Hampshire County Council

21 February 2008 Item 9

Revenue Budget and Precept 2008/09 and Provisional Budgets 2009/10 to 2010/11 (Part A)

Capital Programme 2008/09 to 2010/11 (Part B)

Report of the Cabinet

With the concurrence of the Chairman under Section 100B (4)(b) of the Local Government Act 1972, this matter has been included on the agenda to ensure that timely decisions are taken with regard to the Revenue Budget and precept 2008/09 and the Capital Programme 2008/09-2010/11.

A. REVENUE BUDGET AND PRECEPT 2008/09

1. Summary

1.1 The Cabinet recommends a council tax increase of 4.5% (£43 for Band D) and a proposed budget, before grant, of £642.7m (excluding schools). The proposed budget is within the guidelines approved by the Cabinet on 17 December 2007 and takes account of the relevant Executive Members consideration of those guidelines together with scrutiny arrangements through the Select Committees. This level of council tax and the budget are proposed following full consultation with key stakeholders.

1.2 The level of council tax proposed is within the Government's capping limit of 5% and has been achieved despite a continuing low formula grant increase of just 2.0% (£2.8m), the total amount of grant for 2008/09 being £142.7m. This includes an adjustment to the provisional settlement of an additional £563,000 for public law family fees to reflect the policy change by the Court Service of full cost recovery for proceedings under the Children's Act. However, this is matched by an equivalent increase in the cash limit for Children's Services as the new costs had not been included in its budget.

1.3 The increase in formula grant for 2008/09 is slightly higher than expected, nonetheless it is well below inflation (retail price index - 4.1% and consumer price index for services - 3.3%) and does not adequately take account of demographic and other pressures faced by Hampshire on social care (increasing numbers of older people and adults with disabilities requiring care, committed costs of the waste management contract and increased landfill tax). Hampshire has the second lowest grant per head (£112 compared with an average of £176) and given that the average grant increase for counties is 5.3%, Hampshire might be expected to have an above average council tax increase. Strong representations were made to the Department for Communities and Local Government but disappointingly, no attempt has been made to answer the specific points raised and hence no change to the final settlement.

1.4 The Government has indicated that it will not hesitate to use its capping powers therefore the proposed budget avoids this risk as well as identifying substantial cashable efficiency savings of £14.6m (2.2%).

1.5 The tight grant position for services contrasts starkly with the 4.5% per pupil increase in the Dedicated Schools Grant (DSG). The total schools budget is £766m consisting of £671m in DSG, £53.7m schools budget standards fund, £33.8m schools standard grant and £18m general sure start grant. The overall headroom above the base budget in DSG is £10.3m and the Schools Forum has allocated this for deprivation (£3.9m), individual schools budget (£3.7m) including provision for exclusion, pay and benefits and ICT, early years (£1.1m) and central expenditure pressures (£1.6m) including early intervention and preventative services.

2. Main features of the budget

2.1 The main features of the budget are summarised below:

3. Budget guidelines and service budgets

3.1 Executive Members have put forward service budgets within the cash limits
set by the budget guidelines and in accordance with an agreed budget strategy. Following a review of Executive Members specific proposals and taking into account the changes that have occurred since the budget guidelines were approved in December 2007, the Cabinet proposes total planned expenditure of £1,395.152m as summarised below:

3.2 In respect of service budgets, general grant and council tax funding have been allocated as the highest priority for maximising wellbeing towards meeting the needs of the most vulnerable in Adult Services (5.6% in County Council terms and 5.3% overall after specific and area based grant changes are taken into account). Children's Services also remain a priority and due to the impact of the Government's specific grant priorities, the largest overall increase in spending benefits Children's Services (6.4%). Priority has also been given to the waste management contract (4.1%). This is a slightly below trend increase as a result of the changes associated with the implementation of producer responsibility for electrical goods which has released £0.7m of the contingency set aside for 2008/09 for this contract. Planned service growth has therefore been allocated to these priority services, with all services having identified savings and other redeployments to meet additional pressures over the base budget guideline figures set.

4. Performance and risk management

4.1 A key component of the Audit Commission's Corporate Assessment is Use of Resources which requires the linking of budgets with performance management and for which the County Council has recently been awarded three out of four in the Comprehensive Performance Assessment for 2007. Accordingly proposals for additional spending should indicate measurable improvements in performance anticipated and an implementation plan for any significant savings. All Executive Members are required to review their plans and monitor achievement against them for all the proposed growth and redeployment proposals, particularly to monitor performance against specific plans for achieving all savings targets and will have explicit regard to the value for money of all their decisions. The Cabinet also regularly monitors the activity, costs and performance of the volatile and high risk budgets.

4.2 The budget proposals recognise the priorities of the Corporate Business Plan, which together with the Corporate Strategy and the Corporate Management Plan provide the framework for the integration of service, workforce and financial planning.

4.3 The main areas of risk for the coming year are equal pay claims arising from the implementation of the new pay framework (to be met by the pay and benefits reserve); grant loss from the unwinding of the grant floor; risks from the budget assumptions particularly around price inflation on purchase of services and energy costs; the achievement of capital receipts, pressure from prudential borrowing and variations in capital payments, which affect capital financing forecasts.

5. Earmarked reserves (budgeted at 31 March 2009)

5.1 The single largest budgeted reserve continues to be the Schools reserve now anticipated to be £41.4m. The Grant Equalisation Reserve is budgeted at £26.1m at 31 March 2008 (£18.7m at the end of the three year budget period) and was set up in 2003/04 when the Government changed the funding formula and started moving grant away from Hampshire. The removal of £9m of damping means that the County Council now just receives floor grant of £29m for 2008/09, which will reduce to £21m by 2010/11, therefore it is planned to run down this reserve over the next six year period to reflect the unwinding of the grant floor. The Pay and Benefits reserve will be increased to £31.1m by 31 March 2009 in order to provide a substantial cushion against the risk of equal pay claims or compensation arising from the implementation of the pay and benefits job evaluation exercise taking account that claims may be payable up to a period of six years; interest will continue to be credited in future years. The Landfill Allowances Reserve (£4.0m) is available to offset future council tax rises, bearing in mind past investment in waste infrastructure and to finance future waste infrastructure to ensure that all recycling and landfill targets are met. The insurance reserve (£5.2m) has been budgeted on the basis that internal premiums will match liabilities chargeable and fire reinstatement costs incurred in 2007/08 and 2008/09. However, recent trends in liability claims suggest that public and employer liability premiums can be reduced therefore a reduction of £450,000 (£375,000 excluding schools) is proposed. The £375,000 released can be used to cover the cost of disaster recovery insurance for the data centre over the next three year period as it relocates from its current location to Ashburton Court North. The capital reserve is budgeted at £1.5m and an addition of £5.5m is proposed to fund the shortfall of resources in the capital programme in 2009/10 and 2010/11.

6. Balances

6.1 Projected balances at 31 March 2008 are estimated at £14.4m with budgeted contributions of £974,000 to be made to balances in 2008/09 and 2009/10. Economic development initiatives of £210,000 over the next two years from the Local Authority Business Grant Initiative (LABGI) received in 2007/08 will be carried forward in balances. The unused contingency of £120,000 for Hantsdirect will also be carried forward from 2007/08 for use in 2008/09. After reinstating the planned removal of £5m for the Manydown purchase, this results in balances at or around the recommended level of £15m or about 0.9% of gross expenditure (2.3% of net expenditure) in 2008/09. This level of balances will also be sufficiently robust for the County Treasurer's assurance required by Section 25 of the Local Government Act (see below).

7. Provisional Budgets 2009/10 to 2010/11

7.1 The formula grant increase for 2009/10 is £2.5m (1.75%) and for 2010/11, £2.2m (1.5%) and as with 2008/09, both are well below inflation and do not adequately recognise the continuing challenges the County Council is faced with. The County Council's floor grant will be reduced to £21m by 2010/11. Without changing the budget guidelines for service related spending, it is possible to set provisional council tax rises of 3.5% in 2009/10 and 2010/11. The continued threat of capping by the Government for excessive increases in council taxes will remain.

7.2 The budget guidelines for 2009/10 and 2010/11 follow those confirmed by the Cabinet on 17 December 2007. Priority has again been given to Adult Services, Children's Services and the waste management contract to reflect demographic and other pressures. Other services remain at base budget level with the full year effects of savings and growth, variations in reserves and use of balances built into the plan.

7.3 The provisional budget requirements for 2009/10 and 2010/11 are estimated as follows:

8. Section 25 report, Local Government Act 2003

8.1 The Local Government Act 2003 comprises a series of duties and powers that give statutory support to important aspects of good financial practice. 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 and the adequacy of the financial reserves in the budget. The County Treasurer's report on this matter is set out in detail in Appendix 1, but in summary it is suggested that provided the County Council considers the factors detailed above in paragraph 6.1 and accepts the budget recommendations, including the level of earmarked reserves, a positive opinion can be given under Section 25 on the robustness of the estimates and levels of reserves.

9. Treasury Management and Annual Investment Strategies, Prudential and Financial Health Indicators

9.1 The County Council is required to adopt a treasury management strategy and an annual investment strategy for 2008/09 in regard to the management of the long-term debt portfolio relative to forecast trends in long and short term interests rates, arrangements for the investment of surplus cash funds during the year and that the investment strategy conforms with the prudential code for financial management. Lender's option/borrower's options loans can also be considered in order to generate short-term savings in interest costs. Guideline annual targets of up to £14m and £7m are proposed for 2008/09 to 2010/11 for long term fixed rate borrowing and lender's option/borrower's options loans respectively, which can be exceeded if the circumstances are appropriate. It is envisaged that longer-term interest rates will remain stable over the next year at around 4.5% although the most recent downward trend could indicate the possibility of marginally lower rates becoming available during 2008. Furthermore, that the County Treasurer be given authority to repay Public Works Loan Board loans held at high coupon rates prematurely, replace with longer term loans at lower rates, and amortise the early termination penalties over the outstanding period of those replacement loans. The Cabinet therefore recommends the approval of the Annual Investment Strategy, set out in Appendix 2 together with the prudential and financial health indicators set out in Appendix, which have been amended to reflect the recommendations made by the Cabinet relating to additional borrowing of £11.2m to support the capital programme.

10. Conclusion

10.1 The County Council continues to face many pressures, particularly in Adult and Children's Services in order to meet the needs of the most vulnerable, and with the waste management contract and landfill tax costs. This position is exacerbated by the continued low level of formula grant increases, which are way below inflation and the average grant increase for counties of 5.3%. Therefore the proposals set out above present a robust response to these difficulties. Despite these challenges, the Adult Services recovery and modernisation plan is on track for completion by 31 March 2008 and the County Council continues to achieve substantial efficiency savings.

RECOMMENDATIONS

That:

B. CAPITAL PROGRAMME 2008/09 - 2010/11

1. Summary

1.1 The Cabinet has considered proposals put forward by Executive Members for the three years 2008/09 to 2010/11. The resultant draft capital programme is attached as a separate document. In drawing up their preferred programmes, Executive Members were requested to:

1.2 The total starts value of the programme is (round figures) £443m. The main elements are £326m for schemes supported by Government borrowing allocations and £117m for the three-year locally resourced programme (schemes financed from the County Council's own resources such as capital receipts, contributions from the revenue budget, reserves and other funds).

1.3 In respect of Government borrowing allocations, guidelines have been confirmed which limits the take up over the three-year period of the capital programme. This follows the Government's decision not to provide full formula grant support towards the loans raised by the County Council on the basis of the so-called `supported' borrowing allocations. Lobbying on this issue has continued but unfortunately it has not persuaded the Government to recognise the cost of new borrowing allocations in its calculation of the revenue grant floor, or alternatively, provide its support in the form of capital grants.

2. Capital expenditure

2.1 Capital spending will be broadly matched by resources in 2008/09 but there will be shortfalls of resources in 2009/10 of £4.8m and in 2010/11 of £0.7m to be met from the capital reserve fund as recommended by the Cabinet in the Revenue Budget report. The financing position over the period to 2014/15 is consistent with that reported in February 2007 and is reliant on record capital receipts being obtained (over £64m in 2007/08) which is on target. Invest-to-save funding of £310,000 per annum originally set up for a two-year period has been retained in the Property Services revenue budget on an ongoing basis to help achieve this substantial disposal programme, supplementing the £190,000 per annum previously allocated for this purpose. The Chief Executive will bring forward a business case for a further £300,000 to enable an increase in the targets for future capital receipts.

3. Prudential borrowing

3.1 A framework for the use of prudential borrowing under the Prudential Code for Capital Finance introduced by the Local Government Act 2003 was agreed by the Cabinet in 2003 and updated in February 2006. Prudential borrowing does not attract Government revenue grants towards the loan charges. Instead the loan repayments and interest charges have to be financed by the County Council from its own resources. In compliance with the framework and subject to specific proposals being submitted by the Executive Members for Children's Services (£25.7m), Environment (£7.1m) and Policy and Resource (£1m), further prudential borrowing for the 2008/09 to 2010/11 programmes of up to £33.8m is recommended.

4. Summary of programmes prepared by the Executive Members

4.1 Adult Services

4.2 Children's Services

4.3 Environment

4.4 Policy and Resources

4.5 Recreation and Heritage

5. Private finance initiative (PFI)

5.1 The only specific PFI scheme identified for inclusion in the programme at this stage is for the replacement of street lighting columns. The bid has been assessed and evaluated by the Department for Transport and HM Treasury and confirmation that the scheme has been fully approved has recently been received. This will allow the County Council and its two partners to move onto the next stage to assess and negotiate with a number of private sector bidders before selecting a new service provider to take over in the autumn of 2009.

6. Further review

6.1 Regular monitoring reports on implementation of the capital programme will be submitted including progress of major projects, the level of capital expenditure and resources in 2008/09, including meeting the challenging capital receipts targets. In addition the Chief Executive and County Treasurer plan to bring forward reports on the Strategic Property Review, capital receipts targets in the longer term and Building Schools for the Future.

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