A new study by the National Audit Office suggests the complexity of funding formulae used to calculate council grant funding reduces transparency, reports Dermott Calpin.
Like buses, local government finance may often seem one of life’s great mysteries – totally absent from the event horizon for long periods of time - and then suddenly arriving full of possibilities all at once.
Though the headlines have concentrated largely on Communities Secretary Eric Pickles and his ‘radical new plans’ to allow councils to keep their own business rates, a new report from the National Audit Office is also jockeying for local government attention.
No surprise that the Communities Secretary may have come up with the catchy phrases, dubbing his proposals on business rates retention as a move to ‘free councils’ from the need to use ‘begging bowls’ and reduce their dependency on central Government grant.
While for its part the NAO report was endowed with the more workaday, if worthy title Cross-government landscape review: Formula funding of local public services - but struggled for barely any public attention. That said, the ‘Landscape review’ has some important points to make about the present funding system and the debate over the fairness of grants.
Though in the long run the great promise of business rates reform is that it will give councils more financial room to manoeuvre, it will still leave them heavily reliant for their income on central Government grants and in particular on formula grant allocated by the Department of Communities and Local Government.
The NAO’s ‘Landscape review’ looks at the formula grant for councils, police authorities and fire authorities administered by CLG; along with the Primary Care Trust allocations to administered by the Department of Health and the Dedicated Schools Grant, paid to local authorities, but ring fenced for maintained schools.
Between them these three formula–based grants account for £152 billion in Government spending in the current 2011-12 financial year, funding a total of 575 local public organisations and employing 165 indicators in the different complex formulae used to assess needs and work out grant allocations.
Among the key facts highlighted by the study is the widespread variation in grant allocations – ranging from £142 to £1,075 in formula grant allocations for council and fire services and from £93 to £258 for police authorities.
For schools the variation in allocations to local education authorities based on the dedicated schools grant, ranges from £4,429 per pupil to £8,051; and the variation in per capita allocations to primary care trusts ranges from £1,298 to £2,268.
Government has used formula funding as a way of calculating local government grant as part of an assessment of relative needs ‘since at least 1929 ‘ according to the NAO, while in health services formula funding has been employed since 1976.
At their best the rationality behind the formulae offer some degree of transparency which can inform public debate on their operation but the Landscape review also acknowledges ‘ formula funding ‘has it limitations’ and then delivers a concise summary of these weaknesses: -
‘The basis for distribution can be unclear as he formulae attempt to reconcile multiple objectives. Key choices in formula design such as the choice and weighting of needs indicators are contestable. Approaches to formula design are con strained by data availability.’
Though the funding models are designed to respond to meet a number of different aims, the NAO says these are not always objective and can be open to interpretation, with different judgements made on which factors should be given most priority, which then limit the extent to which funding formula actually meet local needs.
Assessing the clarity of formula funding the NAO review finds that the Department of Health publishes a fairly clear set of objectives that highlight equality of access to health care and aim of reducing health inequalities.
On the other hand the review is critical of the DoE and the DCLG for their failures to set out or prioritise the objectives of their grant formula and says: ‘None of the formula have objectives which are sufficiently precise or time-bound to allow assessment to which they have been achieved. Their qualitative nature provides little discipline over key elements in the allocations process, such as the balance between responding to needs and providing funding stability.’
For councils in particular the DCLG’s aim of avoiding a direct link between calculated levels of service needs and funding allocations has, according to the NAO, only added to the complexity of the funding formula and reduced its transparency – despite the Government rhetoric about increasing transparency and public understanding.
Turning to the way in which the formula grant responds to local needs and the quality of the data which inform its calculations, the NAO highlights the central importance given to the ten yearly census data and the variance between different sets of information – using the example GP registrations and population projections published by the Office for National Statistics, the review says that differences have been as high as 25%.
In a point which will resonate strongly about funding levels with many council leaders and chief executives, as well as for their hard –pressed finance departments, the NAO says that nearly one in five of all authorities receiving allocations more than 10% lower than their requirements and adds: ‘Given the central importance of population data to the capitation approach, these variances represent a risk to funding according to needs.’
Examining the limitations on the data used in calculating funding levels, the NAO suggest that a quarter of the indicators used to calculate formula grant and some 10% of those used in PCT allocations and ‘entirely based on data sources that are now ten or more years old, usually because they are based on census data.’
