ITEM CA10
CABINET – 18 SEPTEMBER 2007
CONSULTATION ON FORMULA GRANT DISTRIBUTION
Report by the Head of Finance & Procurement
Introduction
1. In December 2007, the Government should announce the formula grant figures for the next three years – 2008/09, 2009/10 and 2010/11. These will be based on overall totals that will be announced by the Comprehensive Spending Review 2007 – this should be published during the period 8-18 October. During 2007 the Government has been carrying out a review of the methods it uses to distribute formula grant. This review has produced a number of options for change and the Government is consulting on these options. This paper sets out a proposed response to this consultation, which must be made by 10 October 2007.
Background – The Current Grant Position
2. In 2007/08, the Council’s spending is funded by £92.261m of Formula Grant. This grant had increased by 2.7% compared to 2006/07. In 2007/08, the grant has four elements (or ‘blocks’). The amounts that we get for these blocks are broadly as follows:
1. An allowance of £72.103m - this evens out our estimated need to spend compared to other authorities.
2. A deduction of £64.078m - that removes the benefit of having a Council Tax base figure (per head) that is above that of other authorities.
3. An allowance of £77.461m - that is allocated on an amount per head basis.
4. An allowance of £6.775m - that ensures that the Council experienced a 2.7% increase in formula grant from the previous year (2006/07, adjusted for changes in functions). This is known as ‘floor damping grant’ as it damps or reduces changes in the grant from year to year.
3. The Council relies heavily on the damping grant figure of £6.775m. Our ‘underlying grant’ entitlement (for the other three blocks) is only £85.486m. Over time, we expect the damping grant figure to reduce. In 2006/07 the damping grant was £7.669m, so there was an 8.8% reduction from 2006/07 to 2007/08. In years when damping is removed, we will be dependent on the minimum grant increases (2.7% in 2007/08) that are decided by Ministers. If the grant continues to decline at the current rate (£0.894m per year) it will be eight years before we are no longer dependent on damping grant.
4. At the national level a great deal of cash is tied up in the damping grant arrangements – in 2007/08, damping grant transferred around £520m from one authority to another.
Options in the Consultation Paper
5. The consultation paper asks 30 questions (these are set out in Annex 2) (download as .doc file). Three of the questions relate to police services so we have not responded. For 14 of the questions, an illustration of the likely effects on formula grant is given. For two other questions, the likely effects can be estimated from earlier work:
· Question 20 – Relative needs and resource equalisation – a previously issued paper gave four options, with an average loss for Oxfordshire County Council of £1.759m. All four options produced losses for Oxfordshire.
· Questions 28 and 29 – Student exemptions and Council Tax base – a previously issued paper suggests that we would lose either £0.1m or £0.2m.
6. Annex 1 (download as .xls file) summarises the effects of the different options on Oxfordshire County Council.
· If all the worst options were chosen, our ‘underlying grant’ figure would reduce by £6.7m as shown in the last but one column of Annex 1 (download as .xls file). Most of this reduction (£3.4m) arises from unwinding the £9.220m of protection that is built into the needs assessments for the social services formulae for younger adults (this protection is in addition to the £6.775m damping grant mentioned earlier). If all the worst options were chosen, our actual grant payment should be protected by the damping grant arrangements. Our damping grant figure would therefore increase. We would receive whatever minimum increase the Government promised for the next three years and for a longer time after that.
· If all the best options were chose, our ‘underlying grant’ figure would increase by £1.9m as shown in the final column of Annex 1 (download as .xls file). However this is not enough to remove our reliance on damping grant. Thus our damping grant figure would reduce but not disappear entirely. Again, we would receive whatever minimum increase the Government promised for the next three years, but after that we should escape from the damping system sooner.
· Question 22 relates to the damping grant calculations themselves. The consultation paper illustrates the effects of minimum grant increases of 2%, 1% and 0% (losses of £0.6m, £1,5m and £2.4m respectively). These are losses that we could actually experience in 2008/09, 2009/10 and 2010/11. Our current medium term financial plan for the Council relies on an assumption that formula grant will increase by at least 1% each year. If the minimum increases did not provide a similar income stream, we would clearly have difficulty during the next three years.
It needs to be remembered that all the figures in Annex 1 (download as .xls file) are estimates of the effect of change based on information for 2007/08. It may be that applying the same methods to data for 2008/09 will give different results. Thus as an example, slight gains might change into slight losses, or vice versa.
7. Thus our response to Question 22 and the Government’s decisions about this is absolutely crucial. All the other options only affect our underlying grant and are unlikely to affect grant payments in the next three years. However we would be in a healthier long-term position if favourable options were chosen at this stage. This would reduce our reliance on damping grant and Ministerial discretion.
Principles for Our Response
8. Our proposed response to the consultation is set out in Annex 2 (download as .doc file). Various principles guide the proposed responses, as follows:
· As a general rule we accept the introduction of new data. Ten of the questions refer to data issues. It is difficult to argue that old information should be used, unless the new information is obviously deficient. Fortunately for Oxfordshire, new data generally improves our position. For questions 28 and 29 (student exemptions) though, the figures suggest that we would lose. However it is difficult to argue that the Council Tax base figures used in the grant calculations should not take account of the fact that student accommodation is exempt.
· We generally oppose reductions in our relative needs calculations and support increases, especially if there are good reasons for doing this. In the longer term a more favourable settlement will reduce our reliance on damping grant.
· We do consider the position of the district councils in Oxfordshire. Question 12 relates to the addition of around £200m of extra funding to pay for improvements in the concessionary fares schemes, which are operated by the district councils. For technical reasons we lose slightly when this new funding is added. It is quite unacceptable for us to lose grant when another tier is taking on a new role. This is one of the unusual side effects of the four-block model and we have asked for these losses to be prevented. Given this, we can support an option that is in the best interests of Oxfordshire as a whole.
· Damping is obviously the key issue for us. Two criteria for setting the levels of damping are proposed in our response to Question 22. These are that:
- The minimum increases guaranteed to authorities should relate to the overall increase in formula grant funding. Broadly, the minimum increase should be no more than one percentage point below the overall increase. A wider gap is only appropriate if the overall increase is both well above inflation and more than about 5%; and
- The minimum increases should be at or above the rate of inflation.
Specific Grant Transfers and the Four-Block Model
9. Excluding the Dedicated Schools Grant (of around £300m) Oxfordshire was given over 50 different specific grants in 2007/08, worth £130m. In the Government’s March 2007 Budget report, it promised to:
‘set out a clear target to reduce specific grants and ring fenced funding…’
Thus we might expect that there will be fewer specific grants in the forthcoming settlements, although this issue is not mentioned in the consultation paper. This promise from the Government has coincided with increasing concern amongst local authorities about whether the four-block model is capable of allocating new funding correctly. As noted above, adding extra funding for districts to improve concessionary fare schemes has the side effect of reducing the underlying grant for many county councils including Oxfordshire. This is hard to explain, can’t be justified and is not acceptable.
10. Specific grants can be rolled into the formula grant damping arrangements. The grant figures for previous years are increased by the amounts of the specific grants before adding the minimum percentage increases (for example our 2.7% increase). However this needs to be done in a clear way. Transfers of specific grant into formula grant in the past have not always been clear – we have had problems with the shift to funding capital grants through formula grant in 2006/07 and 2007/08 for example. Once they are included in the damping arrangements in this way, specific grants will only increase in line with the minimum increases in formula grant – these could be below the rate of inflation in future.
11. We also have concerns about the four-block models complexity, extensive use of damping, reliance on discretionary decisions by ministers and by its focus on equalising Council Tax base on a per head basis. We have expressed these concerns in our response to Questions 30.
Amending our Response
12. Our knowledge and understanding of the options in the consultation process may well change before the final deadline of 10th October. Sometimes Communities and Local Government Department issues amended or additional figures at a late stage. Sometimes work by our technical advisers in Somerset leads us to revise our position. Thus we may need to amend the draft response set out in Annex 2 (download as .doc file) before submitting it. Any changes that emerge by the date of the Cabinet meeting will be reported to that meeting. If further changes seem to be needed after the Cabinet meeting it is proposed that the Cabinet Member for Finance exercise delegated authority to authorise these.
Financial and Staff Implications, Risk Management
13. Whenever the Government considers changing the formula grant system, our grant figure is at risk. Being given a lower grant increase than we expect in our medium term plans would put additional pressures on our budget processes. The uncertainty makes planning difficult. We can minimise the effects of this risk by awareness of the likely results of consultation and by responding effectively when there is an opportunity to comment on the government’s proposals. Our representations are not always successful, but as noted in the response to Question 11, our recent opposition to the planned changes in urban/rural road classification does seem to have had the effect of removing this option from the consultation process.
RECOMMENDATION
14. The Cabinet is RECOMMENDED to approve the response to the formula grant consultation set out in Annex 2 (download as .doc file) and agree the authority to approve any changes necessary as a result of new information or understanding be delegated to the Cabinet Member for Finance.
Sue Scane Head of Finance & Procurement Corporate Core
Background papers: Local Government Finance, Formula Grant Distribution, Consultation Paper, Communities and Local Government: London, July 2007 Available at: http://www.local.communities.gov.uk/finance/0809/sumcon/index.htm
Contact Officer: David Illingworth, Financial Planning Manger Tel: (01865) 815352
August 2007
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