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Introduction: Building Blocks of Reform

A1.   Part 3 of the green paper sets out how the weaknesses of the present grant distribution system could be addressed by making use of a number of features, or ‘building blocks’. These could be used in combination to produce a grant system more in line with the aims of a good local government finance system, as set out in paragraph 1.3 of the green paper. For convenience, these aims are set out again below.

The Aims of a Good Local Government Finance System:

• To provide adequate funding to all authorities;

• To promote continuous improvement;
• To provide a reasonable degree of predictability and stability;
• To balance funding for local government's delivery of national national priorities and targets with real financial freedom and responsibility for local authorities;
• To be fair to those who use and pay for local authority services;
• To clarify accountability for financial decisions;
• To be intelligible and transparent to all stakeholders;
• To faciliate partnership working; and
• To encourage consultation, particularly with local taxpayers.

A2.   Some of these building blocks, such as specific grants or formulae, are familiar elements of the existing system, and could continue to have a role to play in grant distribution. Others, such as safety valves, or the assessment of corporate plans, would introduce new features. This annex provides more information on these building blocks of reform.

A3.   There is further discussion of:

• Options for improving predictability and stability, including proposals for floors and ceilings (paragraphs 3.5-3.10 of the green paper);
• Options for developing formulae (paragraphs 3.12-3.15);
• Safety valves (paragraph 3.16);
• Local PSAs (paragraph 3.19); and
• Use of local authority plans (paragraphs 3.20-3.22)

A4.   The annex concludes with a discussion of ways in which the building blocks can be combined, and by illustrating possible timetables for the annual local government finance settlement using systems consisting of different building blocks.

Predictability and Stability

A5.   The Government has already introduced reforms that bring greater predictability and stability to local authority funding. In place of the old annual public expenditure rounds, it has introduced spending reviews that take place every two years. They set firm funding figures for the two coming years and an indicative figure for the third year. The Government has implemented a moratorium on SSA formula changes while the revenue grant system is reviewed. And it has introduced central support protection grant (CSPG). This guarantees that no authority in England will have its grant reduced in cash terms from one year to the next, and that authorities responsible for education and social services receive a minimum grant increase of 1½ per cent. Unlike the traditional ‘damping grant’, CSPG covers both formula and data changes. Table 1 illustrates changes in grant for the year prior and two years following the introduction of CSPG in 1999-00. Before CSPG, it can be seen that 59 authorities faced reductions in grant of more than 4%. For 18 of those, grant reduction was more than 8%.

Table 1: Improved stability from CSPG

Number of authorities receiving Year-on-year Increases in grant[1]of:	1998/99	1999/00	2000/01
< -6 %	36	0	0
-4 to -6%	23	0	0
-2 to -4%	38	0	0
0 to -2%	48	0	0
0 to +2%	36	152	62
+2 to +4%	60	174	192
+4 to +6%	79	82	153
+6 to +8%	56	23	13
+8 to +10%	17	1	6
> +10%	10	1	2
Overall % grant increase	4.7	3.3	3.8

A6.   Predictability and stability are slightly different concepts. By improving stability, we mean reducing the extent to which there are year-on-year changes in authorities’ grant. By improving predictability we mean increasing authorities’ ability to forecast their grant with confidence. Greater stability necessarily implies greater predictability, but the opposite is not true. In principle, it would be perfectly possible to devise a grant system, which gave local authorities advance notice of changes in grant, but set no limits on how large those changes could be.

A7.   It is clear from authorities’ positive response to the reforms discussed in A5 and from the extensive attitude survey[2]can be found on the internet at http://www.local.dtlr.gov.uk/review/opinion.htm carried out in 1999 that local authorities value both predictability and stability. For example, the attitude survey asked authorities to rank the three most important characteristics of the grant distribution system. Stability was mentioned by 61% of respondents, and predictability by 71%. Only fairness was mentioned more often.

A8.   The Government also recognises the value of predictability and stability. Improved predictability allows authorities to plan ahead with confidence. A degree of stability enables changes in grant to be accommodated over a period of time. It is clear that there are a number of areas where authorities’ ability to manage significant reductions in grant in the short term is limited, such as redundancy payments and maintaining fixed costs. Significant increases in expenditure programmes need to be planned for in advance if value for money is to be assured. Large grant changes can therefore have a dtlrimental impact on service delivery and effectiveness. Authorities may choose to feed volatility in grant through to large changes in council tax, at the risk of provoking resentment on the part of council tax payers.

A9.   In securing the benefits of improved stability, it is also important not to lose sight of fairness. Authorities’ circumstances change over time and their grant entitlement has to reflect changes in (for example) numbers of clients per service. There is therefore a balance to be struck between stability and responsiveness.

A10.   Some authorities have extended the benefit of predictability and stability to others. As discussed above, greater stability of grant enables greater stability of council tax, to the benefit of taxpayers. It is also possible to pass on the benefits of predictability and stability to schools and other budget-holders. These are trends that the Government wishes to encourage. There are also likely to be benefits to authorities when working alongside others, for example as part of a local strategic partnership to tackle the joined-up problems facing deprived neighbourhoods. Such partnerships require a firm commitment from stakeholders, and the development and delivery of a long term strategy. Improving certainty over future levels of resources, and the ability to plan ahead with confidence, has an important role to play in assisting this.

A11.   The Government’s conclusion is that the aim of any grant system should be to maximise predictability (the main constraint here being the extent to which the Government, itself, can forecast the macro-economic and public expenditure trends) and to deliver a reasonable degree of stability.

Floors and Ceilings

A12.   CSPG is essentially a ‘floor’. It sets a lower limit on the grant entitlement of all authorities. It is pitched at a relatively low level - zero change in cash terms for district councils and a 1½ per cent increase for ‘upper tier’ authorities. We would welcome the views of respondents to the green paper on the case for going further, by setting ‘floors’ at a higher level than the CSPG (relative to overall grant increases) and by introducing ‘ceilings’. In the attitude survey, 76% of authorities, and 73% of telephone respondents, agreed or strongly agreed that the grant distribution system would be better if all authorities were guaranteed a limit to any year on year changes in their grant.

A13.  Introducing ceilings as well as a floor would increase the stability and predictability of grant outcomes by further narrowing the possible range of future grant outcomes. It would ensure that authorities are more realistic about the extent to which grant could be redistributed in their favour within a relatively short period. It could also limit grant increases resulting from changes where the link with cost pressures on the ground was not obvious, such as those caused by volatile data. Without a ceiling, these grant increases would then be protected by the guarantee of a floor increase in the following year. This benefits the authority concerned, but at the expense of other authorities, and does not sit comfortably with the principle of fairness. A ceiling would be particularly useful if assessment of authorities’ plans were a feature of the grant distribution system, as it would allow plans to be based around realistic scenarios.

A14.   The CSPG for 2001/2 was announced at the same time as the 2000/1 settlement, giving authorities notice of minimum increases over a year in advance. However, we could increase predictability and stability of grant further in future, by announcing and setting floors and ceilings for the 3-year period covered by each spending review. It would be difficult to set floors and ceilings that extend beyond one spending review period. Any floor that applied to future spending reviews, before their outcome was known, would have to be set quite low so as to give sufficient room for change. This would limit their value in increasing predictability and stability.

A15.   There are a number of factors that need to be considered in setting the levels of floors and ceilings. The key issue is how we strike the balance between stability and how quickly relative change to the grant received by different authorities can be achieved. As set out below, the main factors that have a bearing on this are the level at which the floor is set in relation to the total level of resources available, the gap between the floor and any ceiling, and special circumstances which could allow the ceiling to be breached. The detailed design of floors and ceilings would need further discussion with local government.

Issues in Setting Floors and Ceilings:

• Spending review outcomes: The higher the floor is set in relation to the level of resources available, the less quickly changes in distribution can be achieved, as there is less room for manoeuvre. The priorities attached to different services may need to be reflected by setting different floors and ceilings for different types of authority.

• Gap between floor and ceiling: The closer the ceiling is set to the floor, the less variation there will be between each authority's year on year increase. The effect of any changes to levels of grant would also impact more slowly.

• Special cases: Boundary changes and changes in responsibility will need to be taken into account. There may also be exceptional circumstances under which a ceiling could be breached, such as the very rapid population growth of the sort which resulted from the creation of new towns.

A16.   The increases in grant announced in this year’s spending review (SR2000) are slightly higher than those of the 1998 comprehensive spending review. They are also slightly higher for ‘upper tier’ authorities than for district councils. If increases of this order of magnitude continued, what options for floors and ceilings could be considered? We could stick with the CSPG increases, given the slightly higher increases in grant under SR2000. This would mean relative changes in grant could be achieved more quickly (as the floor would be lower relative to the average increases in grant). Alternatively, the floor could be pitched a little higher, say at 2% for upper tier authorities and 1% for the rest. If there was a ceiling, we would be less concerned about the possibility of large increases in grant caused by volatile data being locked in by the floor. So it might be possible to pitch the floors a little higher than would otherwise be the case. So for education authorities the floor to ceiling range might be 3% to 8%. For other authorities it might be 2% to 6%. However, if more weight were to be given to responsiveness than stability, the ranges could be broader than this: for example 1% to 10% for the upper tier, or 0% to 8% for other authorities. If the same floors and ceilings were set for all authorities, then the range would probably need to be broader than if they were set at different levels for different tiers.

The floor and the affordability of Best Value Performance Plans (BVPPs)

A17.   Past local government finance grant distribution rounds have been marked by debates over whether local authorities were receiving sufficient funding to maintain existing services. Best Value requires authorities to challenge the manner in which functions are carried out, and whether they need to be carried out at all. Service provision should be adapted where necessary to reflect real demand. The concept of providing sufficient funding to ‘maintain existing services’ may cease to be meaningful. But in its place comes a debate over whether authorities receive funding sufficient to implement their BVPP.

A18.   Best Value guidance requires that BVPPs be affordable. The Audit Commission will be taking this into account in their assessment of them. In deciding how to allocate its own resources, an authority is therefore likely to give the highest priority to implementing its own BVPP and meeting the top quartile national best value targets.

A19.   Under a plan-based approach, it becomes important to ensure that ministers do not end up taking decisions that could affect delivery of the BVPP. A new definition of ‘affordability’ of BVPPs could be cast in terms of their being deliverable within a floor increase in grant and an increase in council tax that is acceptable to local council taxpayers.

Continuing with Methodology Freezes

A20.   The current moratorium on SSA formula changes has received a wide degree of support from all the political groups in the Central Local Partnership. Even authorities dissatisfied with the last round of SSA formula changes made in 1998/99 have recognised the benefits of not revisiting the formulae annually. It is also worth noting that annual revisions to the formulae had not been envisaged when the SSA grant distribution system was originally established, but changes became more frequent over time.

A21.   If formulae are used as one of the building blocks of a reformed grant distribution system, the Government therefore sees attractions in moving away from annual revisions to them. It might be sensible to align the timetable for changes to the methodology of grant distribution with the spending review timetable. We suggest three options for further consideration:

• all formulae are reviewed in each spending review (every two years);

• all formulae are reviewed in alternate spending reviews (every four years);

• half the formulae are reviewed during one spending review and the other half during the next spending review.

A22.   The choice between the first two options turns on striking the right balance between stability and the need to keep the grant distribution formulae up-to-date. The choice between the second and third option depends on the extent to which authorities that turn out to be significant net ‘winners’ from one round of changes turn out to be significant net ‘losers’ from the other. The second option, by making all the changes together, might put less strain on the system of floors and ceilings.

A23.   There can be other methodology changes in addition to the formulae themselves. For example, there can be changes to data definitions, or adjustments as a result of changes in responsibility. While such changes could be made at the same time as changes to the formulae, some of these changes will necessarily need to be made more promptly. As with the current moratorium on formula changes, changes in responsibility may mean that there are consequential changes that need to be made to the formulae.

A24.   Methodology changes that the government is minded to make could be announced earlier in future. If formula changes were made in line with spending reviews, we could take representations on formula changes in the period running up to the publication of the spending review white paper. There might also be policy announcements as part of the spending review that would necessitate changes. But the government might be able to announce the changes it was minded to make by early autumn, rather than in late November as is currently the case.

Improving the predictability of data changes

A25.   The current formulae are generally of the form volume-times-unit cost. Volume data consists of client populations, or road lengths. Sometimes the volume data is ‘hard’ like pupil numbers. Sometimes it is estimated, like resident population figures. Some of the estimates - such as the potential number of elderly supported residents - make use of adjustments for deprivation by using indicators such as benefits claimants. There are also cost adjustments including indicators such as sparsity, snow-lying days, earnings, and so on. Of these different indicators, some data is very stable (e.g. coastline), some is more volatile (e.g. interest rates). The accepted principle is that all data should be updated annually on the basis that the formulae should use the most ‘up to date’ data available, in the interests of fairness. The Government would be content to stick with this principle, if that is the preference of local authorities. However, a number of authorities have expressed concern about the extent to which data changes have undermined the predictability that they expected the formula freeze to deliver.

A26.   With that in mind, the predictability of future grant could be further increased by making greater use of ‘smoothing’ some of the more volatile data changes. This can be done by making greater use of moving averages. For example, the current formulae include a number of indicators that make use of one year’s benefits data such as the numbers of income support claimants. The unevenness of year on year changes could be reduced by using a three-year average instead. The case for such smoothing would need to be examined on a case by case basis. The volatility of indicators may be related to the size of authorities. For example, population estimates may be more robust for large authorities than for district councils or smaller unitary authorities.

A27.  There may also be a case for confining data updates to data that are the strongest drivers of spending on the ground, and freezing indicators where the link to spending is less direct. For example, there is likely to be a stronger link between movements in spending and movements in client volumes such as pupil numbers, than there is between deprivation indicators such as income support.

Improving advance notice of grant changes

A28.   Local authorities would prefer to know the grant settlement for the year ahead about 9-10 months before the start of the financial year. There is an important trade-off to be considered here between increased advance notice and the ability to use the most up-to-date data.

A29.   If revenue grant distribution was based on assessment of corporate plans, then grant decisions on the plan-based element of grant could be given for the three-year period of each spending review. Each local authority would receive firm grant figures for the first two years and an indicative figure for the third year. In terms of the above trade-off, there is considerable advance notice of this element of grant, but it would have to be based on the best estimates of future circumstances.

A30.   Under other alternatives, it would be similarly possible to give authorities firm grant figures for the first two years of each spending review period, and an indicative figure for the third year if the data on which the formula’s calculations were based were determined at the outset. However, discussions with local government have so far suggested that authorities might prefer the annual updating of data, to forecasting or freezing data in order to achieve this, even though this would leave the grant figures subject to some fluctuation.

A31.   Nevertheless, the knowledge of three year overall aggregates, together with methodology freezes, possible earlier announcements of formula changes, the stability afforded by floors and ceilings, and smoothing of more volatile data changes, would all increase authorities’ ability to predict their future grant, even if it cannot be known with certainty. The issue is whether this will provide as much certainty as authorities would wish at around 9-10 months before the start of the financial year. For example, some data changes may be difficult to forecast in advance, and some indicators (such as pupil numbers) only become available at a late stage in the current settlement timetable. So one way to improve predictability still further, and commensurate with annual updating, would be to use data a year more out of date than is currently the case. In the attitude survey, of those agreeing that they would prefer greater advance notice of the settlement (95% in the authority survey, 93% in the telephone survey), 65% and 70% respectively continued to agree, even if it meant using data up to one year more out of date than we do currently. For those authorities that did not continue to agree, a particular concern is likely to be that using more out of date data would increase the lag with which increasing client populations are reflected by the formulae.

A32.   The predictability and stability of ring-fenced grants is also important. We are starting to improve this. The SR2000 white paper said that we will aim to announce the majority of such grants on a three-year basis this autumn, together with information on how they will be distributed. Earlier information will also be provided on capital programmes. Three year plans for at least 85 per cent of total capital resources provided to local authorities will be announced in Departmental Investment Strategies to be published in the autumn, with details of how this will be distributed to individual local authorities to follow by December 2000.

 

Options for developing formulae

A33.   The current grant distribution formulae have become very reliant on the mechanical use of statistical analysis of spending. They have also become increasingly complex over time, as the underlying statistical analyses have been continually refined in an attempt to better reflect the variation in local circumstances. Ministers are concerned about the difficulty of explaining the system to Parliament, local authorities and the electorate. Concerns about the fairness of the system are closely linked to how well it is understood. If formulae are to continue to play a role in grant distribution, it is therefore important that every effort is made to ensure the formulae are intelligible to stakeholders. The options for developing formulae need to be considered in this context. These options include continuing to rely on regression analysis; drawing on wider evidence, including that emerging from Best Value; and improving the way that formulae are presented.

Regression analysis

A34.   It would be possible to continue to rely on regression analysis. In order to meet the aim of developing more intelligible formulae, there might be scope for reducing the number of indicators and/or the number of sub-blocks. However, central and local government need to be realistic about the extent to which simpler formulae could be developed by sticking to a very mechanistic use of statistical analysis. Under such an approach, if indicators that were known to be statistically significant were deliberately left out of any analysis in the interests of simplification, then it could prove difficult to justify to losers that the simpler formula was as fair as the original. Similarly, and as past experience has shown, it is difficult to resist refinements to the formulae over time, as new analyses provide evidence of significant correlation between expenditure and particular indicators. The scope for simplification may therefore be limited, though there may be some scope to avoid over-complexity if use is made of a ‘safety valve’ as described at A49.

A35.   One of the technical criticisms of regression analysis of past expenditure has been that it can reflect historic funding levels and differences in efficiency. There are techniques available to try to avoid this. An example is multi-level modelling, as used in the Children’s Social Services SSA. Multi-level modelling aims to avoid reflecting differences in efficiency and historic funding levels that occur between authorities, by focusing instead on the pattern of expenditure within authorities. Such techniques can result in formulae that are simple in final form with plausible weights attached to each indicator. But because the techniques used are more complicated, it can be more difficult to explain how the formulae have been arrived at, and this can impact on whether the formulae are perceived as fair. In the attitude survey carried out for the Review, 55% of telephone survey respondents, and 39% of authority survey respondents agreed or agreed strongly with the statement that it is impossible to tell if the current system delivers a fair outcome or not because it is too complex.

A36.   The current system largely relies on expenditure data from 1990/1 as this pre-dates the effects of capping on expenditure. However, the data is becoming increasingly out-of-date, and universal capping has been replaced with a move to reserve powers. If regressions of past expenditure continue to be used, it would seem sensible to update the expenditure database. For example, using data from 2001/2 would allow us to take on board any changes arising from the 2001 Census. It might also be possible to make greater use of non-expenditure information. An example in the existing system is the police SSA, which uses data on the number of recorded crimes rather than expenditure as the dependent variable in the regression analysis. But updating the expenditure database or making greater use of non-expenditure data may not be sufficient changes in themselves to greatly improve the intelligibility of formulae, if they were to continue to be used in regression analysis in a mechanistic way.

 

Drawing on wider evidence

A37.   Rather than rely on the mechanical use of statistical analysis of past levels of expenditure, there might be a place for drawing on wider evidence, or for reflecting on the extent to which the patterns of past spending have their limitations as indications of patterns of future need.

A38.   This wider evidence could be used as a ‘plausibility check’ on formulae. Judgement could be used to adjust the results emerging from traditional regression analysis to make sure that they are consistent with broader evidence, such as that emerging from Best Value. This includes not only performance indicators, but also the broader emerging body of audit and inspection opinion. This could help ensure that indicators are plausible, and that the weights attached to them make sense in the light of informed opinion. In order to address the problem that regressions of past expenditure can end up reflecting historic funding levels or differences in efficiency, there might also be a role for judgement in trying to adjust expenditure figures for differences in efficiency and service standards prior to any statistical analysis.

A39.   The approach to grant distribution in the Netherlands is along these lines. Their system is based around ‘clusters’ of services, not unlike our own service blocks, but sometimes rather broader in nature. A sample of authorities with very wide differences in costs is chosen for each cluster, and the sample is explored using a range of techniques to identify factors explaining the variation. The sample is also used to determine what weight each factor should be given in order to compensate for differences in costs. These weights are determined with the help of various statistical techniques including regression. Final weights are adjusted in the light of judgement.

A40.   Such use of wider evidence could be used to make a concerted effort to develop intelligible and transparent formulae by avoiding regression analysis altogether. The bullets below illustrate how such a formula could be built up for education. A similar approach could be extended to other services. The key simplifying assumption is that there is a basic minimum cost of providing education services that is common to all authorities. This basic minimum need not be derived from regression analysis but can draw on wider and more up-to-date evidence, recognising the changes that have taken place in delivering education since 1990/1. On top of this basic minimum, there would then need to be recognition of the additional costs of providing services in deprived areas, and in areas where the cost of recruiting and retaining staff is higher. Again, these top-up adjustments could draw on wider evidence of the cost of delivering outcomes to ensure that they are plausible and explicable to stakeholders.

Illustrating a formula for education which draws on wider evidence:

• A simpler, more intelligible formula could be derived using analysis of evidence about variations in pupil characteristics, cost and achievement, rather than analysis of past spending. It could consist of three components;

• A minimum per pupil: There could be a basic entitlement per primary and secondary school pupil that would be the same for all authorities.

• A deprivation top-up: There could be increases above the basic minimum for authorities where significant deprivation adds to education costs.

• A pay costs top-up: There could also be increases above the basic minimum for authorities needing to pay more to recruit and retain staff

A41.   An extension of this approach would be for the majority of grant to be allocated on the basis of client indicators. But rather than having a deprivation top-up specific to individual services, these top-ups could be cross-cutting in nature, and targeted at urban and rural deprivation more widely, and any other factors that are intense in a minority of authorities. Such an approach would be similar to that in France, where about 90% of grant is based on the amount each authority received the previous year (which is similar to a floor). The remainder is made up of various grants, for example rural and urban ‘solidarity’ grants. These are allocated by formula, but the weights used on the indicators are set judgementally.

Fixed and variable costs

A42.   Whether formulae were to continue to rely on regression analysis, or draw on wider evidence, it might be possible to ensure that they distinguish more clearly between the fixed and variable costs of providing services. For example, district councils have raised a concern about the fixed costs of implementing the modernisation agenda (eg the cost of preparing a BVPP). Metropolitan authorities have raised a concern that the current formulae are unfair to areas with a declining population, as they do not recognise the element of fixed costs of providing services in the short term. In principle, these appear to be legitimate criticisms. The SSA formulae assume a proportionate relationship between cost and client populations, whereas services in practice do involve a mix of fixed and variable costs. An element of fixed costs is reflected in the grant distribution formulae used in some other countries including the Netherlands and Denmark.

A43.   The Department of Environment, Transport and the Regions (DTLR) has therefore commissioned a scoping study to help determine what further research needs to be undertaken on these issues. The scoping study will review the existing evidence and literature on economies and diseconomies of scale in providing local government services, and the way in which costs increase/decrease in response to changes in client populations. Informed by this review, the study will then consider a range of possible approaches for further research, with a view to proposing a best way forward. In recommending further work, the scoping study will need to ensure that the proposed approach is capable of leading to a relatively straightforward way of recognising the implications of fixed cost in the formulae.

Longer-term options for reform

A44.   In the future, data might become available that allows formulae to be derived ‘bottom-up’ from the actual costs of providing services. For example, it has been suggested that activity-based costing could be used to establish the costs of delivering the national core curriculum, based on the access which an individual pupil requires to teachers’ time, IT, books and other materials. Such activity-based costing could have an important role to play in deriving a basic minimum grant entitlement and in influencing the design of the Fair Funding formulae used to distribute funds within local authorities. Its main attractions are that it is firmly based in hard evidence about the cost of delivering services and that it is readily intelligible to the key stakeholders.

A45.   However, the approach could not easily be extended, at this stage, to other local authority services, where there is not the same clear specification of outputs as there is for education. Even for education, the approach has its limitations. It is better at dealing with the direct cost of teachers’ time than with the cost of the many other staff whose work is vital to the smooth running of a school. Delivery of the national core curriculum may require greater access to teachers’ time for pupils with learning difficulties. In small schools in rural areas, the teacher-pupil ratios may have to be higher than implied by the calculation of teachers’ time required to deliver the curriculum.

A46.   Best Value information might also form the basis of an approach to revenue grant distribution based on the actual costs of providing services rather than regression analysis. The Best Value framework will make available a wide range of information including the national suite of performance indicators. These will include independently audited indicators of the unit costs of providing key services. In principle, these could be used in combination with volume indicators to determine grant allocations. However, unit cost indicators are at an early stage of development and it may be a number of years before reliable comparisons in costs can be made across authorities, though the Best Value accounting code of practice should do much to aid this. The advantage of using Best Value information over activity-based costing is that it might be able to deal with services where an output specification would be more difficult to derive than for education. It can also pick up direct and indirect costs together. There would still be a need to reflect differences in costs around the country from factors such as rurality, deprivation, and pay costs. Best Value could therefore be used to derive a unit-cost per local authority ‘family’, or (like activity-based costing) it could be used to inform a minimum entitlement.

Improving the presentation of formulae

A47.   The Local Government Finance Report is the formal document approved by Parliament and the legal basis for the distribution of revenue grant. It provides information for local authorities to calculate their SSAs by listing the coefficients derived by statistical analysis. However it does not explain how these are derived. DTLR’s ‘Plain English’ guide to the local government finance regime does not explain SSA in any detail. DTLR’s guide to SSA methodology has provided only a technical explanation.

A48.   We believe that there is scope for a clearer explanation of how the formulae work and why they have been structured as they have, in a way that is intelligible to all key stakeholders. Such an explanation would not only cover the workings of grant distribution, but set it in the context of the local government finance system as a whole. Good examples already exist, such as ‘Pounding the Beat’ - the Association of Police Authorities’ guide to police finance. But if a future formula-based system is to be more widely accepted, then the presentational effort will need to be a joint central-local one. Working through the Central Local Partnership, central and local government should be able to explain better to stakeholders both where revenue grant comes from and how it is distributed.

Safety valves

A49.   Part three of the green paper describes how a ‘safety valve’ mechanism could form one of the building blocks of a reformed grant distribution system. This section fleshes out how such a system might operate.

What is a safety valve?

A50.   A safety valve would be a mechanism that would allow the payment of additional general grant to authorities that are underfunded by the formulae relative to other authorities. It is clear that no formula for an individual service can pick up all the factors that have an impact on the cost of providing it. A well-designed formula should produce broadly the right allocation of resources at the national level, but will inevitably allocate too little resource to some authorities and too much to others. This element of ‘rough justice’ is inherent in formula-based approaches. Authorities with a mix of responsibilities are covered by a number of different SSA formulae, which means that their ‘underfunding’ by one formula may be offset by their ‘overfunding’ via another formula. However, even for these authorities, there is no reason to suppose that the effects will cancel one another out. And in the case of district councils, fire authorities and police authorities there is only one service block. A formula-based grant system may well therefore leave a small number of authorities with net ‘underfunding’. Accordingly, safety valve grant would be expected to be make up only a small proportion of total grants, and be paid to only a small number of local authorities.

A51.   Safety valve grant could be used in two ways to address ‘rough justice’ at the margins. Firstly, it could be used instead of a formula change, where that change would risk making the formulae unduly complex. Secondly, it could be paid to authorities that were able to demonstrate that they had been historically underfunded by the formulae. This section focuses on the second of these two cases.

How could a safety valve work?

A52.   In order for an authority to demonstrate that it was underfunded, it would need to provide practical evidence of the consequences of underfunding, rather than rely on theoretical arguments about the adequacy of the resource inputs from the formulae. Apart from increasing efficiency, an authority can respond to spending pressures by increasing its council tax, cutting spend on core services, or disengaging from non-core activities. So a case for additional grant would need to demonstrate that an authority has (a) a high council tax level, (b) low service standards, or (c) gaps in its suite of activities/services, and that the problems were not due to inefficiency or political choice.

A53.   In this respect, the authority would need to bring forward evidence across the whole range of services, rather than highlight a few problem areas. This is because it does not necessarily follow that a problem in one area implies the authority as a whole is underfunded. Given this need to look at all services in the round, much of the information an authority would need in order to make its case persuasively would be the sort of information emerging from its planning processes.

A54.   Safety valve grant would be intended only for a small number of authorities. However, it seems likely that if there were no disincentives or restrictions on which authorities could apply, the majority of authorities would submit a case for consideration as a matter of routine. If this were the case, the implication would be a considerable administrative effort, both by local authorities in putting together, and by Government in appraising, a large number of bids, many of which would have little chance of success.

A55.   Therefore in order to keep the system manageable and focused on the most deserving cases, there would probably need to be initial criteria that would have to be met before payment of the safety valve grant could be made.

A56.   The section below gives examples of possible criteria. They would need to be developed in consultation with local government, and would need to be as robust and clear as possible. The criteria would need to be related to the practical ways in which underfunding can be manifested as discussed in paragraph A52. We think it is possible to develop criteria that would reflect low service standards, high levels of council tax, and efficiency. It may prove more difficult to develop criteria reflecting gaps in the suite of discretionary services, at least until Best Value information becomes more comprehensive. In the first instance, this may mean that the safety valve would need to be focused only on problems in delivering core services.

Examples of eligibility criteria:

• In order to identify authorities with low service standards across the piece, criteria could be developed using a basket of Best Value performance indicators relating to outcomes and quality of service;

• Authorities with a high council tax level could be taken to be those in the top quartile or decile, either nationality, or by class or family of authority;

• An efficiency criterion could be developed using a basket of unit cost indicators, with unit costs being compared across groups of authorities facing similar cost pressures.

A57.   In developing criteria we would need to ensure that there are no perverse incentives created. There is also a balance to be struck as to how strictly the criteria are applied. The more stringent the criteria, the more targeted the list of eligible authorities would be on those most likely to be underfunded. But there would also be a greater risk that deserving cases might be excluded. The broader the criteria, the greater the number of authorities that would be eligible for the safety valve. However, in this case, the greater the administrative cost in running the system, and the greater the probability that authorities with only a weak case for underfunding met the criteria.

A58.   Authorities that met the criteria would be eligible to submit a case for consideration by Ministers. There would not be an automatic link between meeting the criteria and payment of safety valve grant, but rather the use of ministerial discretion. The relationship between funding and performance is not straightforward, and we would not wish to rely on a mechanistic interpretation of performance indicators, but rather draw on wider evidence such as that emerging from Best Value audit and inspections.

Timing

A59.   The way in which a safety valve mechanism would fit into the settlement timetable would need to be considered. If methodology changes are made in line with the spending review cycle, then safety valve cases could be submitted every other year in line with the timetable for formula changes. Safety valve cases could be submitted while formulae are being reviewed, as the cases could then form part of the evidence-base informing formula decisions. Eligible authorities would therefore need to be notified at an early stage in the formula review process. Once the formulae had been decided, decisions on the safety valves could be finalised, since some of the formula changes might work to the advantage of authorities that had submitted cases, and so obviate their need for safety valve grant.

A60.   Were the safety valve to be used to avoid making a formula change that risks over-complicating the formulae, then the timing involved is the same as that for decisions about the formulae, and the resulting implications for safety valves could then be announced at the same time as decisions on the individual cases put forward by authorities.

Local public service agreements (PSAs)

A61.   The SR2000 white paper announced that the Government intends to offer local authorities the opportunity to enter into new local PSAs. They will strengthen links between central and local government and have been developed in close partnership with the Local Government Association (LGA), based in part on the LGA’s Local Challenge proposals.

A62.   Local PSAs are a means by which local authorities can build upon Best Value and commit themselves to delivering even better outcomes for local people than they would otherwise expect to achieve. Each local PSA will focus on about twelve key outcomes which reflect a mix of national and local priorities, including where appropriate targets to improve outcomes for areas or groups most at risk of social exclusion. In return, central government will offer a package of agreed freedoms and flexibilities, alongside financial incentives (invest to improve grants of up to £1m per authority). Authorities that meet the more stretching performance targets agreed in local PSAs will gain access to a new Performance Reward Fund - receiving up to 2.5% of their 2000/01 budget requirement if they achieve their enhanced outcomes. Payment of the Performance Reward Fund will be spread over three years.

A63.   The voluntary scheme will be piloted with around 20 authorities in 2001/02. If successful, a wider rollout is planned to other county councils, metropolitan districts, London boroughs and unitary authorities in 2002/03, and it is hoped, to shire districts thereafter. Potential pilot authorities were asked to confirm their interest in principle by 4 September and will submit initial proposals by 31 October (30 September for the seven authorities with whom the Government had held initial scoping discussions). The aim is to complete detailed negotiations about the content of the local PSAs by the end of the year. More details about local PSAs can be found in Local Public Service Agreements: A Prospectus for Pilot Authorities available at http://www.local-regions.dtlr.gov.uk/propilot/index.htm.

Use of Local Authority Plans

A64.   This section looks at how local authority corporate plans might be used within the grant distribution system. It looks first at why local authorities need to produce plans for internal management purposes and to inform consultations with local stakeholders, and at the information they would have to incorporate in such a plan. It then considers how these plans might be used to inform the revenue grant distribution decision. The way in which plans could be combined with other building blocks is considered later in the annex.

Why have plans?

A65.   Any public, private or voluntary sector body needs a corporate plan of some sort to link its objectives to its resources, so that it knows what it can and cannot afford to do in the longer term. For many bodies, this plan is a purely internal management tool. But, for local authorities, there is also the need to use plans as a basis for consultation.

A66.   Local authorities are already required to produce Best Value Performance Plans (BVPPs) which bring together quality and unit cost targets for future years. The Local Government Act 2000 will require authorities to develop community strategies that bring together key partners in delivering local sustainable development. There is an iterative relationship between the corporate plan and the BVPP and community strategy. The BVPP performance targets and the commitments made to partners in the community strategy must be grounded in the corporate and financial planning framework of the authority. But the corporate plan must take account of the consultation with residents and partners that takes place in preparing the BVPP and community strategy.

A67.   Similarly, the corporate plan will both inform and be informed by:

• consultation with residents on budget and council tax increases, setting out what increases in service the authority can deliver in exchange for a given level of council tax;
• consultation with the business community on the supplementary business rate;
• consultation on the fees and charges plans;
• consultation on the capital investment strategy.

A68.   Many local authorities have put in place, or are developing, corporate plans that look forward at least three years. There is increasing recognition that such plans should deal with revenues and service delivery, rather than focusing narrowly on expenditure. The announcement of three-year public expenditure totals, the SSA formula freeze and the abolition of crude and universal capping has removed three major obstacles to rational forward planning by local authorities. Best practice on the production of corporate plans was highlighted in last year’s Audit Commission report Planning to Succeed. Discussions with local government during the revenue grant distribution review confirmed that there is general acceptance of the need for corporate plans and of the role they play in drawing together all the different strands of local authorities’ forward planning.

Content of a local authority corporate plan

A69.   A corporate plan needs to look three to five years ahead. It needs to cover all the responsibilities of a local authority. It also needs to cover all sources and applications of funds. That means looking at all forms of expenditure (bringing together capital and revenue spend) and at all sources of funding (including Government grant, the yield from council tax and supplementary local business rate, revenue from fees and charges, and proceeds from the disposal of assets). It needs to link the expenditure to the authorities’ objectives and to the resources available, recognising the essential principle that local authorities are required to balance their revenue budgets and expected to maintain a prudent level of reserves.

A70.   In order to take a view on the likely future cost of providing a given service, local authorities need to understand the historic cost-profile of the service, to gauge the future pressures on it arising from factors beyond their control, and to take account of their own plans to raise service standards, improve efficiency, or change the way in which the service is delivered. Key elements in the forecast of the cost of any service will be the projected increase or decrease in the client population, the upward pressures on cost from pay increases and non-pay inflation, and the offsetting savings expected from improved cost-effectiveness. Similar factors underpin forecasts on the revenue side. For example, the projected yield from council tax depends on changes in the number of households paying the tax and the authority’s success in collecting it. Before they take policy decisions on the basis of the plan, local authorities will obviously want to satisfy themselves that:

• the forecasts are robust (e.g. by comparing the projections with historic trends) and internally consistent (e.g. that the same demographic assumptions underpin the expenditure and revenue figures);
• the figures accurately reflect the costs and savings resulting from implementing their BVPP and meeting national Best Value targets.

A71.   They can then take a view of the additional improvements that they might be able to deliver (a) if they secured additional government grant or (b) in exchange for a higher level of council tax or the introduction of the supplementary business rate.

A72.   If grant decisions operated within ‘floors and ceilings’ then authorities might use their corporate plan to set out how they would balance their resources and expenditure in order to achieve their priority outcomes if they were allocated the ‘floor’ increase, the ‘ceiling’ increase or an intermediate scenario. Implementation of the capital finance reforms discussed in part 4 of the green paper could allow income from the disposal of assets and outcomes relating to capital projects to be included in the corporate plan too.

How might corporate plans inform grant distribution decisions?

A73.   Corporate plans will, of necessity, contain a lot of information about a local authority’s costs. They therefore provide a basis which could allow authorities to explain to central government why their services cost what they do. Particular spending pressures and special circumstances could be highlighted in a way that is not possible when grant is distributed wholly by formula. They can thus be used to form the basis of Ministers’ informed judgement of authorities’ spending requirements.

A74.   It would be important to ensure that the use of plans to inform grant distribution decisions did not involve local authorities in significant additional work. The Government would consult on guidance on the production of plans in order to avoid the imposition of significant new burdens on authorities. This could be done by eliminating requirements for information that an authority would not use in their internal forward planning. Such guidance might also restrict the length of corporate plans and the amount of information and argumentation they contain. This would make their production and appraisal manageable. It would also ensure that larger and better resourced authorities were not perceived to have an unfair advantage.

A75.   A local authority’s plan would set out the cost increases or decreases resulting from changes in demand for its services. For example, authorities with increases in client populations would project the resulting cost increases. Similarly, authorities with declining client populations would set out the rate at which the cost of providing those services declined, based on past evidence and their knowledge of their own cost structures. Although there is scope for judgement at the margins, local authorities should be able to produce robust estimates of the impact of changes in demand, supported by hard evidence. Similarly, they should be able to forecast trends on the resources side with a reasonable degree of confidence, such as changes resulting from transfer of housing stock or changes to council tax yield arising from demographic changes.

A76.   Plans also provide a basis on which authorities could make a bid for Government grant to support the additional improvements referred to in paragraph A71 above. In essence, the plan sets out for Ministers the cost of implementing the BVPP and the authority’s proposals for going beyond its BVPP.

The cost of implementing the BVPP

A77.   Before moving to a plan-based approach to grant distribution, the Government would also need to decide what proportion of funding should be distributed on the basis of appraisal of plans (essentially, the gap between the funding floor for all authorities and the total amount of revenue funding available). It depends on three things:

• the width of the gap between floor and ceiling;
• the rate of increase in total grant for local authorities. This currently exceeds the increase in local authority pay and prices by a reasonably comfortable margin, which creates headroom for expenditure on new services, though that cannot be guaranteed indefinitely;
• whether a definition of ‘affordability’ in the context of the local BVPP can be agreed (see paragraphs A17-A19 above).

Prioritising proposals for funding using the corporate plan

A78.   Local authorities could then use the corporate plan, drawing on information already collated as part of the BVPP, to set out how they might go beyond delivering what is affordable under it. We could draft guidance in such a way that indicated that we would be willing to consider different types of proposal from local authorities. For example, councils might submit proposals:

• to tackle problems arising from historic underfunding, such as restraining council tax or plugging gaps in the range of discretionary services provided. An authority would have to demonstrate that its council tax level is high and/or that there are gaps in the services it provides, compared with other similar authorities. It would also need to demonstrate that these problems are attributable to underfunding, rather than to inefficiency. As with the ‘safety-valve’ under the formula-based approach, the ‘gateway’ could be clearly and narrowly defined in the guidance.

• for delivering service improvements or cost reductions that go beyond what is achievable under their BVPP. For example, the BVPP might be constrained by the affordability criterion, either because the authority has been historically underfunded by SSA or because there is a need to ‘invest to save’ or ‘invest to improve’. Such proposals might flow from the need to meet the ‘floor targets’ of the national-level Public Service Agreements and/or local PSAs, covering objectives whose delivery depends on local authority action. The appraisal would focus on the robustness of the proposals and value for money.

• for new services or facilities for which consultation has demonstrated local demand. Recent increases in community consultation have generated many new spending pressures - such as town centre improvement schemes, better sport and leisure centres, the introduction of CCTV, or blitzes on graffiti or potholes. They typically require a mix of capital and current spend. Obstacles to implementation include non-availability of credit approvals or a lack of revenue cover for ongoing costs of projects for which there is Government or lottery grant. The obstacles are likely to be more formidable for small authorities or those with modest revenue bases. The appraisal would look at the strength of local support, the extent to which local people were prepared to contribute to the cost and at value for money. The prosperity of the area would be a key consideration, since residents and businesses in prosperous areas are better placed to contribute to costs than those in deprived areas.

• to tackle neglected services. Routine maintenance has often been the first casualty of budgetary pressure. It can be difficult to justify spending on IT because the benefits are not readily visible to local voters. Authorities can also be reluctant to incur expenditure to further ‘cross-cutting’ objectives for which they are not directly answerable. For example, the ‘credit’ for a reduction in car-theft secured by improving security at council-owned car parks goes to the police. Criteria in the guidance on corporate plans could reflect generic types of expenditure that we would wish to support such as those described above.

A79.   In order to allow meaningful assessment of the possible service enhancements described above, the plan’s content would need to reflect the criteria that ministers would apply in determining the merits of different packages of expenditure proposals. This could be done by issuing guidance on the assessment of plans that focussed on setting out the priority calls for further funding above the floor increase, such as the proposals described above.

A80.   Some authorities may be content with ‘floor’ allocations year on year. Their Best Value reviews and feedback from community consultation processes may indicate that they do not face substantial cost pressures. There would be no reason for such authorities to submit corporate plans to central government, although they would obviously need to produce them for internal management purposes and to inform local consultations.

The decision-making process

A81.   During the revenue grant distribution review, it became clear that the importance of the decision on the plan was such that local authorities would expect:

• decisions on an individual authority’s grant allocation to be taken by Ministers themselves, rather than delegated to civil servants or an independent body;

• an opportunity of putting their case face-to-face to a Minister after the indicative grant allocations had been announced, but before final decisions were taken on the grant figures to be recommended to Parliament.

A82.   In principle, the Government accepts both these points. However, it is important to think about the practicalities too. Although Ministers would be prepared to devote considerable time and effort to consideration of the plans of the 150 ‘upper-tier’ authorities, they are unlikely to be able to offer a similar undertaking to all 238 district councils because of the time-commitment this would involve. The content of an ‘upper tier’ authority’s own plan would be wider in scope than that of a shire district council. To the extent that it is meaningful to distinguish between national and local issues, the work of district councils tends to have a more ‘local’ focus. We would need to consider whether plan-based grant distribution could be tailored to impose less of a burden on district councils - which have less staff resource to devote to corporate management and planning - and on central Government’s appraisal of district councils’ plans as well.

A83.   The preliminary stages of appraising an authority’s corporate plan involve:

• validating the cost and revenue forecasts and the assumptions underpinning them;

• taking a view on the merits of the funding proposals.

Validating cost and revenue forecasts

A84.   The simplest check on the realism of an authority’s cost and revenue forecasts is to compare them with the historic trend. If the future is a straight-line extrapolation of the past, there would be a presumption that the forecasts are realistic. If the forecasts deviate significantly from past trends, the reasons would need to be probed. In this way, trends could act as a ‘filter’ and we would concentrate assessment on departures from trend (or projection) which would need to be justified. We would also check for consistency between cost and revenue forecasts.

A85.   For example, in considering forecasts for increases or decreases in the taxbase and its constituent elements, we would apply the same tests of realism as the authority itself. We would expect to see absolute consistency between the demographic assumptions underpinning the revenue forecasts and those underpinning the cost forecasts. We would expect to see either consistency between the historic and forecast trends for the authority or convincing reasons why the forecast trend is different from the historic trend. If these conditions were satisfied, there would be no need to consider the taxbase forecasts further.

A86.   We would also check that forecasts accurately reflect the costs and savings resulting from implementing their BVPP and meeting national Best Value targets. For example, in the case of council tax collection rates, we would expect to see authorities in the top quartile maintain their council tax collection rates and all other authorities improve their collection rates to the current top-quartile level over five years. Bids for grant to offset inadequate council tax collection rates would not be met.

A87.   The level at which council tax is set is also a key element of revenue forecasts. This is a matter for which authorities should be properly accountable to their electorate. Crude and universal capping has been abolished and Ministers would not wish to get re-embroiled in capping decisions by the ‘back-door’ through consideration of plans. We have set out how the level of the council tax could be considered as part of assessment of the corporate plan below.

Council Tax and the Corporate Plan:

With regard to the level of council tax, there are only two questions that would concern us:

• Is a particular authority proposing increases in council tax and budget which require capping action?

• Is it proposing very low council tax levels which require an excessive subsidy from the national taxpayer?

If the answer to both questions was 'No', we would not need to give an authority's council tax level further consideration.

In the case of the first question, we would still need to go through the annual process of looking at the actual budget and council tax levels proposed by a local authority each year when considering the need to use reserve capping powers. There would be the option of discussing proposed council tax increases during the corporate plan appraisal process.

The second question raises a more difficult set of issues. We do not wish to discourage authorities from seeking low council tax increases, particularly where the current level of council tax is uncomfortably high. Some authorities have already adopted council tax restraint policies. This is a welcome development. However, were an authority to wish to see its council tax restraint policy subsidised by grant from the national taxpayer, it would need to make a formal proposal to that effect in its plan, which the Government could consider on its merits. In general, the Government would accept such proposals only from historically underfunded authorities, which could be indentified as discussed at paragraph A78.

Examining the merits of funding proposals

A88.   Taking a view on the merits of proposals for additional funding could be done in different ways. It could be on a service-by-service basis - this would mean extracting all proposals from different authorities on a particular service, such as education or transport, and ranking them on merit. Or it could be a more cross-cutting appraisal that looked at the plan in the round. Plans could be assessed ‘thematically’ - looking at services for children or the elderly; or by geographic area. In each case there would be a need to weigh up the merits of different types of proposal as set out in paragraph A78. At the margins, this would inevitably involve the use of judgement. This is another reason why it would be important for Ministers to devote considerable time to the assessment process.

A89.   If the appraisal process was to be manageable, then the initial appraisal of corporate plans would need to be made in a ‘joined-up’ way by central government using cross-cutting teams made up from government departments with local government interests. Any assessment process would also need to allow for the possibility of joint bids by local authorities (such as a county and the districts within it) or the pooling of budgets between different service providers such as health authorities and local strategic partnerships.

A90.   Local authorities would also expect to receive an explanation of how funding decisions had been reached by central government. This could be done via a combination of a formal statement of the reasons for the grant decision plus more informal feedback at working level. The reasons should be targeted enough to be helpful to individual councils without getting bogged down in minutiae. Promoting best practice could also be a key element of the feedback process.

A91.   While the above discussion applies to general grant, authorities could also submit bids for ring-fenced grant in parallel with the corporate plan, with authorities receiving decisions on ring-fenced and general grant at the same time. This could enable central government to take a more ‘joined-up’ approach to allocating grant.

Summary of the features of a plan-based system

A92.   In conclusion, a plan-based approach to distributing grant might have the following features:

• Predictability and stability of funding is enhanced by authorities receiving three-year settlements in the same way as government departments, updated every other year. There are rules setting ‘floor’ and ‘ceiling’ levels of grant increase.

• Ministers themselves make judgements on individual authorities’ grants. Councils have the opportunity of putting their case face-to-face with a minister before ministers make their grant allocation recommendations to Parliament. Successful authorities will be expected to deliver the outcomes promised in their corporate plan in return for an increase in grant above the ‘floor’.

• The Government issues clear guidance on the preparation and appraisal of plans, spelling out how both national and local priorities were to be taken into account. It gives feedback, both formally and at working level, of the reasons for its decisions.

• The submission of corporate plans to government is voluntary. Those authorities that do not participate would receive no more than the floor increase.

Combining the Building Blocks

A93.   There are a number of different ways in which some of the building blocks could be combined, to deliver a local government finance system more in line with the aims set out at A1 above. Part 3 of the green paper illustrates two possibilities, and notes the implications for the relationship between central and local government. The first is that the components could operate separately - starting with floors and ceilings and formulae, and then adding a safety valve and targeted grant. Incentives would be built in through local PSAs. Or we could try to create an ‘all in one’ package by considering corporate plans framed between an all-encompassing floor and ceiling. 

A94.   Other combinations are possible. But some variations would not make sense. For example, as set out in paragraph A78, the plan could set out the case for additional funding which was the result of historic underfunding, and would involve the use of ministerial judgement. The plan would therefore fulfil the role of the safety valve, and there would be no advantage in including both these building blocks in a new system.

A95.   Similarly, a corporate plan would set out the resources and expenditure required to achieve authorities’ priority outcomes, such as Best Value upper quartile targets. Such an approach could encompass the sorts of outcome targets set in local PSAs, and the plan could be used to recognise and reward their achievement.

A96.   Plans could be combined with formulae. There are two ways in which this could work. The plan and formula could allocate separate totals. So decisions on the distribution of the plan-based total would be taken for the period of the spending review, while distribution of the formula-based total could be determined annually with the most up-to-date data. The amount of grant allocated to each authority would change as data underpinning the formula was updated, though only to the extent that these data changes were not foreseen in the plan.

A97.   Alternatively, the plan could be seen as determining the authority’s overall total of grant. If the formula was annually updated, the plan allocation would be the balancing amount needed so that the total grant received by the authority stayed the same as that expected at the time the plan was appraised.

A98.   In these two approaches, the formulae would act as a safeguard against a declining share of grant. If an authority were to continually receive a floor increase, there would eventually come a point when its formula allocation would take it above the floor. How quickly such a safeguard kicked in would depend on the proportion of total grant allocated by formula.

A99.   The way in which floors and ceilings could operate could be different, depending on which building blocks are combined. Under a system involving formulae but not plans, then safety valves, local PSAs and ring-fenced grants could remain outside the total to which the floor and ceiling are applied. A system involving plans could be slightly different. As discussed above, the plan would encompass safety valves and local PSAs. The funding total to which floors and ceilings would be applied would therefore be broader than one in which safety valves and local PSAs operated separately.

A100.   Finally, it is worth noting that the combination of building blocks could be different for different types of authority. As set out in part 6 of the green paper, there could be different approaches for, for example, district councils, police or fire authorities.

Illustrative Timetables

A101.   The green paper illustrates how the different building blocks could be combined. This section shows how the potential different elements of a reformed grant distribution system would fit the timetable for the annual local government finance settlement.

A102.   Table 2 illustrates the timing for formulae and safety valves had a new system been introduced in line with SR2000. Further details on the timetable for local PSAs can be found at the link in paragraph A63.

A103.   In the case of formulae, the current arrangements are that consultation takes place around late November, with the final settlement being debated in February. The timing of the settlement is largely determined by the availability of the most up-to-date data. As discussed in the section on predictability and stability, the timing of the settlement could be brought forward if data a year further out of date was used. However, the timing of the settlement could not be brought before July, when the Spending Review outcome setting overall aggregates would be known.

Table 2: An illustrative timetable for formulae and safety valves

	First Spending Review Period	Second Spending Review Period
2000 Jan	Authorities eligible for safety valve announced
Jan-Aug	Formula methodology reviewed
May	Safety valve cases submitted
Jul	SR outcome announced
Between Jul and end Nov	Floors and ceilings, methodology, control totals and safety valve decisions announced for consultation
By end Nov	All year 1 data published
2001 By end Feb	2001/02 Settlement (Year 1 of Spending Review)
By end Nov	All year 2 data published
2002 Jan		Authorities eligible for safety valve announced
Jan-Aug		Formula methodology reviewed
By end Feb	2002/03 Settlement (Year 2 of Spending Review)
May		Safety valve cases submitted
Jul		SR outcome announced
Between Jul and end Nov		Floors and ceilings, methodology, control totals and safety valve decisions announced for consultation
By end Nov		All year 1 data published
2003 By end Feb		2003/04 Settlement (Year 1 of Spending Review)
By end Nov		All year 2 data published
2004 By end Feb		2004/05 Settlement (Year 2 of Spending Review)

A104.   Even if the timing of the settlement was left unchanged, there could still be earlier announcements of key information required to increase the predictability of the settlement. This includes decisions on methodology, floors and ceilings, and control totals for each sub-block. Issues around the timing for safety valves are discussed in paragraph A59.

Table 3: An illustrative timetable for appraising corporate plans

Month/year	First Spending Review Period	Second Spending Review Period
2000 Jul	SR outcome announced
Sept	Authorities submit plans
Mid Nov	Indicative grant allocations announced
Mid Nov-Dec	Authorities’ day in court
2001 Feb	Announce grant allocations for 2001/02, 2002/03 & indicative allocations for 2003/04
Apr	2001/02 grant allocated (Year 1 of SR)
2002 Apr	2002/03 grant allocated (Year 2 of SR)
Jul		SR outcome announced
Sept		Authorities submit plans
Mid Nov		Indicative grant allocations announced
Mid Nov-Dec		Authorities’ day in court
2003 Feb		Announce grant allocations for 2003/04, 2004/05 & indicative allocations for 2005/06
Apr		2003/04 grant allocated (Year 1 of SR)
2004 Apr		2004/05 grants allocated (Year 2 of SR)

A105.   Table 3 illustrates a possible timetable for consideration of authorities' plans. A link with the Spending Review cycle suggests that authorities would submit plans every two years for the three-year period covered by spending reviews. With a spending review announcement in July, and consultation taking place no later than currently, the timetable for preparing and assessing plans would seem highly compressed. However, authorities do not need to know the outcome of the spending review before drawing up their plans. They only need to know the levels of the floors and ceilings, which would determine the scenarios around which plans are based.

A106.   As an illustration of a possible timetable, authorities could submit their plans by September. Central Government would then have October and the first half of November to make an initial assessment of authorities’ plans and announce indicative grant allocations (which would be instead of consultation as it is now). In the second half of November and December, authorities would have their ‘day in court’ with Ministers to discuss their plan and indicative allocations. In January, the indicative allocations would be finalised in the light of evidence presented at the days in court, with three year allocations being announced in February (potentially earlier).

A107.   However the building blocks are combined, it should be possible to align better both general and ring-fenced grant decision-making processes and timetables. Paragraph A32 notes how we are already starting to improve this.

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1 This table is based upon the grant totals used to calculate the Central Support Protection Grant which is mainly RSG, plus NNDR and damping grants. The table omits authorities affected by boundary changes in 1998-99 and 2000-01, though the overall grant increase figures are for all authorities.

2 The full report, titled Revenue Grant Distribution System:Research on Local Government Perspectives, can be found on the internet at http://www.local.dtlr.gov.uk/review/opinion.htm

[ Contents ] [ Annex B ]

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Published on 19 September 2000

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