'The area cost adjustment is based mainly on evidence of differences between areas in rates of pay in occupations within which local authorities are likely to have to compete for employees. The evidence of rates of pay is taken from the new earnings survey, and is updated each year.
'The ACC has criticised the scale of the area cost adjustment. In 1993, it suggested that the adjustment should, in case of teachers, police, and firefighters, take account only of London weighting payments. In 1994, the association suggested that the other specific employment-related costs might also be included, although it is believed that, even if this were done, the total of the area cost adjustment would be less than it is.
'We have misgivings, however, about the association's proposals in 1993 to base the area cost adjustment on London weighting payments alone because this would not reflect all the variations in employment costs faced by local authorities.
'We remain to be persuaded that a generally agreed list of extra costs could be identified and costed objectively, without reference to evidence of prevailing rates of pay in the local employment market of the kind which already forms the basis of the area cost adjustment.
'The association's observations in 1994 were not developed into a methodology which could be applied in the calculation of the area cost adjustment. It is therefore not possible to say what the area cost adjustment would have been if the association's views had formed the basis of the calculation.
'Nor does the department currently have sufficient information to calculate the level of the area cost adjustment if it were based solely on actual wage payments, local authority pay scales or London weighting. Any change in the basis of area cost adjustment would also affect other aspects of the formula for calculating SSAs. For example, there would need to be a reappraisal of the weighting given to additional education needs.
'Nevertheless, (the secretary of state) has discussed with the ACC its views on the area cost adjustment. We are prepared to consider further any proposals they may make for an alternative methodology for calculating the adjustment.
'We also propose to commission research this year which may enable the area cost adjustment to take account of variations in rates of pay between travel-to-work areas in all parts of England. Travel-to-work areas are being considered because they may be a better reflection of the pattern of local labour markets than are the administrative areas of local authorities.
'The progress of the research will depend both on the availability of the necessary data and the success of the researchers in developing a method by which it could be used in the area cost adjustment. We will consider the findings of the research, once they are available.'