the future. There is still considerable scope for the MPS to refine its own activity based costing.

12. The workload indicators used as the benchmark for the pattern of policing needs in relation to each service component have been derived from the PPAF outcome measures. There will be increasing reliance on crime data provided under the national crime recording standard (NCRS), another reason for ensuring the quality of MPS data. The socio-economic and demographic data set available for the regression analyses has been brought up to date particularly with the inclusion of 2001 census data.

13. These changes to the formula methodology and data, which underpin all the proposed options, would create substantial variation in grant distribution in any case. As will be seen the variations can differ widely depending on how the new elements and data are put together in the various options.

14. Two of the constituents of the current grant distribution which lie outside the core formula are affected by specific considerations and these need to be explained before looking at the proposed formula options.

Police pensions

15. The arrangements for financing police pensions will be changing from April 2006. This was the subject of an earlier consultation paper considered by the Finance Committee at its meeting on 23 June 2005. In future, the police pension costs borne by police authority budgets will take the form of employer’s contributions rather than the actual pension payments. Under the new arrangements there is no need for any specific treatment of this cost within the grant distribution system. Therefore, after deducting the amount of grant required initially to cover the pension account deficits which will in future be funded by the Home Office, the grant total inclusive of the current pensions element will all be distributed by way of the formula. There will be no separate pensions component in the system.

Dedicated security posts

16. There has been concern for the last two years about the separate component in the grant distribution relating to dedicated security posts (DSPs). The sum allocated in the grant system is a fixed proportion of the total grant. However, the number of DSPs approved can vary significantly year on year thus reflecting in variations in the unit cost. This was starkly illustrated in the 2004/05 grant year when the number of DSPs approved increased by over 500 posts (17%) with no commensurate increase in the grant allocated.

17. This issue has been the subject of specific consideration as part of the grant formula review. ACPO and the MPS have supported a move to convert DSP funding into a specific grant and the Home Office is consulting on this proposal. There is no exemplification of the effect of this change.

18. DSP funding is very significant for the Metropolitan Police which receives over 50% of the total grant allocated for this purpose. The treatment of DSP funding within the general grant framework already has characteristics of a specific grant with the approval of specific numbers of posts for specified security duties. A specific grant would make this process more transparent. The transfer out of the general grant system should be clean and based solely on the current metrics, so that any subsequent changes, e.g. to the allocated total or the basis of distribution, are made under the specific grant regime. Central and local government have both supported a move away from specific grants in recent years but DSP funding is probably an appropriate candidate for going against this trend. It would also facilitate a clearer focus on an element of the grant system which is particularly relevant to the MPA. It is unlikely in the present climate that DSP funding could be reduced.

Police formula options

19. Four options for a revised police grant distribution formula are exemplified in the consultation document. However, the document quite specifically leaves open the possibility that other options may be used in the final analysis depending on the results of the consultation. Alternative proposals are welcomed.

20. There are actually five exemplifications in the police chapter, the first representing a revised 2005/06 distribution, after reflecting the estimated impact of the pensions financing change, as a base position against which to exemplify the effect of the options which are subject to consultation. The following paragraphs summarise the options together with the exemplified impact on the MPA. The Authority’s response is then proposed. The paragraph numbers following each option reference indicate the relevant part of the attached chapter 8.

Option POL1 (Para146)

21. This is the revised baseline reflecting the new pensions financing arrangements. It is not an option for consultation. However there is an issue of particular concern to the MPA. The exemplification shows an adverse change of some £25 million for the MPA. About £20 million of this loss reflects the elimination of the grant adjustment from which the Authority benefits and which is designed to compensate for the MPA’s higher police staff pension costs. (It was previously referred to as the Metropolitan Police Civil Staff Pensions Uplift.) This adjustment is integrated into the current police pensions component and needs to be built back into the grant distribution via an alternative mechanism. Discussions have been taking place on this issue with the Home Office at officer level.

22. The justification for the continuation of the uplift is based on significant differences between the civil service pension scheme, to which MPA/MPS police staff belong, and the local government superannuation scheme which covers all other police authorities. In particular, employee contributions are lower and therefore employer’s contributions higher in the civil service scheme. Secondly, the two schemes are subject to different actuarial valuation regimes reflecting the fact that one is funded and the other unfunded. Partial information which we have seen suggests that police authority employer contributions to the local government scheme following the latest triennial revaluation have not increased at anything approaching the increase faced by the MPA from April this year.

23. It would help to reinforce your officers’ position in negotiation with the Home Office if the MPA’s response to the consultation includes strong support for reinstatement of the police staff pensions uplift reflecting the latest differential in police staff pension costs.

Option POL2 (Paras 153-156)

24. This is the first of the four options for consultation. It is described as ‘Full review – 7 categories of crime’. This means that it includes revised formulae for all of the service components. It also indicates that the largest service component, crime, has been subdivided into seven categories for the purpose of the analysis. This option and POL3 use relatively complex formulae with a significant number of indicators in an attempt to reflect relative needs as closely as possible. The impact of this option on the MPA as exemplified would be a grant loss of £62 million. Our principal concern through the development of the new formulae has been to ensure that the crime component which distributes around 50% of the total is adequately aligned with the level of costs experienced in the particular circumstances affecting London. The seven category model does not achieve this.

25. Options POL2 and POL3 also include a formula for traffic which is based exclusively on sparsity which we have argued is implausible. Three options for the traffic management formula were presented to the working group. The one supported by GLA/MPA representatives combines sparsity with built-up road lengths but this has not been included in any of the options exemplified.

Option POL3 (Paras 157-158)

26. This option reflects the crime categorisation advocated by the MPA/GLA representatives in the working group. It differs from POL2 in combining robbery with serious violence and sexual crimes. The MPS ABC data supports the view that these crimes absorb a disproportionate amount of policing resource in London. This model provides a much closer fit with the costs necessarily incurred by the MPS. The exemplification results in a gain for the MPA of nearly £7 million.

Option POL4 (Paras 159-160)

27. This option differs from POL2 and POL3 by deliberately limiting the number of indicators in the formulae in order to simplify the presentation. Inevitably there is some loss in terms of the formulae’s power to explain variations in need. This conforms to a general approach being pressed by ODPM. This option includes an alternative formula for the traffic component based on resident population which assists in producing an exemplified gain for the MPA of £9.2 million.

Option POL5 (Paras 161-163)

28. This option is described as ‘partial review’ because it retains the existing formula for the incidents component. This reflects some concerns about the data quality in relation to incidents. The impact of this option on the MPA is a loss of £28.5 million.

Proposed response

29. The consultation specifically asks: Which of the four police options POL2, POL3, POL4 or POL5 do you prefer? It is suggested that no single option as exemplified is wholly acceptable. We should therefore indicate which elements we would want to see in the final formula. These are proposed as follows:

• The crime component should be based on the six category model which provides the best match with needs in London (as in POL3).
• The traffic formula should include built-up road lengths as an indicator as well as sparsity. This is not included in any of the exemplified options.
• There is a fine balance between simplicity and complexity. The former may be easier to explain but involves compromise and a degree of rough justice. The latter may be less understandable but is likely to be fairer. It may be felt that the grant system is inherently complex and that fairness might be sacrificed for a simplification that does not achieve its objective. This would tend to argue against the approach reflected in POL4.
• Given the inevitability of another period of formula freeze it would be unfortunate to lose the opportunity to move the system forward in its entirety at this stage. A partial review as reflected in POL5 would therefore be undesirable.

General formula issues

30. There are a number of matters subject to consultation which are outside the police formula itself but which will affect police grant distribution. They include:

• Cross-cutting formulae (capital financing, area cost adjustment).
• Adjustments to underlying assumptions (resource equalisation).
• Limitations on year-on-year grant change (floors and ceilings).
• Data issues (day visitors).

Capital financing

31. Capital financing has always been treated as a separate service block within the overall local government formulae, of which police authorities receive a share. The current formula contains specific treatment of interest receipts which reflects a regulatory regime which no longer applies. It is also felt to be inconsistent with the prudential framework for capital finance introduced in the last two years.

32. The Government is proposing that the capital financing block should reflect debt charges only. Three questions are posed in the consultation document (Q25-27 in Appendix 2). Our proposed response is simply to support the removal of the interest receipt elements. This would imply support for option CF1 in the consultation document which would result in a gain to the MPA of £12.8 million.

Area cost adjustment

33. The area cost adjustment (ACA) compensates authorities for the higher costs they face in providing their services. Clearly, it is a very significant element of the grant distribution for London authorities. In 2005/06 the MPA received 13% of its formula-based grant by way of the ACA.

34. A number of matters have been raised with respect to the ACA as reflected in the questions set out in Appendix 2 (Q28-32). Basically, there are three issues as follows.

• A more comprehensive data set of comparative earnings is now available, which ODPM propose to use. There is no reason not to support this.
• There is a proposal to remove the rates cost adjustment which is a relatively small proportion of the total ACA. However, this would reduce the MPA’s entitlement by some £7 million and we would argue that there is no pressing reason to make this change and this element should instead be updated. This means supporting option ACA3 which would make no significant change.
• There is also a proposal to spread the effect of the ACA across many more authorities. The MPA should resist this because it dilutes our own allocation. The exemplifications show the MPA losing by up to £23 million.

Resource equalisation

35. One of the objectives of the grant system is resource equalisation, i.e. the same level of service should cost the same rate of council tax across the country. Within the grant distribution process therefore the Government sets an assumed average national council tax (ANCT). Over time, as authorities make their own local decisions about actual council tax rates, the ANCT becomes increasingly divorced from, in practice lower than, actual tax levels. The Government proposes to correct for this by a one-off adjustment to ANCT in 2006/07. A similar adjustment was last made in 2003/04.

36. Questions 33 and 34 in Appendix 2 relate to this issue. Because total grant remains unchanged when ANCT is increased for this purpose service block expenditure totals (formula spending shares or FSS) have to be adjusted as well. This means that there is a differential impact between services. In practice the MPA gains under all the exemplified options, varying from £8.7 million to £27.4 million. We would support a full rather than half adjustment, and in particular option RE1 which is at the upper end of the exemplified gains.

Floor damping

37. As from 2005/06 damping of year-on-year grant changes was achieved by setting floors to ensure that all authorities received a minimum increase in grant, paid for by scaling back proportionately the grant entitlements of all authorities above the floor. There was no fixed ceiling.

38. There are two proposals for change to the damping process in the consultation document. The first is relatively minor proposing the abolition of a capital adjustment introduced in 2002/03. There is virtually no impact on the MPA and we have no reason not to support the removal of a technical complexity. The second proposal is much more significant suggesting that the cost of the floors could be met by all authorities and not just authorities above the floor. Since the MPA has been substantially above the floor in recent years the exemplifications indicate large gains for the Authority (43.8 million or £16.2 million depending on the actual approach). We should therefore support the most favourable option (DMP2) whilst recognising that our grant position could deteriorate as a result of the formula changes and this could radically alter our position in relation to the floor in future.

Day visitors

39. There is one data issue subject to consultation. Day visitors is currently used as an indicator in a number of service blocks including police. However there is no single reliable source for this data. The current indicator was constructed using various sources dating from around 1991. ODPM has commissioned specific research to produce an updated day visitor indicator. However this is not a like-for-like updating and there is considerable volatility compared with the existing measure and a lack of plausibility about projections for individual authority areas. The consultation asks whether the new data should be used. We would find it difficult to support, especially as there is no exemplification of its impact on grant distribution. In practice this probably means day visitors will not feature in the new formulae.

Contextual issues

40. The consultation document refers to a number of issues relating to the wider context within which the grant system operates. These are not all matters for consultation.

Schools transfer

41. The Government is taking direct schools funding out of the local government grant system. It proposes to take steps to isolate non education authorities, including police, from the effect of this transfer. The consultation asks for any comments on this proposal. We would clearly wish to support it.

Alternative grant systems

42. ODPM has a view about the potential misuse of notional spending and council tax measures contained in the current grant system. What is described as an alternative system is proposed based on four blocks of cash:

• the relative needs block,
• the resource block,
• the basic amount block, and
• the damping block.

In practice, this is not a radical new system but a re-presentation of the present system. It is little more than smoke and mirrors to conceal some of the grant mechanisms. The MPA would have no particular reason to support this proposal.

Three year settlements

43. The Government announced some time ago its intention to move to three year grant settlements and has already consulted on the matter. This chapter of the current consultation document confirms that the new approach will commence in 2006/07 with a two year settlement moving to three years for subsequent periods. A number of technical issues are clarified.

Amending reports

44. A series of grant amending reports has been triggered by retrospective adjustments to population estimates in the wake of the 2001 census. The consultation document clarifies a number of issues in relation to the amending reports due in respect of 2004/05 and 2005/06.

C. Race and equality impact

There are no specific issues affecting race and diversity.

D. Financial implications

These are set out in the report.

E. Background papers

• Formula Grant Distribution: A Consultation Paper published by ODPM
• Home Office Allocation Formula Working Group papers.

F. Contact details

Report author: Ken Hunt, MPA.

For more information contact:

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

Appendix 2

List of questions and proposed MPA responses

Chapter 2: Schools transfer

Question 1: Do you think that there should be a customised damping system?
Not applicable to police authorities (N/A)

Question 2: Do you have comments on the Government's other proposals, to adjust the base using spend figures and to isolate police, fire and shire district authorities from the effects of the transfer?
Support proposal to isolate police authorities from the effects of this transfer.

Chapter 3: New grant system

Question 3: Whether we should use the proposed alternative grant system?
No strong case made to move from present system.

Chapter 6: Education – LEA block

Question 4: Do you think we should remove the element for Further Education residual pensions?
N/A

Question 5: Do you think the LEA damping block should be removed?
N/A

Chapter 7: Personal social services

Question 6: Do you agree with the Government's proposal to implement option SSC1? If not, what alternative would you propose?
N/A

Question 7: Which option for updating the Foster Cost Adjustment do you prefer?
N/A

Question 8: Do you think that there should be specific floors with either ceilings or scaling factors on the children’s social services FSS to limit the extent of the changes?
N/A

Question 9: Which needs formula option do you prefer– SSE1 or SSE2?
N/A

Question 10: Do you agree with the proposal to revise the Low Income Adjustment to include 2001 Census data?
N/A

Question 11: Which method of distributing the sparsity top up do you prefer?
N/A
Question 12: Do you favour increasing the quantum for the sparsity adjustment to more than 0.4%?
N/A
Question 13: Which option do you prefer for the Younger Adults Social Services formula?
N/A

Chapter: 8 Police

Question 14: Which of the four police options POL2, POL3, POL4 or POL5 do you prefer?
No single option as exemplified is wholly acceptable.
We would want to see the following elements in a final formula:

• The crime component should be based on the six category model which provides the best match with needs in London (as in POL3).
• The traffic formula should include built-up road lengths as an indicator as well as sparsity. This is not included in any of the exemplified options.
• There is a fine balance between simplicity and complexity. The former may be easier to explain but involves compromise and a degree of rough justice. The latter may be less understandable but is likely to be fairer. It may be felt that the grant system is inherently complex and that fairness might be sacrificed for a simplification that does not achieve its objective. This would tend to support the more complex formulae as reflected particularly in POL3.
• Given the inevitability of another period of formula freeze it would be unfortunate to lose the opportunity to move the system forward in its entirety at this stage. A partial review as reflected in POL5 would therefore be undesirable.

Question 15: Do you agree that dedicated security funding should be switched from general to specific grant?
We support a specific grant provided the transfer is transparent.

Chapter 9 Fire and Rescue

Question 16: Do you think that the weight of the fixed element for community fire safety should be doubled to 6% (FIR3 and FIR4)?
N/A

Question 17: Do you agree with the proposal (FIR5) to use a property and societal risk indicator to replace the fire safety enforcement indicator? If not, what would you prefer?
N/A

Question 18: Which proposal (FIR6 or FIR7) would you prefer to see used as the risk index indicator?
N/A

Question 19: Do you agree with the proposal to include a fixed element for sparsity (FIR8)?
N/A

Chapter 10: Highway maintenance

Question 20: Do you agree that back lanes should be included in the highway maintenance formula?
N/A

Chapter 11 Environmental, protective and cultural services

Question 21: Do you think we should adjust the coefficients for concessionary fares?
N/A

Question 22: Do you think we should make any further changes to coefficients; for example, it has been argued that we should do so to take into account the increasing expenditure on waste?
N/A

Question 23: Do you think we should update the fixed cost element?
N/A

Question 24: Do you agree with the proposed method for transferring COWs to the Environment agency?
N/A

Chapter 12: Capital Financing

Question 25: Do you think we should remove the Interest Receipt elements?
Yes. This is consistent with other recent developments in local government finance such as the prudential code.

Question 26: If we retain one or both of the Interest Receipt elements, do you have any views on how they should be distributed?
N/A. See answer to Q25.

Question 27: If so, should we reduce other FSS totals to compensate, or not? And if we reduce other FSS elements, where should we make the reductions?
Should not reduce other FSS totals.

Chapter 13 Area Cost Adjustment

Question 28: Do you have any comments on our intention to use the full ASHE data set to calculate the ACA?
Support use of more comprehensive data.

Question 29: Do you think that we should remove the very small rates cost adjustment, or do you think that we should update the weighting of the RCA in line with 2003/4 expenditure data?
Retain rates adjustment and update weighting.

Question 30: Do you agree with the Government’s proposal to retain the current method of setting the lower limit for options ACA1-3?
Yes.

Question 31: Do you think that we should calculate a separate ACA factor for each upper tier authority?
No.

Question 32: If we implement the change above, which option for setting the lower limit do you prefer?
N/A. See answer to Q31.

Chapter 14: Additional resource equalisation

Question 33: Do you think we should increase resource equalisation?
Yes.

Question 34: Which of the options do you prefer?
RE1.

Chapter 15: Floor damping

Question 35: Do you consider that the capital adjustment should be abolished?
Yes.

Question 36: Which approach for paying for damping you prefer (i.e. the existing method, DMP2 or DMP3)?
DMP2.

Chapter 16: Day visitors

Question 37: Would you prefer us to use the new day visitors indicator?
No.

Additional questions following publication

Question 38: Do you agree that the January pupil count should be used instead of the September pupil count as the source for pupils aged 11 and over?
N/A

Question 39: Do you agree that an adjustment to the 2001 Census based country of birth indicator used in EPCS should be made?
N/A

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