Grant consultation 2008/09

Report: 5
Date: 20 September 2007
By: Treasurer and Director of Strategic Finance

Summary

This report provides information on the limited review of the grant system, which has led to the publication of a consultation paper by the Department for Communities and Local Government. The merits of the various options for change are considered and a draft response to the consultation presented.

A. Recommendations

That members

1. Consider the options in the consultation paper on formula grant distribution and agree or amend the MPA’s response as set out in Appendix 2.

B. Supporting information

Introduction

1. The Department for Communities and Local Government (DCLG) has published a consultation paper ‘Local Government Finance: Formula Grant Distribution’ with a deadline for comments of 10 October 2007. A full copy of the consultation paper has been placed in the Members’ Room and the paper seeks views on a number of options, which would amend the grant distribution formula. Chapter 4 of the consultation paper is particularly relevant as it relates specifically to the police allocation formula and it is therefore attached at Appendix 1. The Authority receives £1.8Bn grant allocated by national formula (including £192M Special Payment).

2. The last review was in 2005 where substantial changes were made before the agreed 2006/07 government settlement. DCLG state their aim that this review is mainly looking to update and fine tune the existing system. However, as will be shown later, some of the proposals are distinctly disadvantageous to the Authority and there is some potential for significant redistribution of resources between different police authorities.

3. Any changes would be implemented and fixed in the three-year settlement from 2008/09 to 2010/11.

Review process

4. The review of the police allocation formula has been conducted through the Home Office’s Police Allocation Formula Working Group. The group includes representation at officer level from APA and ACPO. The Director of Strategic Finance and I are members representing the MPS and MPA respectively. There is also representation from the GLA and London Councils.

5. Due to the limited scope of the review the group had only three meetings. Most of the deliberations led by the Home Office have been exemplified in the consultation paper, with the exception of a joint MPA/MPS paper presented to the group on the Met Special Payment. Although the consultation paper does not request comments the opportunity is taken to incorporate comments on the Special Payment in paragraph 33 below.

6. The following paragraphs identify issues in the consultation paper for the MPA’s own response. Three options for change are exemplified in Chapter 4 as being particularly relevant to policing. They are limited in scope to either updating the resource base or include specific grants within general grant. In addition there are a number of cross cutting or service specific issues. A draft response is attached at Appendix 2.

Options directly concerning the police formula

Updating the resource base (POL 1)

7. Activity Based Costing (ABC) is a method of allocating costs to services used by the police service. As a result of the 2005 Formula Review, it was decided to use this data to weight the various police services within the police funding formula. At the time the Audit Commission had verified ABC data for 2003/04 but deemed some authority data to be of too poor a quality. This was put down to the introduction of the new system and a “bedding down” period.

8. Since then the Audit Commission has reviewed the 2004/05 and 2005/06 police authority ABC data, which is considered to be of a higher quality. It is therefore proposed that a two-year average is used to reweight the service areas within the police funding formula.

9. These revised weightings favour metropolitan areas over shire areas and the MPA would gain £15.1M (before floor damping) as follows:

10. The Authority is recommended to support a formula that is based on the use of the most up to date data in weighting the police funding formula. Members will already be aware of concerns in the past about the reliability of ABC data and the collection of the activity analysis that supports this. However, in the absence of other readily available data sources, which would enable the overall resource base to be disaggregated, its use should be supported. During discussions at the Police Allocation Formula Working Group it was suggested that a three-year average should be used. Whilst the use of three-year averaging is the norm throughout other service blocks, because of the unavailability yet of the 2006/07 ABC data and the previously mentioned unreliability of the 2003/04 data, the Authority should wait until exemplifications are available before supporting three-year averaging.

Incorporating existing “Rule 2” grants into formula grant (POL 2)

11. As a result of the Formula Review 2005, the Home Office responded to concerns they had over the level of specific grants by creating a new special formula grants category, “Rule 2” grants. This involved presenting a series of grants as one single grant and removing the spend restriction associated with them. The aim of this was to create a ‘half way’ house. This option proposes to add the Rule 2 grants into the principal formula grant. They would then be distributed according to the general formula rather than the specific grant rules.

12. The Authority’s present Rule 2 grants (which have been frozen in cash terms since 2006) are:

In order to provide some protection for authorities who would lose grant the current year’s Rule 2 grant entitlements have been added into the baseline by the Home Office for calculating the grant floors for 2008/09 (ie a damped increase of x% would apply to £1.905bn rather than £1.850bn).

13. The consultation paper exemplifies the effect of this change as follows, showing there is a potential loss of £15M to the MPA, although Metropolitan authorities as a whole benefit from the change.

14. The Home Office has provided further exemplifications, which show the effect of the application of damping arrangements similar to those in operation at present. This showed that the existing distribution of the grant presently distributed by Rule 2 money is substantially protected. However this situation is totally dependent on the maintenance of the present grant floor arrangements, which are undoubtedly bound to be considered generous by those Authorities who presently see their grant top sliced to finance the grant floor.

15. This Authority, along with others has previously adopted the position that it wished to have more flexibility and freedoms around the use of specific grants and argued against the scale and restrictive nature of specific grants. The Home Office responded to this in 2005 by merging the London and South East Allowance grant, Special Priority Payments and Forensic grant (and Rural Policing Fund) into the new Special Formula Grant and allowed flexibility in its use. Further flexibility and freedoms have been given this year in the use of the Crime Fighting Fund (£73M) and the Neighbourhood Policing Fund (£78.3M). However, Ministers have made it clear that they expect authorities to honour commitments and agreed policy initiatives associated with these grants. The amalgamation of the South East Allowance grant into the general formula pot would be particularly detrimental to the MPA/MPS since it was originally targeted at the 10 forces in South-East England who pay some level of pay lead to their officers; the MPS received 70% of the original total grant. Clearly the national formula cannot replicate the effect of targeting grants to particular forces. There is no need at present to merge these specific grants into general formula grant.

16. As the changes already made to the Rule 2 grants overcomes the perceived restrictions whilst retaining the ability to target specific forces we should argue for its retention. In the circumstances it is recommended that the Authority do not support this option, unless the government can guarantee permanent protection for the grant loss from this amendment, either through additional direct grant, or by way of maintenance of an adequate grant floor. However, given the 3-year CSR review process it is unlikely that any commitment would continue past the end of the current review (ie 2011).

Incorporating CFF as well as rule 2 grants in principal formula grant (POL 3)

17. The Home Office has also exemplified rolling the Crime Fighting Fund (CFF) specific grant into the formula pot. This grant currently has a degree of targeting in its allocation to recognise the higher costs of the MPS (e.g. London Weighting) and this would be lost if it were subsumed into the formula pot. The conditions applying to the continued receipt of CFF allocations have already been relaxed improving the freedom and flexibility, which the MPA/MPS has sought. The POL 3 exemplification adds CFF as well as the existing Rule 2 grants into the principal formula grant on the same conditions as with POL 2 (adjusting the floor baseline to provide some protection for the current distribution).

18. The Home Office exemplification shows the effect of this option before floor damping. The combined effect of Additional Rule 2 grants and CFF are shown, rather than showing the CFF separately. The effect is a loss of £30.9M to the MPA/MPS:

19. The arguments outlined above for POL 2 apply to this option. The Authority is recommended not to support this option, unless the government can guarantee permanent protection for the grant loss from this amendment, either through additional direct grant, or by way of maintenance of an adequate grant. The government could adopt an alternative approach by retaining the CFF as an earmarked specific grant for at least the duration of the three-year settlement.

Cross service options and generic issues

20. There are cross service issues and wider generic issues, which affect all authorities, including police authorities. Exemplifications are shown in relation to the GLA as a whole, but the majority of the impact is on the MPA. The following paragraphs suggest appropriate responses from the MPA.

Area Cost Adjustment

21. There are four options proposed. The area cost adjustment is used to reflect the differing labour and business rates cost around the country incurred when providing services.

22. The consultation proposes a series of options to update the way the Labour Cost Adjustment (LCA) and Rates Cost adjustment (RCA), which combined form the Area Cost Adjustment.

• ACA1 – Update the RCA weightings to; Education 1%, Highways Maintenance 1%, Social Services 0%, Police 1%, Fire 1% and EPCS 2%;
• ACA2 – Update the LCA weightings to; Education 80%; Highways Maintenance 60%, social Services 75%, Police 85%, Fire 85% and EPCS 60%. Expenditure is used to determine these weightings, which vary, by service. These are highest for police and fire where it is estimated that 85% of spending is affected by labour costs in the area.

23. With ACA1 there is no impact for the GLA and the change is driven by data collected from expenditure returns and is a simple update exercise and can be supported. With ACA2 despite the weighting for police remaining unchanged at 85% there is a marginal loss for the GLA, but this is enough to cause a loss of £2M. Despite being marginal the Authority should oppose on the basis on unneeded turbulence within the ACA calculations.

24. The second series or options propose a few changes to the areas grouped together for the purposes of ACA calculation.

• ACA3 – Create two new ACA areas in Cambridge and Hampshire, move Wandsworth to the West Outer London ACA and Greenwich and Lewisham to the East Outer London ACA; and
• ACA4 – Create two new ACA areas in Cambridge and Hampshire, move Wandsworth to the West Outer London ACA and create a new East Inner London ACA containing Greenwich, Lewisham, Hackney and the East Outer London ACA authorities.

25. Both ACA 3 and 4 attempts to adjust the geography of the ACA, they attempt to provide a better fit to local labour markets. With ACA3 the borough of Wandsworth moves to the west outer London area and the boroughs of Greenwich and Lewisham to the east outer London area. The changes in London arise from wage evidence that those three boroughs have lower local wages than the rest of Inner London. Each of these boroughs would lose around 12% of grant but because the GLA’s ACA is a weighted average of the individual ACAs our own ACA would reduce. Although the variation is less than 1%, it still results in a loss of some £16M in total.

26. ACA4 again impacts significantly on the MPA/MPS. Although we are told it is a statistically more accurate way of dealing with the same issue and in particular creates a new “East Inner London ACA“ area (comprising Greenwich, Lewisham, Hackney boroughs which have an ACA uplift less than Inner London) along with other boroughs in the east outer area. The MPA/MPS loses £14M as a result of this option.

27. The Authority should oppose these changes because none of the underlying wage pressures across London has changed as regards the costs for London wide services, only the groupings. There is therefore no rationale for the MPA/MPS ACA to reduce. In addition the MPA/MPS does not have differential pay scales for police staff (other than inner and outer zone location allowances) and is therefore obliged to pay rates that are competitive in the more expensive areas of London where most our large concentrations of staff are located. Similarly, location allowances for police officers are uniform across London and cannot, therefore, reflect localised variations in costs.

Possible adjustments to relative needs and resources

28. To stimulate debate DCLG provided exemplifications of changing the grant block sizes to take more account of relative need independently of relative resource. The needs block takes account of the relative needs by different councils/authorities to spend on services based on their socio-economic and demographic characteristics, and the resources block takes account of the relative ability of different councils to raise council tax. Exemplifications were considered by PAFWG of possible changes and the effect on the MPA/MPS varied from a reduction of £5m to an increase of £16M. There is no specific proposal to do this in the consultation paper but DCLG are asking for views on whether there should be further judgemental change in the extent to which the system takes account of needs or resources.

29. Since the size of the blocks is purely judgemental it is difficult to see a rationale for any specific change and there is unlikely to be any consensus. As any change would introduce substantial turbulence to the system the Authority should respond that no changes should be made without a strong rationale. The Authority should be mindful that there has been ‘leakage’ from changes in other grant service blocks (for example the personal social services block as identified below) where the MPA/MPS will lose grant. If the only way to correct this (ie. ensure no loss of grant) within the current complex grant system is by DCLG making judgemental changes between needs and resources blocks then the Authority should support this as a way of ironing out unintended consequences.

Tapering grant floors down

30. Since 2002/03 the formula grant distribution methodology has contained damping to ensure after the formula has measured “need”, all authorities receive a minimum increase in grant. Consequently this overwrites the results of the needs formula. Although government consider damping to be an integral part of the formula distribution they are considering how it can be reduced to let the influence of the formula become more apparent. Scaling back the grant of authorities above the floor pays those receiving assistance at the ‘grant floor’. The MPA now receives protection from the floor in the sum of £33M.

31. DCLG has provided exemplifications to show the effect in 2007/08 if floors had been set at 2%, 1% or 0% As the MPA/MPS is likely to be at the floor for some considerable time progressive release of protection will cause the MPA a large financial loss and major financial difficulty over a number of years. These large losses highlight that relative need is clearly not reflected in the current formula. These inadequacies mean that the Authority is recommended not to support reducing the level of grant floors and that the government should not withdraw protection but keep it in place while further consideration is given to a grant formula review as part of the next CSR review settlement period in 2011.

Data changes

32. DCLG has exemplified data improvement options across various formulae. The areas looked at include, quarterly scans of benefits data, attractiveness of an area to day visitors and student exemptions and the council tax base. CLG exemplify four options, which either have minimal, or no impact. The Authority should support the move of using sound data that is more frequently updatable.

Personal social services damping

33. The 2005 formula review introduced new formulae in 2006/07 for Children’s Services and Adults’ Personal Social Services Blocks, which caused considerable distributional turbulence. As a result DCLG introduced formula damping within these blocks. Undamped losses for borough councils in Inner London would have been acute (between 20-30%). DCLG are consulting on whether the damping should be removed completely or phased out so no authority loses more than 10%. While the government’s stated aim of the current Formula Review exercise is to update and fine tune the existing system, in this instance police funding is being adversely affected by formula changes NOT relating to police authority services. An unintended consequence of the current system is that the impact of these social services changes adversely affects the GLA (both police and fire services) with a potential loss of £43M or £12 million. The Authority is recommended to respond that any changes to borough services should be ring fenced and there should be no impact on the GLA and specifically the MPA.

Capital finance

34. The capital financing relative needs formula is based on assumed outstanding debt. This is calculated by totalling authorities’ historic single capital pot allocations plus separate programme elements plus where applicable a share of associated amounts for levying authorities (totally known as SCE(R)). DCLG have commented that authorities who are allocated a share of the associated capital elements for levying bodies may find their allocations changed between settlements. To eliminate this issue it is proposed that the shares of SCE(R) are frozen to those in 2007/08 settlement and in the future the shares are calculated using the current year’s population figures.

35. Although not directly applicable to the MPA this could be supported as it is a logical development to the capital financing formula and would remove confusion surrounding allocations between grant settlements.

MPA/MPS special payment

36. The Special Payment is not an option formally offered for consultation by the DCLG/Home Office. However, the MPA/MPS presented a paper to the Police Allocation Formula Working Group on the Special Payment. It specifically made the case for London, focusing on new pressures and drivers for change, identified the national and International functions of the MPS, outlined the challenges of the changing environment that the MPS faced and reiterated the need for sustainable funding. In this context a budget shortfall was identified in the sum of £150M. While the validity of the London dimension claim for sustainable funding is acknowledged by the Home Office, it may well be worthwhile to reiterate the need for an adequate uplift to the Met Special payment which recognises the need for adequate sustainable funding.

37. The Special Payment is included within total overall grant totals, which are presently subject to damping. The Authority is at the grant floor so to ensure any increase actually feeds through as a cash increase, DCLG/Home Office would need to make a baseline addition when calculating the grant floors for 2008/09, or there would need to be some other form of special treatment.

C. Race and equality impact

There are no specific implications arising from information set out in this report.

D. Financial implications

Financial implications are set out throughout this report.

E. Background papers

None

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 – Formula Grant and Local Government Restructuring in a Three-Year Settlement

Question 1: Do you agree with the fallback mechanism described for calculating settlements in restructured areas during the 3-year settlement?

Not applicable to police authorities (N/A)

Chapter 3 – Children’s and Adults’ Personal Social Services

Question 2: Should the specific formula floor continue for Children’s PSS?

Question 3: If yes, how quickly should the formula floor be phased out?

Question 4: Should the specific formula floor continue for Younger Adults’ PSS?

Question 5: If yes, how quickly should the formula floor be phased out?

Question 6: Which option do you prefer – SSE1 or SSE2?

Questions 2 – 6. The Authority are not commenting on this specific service formula change but would comment that any changes to borough services, in this case social services, should be ring fenced and there should be no impact on the GLA and specifically the MPA.

Chapter 4 - Police

Question 7: Do you agree the resource base should be updated (POL1)?

The Authority supports a formula that is based on the use of the most up to date data in weighting the police funding formula

Question 8: Do you agree that the Additional Rule 2 grants should be rolled into principal formula Police Grant (POL2)?

The Authority does not support this option, unless the government can guarantee permanent protection for the grant loss from this amendment, either through additional direct grant, or by way of maintenance of an adequate grant floor.

This Authority, along with others has previously adopted the position that it wished to have more flexibility and freedoms around the use of specific grants and argued against the scale and restrictive nature of specific grants. The Home Office responded to this in 2005 by merging the London and South East Allowance grant, Special Priority Payments and Forensic grant (and Rural Policing Fund) into the new Special Formula Grant and allowed flexibility in its use. Further flexibility and freedoms have been given this year in the use of the Crime Fighting Fund (£73M) and the Neighbourhood Policing Fund (£78.3M). However, Ministers have made it clear that they expect authorities to honour commitments and agreed policy initiatives associated with these grants. The amalgamation of the South East Allowance grant into the general formula pot would be particularly detrimental to the MPA/MPS since it was originally targeted at the 10 forces in South-East England who pay some level of pay lead to their officers; the MPS received 70% of the original total grant. Clearly the national formula cannot replicate the effect of targeting grants to particular forces. There is no need at present to merge these specific grants into general formula grant.

Question 9: Do you also agree that the Crime Fighting Fund should be rolled into principal formula Police Grant (POL3)?

The Authority does not support this option, unless the government can guarantee permanent protection for the grant loss from this amendment, either through additional direct grant, or by way of maintenance of an adequate grant floor.

Further comments as above, and in addition the CFF grant currently has a degree of targeting in its allocation to recognise the higher costs of the MPS (e.g. London Weighting) and this would be lost if it were subsumed into the formula pot. The conditions applying to the continued receipt of CFF allocations have already been relaxed improving the freedom and flexibility, which the MPA/MPS has sought.

Chapter 5 – Fire & Rescue

Question 10: Do you agree that the expenditure data used to determine the coefficients should be updated (FIR1)?

Not applicable (N/A)

Chapter 6 – Highways Maintenance

Question 11: Do you agree that the expenditure data used to determine the coefficients should be updated (HM1)?

Not applicable (N/A)

Chapter 7 – Environmental, Protective and Cultural Services

Question 12: If the money is to be added to Formula Grant, which option for distribution do you prefer – EPCS1, EPCS2 or EPCS3?

Not applicable (N/A)

Question 13: Do you have any other suggestions for distributing the funding via Formula Grant? If so, please specify.

Not applicable (N/A)

Chapter 8 – Capital Finance

Question 14: Do you agree with the proposal to freeze the shares of SCE(R) for years prior to 2007/08 to the level used in the 2007/08 Settlement; and that in future, the shares of SCE(R) will not be recalculated to the current year shares in every Settlement?

Although not directly applicable to the MPA this is supported, as it is a logical development to the capital financing formula and would remove confusion surrounding allocations between grant settlements.

Chapter 9 – Area Cost Adjustment

Question 15: Do you agree with the proposal to update the weights given to the rates cost adjustment (ACA1)?

This is supported the change is driven by data collected from expenditure returns and is a simple update exercise.

Question 16: Do you agree with the proposal to update the weights given to the labour cost adjustment (ACA2)?

The Authority notes that the weight for policing is unchanged, yet through unnecessary turbulence in the system marginally loses grant. This is seen as an unnecessary change and would prefer stability remains by not updating the weights.

Question 17: Do you agree that we should revise the geography of the ACA?

Question 18: Which option for revising the geography of the ACA do you prefer – ACA3 or ACA4?

The Authority opposes these changes.

None of the underlying wage pressures across London has changed as regards the costs for London wide services, only the groupings. There is therefore no rationale for the MPA/MPS ACA to reduce. In addition the MPA/MPS does not have differential pay scales for police staff (other than inner and outer zone location allowances) and is therefore obliged to pay rates that are competitive in the more expensive areas of London where most our large concentrations of staff are located. Similarly, location allowances for police officers are uniform across London and cannot, therefore, reflect localised variations in costs.

Question 19: Do you have other proposals for revising the geography of the ACA? If so, please specify.

The Authority has no proposals

Chapter 10 – Taking Account of Relative Needs and Resources

Question 20: Do you think there should be a further judgemental change in the extent to which the system takes account of needs or resource?

No changes should be made without a strong rationale.

The Authority is mindful that there has been ‘leakage’ from changes in other grant service blocks (for example the personal social services block) where the MPA/MPS will lose grant. If the only way to correct this (ie. ensure no loss of grant) within the current complex grant system is by DCLG making judgemental changes between needs and resources blocks then the Authority would support this as a way of ironing out unintended consequences.

Question 21: If so, what change would you suggest?

Not applicable (N/A)

Chapter 11 – Tapering Grant Floors Down

Question 22: Do you support the approach of reducing the levels of grant floors over the 3 years of the settlement?

The Authority does not support reducing the level of grant floors.

Government should not withdraw protection, but keep it in place while further consideration is given to a grant formula review as part of the next CSR review settlement period in 2011.

Question 23: Do you have other suggestions on the way in which the grant floors system should be operated?

The Authority has no comment

Chapter 12 – 100% Quarterly Scans of Benefits Data

Question 24: Do you agree that the DLA indicator is based on a three-year average using quarterly rather than annual data? (Option DATA1)

The Authority supports the move of using sound data that is more frequently updatable.

Question 25: Do you agree that we use quarterly data on income support claimants and claimants of pension credit? (Option DATA2)

The Authority supports the move of using sound data that is more frequently updatable.

Chapter 13 – Attractiveness of an Area to Day Visitors

Question 26: Do you agree that we should replace the day visitors indicator with a population-weighted indicator that takes into account the attractiveness to an area of day visitors? (Option DATA3)

Not applicable (N/A)

Question 27: Do you agree that we should remove the day visitors indicator from the Highways Maintenance formula? (Option DATA4)

Not applicable (N/A)

Chapter 14 – Student Exemptions and the Council Tax Base

Question 28: Do you agree that we use student exemption numbers from 31 May 2007 to adjust the starting position of the taxbase projections? (Option DATA5)

The Authority supports the move of using sound data that is more frequently updatable.

Question 29: Do you agree that we use the average of student exemption numbers from 31 May and mid- September 2007 to adjust the starting position of the taxbase projections? (Option DATA6)

The Authority supports the move of using sound data that is more frequently updatable.

Further Comments from the Authority

Met Special Payment

The Special Payment is not an option formally offered for consultation by the DCLG/Home Office. However, the MPA/MPS presented a paper to the Police Allocation Formula Working Group on the Special Payment. It specifically made the case for London, focusing on new pressures and drivers for change, identified the national and International functions of the MPS, outlined the challenges of the changing environment that the MPS faced and reiterated the need for sustainable funding. In this context a budget shortfall was identified in the sum of £150M. While the validity of the London dimension claim for sustainable funding is acknowledged by the Home Office, we wish to reiterate the need for an adequate uplift to the Met Special Payment which recognises the need for adequate sustainable funding.

The Special Payment is included within total overall grant totals, which are presently subject to damping. The Authority is at the grant floor so to ensure any increase actually feeds through as a cash increase DCLG/Home Office would need to make a baseline addition when calculating the grant floors for 2008/09, or there would need to be some other form of special treatment.

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