Hampshire County Council Item 9

19 February 2009

Revenue Budget and Precept 2009/10 and Provisional Budget 2010/11 - 2011/12 (Part A)

Capital Programme 2009/10 to 2011/12 (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 2009/10 and the Capital Programme 2008/09-2010/11.

A. Revenue Budget and Precept 2009/10

1 Summary

The Cabinet recommends a council tax increase of 1.9% (£19.17 a year or £0.37 a week, for a band D property) and a proposed budget requirement for the general expenses of the County Council for the year beginning 1 April 2009 of £657,009,000. The recommended precept, met by council tax payers is £509,698,895.42, which results in a band D council tax of £1,018.17.

The proposed budget is within the budget guidelines approved by Cabinet on 22 December 2008 and takes account of the relevant Executive Members' consideration of those guidelines, together with the scrutiny arrangements undertaken through the Select Committees. The budget also includes proposals for some additional one-off and continuing spending in excess of the budget guidelines. The level of council tax and the budget being proposed follow consultation with key stakeholders and careful consideration of the levels of pay awards and price inflation that can be realistically assumed in 2009/10 and 2010/11.

2 Main features of the budget

(a) a band D council tax of £1,018.17, just 1.9%(£19.17 a year, or £0.37 a week) higher than in 2008/09 with a similar, projected council tax increase of 1.9% in 2010/11;


(b) Proposed service carry forwards from 2008/09 to 2009/10 of £10.573m;


(c) Additional pressures and growth proposals from Executive members totalling £28.1m (Adult Services £18.5m, Children's Services £4.8m, Environment £2.9m, Policy & Resources £1.5m and Recreation & Heritage of £0.4m) which require a net, total redeployment of £19.9m; to comply with budget guidelines.


(d) Total efficiency savings in the 2009/10 budget of £20.5m;


(e) Additional efficiency and other savings anticipated in 2008/09 and 2009/10, particularly as a result of savings on the waste management contract, and variations in tax base and the surplus on collection funds provide additional resources of £6.7m on a one-off basis and £6.1m on a continuing basis.


(f) Additional one off growth proposals of £6.1m for the following:-

	£' 000
A326 - road safety improvements	450
Locality funding	285
Energy - electricity prices	1,317
Building Schools for the Future	500
Rural strategy	200
Economic prosperity and wellbeing	200
Community involvement	100
Safeguarding costs	100
Revenue contributions to capital	3,000
Proposed use	6,152

(g) Additional growth funded from continuing resources as follows:-

	Allocation £'000
Children's Services - safeguarding	1,200
Recreation and Heritage - final support for modernisation	250
Allocated to services	1,450

(h) the remaining additional one-off resources of £0.6m and continuing resources of £4.6m have been used to reduce the council tax in 2009/10 and 2010/11


(i) An expectation that despite Hampshire County Council having the lowest County Council formula grant per head in 2009/10 the proposed budget will ensure

* council tax which remains below average and within, or close to, the lowest quartile target;

* council tax rise below average

3 Contextual information

The Cabinet agreed a three year budget plan for 2008/09 to 2010/11 in February 2008. The key features of the plan are as follows:

· it makes allowance for increased demand for social care services and for projected higher costs of the waste management contract, but otherwise contains no provision for growth in service budgets;


· all service budgets are uplifted for inflation based on the assumption that increases in pay and prices in 2009/10 and 2010/11 would be no more than 2.5% respectively. The Cabinet amended these assumptions in February 2009 to 1.5% for pay and 2.25% for prices.;


· income is to be maximised by reviewing charges in line with the average inflation on the related gross expenditure;


· it assumes that efficiency savings will be achieved to finance any proposed service developments, unfunded demand pressures or to cover excess inflation within the context of the Government's target for local government of annual efficiency savings of 3% per annum.

In order to maintain a three year financial plan, Cabinet agreed an updated medium term financial strategy in October 2008 to include 2011/12, based on similar assumptions.

4 2009/10 local government settlement

It is disappointing to report that there has been no change in the distribution of formula grant for 2009/10, despite the County Council's response to the provisional settlement. No attempt has been made by the Secretary of State for Communities and Local Government to answer any of the points raised by the County Council.
Formula grant for 2009/10 is £144.8m, a £2.5m (1.75%) floor grant increase over 2008/09. The increase for 2010/11 is £2.2m (1.5%). There are no base line adjustments or late changes as in previous years. As reported at the last Cabinet the figures for 2010/11 should now be treated with caution in the current economic climate. As announced in the Pre Budget Report substantial additional efficiency savings are now being sought in public spending which may be announced in the Budget in April 2009. This could result in the floor grant being reduced to zero. No grant figure is available for the new third year - 2011/12. The County Council has achieved £51m of efficiency savings over the four budget years up to 2007/08.

5 2010/11 to 2011/12 Provisional Budgets

The guidelines for 2010/11 and 2011/12 follow those provisionally set in February 2008 for 2010/11, and in October 2008 for 2011/12 and subsequently confirmed in December 2008. Priority has been given to Adult Services and Children's Services to reflect demographic and cost pressures. Other services remain at base budget level. Full year effects of savings and growth, variations in reserves and use of balances are built into the plan. No assumptions have been made about the level of the schools budget beyond 2010/11 for which there is currently no information available on Government grant.

The provisional budget requirements for 2010/11 and 2011/12 are estimated as follows;-

2010/11: £675,493m - an increase of 2.4%

2011/12: £699,491m - an increase of 3.6%

6 Service budgets

Revenue budget service cash limits for each service are as follows:-

	2009/10 £'000	2010/11 £'000 (provisional)	2011/12 £'000 (provisional)
Schools budget	803,587	829,478	829,478
Adult Services	305,739	318,967	327,998
Children's Services	167,277	170,698	176,295
Environment	116,550	118,524	120,156
Policy and Resources	63,685	59,050	59,640
Recreation and heritage	35,448	36,078	37,048
	1,492,286	1,532,795	1,550,615

7. Integrated planning, performance and risk management

The recommended budget recognises the priorities set in the corporate improvement plan and reflects the overall corporate strategy, particularly ensuring value for money, improving capacity and that resources follow priorities. The performance management framework provides for the overall integration of services, work force and financial planning.

The main areas of risk are:

· equal pay claims - this is dealt with by the job evaluation transitional costs reserve and no further provision is proposed this year. It is proposed to rename this reserve as the equal pay reserve. Capitalisation directions will also be applied for to spread the cost over a number of years. The transfer out of the reserve is not now expected until 2010 at the earliest.


· grant loss - there is now certainty for the next two budget years, with predicted grant losses as the floor is unwound. The planned use of the grant equalisation reserve will reduce some of these pressures on future council tax rises and the pattern of profile for the use of this reserve was reported to Cabinet in October 2008. However the grant increase for 2011/12 is not known and could be zero, or even a cash reduction, which may require a quicker use of the reserve than currently planned.


· risks from the budget assumptions - the original assumptions regarding pay and price inflation (both 2.5%) have been revised in light of the prevailing economic conditions to 1.5% (for pay) and 2.25% (price inflation).


· the fall in interest rates, the temporary increase in electricity prices and the collapse of land sales have been dealt with at the October and December Cabinets as they occurred, or have been allowed for in the budget and financial planning.

The detailed risk assessment is set out in Appendix 1 and indicates a prudent level of balances at around £16m (about 0.9% of gross expenditure or 2.4% of net expenditure).

8 Earmarked reserves - budgeted at 31 March 2010

The single largest budgeted reserve remains the Schools reserve which is about the same as the actual balance at 1 April 2008, as the budget assumes that schools spending matches their delegated budgets in 2008/09 and 2009/10. The reserve is only available to each relevant school. The invest to save/modernisation reserve (£3.6m) is to provide investment against business cases for further service improvements. It is anticipated that the corporate efficiency reviews may require some additional investment to secure longer term savings. There are £7.6m of surpluses within the County Council's various trading activities while the Insurance budget heading at 2008/09 outturn has increased to £7.7m.

The Equal Pay reserve of £38.4m is earmarked for potential settlement of outstanding claims through the employment appeals process. Interest on the balance will be added to the reserve, from which £0.8m will be taken in 2009/10 to finance the human resources and legal costs associated with managing equal pay claims.

The County Council will have remaining damping grant of £21m at 31 March 2010 but it is anticipated that the remainder of the grant damping will be lost over the next two spending review periods. It is planned to use £2.5m in 2009/10, £3.7m in 2010/11 and £4.5m in 2011/12 from the grant equalisation reserve to help cover the anticipated grant loss. The balance on the reserve will therefore be £22.4m at 31 March 2010 and £14.2m by 31 March 2012.

A new Local Authority Business growth incentive (LABGI) reserve of £1m is being set up for future allocation on longer term contributions towards economic prosperity, well being and regeneration and other capital investment projects. The Landfill allowances reserve of £6.1m is available to offset future council tax rises, bearing in mind past investment in waste infrastructure, and to finance future waste infrastructure costs.

The new corporate policy fund reserve of £1.5m proposed for 2009/10 has been secured by the SAP benefit realisation savings and it is proposed that the reserve will be increased by efficiency savings generated by the corporate efficiency review. This reserve will provide additional resources for future investment as public expenditure constraints tighten, and to provide in year flexibility towards new, emerging front-line service priorities.

Full details of each reserve from 31 March 2008 to 31 March 2012 are set out on Page A17 of the draft budget book.

9 Balances

Budgeted balances at 31 March 2009 were £15m. Balances were increased with the 2007/08 underspend, although some were set aside for additional spending during 2008/09 and later years. One off additions will add to balances at 31 March 2009, and the estimated level of balances at 31 March 2009 is therefore £29.0m. This includes the additional projected savings in 2008/09, not allocated to earmarked reserves but carried forward to support council tax reductions in 2009/10 and 2010/11. £7.6m will be drawn down in 2009/10 and 2010/11 towards the commitment for lower council taxes in these years.

10 Section 25 report, Local Government Act 2003

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 Council is required to have regard to this report in approving the budget and council tax.

A detailed summary of the County Treasurer's opinion is outlined in Appendix 1 of this report. Whilst highlighting several matters that will be kept under review there is no known significant risk or liability which requires a provision, contingency or reserve not already allowed for in the budget report. Correspondingly, it is the County Treasurer's view that, provided that the County Council considers the factors laid out in Appendix 1 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.

11 Treasury Management and Annual Investment Strategies, Prudential and Financial Health indicators

The County Council is required to adopt a treasury management strategy and an annual investment strategy for 2009/10 which covers management of the long-term debt portfolio relative to forecast trends in long and short term interest rates, arrangements for the investment of surplus cash funds during the year and which is fully compliant with the prudential code for financial management. A guideline annual target of up to £17m is proposed for 2009/10 to 2011/12 for new long-term fixed-rate borrowing, which can be exceeded if circumstances are appropriate. No Lender's Option/Borrower Option loans (LOBOs) were taken out in 2008/09 and although the situation will be kept under review, there is expected to be no commercial advantage in the County Council taking out further LOBO finance in 2009/10.

After having reached a peak of 5.75% in July 2007, a succession of interest rate cuts meant that, by February 2009, the Base Rate of 1.0% had fallen below the lowest recorded level of 2.0% since the Bank of England was formed in 1694. It is now envisaged that longer term interest rates will remain on a stable path over the next year. The strategy will be to take out long-term fixed-rate borrowing from the Public Works Loan Board (PWLB) of up to £17m in the period to March 2010 at a target rate of 4.2% or less, or prevailing rates if this target rate were to prove unattainable.

Inflationary concerns have all but dissipated with annual Consumer Price Index (CPI) inflation having fallen from its September 2008 peak of 5.2% to its current December 2008 level of 3.1%, with this figure expected to continue to fall further over the coming months. Unemployment, already at 6%, is expected to rise further and concern over the possibility of unemployment is expected to keep wage bargaining and wage inflation to a minimum. The revised expectations for both reduced wage and price inflation have allowed a prudent budget to be set with a lower than originally anticipated council tax rise.

The County Council is required to approve the Annual Investment Strategy, the policy for making revenue provision for the repayment of debt and the Prudential indicators, which are set out in Appendices 2 and 3 respectively.

RECOMMENDATIONS

That:
the Treasurer's report under Section 25 of the Local Government Act 2003 be taken into account when the Council determines its budget and precept for 2009/10 (Appendix 1)

a) the revenue budget for 2009/10 (as set out in the attached draft budget book) and the provisional budgets for 2010/11 and 2011/12 be approved

b) the total budget requirement for the general expenses of the County Council for the year beginning 1 April 2009 be £657,009,000

c) the County Council's band D council tax for the year beginning 1 April 2009 be increased by 1.9% to be £1,018.17

d) the County Council's council tax for the year beginning 1 April 2009 for properties in each tax band be:

	£
Band A	678.78
Band B	791.91
Band C	905.04
Band D	1,018.17
Band E	1,244.43
Band F	1,470.69
Band G	1,696.95
Band H	2,036.34

e) precepts be issued totalling £509,698,895.42 on the billing authorities in Hampshire, requiring the payment, in such instalments and on such dates set by them and previously notified to the County Council, in proportion to the taxbase of each billing authority's area as determined by them and as set out below:

	£
Basingstoke and Deane Borough Council	62,657.70
East Hampshire District Council	47,514.78
Eastleigh Borough Council	43,666.14
Fareham Borough Council	42,383.00
Gosport Borough Council	27,670.70
Hart District Council	37,892.60
Havant Borough Council	42,674.00
New Forest District Council	72,350.90
Rushmoor Borough Council	31,184.03
Test Valley Borough Council	45,327.00
Winchester City Council	47,282.09

f) the annual investment strategy and policy for the level of minimum revenue provision (Appendix 2) be approved

g) the prudential and financial health indicators ( Appendix 3) be approved.

B. Capital Programme

1 Summary

The Cabinet has considered proposals put forward by Executive Members for the three years 2009/10 to 2011/12. The resultant draft capital programme is attached as a separate document. In drawing up their preferred programmes, Executive Members were requested to:

(a) submit proposals for a locally resourced capital programme for the three-year period from 2009/10 to 2011/12 within the guidelines that spread the existing programme for 2009/10 and 2010/11 over three years


(b) submit a programme of schemes supported by Government grants or supported borrowing allocations in 2009/10 and 2010/11 and those expected to be supported in 2011/12, subject to limits restricting the take-up of Government supported borrowing allocations.

The total starts value of the three-year programme submitted by executive members is £427m. It includes £365m of schemes supported by Government allocations.

2 Contextual Information

The proposed capital programme reflects a reduction in the forecast level of capital receipts. Because of the downturn in the property market this will require the use of temporary prudential borrowing of £12.804m in 2009/10 and £5.525m in 2010/11. On current assumptions about the recovery of the property market and the flow of capital receipts, this temporary prudential borrowing will begin to be repaid in 2011/12 and will be fully repaid over the next ten years.

The need for temporary prudential borrowing is lower than would have been necessary if Cabinet had not agreed in December 2008 to spread the existing guidelines for the locally resourced capital programmes for 2009/10 and 2010/11 over the three-year period from 2009/10 to 2011/12, effectively a deferral of one-third or £25m.

The proposed programme complies with the requirements of the Prudential Code for Capital Finance in Local Authorities. The prudential indicators are included in Appendix 3 of this report .

The other main points of the report are:

· the proposed capital programmes are in line with the guidelines set by Cabinet, together with schemes supported by Government grant and borrowing allocations

· previously approved prudential borrowing to finance school building and other schemes in advance of capital receipts and developers contributions will be outstanding for longer periods than had originally been planned because of the downturn in the housing market

· for the County Council in total, loans outstanding for prudential borrowing will peak at £116m in 2009/10. The bridging loans included in this total are forecast to be fully repaid by 2013/14

· the total value of the proposed programme over the three-year period from 2009/10 is £427m.

3 Summary of capital programmes submitted

The total starts value of the three-year programme submitted by executive members is £427m, (£177.013m in 2009/10, 147.553m in 2010/11 and £102.202m in 2011/12).

4 Adult Services

The proposed programme for Adult Services is in line with the guidelines for the locally resourced programme. The programme for 2009/10 includes the final year of the additions agreed by Cabinet in July 2006 after a review of the Service's capital expenditure needs and the resources available. The 3 year programme, which totals £2.796 million, includes government capital grant in respect of Mental Health, Social Care Infrastructure and Extra Care Housing support.

5 Children's Services

The proposed programme for Children's Services of £189m over the next three years is supported principally by government capital grant including schools' devolved capital (£ 63.147m), the primary capital programme (£21.272m) and New Deal for Schools modernisation (£15.517m). The most significant element of borrowing allocation is for new pupil places (£18.693m).

As in previous years, the Government's New Deal for Schools (NDS) allocations have been divided between modernisation works (included in the Children's Services capital programme) and condition works (included in the Policy and Resources capital programme) using the 46% : 54% split agreed in July 2003.

The proposed amounts for NDS over the next 3 years, for both modernisation and condition works, are £13.809m (2009/10), 12.088m (2010/11) and 12.088m (2011/12). The amounts are before taking into account the County Council's decision not to take up in full the Government's borrowing allocations, amounting to £9.5m over the three year period for NDS.

The Executive Member for Children's Services also recommended carrying forward capital resources of £11.047m from the 2008/09 programme to 2009/10 and 2009/10. The schemes are listed below.

Children's Services schemes to be deferred from 2008/09
to 2009/10 and 2010/11
	£000
Uncommitted resources - carry forward agreed
in July 2008	4,211
Andover's Children's Centre	600
Bentley Primary School	300
East Anton Primary School, Andover	1,987
Roman Way Primary School, Andover	340
Stanmore Primary School, Winchester	450
Robert Mays Secondary School, Odiham	170
Hook Junior School	110
Wyvern Technology College, Fair Oak	125
Management of falling rolls	150
Staff workforce	218
Schools Access Initiative	1,089
Health & Safety Swimming Pools	563
Developers' contributions	290
Asset Management Plan data provision	100
Targeted Capital Fund	344
	----------
Total to be carried forward	11,047
	----------

Primary Capital Programme

The County Council is a pathfinder authority for the Government's new grant-funded Primary Capital Programme which is intended to make far-reaching improvements to primary schools over a period of up to fifteen years.

Primary Capital Programme grants are available of £9.447m in 2009/10 and £11.825m in 2010/11. This will be allocated to a number of projects in the Havant and Gosport areas, along with the East New Forest Special school project (approved by the Cabinet on 21 May 2007), in accordance with the County Council's submission to the DCSF in June 2008. Recommendations for specific projects will be brought back to the Executive Lead Member for Children's Services (Education) in the early part of 2009.

It is anticipated that the 2011/12 allocation will be about £6 million.

Other elements of the Children's Services programme

Sure Start grant includes funding for children's centres in phase 3 and allocations to improve the quality of accommodation in early years and childcare settings, mainly those operated by private providers.

Targeted Capital Fund grant is allocated to authorities on a flat rate basis with the Government's priority likely to be given to special education and 14-19 programmes.

Although welcome, the funding in respect of Youth Capital Fund, disabled children grant, food technology grant and adult safeguarded learning are all below £1 million. The last three of these grants are, however, new grants.

The three new primary schools included in the programme for 2010/11 which will be partly funded from developers' contributions are the primary schools at East Anton and Picket Twenty in Andover and West of Waterlooville. They are required to meet the growth in pupil numbers arising from localised development pressures. The capital programme has been prepared on the basis that the developers' contributions for these three schemes will be received in time to fund the capital expenditure on the schools directly without recourse to borrowing but the position will need to be kept under review.

Pressures on the Children's Services capital programme

There are sufficient resources to fund all schemes which need to be started in 2009/10. The position for 2010/11 and following years, however, continues to be difficult. With developers' contributions meeting only about 65% of the cost of a new school, the pressure on the Children's Services programme is likely to continue.

Building Schools for the Future

No provision has been included in the proposed capital programme for 2009/10 to 2011/12 because a response is expected shortly from the Government to the County Council's application for inclusion in a forthcoming wave of the BSF programme.

6 Environment

The proposed three year Environment programme, which includes schemes wholly or partly funded by developers' or other contributions, totals £149.944 million. Schemes dependent on outside contributions have only been included where there is reasonable confidence in the security of funding and programme dates.

It is proposed that £19.330m should be added to Environment's capital programme for 2008/09 for the cost of the architectural enhancement pass-through costs at the Chineham, Marchwood and Portsmouth Energy Recovery Facilities. The County Council is liable under the terms of the long-term waste disposal contract with Veolia Environmental Services Hampshire for the cost of architectural standards above a basic design.

Provision of £3.257m has been made in previous years in Environment's revenue account for annual payments pending the final settlement of the pass-through costs issue. This is now available to fund part of the lump sum, leaving £16.073m to be financed by prudential borrowing. Repayments will be made from the revenue budget over the remaining life of the contract. The saving to the revenue budget from making a lump sum payment to Veolia, financed by prudential borrowing, will be £0.8m a year.

Major transport schemes

Work is under way to develop evidence bases to support potential bids for major transport schemes. Where these schemes occur in South Hampshire, a partnership approach is being used through Transport for South Hampshire (TfSH) which also attracts additional resources.

TfSH receives some funding for transport infrastructure through the Partnership for Urban South Hampshire (PUSH) which in turn receives capital and revenue funding from Government through `New Growth Point Funding'. These funds are allocated to specific projects by PUSH/TfSH and are paid over to lead local authorities who deliver the schemes.

The proposed Environment capital programme for 2009/10 includes a scheme to improve the M27 junction 5 at Southampton Airport at a cost of £8.325m. This will be an important first step in providing access to the major employment area proposed in Eastleigh River Side along Chickenhall Lane. Whilst there may be some developer contributions, this scheme is dependent on funding from PUSH. If sufficient PUSH resources are made available, it may be possible to start on site in 2009/10. Following approval by Cabinet in October 2008, a bid has also been submitted to the Community Infrastructure Fund for £20m for phase I of South East Hampshire Bus Rapid Transit between Fareham and Gosport. The scheme has been included in the proposed capital programme for 2009/10, for completion in 2011 if the bid is successful.

The Executive Member for Environment has sought to maintain capital spending on highways and bridge maintenance in real terms by making programme deferrals from other programmes such as the environmental improvements programme.

The Cabinet recommended an addition of £450,000 to the 2009/10 Environment capital programme to finance road safety improvements on the A326, following recent fatal accidents.

Household waste recycling centres

Cabinet agreed in July 2004 to increase the provision for improving the County Council's household waste recycling centres (HWRC) to £1m per annum. Following the Government's announcement of its waste infrastructure grant allocations for Hampshire, the HWRC programme can be funded from Environment's share of capital receipts and the waste infrastructure grant without the need for the additional local resources.

7 Policy & Resources

The main corporate priority continues to be the maintenance of the core buildings in the County Council's built estate. The capital repairs programme and the proposed 2009/10 allocations are largely based on existing priorities.

Considerable progress has been made in the schools estate with the New Deal for Schools funding programme. The reduced programme for locally resourced capital repairs will require a reassessment of risk, however, and will slow progress on improving the Council's built estate.

Within the Policy and Resources capital programme it proposed to include carry forwards from 2008/09 to help smooth the reduction in the capital repairs programme; a £0.249m virement to revenue to support the project team developing the Hampshire Workstyle initiative; a £1.0m allocation for smart meters as part of the carbon reduction commitment, funded from the Dedicated Schools grant, and £1.037m being added to the 2009/10 programme to fund section 106 payments to Basingstoke and Deane Borough Council for the Merton Rise development. As a result of the downturn in the housing market it is the County Council, rather than the developer, that is funding these section 106 payments. The eventual sale proceeds will, however, be correspondingly higher than they would have been if the developers had been responsible for the payments.

Advance and advantageous land

The proposed provision for advance and advantageous purchases of land is £0.436m in 2009/10 and just over £0.6m per annum in 2010/11 and 2011/12.

8 Recreation and Heritage

The programme for 2009/10 includes a £1.313m project to provide education and visitor facilities for the Basing House History Park. Provision of £0.422m per annum has also been included in the programmes for 2009/10 and 2010/11 for the final two years of the Playbuilder programme to develop 20 to 25 play areas over three years. This started in 2008/09.

9 Private Finance Initiative (PFI)

No specific public finance initiative (PFI) schemes have been identified at this stage for inclusion in the 2009/10 to 2011/12 capital programme.

Work on the proposal to replace street lighting columns continues following a comprehensive tender process, with the intention of awarding a PFI contract in the second quarter of 2009. Work to replace street lighting infrastructure would then start in late 2009.  

10 Conclusions

Regular reports will be made on the implementation of the programme, including the progress of major projects, the level of capital expenditure and resources in 2009/10, including the progress on meeting the challenging targets for capital receipts. As part of a mid year review process reports will be brought forward for Members to consider on both the capital receipts targets in the longer term and Building Schools for the Future.

RECOMMENDATIONS

That:

(a) the capital programme for 2009/10 and the provisional programmes for 2010/11 and 2011/12 be approved as set out in the accompanying report and subject to the conditions set out in section B.3 of the County Council's Financial Procedures on the responsibilities for managing the capital programme and, where appropriate, to the approval of the Executive Member for Policy and Resources to proposals by executive members to retain more than a 25% share of capital receipts

(b) expenditure on preliminary design and planning work for major transport schemes be permitted when they have achieved a place in the County Council's Local Transport Plan, subject to the cost being met within existing Government allocations

(c) authority be given to incur expenditure on land purchases as follows:

(i) up to the sum specified in respect of sites still required for the schemes included in the capital programme for the period 2009/10 to 2011/12 provided that the relevant scheme has been the subject of a feasibility or design project appraisal approved by the relevant executive member

(ii) up to the amount included in the programmes for 2009/10 to 2011/12 in respect of advance and advantageous land purchases.

T. K. THORNBER, C.B.E.,
Leader.

Section 25 report, Local Government Act 2003

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.

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.

The CIPFA guidance on reserves and balances provides the general framework for considering the adequacy of reserves. The draft budget book includes the provisional budgets for 2010/11 and 2011/12, set in the context of the County Council's medium term financial management policies. The 2010/11 budget is based on firm Government grant allocations, but these do not extend to 2011/12 and therefore assumptions have had to be made on the implications for grant levels.

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 approximately £16m. This assessment is set out as an Annex to the Appendix.

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 were reported to the Cabinet. Schools have the single biggest reserve at a projected £43.6m 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 equal pay reserve.

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 during a recession, potential higher inflation and slippage in the achievement of capital receipts.

The budget report is the conclusion of a detailed process of prior consultation and consideration through out the current year by Cabinet.

The County Council's policy on balances is to hold a minimum prudent level which on the basis of 2009/10's risk assessment is 2.4% of the budget. This is a higher level than has been necessary historically but comparable with 2008/09, when balances were budgeted at 2.3% of the budget requirement, and remains relatively low compared with other comparable local authorities. The risks associated with being a floor authority and thus receiving the minimum increase in government grant and of needing to achieve significant savings in service expenditure to balance the budget continue to justify a higher level of balances than historically. In other respects the risks have changed over the last twelve months, with the risk of higher inflationary expectations having diminished but concerns about the length and depth of the recession and with the stability of the banking system having increased significantly.

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.

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

- the 2008 Local Government pay award has yet to be finally agreed but an assumed increase of 1.5% in 2009/10 represents a reasonable assumption given the recent fall in the rate of increase in the retail price index and the effect of increased unemployment on the labour market

- price inflation has been set at 2.25%. This may not be sufficient in all cases and budgets have been adjusted (e.g. in purchase of social care and for the cost of electricity), where higher prices are likely in 2009/10

- short-term interest rates have been budgeted to average 1.5%, in line with the current base rate, at the time of preparing the budget. A further reduction to 1% was implemented on 5 February.

· Pay drift

- increments are not budgeted for and services will need to secure efficiency savings of £2.6m to offset these. Past trends suggest that this can be managed, and service budgets have been adjusted for the impact of the new pay structure

- there is a substantial potential liability from equal pay claims arising from the pay and benefits review. None of the claims has yet been considered by the employment tribunal and an equal pay reserve estimated at £37.4m at 31 March 2009 has been built up for non-school claims. School balances will assist in meeting claims in respect of school-based staff. An application for a capitalisation direction was agreed by Communities and Local Government for 2008/09, and a further submission will be made in 2009/10 to protect against the risk of successful claims exceeding the capacity to fund them from the relevant reserves; a settlement in excess of this figure will require a capitalisation direction to enable the revenue impact to be phased 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 2009/10 and provisional budget for 2010/11 takes 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 two years. This is based on the outcome of the actuarial valuation at 31 March 2007 and the position for 2011/12 will not be known until after the next actuarial review.

· Additional spending, savings and redeployments built 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 was reported to executive members. The effects of the recession increase the possibility of reductions in some areas of income.

· 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 have been put in place to consolidate and improve financial controls, 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 slow down of the property market has produced a temporary shortfall of capital financing resources in 2008/09 and a further shortfall is anticipated in 2009/10. Additional revenue contributions to capital are proposed in both the 2008/09 revised and the 2009/10 budget and allowance has been made in the budget for additional unsupported borrowing to cover the immediate shortfall

- 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 a continuing impact in containing increased capital financing costs.

· Level of borrowing and outstanding debt

- the issues are fully covered in the treasury management strategy and prudential indicators appendix to the budget report considered by the Cabinet

- the policy on temporary unsupported borrowing for specific projects 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

- however as a result of much lower projected capital receipts some more general temporary unsupported borrowing is expected to be required in 2009/10 and 2010/11.

· 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, which now stands at £7.7m.

· 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 annual governance statement and the external audit governance report.

· Audit Commission

- gave an unqualified opinion on the 2007/08 accounts, and will be announcing results of the Use of Resources CPA assessment over the next month.

· 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. There are no significant externally imposed changes in 2009/10, with the exception of the second phase of the transfer of the student support service to the Student Loan Company

- Though government grants have been confirmed for the next two 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.

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

11 February 2009

RISK ASSESSMENT OF GENERAL BALANCES - 2009/10
£000		£000			%			£000	Comments
Cash- limited expenditure ( excluding schools)					Inflation
	Inflation				Pay	300866	0.5	1504	Possible risk of national pay awards exceeding lower pay award assumption
Pay	292973		7893
Non pay expenditure	554732		12391
Income ( includes inf on specific grants)	-184464		-7042		Non pay	567123	1.0	5671	Allowing for potential for absorption within cash limit
Base budget	663241		13242
Growth in budget strategy	7900				Income	-191506	-1.25	2394	Risk of resistance reduced by lower inflation assumptions
Growth funded from redeployment	2866
Further growth proposed	1450
Balance of contingency allocation	555				Interest rates	22911	1.0	229	Short term interest rates may increase in 2009/10 above current level but majority of interest costs on long term fixed rate borrowing
Capital financing - principal - interest	24398 22911
Flood Protection/LATS	247
RCCO	18292
Specific grants ( excluding schools)	-86626				Demand led budgets	260656	6.0	15639	Allowing for potential for absorption within cash limit
Reserve contributions	-11595				Insurance liabilities	4237	33.0	1398
LEA contribution to schools budget	128				Achievement of cashable savings (say)	16478	25.0	4120	Higher risk assumed due to economic factors
BUDGET REQUIREMENT	657009
Demand sensitive budgets					Capital receipts	4660	10.0	466	To reflect possible reduction in values rather than delay
Older people placements	110729
Physical/ sensory	19882				Winter maintenance	3230	20.0	646	Risk of adverse winter conditions borne from balances, but lower risk within new contract
Learning disabilities	67982
Mental Health	6929
Home to School transport	22908				VAT - partial Exemption (exc schools)	1500	5.0	75	Low risk with new policy options being considered beyond current amnesty
Looked after children	23128
Bus subsidies	8112
Abandoned vehicles	31							32142
Coroners	955		260656
Insurance liabilities			4237		Less likelihood of worst cases coinciding		50	16071
Winter maintenance			3230
Business rates			3974		Proposed target balances			16071
Capital receipts			4660

ANNUAL INVESTMENT STRATEGY AND POLICY FOR THE LEVEL OF MINIMUM REVENUE PROVISION

1 Annual Investment Strategy

1.1 This proposed Annual Investment Strategy has been prepared in accordance with guidance issued under section 15(1)(a) of the Local Government Act 2003.

1.2 When investing its surplus funds, the Council's investment priority is to continue to maintain the security of capital and maintain policy flexibility through liquidity of its investments. The Council will aim to achieve the optimum return on its investments commensurate with the proper levels of security and liquidity.

1.3 Accordingly, only `specified investments' will be used in 2009/10. These categories of investment are defined in the Government's guidance as offering both high security and liquidity.

1.4 The Council's surplus funds will either be invested in:-

· fixed-term deposits for periods of up to 364 days with local authorities, the Government's Debt Management Office, or banks and building societies rated at least A2 by Moody's (a Government-recognised credit rating agency) that are included on the Council's lending list;

· call deposits with NatWest Bank (rated Aa3); and

· call deposits with three managed Aaa-rated money market funds included on the Council's lending list, which are given as follows:

- Standard Life Sterling Fund;

- Fidelity Institutional Sterling Cash Fund; and

- RBS Global Treasury Sterling Fund.

1.5 The `call deposits' may be recalled by the Council at any time. The Council's cash flow position will be monitored on a daily basis and adjustments made as necessary to the funds placed on call.

1.6 Lending is restricted to certain of the UK clearing banks and the larger UK building societies, with the Council's current lending list given as follows:

Counterpart Moody's long-term

rating

Lloyds TSB Aaa

HSBC Aa1

Barclays Aa3

Royal Bank of Scotland (NatWest) Aa3

Abbey Aa3

Clydesdale Aa3

Nationwide Building Society Aa2

Britannia Building Society A2

Yorkshire Building Society A2

Coventry Building Society A2

Chelsea Building Society A2

Skipton Building Society A2

Leeds Building Society A2

Hierarchy of Moody's long-term ratings:

Aaa Obligations rated Aaa are judged to be of the highest quality, with the "smallest degree of risk".

Aa1, Aa2, Aa3 Obligations rated Aa are judged to be of high quality and are subject to very low credit risk, but "their susceptibility to long-term risks appears somewhat greater".

A1, A2, A3 Obligations rated A are considered upper-medium grade and are subject to low credit risk, but that have elements "present that suggest a susceptibility to impairment over the long term".

1.7 The lending list is closely monitored and reviewed by the County Treasurer, taking into account each institution's credit ratings, asset base, market capitalisation, press reports, etc. Institutions will be removed immediately from the list if any doubt is cast on their credit worthiness. Changes in the lending list will be reported in the quarterly review of the financial health indicators.

1.8 Limits are placed on levels of total deposits made with individual institutions, based on their relative strength as a counterparty. Whilst the Treasury Management and Investment Strategy sets a maximum lending term of 364 days, this will be shortened in respect of those institutions with a relatively lower credit rating.

1.9 The County Treasurer will continue to manage cash balances on a cautious basis with the emphasis on capital preservation at the expense, where necessary to avoid unjustifiable risks, of additional interest returns.

1.10 For information, the County Council has never placed deposits with Icelandic banks and has not used any overseas institutions in the last 18 months.

1.11 Other, or `non-specified', investments will not be used.

1.12 Treasury management staff operate within detailed parameters set out in an internal code of practice, which takes account of CIPFA's Treasury Management in the Public Services: Code of Practice and other guidance issued by the Chartered Institute of Public Finance and Accountancy.

2 Policy on Minimum Revenue Provision to repay debt

2.1 The Local Authorities (Capital Finance and Accounting) (England) (Amendment) Regulations 2008 requires that before the start of each financial year, a local authority prepares a statement of its policy on making Minimum Revenue Provision (MRP) for the approval of the Full Council or equivalent. These revised regulations repealed the detailed rules and replaced them with statutory guidance, while requiring local authorities to make `prudent' provision for the repayment of debt.

2.2 It is recommended that the Authority continues with the policy adopted for 2008/09, i.e., to continue to calculate MRP in respect of supported capital expenditure, incurred both before and after 1 April 2008, in accordance with the previous regulations (i.e., generally based on 4% of the Authority's outstanding capital financing requirement). In respect of unsupported borrowing whether relating to capital expenditure incurred before or after 1 April 2008, it is proposed to calculate MRP on the basis of asset life, using the equal instalment basis and adopting asset lives that are no greater than those used to calculate the depreciation provision for the relevant assets.

A. Summary of Prudential Indicators			2007/08 Actual	2008/09 Estimate	2009/10 Estimate	2010/11 Estimate	2011/12 Estimate
Prudential indicators for capital expenditure
Capital expenditure	£m		176.5	215.0	159.1	162.7	151.0
Capital financing requirement	£m		586.3	648.8	687.7	692.6	662.2
Prudential indicators for affordability
Ratio of financing costs to net revenue stream	%		5.35	5.40	6.40	6.72	6.56
Incremental impact of capital programme on council tax	£		n/a	n/a	11.55	5.16	4.98
Prudential indicators for prudence
Medium-term borrowing not to exceed capital financing requirement		County Treasurer will ensure this is not breached
Prudential indicators for external debt
Actual external debt	£m		404.3	n/a	n/a	n/a	n/a
Authorised limits	£m		590.0	620.0	690.0	700.0	670.0
Operational boundaries	£m		480.0	510.0	570.0	580.0	550.0
Prudential indicators for Treasury Management
Adoption of CIPFA Code of Practice	Agreed by the Cabinet in February 2003
Upper limits - fixed rates	£m		256.0	300.0	320.0	320.0	320.0
Upper limits - variable rates	£m		202.0	370.0	440.0	450.0	430.0

Maturity structure of fixed-rate debt
Upper limits
Under 12 months	%	2	1	10	10	10
12 to 24 months	%	2	3	10	10	10
24 months to 5 years	%	5	6	20	20	20
5 years to 10 years	%	16	14	30	30	30
10 years and beyond	%	75	76	90	90	90
Lower limits
Under 12 months	%	2	1	0	0	0
12 to 24 months	%	2	3	0	0	0
24 months to 5 years	%	5	6	0	0	0
5 years to 10 years	%	16	14	10	10	10
10 years and beyond	%	75	76	70	70	70
Total sums invested for more than 364 days	£m	Nil	Nil	Nil	Nil	Nil

B. Financial Health Indicators		2007/08 Actual	2008/09 Estimate	2009/10 Estimate	2010/11 Estimate	2011/12 Estimate
Variance from budget
Net service spending	%	-0.3	-0.5	+/-1	+/-1	+/-1
Overall spending met from formula grant, council tax and balances	%	-1.4	-1.4	+/-2	+/-2	+/-2
Balances as a % of budget requirement	%	3.9	4.5	3.7	2.8	2.5
Capital programme management
Carry forward of schemes	%	29.0	20.0	20.0	20.0	20.0
Actual capital expenditure compared with estimate	%	-6.3	+/-10.0	+/-10.0	+/-10.0	+/-10.0
Actual capital receipts and third party contributions compared with estimate	%	-0.2	-72.3	+/-10.0	+/-10.0	+/-10.0
Income collection
% of outstanding debt more than 12 months old	%	16.1	17.5	17.5	17.5	17.5
% of outstanding debt more than 6 months old	%	24.7	20.0	20.0	20.0	20.0
% of outstanding debt under 60 days old	%	63.2	60.0	60.0	60.0	60.0
% of debt written off to debt raised	%	0.2	<1.0	<1.0	<1.0	<1.0