1 Section 25 of the Act requires the Chief Financial Officer (the County Treasurer) to report to the County Council when setting its council tax on:
· the robustness of the estimates included in the budget
· the adequacy of the financial reserves in the budget
2 The County Council is required to have regard to this report in approving the budget and council tax. It is appropriate for this report to go first to Cabinet and then made available to the County Council in making its final decision.
3 The CIPFA guidance on reserves and balances provides the general framework for considering the adequacy of reserves. Paragraph 13 of the report outlines the provisional budgets for 2009/10 and 2010/11, set in the context of the County Council's medium term financial management policies, which are reviewed in Appendix 7. This year provisional budgets have been formulated on the basis of firm Government grant allocations for a three year period.
4 A risk assessment has been made of the cost and demand pressures on budgets, insurance liabilities, achievement of budget savings, adverse winter conditions and achievement of capital receipts which supports the proposed level of balances of £15m. This assessment is set out as an Annex to the Appendix.
5 Similarly the level of reserves is scrutinised each year and the protocol on the purpose, use, control and review of each reserve has been agreed. Details of the protocol and the expected movements in each reserve are set out in Appendix 6. Schools have the single biggest reserve at a projected £41m within their delegated budget and ring-fenced specific grant. The most important reserves for other services in terms of the three year view are the grant equalisation reserve (used to help match grant loss) and the job evaluation transitional costs reserve.
6 Section 25 concentrates on the uncertainty within the budget year rather than the greater uncertainties in future years. However the greater uncertainties extending beyond 2010/11, particularly for the County Council as a `floor' authority also informs the need for reserves and balances during the period of the current three year grant settlement, together with the impact of pay and benefits, greater risks of overspend from tight savings targets and demand led spending pressures, potential higher inflation and slippage in the achievement of capital receipts.
7 The budget report is the conclusion of a detailed process of prior consultation and consideration through out the current year by Cabinet.
8 The County Council's policy on balances is to hold a minimum prudent level which on the basis of 2008/09's risk assessment is 2.3% of the budget. This is a higher level than has been necessary historically but slightly lower than in 2007/08, when balances were budgeted at 2.4% of the budget requirement, and remains relatively low compared with other comparable local authorities. Risks associated with the potential scale of grant loss after SR2007 and associated with the achievement of the Adult Services recovery plan are lower than in 2007/08, however the economic risks associated with higher inflation and the achievement of capital receipts are more significant. As in 2007/08 the budget will require sustained management action to contain demand, legislative and inflationary pressures and to achieve savings targets. Nonetheless, a relatively low of balances is sustainable given past experience provided that other elements of the financial management policy are maintained, particularly sound budget monitoring and budgetary control, and no supplementary estimates, so that spending variations are contained as far as possible within the year.
9 The level of uncertainty for the budget year is narrowed down as the budget strategy is developed during the year and defined in the performance and risk management and earmarked reserves paragraphs in the budget report.
10 In setting the budget the County Council should have regard to the strategic, operational and financial risks facing the County Council. The County Council has an overall risk management framework which covers these issues. The forward budget plan and reserves take into account the main risks and uncertainties, including:
· Inflation
- pay awards have yet to be agreed and an assumed increase of 2.5%, though higher than the level the Government is seeking to enforce in some parts of the public sector, is significantly below the current rate of inflation
- price inflation has been set at 2.5%. This may not be sufficient in all cases and budgets have been adjusted (eg in purchase of social care) where higher prices are likely in 2008/09
- short-term interest rates have been budgeted to average 5.5%, in line with current rates,but market expectations are that rates will fall over the next twelve months
· Pay drift
- increments are not budgeted for and services will need to secure efficiency savings of £1.7m to offset these. Past trends suggest that this will be managed, through the requirement to achieve some further savings in 2008/09 towards 25% of the increased costs of Pay and Benefits makes this more challenging.
- there is a substantial potential liability from the implementation of the pay and benefits review. The budget provides for estimated continued costs of £10m - £7.5 from a specific pay contingency and £2.5m from a benefits realisation plan, of which £2m has been budgeted in 2007/08 and the remaining £0.5m in 2008/09. A further transfer to the earmarked reserve is proposed, increasing the amount set aside for equal pay claims to £30m; a settlement in excess of this figure will require a capitalisation direction or the phasing of costs over more than one financial year in order to avoid compensating job or service cuts. The Government has taken steps to assist local authorities to spread these costs by introducing regulations which allow the effect of accruals for equal pay liabilities to be disregarded for council tax setting purposes.
· The budget for 2008/09 and provisional budgets for 2009/10 and 2010/11 take account of an increase of 0.5% in the employers' pension contribution to the Local Government Pension scheme, expressed as a percentage of pay, over each of the next three years. This is based on the outcome of the actuarial valuation at 31 March 2007 and the next valuation will not take effect until 2011/12.
· Additional spending, savings and redeployments build in to the budget
- these are subject to planned review by Executive Members, and savings plans will need to be approved and monitored during the course of the year
· Efficiency savings and other savings
- there is a good track record covering the process of setting and achieving savings, but the national target for local authorities has increased in 2008/09 and it may become more difficult to continue to achieve year on year improvements on the scale required to meet the target.
· Income
- there is an annual review to maximise income and increase income at least in line with costs which is referred to in paragraph 6 of the report and reported in greater detail to executive members.
· Achievement of budget plan
- There is a well established and sound history of very close achievement of outturn to budgets, despite the larger overspending on Adult Services than initially predicted in 2005/06, although higher balances had been held because of potential risks.
· Strength of financial information and reporting arrangements
- budget monitoring and control is well established, particularly in reporting and taking action over the second half of the financial year. Corporate co-ordination of budget monitoring has been strengthened with a specific focus on demand led budgets, overall employee budgets and the achievement of planned savings.
- other action plans are being put in place to consolidate and improve on the ratings within the Audit Commission's appraisal of use of resources, including the monitoring of financial health indicators.
· Capital programme
- capital strategy, asset management plans and the local transport plan have all previously been accredited with the highest scores in the comprehensive performance assessment
- the impact of ambitious capital receipt targets is putting a strain on the financing of the capital programme and a further temporary shortfall of capital financing resources is forecast in 2009/10 which is reflected in the proposal to make a one-off contribution to the capital reserve in 2008/09. The additional invest to save funding to provide extra staffing in Property Services to deal with land disposals is being continued and a further review is proposed during 2008/09
- the policy on Government borrowing approvals was reviewed in 2007/08, because as a council at the grant floor, additional `supported borrowing' is not being matched by increased revenue support grant. Restricting the automatic take-up of supported borrowing to a level which will limit the increase in the capital financing requirement relating to supported borrowing to 2.5% per annum will have an impact in containing increased capital financing costs from 2008/09 onwards
· Level of borrowing and outstanding debt
- the issues are fully covered in the treasury management strategy and prudential indicators appendix to the budget report.
- the policy on temporary unsupported borrowing was revised in 2006/07 and will result in the financing costs being contained within the forward budget plan cash limits without an additional impact on the council tax payer
- as a result of the introduction of these policies, the capital financing requirement is expected on the basis of current capital programmes to increase more slowly than in recent years
· Contingent liabilities
- the County Council self-insures, so it finances all its own liability claims. The liabilities are uncertain but to cover these a provision is maintained for known liability claims and a reserve is maintained to deal with fluctuations in liabilities and in the level of fire damage reinstatement
· Statement on internal control ( Annual Governance Statement)
- the Treasurer has the responsibility for ensuring that an effective system of internal financial control is maintained and operated in connection with the resources concerned
- the review of the effectiveness of the system of internal financial control is informed by the work of the managers within the County Council, by internal audit and the Audit Commission in its annual governance report and other reports.
- the Governance Committee receives and reviews the statement on internal control ( in future an annual governance statement) and the external audit governance report
· Audit Commission
- gave an unqualified opinion on the 2006/07 accounts.
- Provided a score of 3 out of 4 on the Use of Resources assessment, despite the critieria becoming more demanding, and an action plan is being developed to sustain and improve this assessment
· Other risks
- there are potential legal claims outstanding and other possible risks which past trends suggest can be met from balances if required. There is no known significant risk or liability which requires a provision, contingency or reserve not already allowed for in the budget report
- changes in function and funding arrangements. These vary from year to year and the most significant change in 2008/09 is the further phase of the establishment of a contact centre, `Hantsdirect' for call handling services, which will require some reorganisation of services within the relinquishing departments and the transfer of Connexions services back to the County Council, for which a grant allocation and the assignment of various liabilities has still to be agreed with the Government.
- Though government grants have been confirmed for the next three years, the County Council's formula grant calculated from the formula is still £20.7m below the grant floor in 2010/11.The proposed policy on the use of the grant equalisation reserve will provide some scope to mitigate the immediate impact of further grant loss beyond 2010/11.
11 Provided that the County Council considers the above factors and accepts the budget recommendations, including the level of earmarked reserves and balances, a positive opinion can be given under Section 25 on the robustness of the estimates and level of reserves.
Jon Pittam
County Treasurer
31 January 2008
Annex |
RISK ASSESSMENT OF GENERAL BALANCES - 2008/09 |
% |
£000 |
Comments | |||||||
Cash- limited expenditure ( exc schools) |
Inflation |
||||||||
Inflation |
Pay |
302776 |
0.5 |
1514 |
Pay award risk lower than in 2007/08 | ||||
Pay |
293882 |
8894 |
Non pay |
553519 |
1 |
5535 |
Allowing for potential for absorption within cash limit | ||
Non pay expenditure |
541130 |
12389 |
Income |
-237297 |
-0.75 |
1780 |
Resistance plus inability to raise charges to meet estimated inflation | ||
Income ( includes inf on specific grants) |
-229213 |
-8084 |
|
||||||
Interest rates |
21247 |
0 |
0 |
Short term interest rates not expected to increase in 2008/09 above current level | |||||
Base budget |
605799 |
13199 |
|
||||||
|
|||||||||
Growth in budget strategy |
7200 |
Demand led |
249854 |
5 |
12493 |
Allowing for potential for absorption within cash limit | |||
Growth funded from redeployment |
1168 |
budgets |
|
||||||
Further growth proposed |
1760 |
Insurance |
4807 |
33 |
1586 |
||||
Balance of contingency allocation |
16842 |
liabilities |
|
||||||
Capital financing - principal |
19936 |
Achievement |
|
||||||
-interest |
21247 |
of cashable |
21412 |
20 |
4282 |
||||
Flood Protection |
512 |
savings |
|
||||||
RCCO |
17915 |
Capital |
46637 |
5 |
2332 |
To reflect possible reduction in values rather than delay | |||
Specific grants ( exc schools) |
-70098 |
receipts |
|
||||||
Reserve contributions |
7072 |
Winter maint'e |
3075 |
20 |
615 |
Risk of adverse winter conditions borne from balances, but | |||
LEA contribution to schools budget |
128 |
lower risk within new contract | |||||||
|
|
VAT - partial |
|
||||||
|
|
exemption |
1500 |
5 |
75 |
Possible amnesty in 2008/09 for authrities exceeding 5% level | |||
|
|
(exc schools) |
|
||||||
|
|
||||||||
BUDGET REQUIREMENT |
642680 |
|
|
||||||
Demand sensitive budgets |
|
|
|||||||
|
|
||||||||
Older people placements |
105105 |
|
|
||||||
Physical/ sensory |
19093 |
|
|||||||
Learning disabilities |
65889 |
30212 |
|||||||
Mental Health |
7170 |
|
|||||||
Less likelihood of worst |
50 |
15106 |
|||||||
Home to School transport |
21848 |
cases coinciding |
|||||||
Looked after children |
21896 |
||||||||
|
|||||||||
Bus subsidies |
7896 |
Balances assessment |
15106 |
||||||
Abandoned vehicles |
100 |
||||||||
Proposed target balances |
15,000 |
||||||||