The Association of London Authorities (ALA), which is Labour-controlled, says the department's plan to divide funds between the capital's local authorities, the metropolitan boroughs, and the shire counties will short-change London boroughs.
Local authority organisations add that the difficulties over finances will be greatly aggravated because of a failure to determine correctly the number of people for whom local authorities will be liable to pay after the changes are implemented next year.
Funding for residential or nursing home care of elderly people on income support will be switched from the Department of Social Security to local authorities next April, when councils are given primary responsibility for care of the elderly, disabled and mentally handicapped.
Local authorities are seeking up to pounds 900m to pay for the additional burdens they face. Virginia Bottomley, Secretary of State for Health, put in a bid for pounds 500m to pounds 600m, which has been broadly agreed, though ministers are still arguing over the detail.
However, the latest figures in the letter to the local authorities concern the way the cake is ultimately divided between councils once the Treasury has decided on the total amount.
Authorities in London, and to a lesser extent the metropolitan boroughs, have been concerned that the Government will allocate funding to councils on the basis of where the elderly currently live. The letter indicates that this is the formula preferred by ministers, and the one most likely to be adopted.
Since the London boroughs and metropolitan authorities tend to be 'net exporters' of elderly people to residential homes outside their areas, the danger is that these councils lose out financially.
The chief difficulty is that, after April, councils will be liable to pay for care of elderly people from their borough, whether they reside there or not.
Efforts to determine the pattern of the migration of elderly people to residential homes outside the capital and the metropolitan areas have so far failed. A survey by the Benefits Agency suffered from under-reporting and local authorities are seriously worried other methods, such as registration with GPs, used to determine movements have also provided incorrect data.
Mark Brangwyn, social policy officer of the ALA, said: 'We are arguing that the London authorities should get the money wherever the elderly people live, otherwise there will be a loss of funds for community care within the capital.'
Chris Waterman, of the London Boroughs' Association, said the chief worry was the basis on which the funding would be divided.
'Our concern is the quality of the data on which the proposed distribution is based. When they did their survey they weren't able to pick up adequately the originating authorities of those in residential care.'
David Hinchliffe, Labour's spokesman on community care, said that the issues went to the heart of the new system, and a failure to address them would undermine the whole programme of changes.
'If we believe in community care the resources ought to be available where the people actually are,' he said. 'If not, then the whole premise of community care will be undermined. This is the key area where we could be in deep trouble.'
No split in the funding has yet been agreed and discussions between the local authority associations and the health department are continuing. But the department is pressing for an agreement by the third week of September.
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