Distribution of Formula Grant to Local Authorities

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Distribution of Formula Grant to Local Authorities

• Department of Communities and Local Government
  (DCLG)
• Local Government Finance Formula Grant
  Distribution Division
• Jo Joslin
• Karen Sussex
• DCLG

2
AIM OF THE PRESENTATION

• What is the Formula Grant settlement?
• Method of distribution
• Past and current methods of distribution
• The current method
• The 4 block model

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WHAT IS FORMULA GRANT?

• LA revenue budget is a combination of formula
  grant, council tax, specific grants and reserves.
• Formula Grant and specific grants are distributed
  from Central Government.
• Allocation of Central Government funds to support
  capital expenditure and revenue expenditure on
  council housing are made separately.

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WHAT IS FORMULA GRANT?
Formula Grant Revenue Support
Grant (RSG) Redistributed
business rates Principal
formula Police Grant

• No restrictions on what local government can
  spend it on (unhypothecated)
• Total amount of Formula Grant available in each
  year are determined through CSR

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WHAT IS THE SETTLEMENT?

• Mechanism to distribute formula grant for the
  forthcoming financial year
• For 2006/07, we distributed 25 billion (incl.
  police grant)
• For 2007/08 (provisional), we have distributed
  26 billion
• Specific grants (ring-fenced or unfenced) made
  separately but usually announced around the same
  time.

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WHO IS FUNDED?

• LAs in England
• London boroughs
• City of London
• Metropolitan district councils (such as
  Manchester)
• Shire county councils
• Unitary councils (such as Nottingham)
• Shire district councils
• Isles of Scilly
• Police authorities
• Fire Rescue Authorities

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WHAT HAS BEEN DONE IN THE PAST?

• Grant has been distributed through a range of
  formula that would take into account
• Needs of a local authority
• Resource of a local authority (based on the
  assumed council tax yield)

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WHAT HAS BEEN DONE IN THE PAST?

• Standard Spending Assessments (SSAs) (1990-2002)
• SSA would indicate the Govts assessment of how
  much an LA should spend
• SSA based on demographic, physical and social
  characteristics of each area
• Formula Spending Shares (FSS) (2003 2005)
• Still based on demographic, physical and social
  characteristics of each area
• Still contained notional measures of council tax
  and council spend
• Was not what an LA should spend but was merely
  the means of sharing grant
• Was not the amount of formula grant the LA would
  receive
• Recently formula frozen for 3 years, but data and
  amount to be distributed within the formula
  updated annually

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WHAT HAS BEEN USED FOR 2006/07?

• We have changed formulae and the distribution
  system.
• Multi-year settlements
• Changes in funding for schools. DfES now provide
  ring-fenced grant to schools (Dedicated Schools
  Grant)
• Opportunity to update or modernise formula (ie
  because of 2001 Census)
• Prevent FSSs being mistaken as a spending target
• This has seen the introduction of the 4-block
  distribution system
• No assessment of spend
• Not universally welcomed by local authorities
  because seen as more complex and/or judgemental.

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4-BLOCK MODEL

• Used to distribute DCLG Formula Grant in 2006/07
  20.878bn
• Each part results in amount expressed in

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RELATIVE NEEDS AMOUNT (RNA)

• For each LA, the Relative Needs Amount is
  determined from combining Relative Need Formulae
  (RNF) for different groups of authorities that
  provide the same service
• Relative Needs Formulae (RNF)
• they are based on formula in each service block
• but RNFs are not expressed in (or any unit)

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RNFs

• Relative Needs Formulae are produced for the
  following services -
• Childrens Social Services
• Youth Community
• LA Central Education Functions
• Childrens Social Care ( damping)
• Adults Personal Social Services
• Social Services for Older People
• Social Services for Younger Adults ( damping)
• Police

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• Fire Rescue
• Highways Maintenance
• Environmental, Protective and Cultural Services
  (EPCS)
• County level EPCS (e.g. libraries, public
  transport support for buses)
• District level EPCS (e.g. cemeteries and
  crematoria)
• Fixed costs
• Flood defence and coast expenditure
• Capital Financing
• Not all authorities provide all these services

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WHO PROVIDES WHICH SERVICE?
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RELATIVE NEEDS AMOUNT Formulae

• RNF designed to reflect the relative needs of
  individual authorities in providing services
• Basic amount usually per head using projected
  population groups
• Top ups local factors which affect service
  costs
• deprivation related
• geographic attributes (density or sparsity),
• area costs
• Can be distributed based on regression, judgement
  or as a fixed element

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SOURCES OF INDICATORS

• ONS
• Sub-national population projections, mid-year
  population estimates, 2001 Census, Labour Force
  Survey, Annual Business Inquiry, International
  Passenger Survey, claimant count
• DfES
• Pupil Level Annual School Census, Absences
• DWP
• Income support, Income based Jobseekers
  Allowance, Incapacity Benefit and Severe
  Disablement Allowance, Attendance Allowance,
  Disability Living Allowance
• DfT
• Road lengths, Traffic flows
• Other Govt Departments and Agencies (Countryside
  Agency, DCLG, DEFRA, DH, HSE)
• Commercial Organisations (CACI)

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AREA COST ADJUSTMENT (ACA)

• The ACA directs funds to areas with high wage and
  business rates costs.
• Acts as a multiplier on most RNF formula
• Has two elements labour cost adjustment and
  rates cost adjustment
• Has a floor, called the lower limit because
  councils in low wage areas still need to pay many
  staff on national pay rates
• ACA factors are different for each service block

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2006/07 ACA GEOGRAPHY

• Largest ACA factor in Central London boroughs
• Wage pressures radiate out from London
• ACA also for Manchester, Leeds and Cheshire

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RNF EXAMPLE

• Social Services for Younger Adults sub-block for
  2006/07 for LA X
• Projected population aged 18-64 in 2006 in X
  multiplied by
• a basic amount deprivation top-up for X
• Result multiplied by ACA for Younger Adults PSS
  for X
• Result multiplied by a Younger Adults scaling
  factor
• Result divided by 10,000,000,000

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RELATIVE NEEDS AMOUNT (RNA)

• To calculate the Relative Needs Amount in cash
  terms, the component Relative Needs Formulae are
  combined into 6 groups
• This enables the LAs RNF to only be compared
  with other councils providing the same service.
• These groups are
• Upper-tier services e.g. Childrens Services,
  Adults PSS, Upper-tier EPCS,
  Continuing EA levies
• Lower-tier services
• Police services
• Fire services
• Mixed-tier services e.g. Flood Defence, Coast
  Protection, Fixed Costs
• Capital Financing

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RELATIVE NEEDS AMOUNT

• For each of the 6 groups we
• work out the minimum amount per head across
  relevant authorities
• i.e. upper tier RNF multiplied by 1,000,000 and
  divided by population projections
• work out amount per head above minimum for
  relevant authorities
• Add the amounts per head above the minimum across
  all 6 groups for each authority and multiply by
  population projections.
• Multiply by relative needs amount control total /
  sum (amounts above minimum)

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4-BLOCK MODEL EXAMPLE

• Local Authority X is a county council with
  responsibility for the provision of fire rescue
  services
• Therefore it has a RNF for
• Upper tier services
• Fire Rescue
• Mixed tier services
• Capital Financing

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RNF EXAMPLE Upper tier RNF
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RNF TO RNA Example
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RELATIVE RESOURCE AMOUNT (RRA)

• Takes account of the amount of income an
  authority can raise
• Uses a measure of the number of properties
  equivalent to Band D for council tax (the
  taxbase)
• Based on projected taxbase multiplied by share of
  projected taxbase
• 4 groups of services
• Upper-tier services
• Lower-tier services
• Police services
• Fire services

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RELATIVE RESOURCE AMOUNT

• For each of the 4 groups we
• work out the minimum amount per head across
  relevant authorities, then
• work out amount per head above the minimum for
  relevant authorities
• Add the amounts per head above the minimum across
  all 4 groups for each authority and multiply by
  population projections
• Multiply by relative resource control total /
  sum (amounts above minimum)

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RRA Example
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CENTRAL ALLOCATION AMOUNT

• This is built-up from the minima from the
  relative needs amount and relative resource
  amount.
• Equal to (sum of relevant needs minima needs
  scaling factor) less (sum of relevant resource
  minima resource scaling factor)
• The result is multiplied by population
  projections
• Multiply by a central allocation control total /
  sum (results from above bullet)

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CENTRAL ALLOCATION AMOUNT Example
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FLOOR DAMPING

• This is calculated for
• the 4 groups of authorities education/PSS
  authorities, police authorities, fire authorities
  and shire districts
• the 4 groups have a different floor
• every authority receives at least the floor
  increase year-on-year after adjusting for changes
  in funding and function
• for those authorities above the floor, the
  increase above the floor is scaled back by a
  scaling factor
• Each floor damping group is self-financing.

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FLOOR DAMPING

• Floor is set by Ministers, but takes into account
• average increase in raw grant in England between
  adjusted base year (i.e. 2005/06) and the
  settlement year (i.e. 2006/07)
• a measure of inflation (GDP deflator)
• A constant re-scaling factor is only applied to
  increases above the floor
• Saving through the re-scaling factor exactly
  offsets net cost of the floor

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ADJUSTMENTS TO BASE PERIOD

• Damping mechanism needs to be based on grant on a
  like-for-like basis
• So 2005/06 had to be adjusted to reflect
  transfers (both in and out) that have occurred in
  2006/07 settlement as if they had occurred in
  2005/06, e.g.
• New firefighters and police pensions financing
  arrangements
• Dedicated Schools Grant
• Residential Allowances (PSS)
• Concessionary fares
• Amended 2005/06 base also had to be adjusted to
  reflect the 2004/05 and 2005/06 Amending Reports

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2007/08 DAMPING Example
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2006/07 FLOORS
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2007/08 FLOORS
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FLOOR DAMPING FOR DISTRICTS
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FINAL FORMULA GRANT Example

• Formula Grant for each authority is the sum of
  the component parts

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KEY AIM

• Predictability through 3 year settlements
• Know what their grant for the following 3 years
• So can implement medium-term planning
• Because no change in formula, no change in data
• Stability as floor damping is an integral
  component of the 4-block model
• Confirms that there will be a guaranteed minimum
  increase
• Therefore no LA loses grant on a like-for-like
  basis

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FURTHER INFORMATION
www.local.communities.gov.uk/finance/0607/grant.ht
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