1. CIPFA conference 2016 13 July 2016

2. Introduction 2  Significant changes ahead for local government funding -Funding system (100% BRR) -Share of funding (Relative Need) -Quantum (SR 2015) -Further complications (e.g. NHB, Revaluation, Devolution, Social Care Precept, Combined Authorities)  Understanding when to act, and how, will be key in delivering a robust MTFS  Today we are going to look at some of the questions we are currently being asked around these issues

3. Q1 How should I be dealing with the impact of Revaluation in 2017? 3  Revaluation should be revenue neutral to local government if.... –(1) The amount of appeals allowed for = the actual amount of appeals resulting –(2) The spread of appeals is shared proportionally to the NDR Baseline of each authority  Whilst (1) is possible, (2) is not, hence why CLG are looking at different ways to manage appeal risk for 2020 onwards  But let’s assume (1) and (2) do occur..... AND the NDR Baseline of the authority equals a realistic target  There is a danger that resources needed to pay for appeals are lost to the levy.... (which is still around until 2020)

4. Q1 How should I be dealing with the impact of Revaluation in 2017? 4  NDR Baseline = £54.9m  Baseline Need = £24.0m  Initially the authority will be collecting more than the baseline (as appeals not raised / dealt with), but then, if not properly provided for, the authority will collect less, as it pays out on appeals (including backdated elements) 2017/182018/192019/202020/21 Total £m NDR Baseline13.113.514.014.2 54.9 Baseline Need5.75.96.16.2 24.0

5. Q1 How should I be dealing with the impact of Revaluation in 2017? 5 2017/182018/192019/202020/21 Total £m Business Rates Income 13.8 14.0 13.5 13.6 54.9 Plus Top up / (Tariff) (7.4)(7.6)(7.9)(8.0) Equals pre-levy / Safety net Income 6.4 5.6 Less Levy on growth above RPI (0.3)(0.2) - - Plus Safety Net payment - - 0.0 0.2 Equals post levy / Safety Net BRR income 6.1 5.6 5.8 23.6  So, despite collecting £54.9m overall (exactly at baseline), only £23.6m was received (instead of £24.0m), due to the levy being paid in years 1 and 2 when the impact of appeals had not been felt.

6. Q1 How should I be dealing with the impact of Revaluation in 2017? 6  This was for an authority that had the right appeals allowance in its NDR Baseline and was collecting at NDR Baseline (both very unlikely!).  Authorities should have a good awareness of whether above or below NDR baseline by now. All things being equal, the position should not change for 2017/18 and 2018/19. Initially more will be collected, but this additional amount is the allowance DCLG has made for appeals.  Whether the allowance will be enough? –Dependent on number of successful appeals locally vs allowance from DCLG –For areas with increases to bills, human nature may mean these are more likely see appeals but... –Larger companies typically will appeal anyway –Successful appeals will trigger others

7. Q2 What should I be doing about forecasting the impact of the Reset on my business rates income? 7  The 2013/14 NDR Baseline was set on actual business rates collected in 2010/11 and 2011/12. The methodology for determining this was subjective and had significant implications for local authorities.  We think the Reset could be the most important element of all the current changes.  Given Core Spending Power figures always assumes Business Rates collected will equal NDR Baseline, they do not reflect the actual resources LAs have / will receive.  Whilst there has been high levels of damping historically on Baseline Need, damping on business rates income is much lower (and it could be lower still going forward i.e. no levy).

8. Q2 What should I be doing about forecasting the impact of the Reset on my business rates income? 8  Locally, the Reset should alter your baseline to reflect more recent business rates receipts. Therefore: –Authorities currently above the NDR Baseline may only collect at the NDR baseline in the future (as now higher) or even go below –Authorities below the baseline will have a better chance of achieving the NDR baseline (as now lower) or even go above  There will of course be outliers, but for financial planning purposes, it would not be unreasonable to assume gains or losses will be wiped out i.e. Resources to equal Baseline Need (whatever it is!)

9. Q2 What should I be doing about forecasting the impact of the Reset on my business rates income? 9 2015/162016/172017/182018/192019/202020/21 £m Business Rates Income 23.4 23.9 24.6 22.4 22.8 Small Business Rate Relief Grant 0.4 Discretionary reliefs funded through S31 grant 0.4 0.0 Plus Top up / (Tariff) (18.8)(18.9)(19.3)(19.9)(20.5)(20.9) Equals pre-levy / Safety net Income 5.4 4.9 5.0 5.1 2.3 2.4 Less Levy on growth above RPI (1.6)(1.4) - - Plus Safety Net payment - - - - - - Plus Pooling Gains / Losses - 0.7 - - Equals post levy / Safety Net BRR income 3.7 4.2 4.3 4.4 2.3 2.4

10. Q2 What should I be doing about forecasting the impact of the Reset on my business rates income? 10 2015/162016/172017/182018/192019/202020/21 £m Business Rates Income 9.7 10.0 10.2 10.5 12.9 13.2 Small Business Rate Relief Grant 0.9 1.0 1.1 Discretionary reliefs funded through S31 grant 0.4 0.0 Plus Top up / (Tariff) (7.2)(7.3)(7.4)(7.6)(7.9)(8.0) Equals pre-levy / Safety net Income 3.8 3.7 3.8 3.9 6.1 6.2 Less Levy on growth above RPI - - - - - - Plus Safety Net payment 1.3 1.5 1.6 - - Plus Pooling Gains / Losses - - - - - - Equals post levy / Safety Net BRR income 5.2 5.3 5.5 6.1 6.2

11. Q2 What should I be doing about forecasting the impact of the Reset on my business rates income? 11  Other Factors –Size of national NDR Baseline (are DCLG going to take all the growth to date from local government) –Methodology for determining local shares of the NDR Baseline –Revaluation (distorting figures for 17/18) –Future decisions made locally from 16/17 to, potentially, 18/19

12. Q3 Will moving to 100% retention from the current 50% rates retention, double my level of risk and reward? 12  In 20011/12 the two tier area split on initially discussed was: –80% county councils –20% district councils  This was reversed to give the current –50% DCLG –10% county councils –40% district councils  Leading to districts being Tariff and counties being Top Up authorities

13. Q3 Will moving to 100% retention from the current 50% rates retention, double my level of risk and reward? 13  This meant that districts faced significant risks and rewards from business rates, albeit damped by the levy and safety net.  Prior to the levy being capped at 50%, some districts faced a levy of 90%, to link a 1% increase in business rates to a 1% increase in resources. However, such is the gearing of these districts, a 0.75% decrease in business rates income meant they hit the safety net.  So with no levy in the new system, even at the current 40% split, there is scope for “lucky districts” (based on a fortunate NDR Baseline) to received large windfalls. Although, there is also the scope for “unlucky” districts to have significant losses, especially if the revised safety net is less generous.

14. Q3 Will moving to 100% retention from the current 50% rates retention, double my level of risk and reward? 14  What can be done...  By minimising top ups and tariffs, it will align business rate income with baseline need. So, for example, currently... Local Authority 100% NDR Baseline Local NDR Baseline Tariff/Top-upBaseline NeedLevy % fall in NNDR to hit the safety net 1% growth in Business Rates (no levy) as a % of Baseline Need Boston 19.1 7.6-5.22.568%2.4%3.1% East Lindsey 32.2 12.9-7.35.656%3.3%2.3% Lincoln 41.1 16.4-12.93.579%1.6%4.7% Lincolnshire 19.682.4102.00%39.1%0.2% North Kesteven 22.7 9.1-6.22.869%2.4%3.2% South Holland 24.5 9.8-6.83.169%2.3%3.2% South Kesteven 40.6 16.2-12.93.479%1.6%4.8% West Lindsey 15.6 6.3-3.52.856%3.3%2.3% DCLG 97.9 Total 195.8 27.7 125.6

15. Q3 Will moving to 100% retention from the current 50% rates retention, double my level of risk and reward? 15  But using a 40% County and 10% District Split Local Authority 100% NDR Baseline Local NDR Baseline Tariff/Top-up Baseline Need Levy % fall in NNDR to hit the safety net 1% growth in Business Rates (no levy) Boston 19.1 1.9 0.62.50%9.7%0.8% East Lindsey 32.2 3.2 2.45.60%13.1%0.6% Lincoln 41.1 4.1(0.6)3.515%6.4%1.2% Lincolnshire - 78.3 23.7102.00%9.8%0.8% North Kesteven 22.7 2.3 0.62.80%9.4%0.8% South Holland 24.5 2.5 0.63.10%9.4%0.8% South Kesteven 40.6 4.1(0.7)3.417%6.2%1.2% West Lindsey 15.6 1.6 1.22.80%13.3%0.6% DCLG 97.9 Total 195.8 27.7125.6

16. Q3 Will moving to 100% retention from the current 50% rates retention, double my level of risk and reward? 16

17. Q4 What are the factors that will determine if my authority gains or loses from the review of Baseline Need? 17  Complex area  Resources can be given with in hand and taken from the other  Usual focus on data / need measures, but the key components will be: –Population –Resources Block (i.e. how to take into account what can be raised locally) –Damping (if it is there and will it unwind)

18. Q4 What are the factors that will determine if my authority gains or loses from the review of Baseline Need? 18 NegativePositive Starting Point – in 2013/14 Received the safety net Subject to Damping Population growth since 2013/14 Below national average Above national average If they use actual council tax levels Above national average Band D rate Below national average Band D rate If they use a notional Band D Rate Below national average Band D rate Above national average Band D rate If they use a simplified distributionHigh need areasLow need areas

19. Q5 Appeals have been a major headache for us. Is there any hope that that the chaos won’t simply be doubled under the move to 100% rates retention? 19  The level of risk around appeals will be dependent on local share e.g. a move from 40% to 20%  The potential new method of revaluation and appeal reforms should be of benefit, providing they do not adversely impact other elements of the system e.g. ensuring the taxbase is not compromised through self assessment  13/14 was a bad starting point as had to deal with the backdated cost of appeals from 2005 and 2010 revaluations (DCLG allowed for in the figures)  Cut off date of March 2015 helpful (although not in April 2015!)  Greater awareness of the issues around appeals now in place e.g. the waiting game

20. Q6 Will the removal of RSG under 100% business rates mean local government funding can no longer be reduced? 20  No  The 2016/17 Provisional Settlement showed us the impact of a Tariff / Top Up adjustment i.e. where there was a net Tariff nationally.  This could be used within 100% BRR to create a payment to DCLG / HMT

21. Q7 Given there is still damping in funding allocations from 2013/14, how much of a role is damping likely to play in protecting authorities post 2020? SFA has two elements of damping Damping movements in the SFA figure itself –Residual damping still form 13/14 –Papers suggest a freeze will not be in place post 2020 i.e. stepped change or transitional period Damping of business rate income (levy / safety net) –No levy post 2020 –Safety net set to continue (although at what level and how funded) Key factor – frequency / nature of Resets –How long before gains / losses wiped out –Redistribution of funding adjusted 21

22. Q8 This is all long term stuff. I should be retired by 2020 living it up abroad. And before that most of these things aren’t going to affect my income projections before then are they? 22  Decisions made in the next 2 years could have a significant impact on the financial position of authorities from 2020 onwards i.e.  Adjusting Financial Strategies to reflect changing shape of local government funding (and its associated risks)  Ensuring Council Tax revenues sufficient to cope with falling grants  Reviewing levels of reserves to ensure appropriate for increased variability  No accumulated loss on the Collection Fund to also absorb  Appropriate appeal provisions post Revaluation  Figures from NNDR3 forms will be used to set the NDR Baseline

23. So, some of your main challenges arising from reform  Finding an equitable framework to manage need – risk – reward  Inter and intra regional competition for business rates growth  Forecasting future business rates income –At the point of change –Beyond the event horizon  Managing inevitable variation in business rates income – just as big an issue for the gains as the losses  Managing Member understanding of the implications of reform  Effective interworking between previous professional silos  Delivering growth previously not realised – easy to say will do, but where in the capacity to manage? 23

24. But some of the main possible benefits for you arising from reform  Economic regeneration will be more at the heart of what a local authority does  More direct stake for local government in economic regeneration  Closer links between the local authority and the business community  Financial gains from growth  Impact of Collection Fund much more critical to future financial sustainability of a local authority 24

25. LG Futures – here to help  Developing Your Financial Strategy  Funding Analysis  Optimise Business Rates Retention Resources  Population and Demand Change Modelling  Strategic Assessment of Reserves 25

26. Lee Geraghty lee.geraghty@lgfutures.co.uk 07738 000368 Rupert Dewhirst rupert.dewhirst@lgfutures.co.uk 07775 428145 www.lgfutures.co.uk 26