Examination of witnesses (Questions 180
- 199)
TUESDAY 30 JUNE 1998
MR JOHN
BALLARD, MR
PHILIP WOOD
and MR PAUL
EVANS
Chairman
180. Income is lost as a result of successful
appeals, in that people will pay less, but if 10 per cent are
wrong because they have been set too high logically there is another
10 per cent that have been set too low?
(Mr Wood) There may well have been such cases,
which of course are less likely to be subject to appeal by the
property owner.
181. But it means that the loss of income
to the Exchequer falls into two categories: the loss arising because
10 per cent have perhaps been set too low and the loss arising
from successful appeals?
(Mr Wood) Of course, that must be right.
Mr Olner
182. Earlier you alluded to the fact that
there had been a move away from external to inhouse valuations.
Have you any estimate of the cost of the revaluation in 2000?
If so, how does it compare with the 1995 rateable valuation?
(Mr Wood) On the same basis - 1998-99 prices -
the cost of the 1995 revaluation was £64 million. The cost
of the year 2000 revaluation is estimated to be £17.3 million.
That is a very large discrepancy. The £64 million included
more than £20 million spent then on the computerisation of
the system. However, that explains only one-half of the difference
between the two. The explanation of the remaining £20 million-odd
is that we are now reaping the rewards of the computerisation
put in hand in 1995 and an extensive series of improvements which
the Valuation Office has put in hand in consultation with the
property world to make the whole process more streamlined and
simpler.
183. Are you happy that you have done enough
tests to ensure that the system does not come crashing down in
the year 2000?
(Mr Wood) We are pretty confident of that. After
all, we had two runs at it in 1990 and 1995.
184. The system will stand up at midnight
2000?
(Mr Wood) We confidently expect that.
185. What provision has been made in the
estimates for 1998-99 for the cost of the revaluation and how
much has been allocated for the maintenance of the council tax
base?
(Mr Wood) The estimates for 1998-99 for council
tax maintenance is £20.3 million, which is slightly down
on the £21.5 million in the previous year. Essentially, the
demands on that side have stabilised and it is not the same sort
of problem as we have on the non-domestic rate front.
Mr Flight
186. I turn to the question of pension and
salary costs. In your estimates have you assessed the impact of
the minimum wage legislation in terms of both inhouse and contracted-out
costs?
(Mr Wood) Our view is that direct labour costs
of local authorities are not likely to be greatly affected by
the recent announcement on the minimum wage. The main minimum
wage figure is £3.60 per hour which will apply from April
1999. That has to be set against the single status pay agreement
giving rise to a minimum of £4 per hour which local authorities
reached in July last. Obviously, that applies to almost all staff
since it is single status. The exception is chief executives,
who are certainly paid much more than £4 per hour, and craftsmen
who in general are paid more than £4 per hour. It does not
apply to apprentices who in any event are not covered by the minimum
wage arrangements. As to the direct labour costs of local authorities,
there should not therefore be any noticeable effect. It may well
be a different matter as far as bought-in services are concerned.
That is likely to be particularly true in areas like personal
social services—carers and so on—where there is a
predominance of low-paid workers. In so far as there is an effect,
by and large we expect it to be concentrated on the personal social
services side.
187. What about people like cleaners?
(Mr Wood) That will have an effect to an extent,
but we do not believe that it will be as significant or concentrated
as in the personal social services area.
188. But as yet there is no quantification
of it?
(Mr Wood) No. It is a difficult matter to estimate
and calculate. By definition, the costs of bought-in services
are subject to negotiation and competitive bidding. Tracing a
line between any estimate that one may make arising from the effect
on individuals of the £3.60 limit from 1999 through to the
prices that local authorities have to pay is extremely difficult.
Chairman
189. If one is to have transparency in local
government surely it is important that local people know how much
the council tax may have to rise in order to pay the minimum wage
in old people's homes, for instance?
(Mr Wood) That must depend on the success of local
authorities in negotiating contracts in the round. It is not merely
the wage costs that the contractors face that are important; it
is also their other costs, the efficiency that they bring to it
and so on.
190. I understand the problem but, surely,
you should have grappled with it and come up with an answer?
(Mr Wood) We take account of this sort of problem
however difficult it is to quantify in looking at the local government
financial settlement. It is not only a question of the effect
on council tax. The Government must take a broad view of all the
factors affecting local authority costs, of which this is but
one.
191. If you take it into account, let us
have the figure.
(Mr Wood) We do not have a precise figure. Perhaps
I may give you a feel for it. I can provide a figure to which
I refuse to be kept because of all the qualifications that must
be made. For example, in personal social services I would not
be surprised if the effect taken in isolation was of the order
of £50 million a year.
Mrs Dunwoody
192. But it cannot be taken in isolation,
can it? Personal social services are people. If you do not have
people you do not have the service. It is all very well to say
that there must be efficiency savings from administration and
private firms must re-negotiate the figures, but the reality is
that even the worst private firms depend on people?
(Mr Wood) Of course.
Dr Whitehead
193. I am rather concerned about this being
depicted as one among a number of factors. Local authorities have
always been subject to concern because such a large proportion
of their total outgoings relate to wage costs. Therefore, their
overall costs inflate faster than the ordinary rate of inflation.
Therefore, it is very germane that the effect of the minimum wage
on what is a very high element of local authority costs ought
to be looked at very closely?
(Mr Wood) Generally speaking, the proportion of
total costs accounted for by labour costs in local authorities
is about half. However, I do not think that that is terribly important
in this context because the consequence of the single status pay
agreement is such that pretty well all directly employed local
authority workers will be taken out of it; ie, they are above
that level. Consequently, there should be no direct effect on
that half of revenue account costs which is covered by labour
costs.
Chairman
194. We are considering the vast majority
of old people's homes, a substantial number of people involved
in schools meals contracts, office-cleaning services and so on.
You say that £50 million will cover all of that long list?
(Mr Wood) No. I am giving you only a broad estimate
or order of magnitude in the area of personal social services
where the effect is likely to be greatest because of the size
of expenditure in that area on contracted-out services and because
of the significance of labour costs within those services. I am
not chancing my arm but giving the Sub-Committee my best view
of the broad order of magnitude in the most important area. We
must also put that figure very much in the context of total local
government expenditure. It is a big figure to all of us but in
proportion it is tiny. The gross expenditure of local authorities
is £75 billion a year.
Mr Flight
195. No doubt next year local authorities
will send out letters to ratepayers telling them why council tax
has gone up. Is it not possible to ask each local authority to
estimate and advise you what they believe the cost of the minimum
wage will add to their costs in terms of contracted-out services?
(Mr Wood) We would look to them to take the responsibility
of deciding whether or not they wanted to account for their expenditure
decisions in that way. When it comes to it it is their decision,
not the Government's.
Chairman
196. You have a figure of £50 million
for personal social services. Do you have any other indicative
figure with all those qualifications?
(Mr Wood) No. We have made no other estimates.
Mr Flight
197. Turning to pension funds, in the round
how much monitoring does the department undertake, and of what
kind? The issues of which one is generally aware are: historic
under-funding because local authorities have been permitted not
to fund up to 100 per cent; the more recent ACT loss of revenue;
early retirement; and the split between employer and employee
contributions. The general perception is that there may be a considerable
collective hole in this area?
(Mr Wood) You have asked a range of questions.
To take them in order, we monitor local authority pension funds
and schemes in six broad ways. First, each fund is subject to
a triennial actuarial assessment and the results of each assessment
are sent to the Secretary of State. His officials consider them
with the Government Actuary's Department. Secondly, each fund
is looked at by the district audit service each year. That is
external audit. Thirdly, each fund has its own internal audit
each year. Fourthly, the department collects data from each scheme
on an annual basis. Fifthly, the department maintains very extensive
informal networks with all the authorities' schemes, interested
professional bodies and trade unions and others in this area.
Sixthly, we are following up the recent Audit Commission report
on early retirement. That contained a suggestion that there might
be more regular reports by the actuaries between the three-yearly
actuarial assessments. We accept that and intend to issue guidance
to local authorities on these stages between triennial actuarial
assessments to help in doing what the Audit Commission recommended.
You also mentioned contributions. Local authority pension funds
like most other funds have three sources of contributions: first,
income from investments; secondly, employee contributions. The
contributions made by employees are set in statutory regulations.
They have been adjusted to 6 per cent for most employees from
April 1998.
198. Is that upwards or downwards?
(Mr Wood) Upwards from 5 per cent.[2]
There are no proposals under consideration for any further change
in that contribution. The third source of contributions is the
local authority employer. The level of contribution which the
local authority as employer makes is the residual, ie it makes
up whatever is required to be met. That contribution is not set
by the authority but by the actuary. That responsibility is placed
on the actuary by statutory regulations. Therefore, the authority
as employer has to make whatever employer contribution is necessary
to put the fund in such a position that it can meet its liabilities.
The present range of contributions by local authority employers
is between 5 and 12 per cent. As to your query or suggestion about
there being a big hole, the monitoring arrangements that I have
described are designed specifically to ensure that that does not
happen. You have a real point in relation to the effect on these
funds of the removal of tax allowances on advance corporation
tax for UK equities. The estimate provided by the Local Government
Association indicates that that will reduce the net income of
the funds taken as a whole by £130 million a year. We cannot
confirm that until we have the results of the current triennial
actuarial assessments that are now in hand. The first results
of that assessment should begin to come in by the autumn of this
year (perhaps from September onwards). Those assessments will
take account not only of the effect of the removal of ACT tax
allowances but also all the factors that bear on the balance between
the liabilities and assets of the funds. We would expect there
to be offsetting factors as well as factors that point in the
wrong direction, as it were. The most important factor will be
the investment record of the funds and the actuaries' assessment
of the income stream that will come from that investment record.
We cannot take in isolation the figure to which the LGA has itself
attached a tag of £130 million; we must take into account
all factors that affect the income of the fund. But I emphasise
that even if that £130 million appeared without any offsetting
savings, because of the arrangement I have described whereby the
authorities have a statutory obligation to make up the difference
in the funds there is no threat whatever to the beneficiaries
of these schemes.
Chairman
199. But there could be a threat to the
council taxpayer?
(Mr Wood) Of course. The fact that these schemes
are statutorily-guaranteed funds means that, because if everything
really goes wrong—I do not believe that there is any prospect
of that - the guarantee lies in the fact that local authorities
are taxing authorities and in the final analysis can use that
power to make up their contributions to these pension funds.
2 Note by witness: Manual employee contributions
had been 5 per cent, officer grades previously paid 6 per cent. Back
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