Contact: Jon Pittam, ext 7400

1 Summary

1.1 The following decisions are sought:

· to approve the proposals for

- formatting the budget

- decision-making on the budget

- future budget monitoring

· to note the current position in 2001/02 and to review the impact of spending pressures in the current year in conjunction with setting budget guidelines for 2002/03 in December.

· to endorse the planning assumptions set out in the report as the basis of the budget planning strategy for 2002/03.

· to endorse the proposals for budget consultation.

· to receive a further report on 17 December setting out the details of the 2002/03 provisional RSG settlement and budget guidelines following consultation with the Leader.

2 Reason(s)

2.1 Prior to setting budget guidelines in December, decisions are required on:

· a number of financial management and budgetary issues arising from the new constitution of the County Council

· budget monitoring issues emerging in 2001/02

· a provisional budget planning strategy for 2002/03.

3 Other options considered and rejected:

Not applicable

4 Conflicts of interest declared by the decision maker or a member or officer consulted

Not applicable

5 Dispensation granted by the Standards Committee

Not applicable

6 Reason(s) for the matter being dealt with if urgent

Not applicable

Approved by: (signature) Date: (date of decision)

Councillor T K Thornber

Section 100 D - Local Government Act 1972 - background papers

The following documents disclose facts or matters on which this report, or an important part of it, is based and has been relied upon to a material extent in the preparation of this report.

NB the list excludes:

1. Published works.

2. Documents which disclose exempt or confidential information as defined in the Act.

TITLE FILE

rjp2538a

Contact: Jon Pittam, ext 7400

7 Summary

7.1 This report covers:

· a number of financial management and budgetary issues requiring decisions or protocols to be approved arising from the new constitution of the County Council

· an update on the budget for 2001/02

· a review of the outlook for the budget for 2002/03 and of the budget planning strategy.

8 Issues arising from the introduction of the new constitution

8.1 There are three main issues arising from the introduction of the new constitution:

· the format of the budget

· the roles of policy review and the executive

· the reporting of budget monitoring.

Format of the budget

8.2 There are two considerations:

· the building blocks for setting cash limits are based on the match between the executive and policy review committees for Education, Social Care, Environment and Recreation and Heritage portfolios, with Policy and Resources also encompassing community development and economic development

· the Regulatory Committee is not budgeted for separately but as at present alongside the related executive functions.

8.3 This represents a minimum change option compared with the previous committee structure and any adjustments required will be agreed with the Leader when budget guidelines are set.

Decision-making structure

8.4 The majority of changes required to reflect the new constitution in relation to budget setting are reasonably clear cut:

· County Council approval of the budget and council tax precept remains unchanged

· Policy and Resources Committee's overall role in resource allocation becomes the responsibility of the Leader and the Cabinet

· approval of service budget proposals for consideration by the Leader and the Cabinet and the full Council becomes the responsibility of the relevant executive member.

8.5 Within the constitution, it is assumed that executive members will request the relevant policy review committee to consider the service budget within budget guidelines, prior to the executive member agreeing its submission to the Cabinet. The advantages of this approach are:

· that backbench and opposition members are involved in the budget process prior to the consideration of the budget by the County Council

· referring the budget prior to the executive member decision being taken avoids a situation in which the executive member might need to make a further decision if the committee were to produce compelling reasons for an amendment to the budget initially proposed by the executive member. The budget could in any event be called-in by the policy review committee and this approach would shorten the steps in the process that could otherwise occur and prejudice the Cabinet's timetable in agreeing its final budget submission to the Council.

8.6 The proposal therefore is to construct the budget timetable on the following basis:

Budget monitoring

8.7 Robust budget monitoring arrangements at both officer and member level are critical, not only to maintaining the County Council's strong record of budgetary control, but also to its financial strategy based on holding a comparatively low level of balances. The importance of the budget monitoring framework has been enhanced as a result of the decision taken last year to cease having a separate revised budget reporting cycle.

8.8 The proposed arrangements for budget monitoring reports to members are as follows:

· reports to be submitted to executive members at their decision-making meetings, by the relevant service chief officer and the County Treasurer

· decisions may be required to approve virements or other action required to keep within cash limits. Alternatively the decision may be that no immediate action is required. The impact of any virements approved by officers under delegated powers should be disclosed in the report

· reports would normally be submitted to executive members in September,
November, January and March though precise arrangements will depend upon the timing of executive member meetings. As the executive member will be approving a revised budget for the year at the January meeting, a separate monitoring report may not be necessary

· the degree of detail contained in the report will depend on the nature of the service and the issues involved. However, reports should identify

· the County Treasurer will then prepare overall budget monitoring reports which will be submitted to the Cabinet, summarising any issues contained in service budget monitoring reports and reporting on budgets which are outside service cash limits. Reports to Cabinet would normally be submitted in October, December (alongside consideration of budget guidelines), February (in conjunction with the approval of the revised budget) and April.

9 2001/02 update

9.1 Initial budget monitoring reports for 2001/02 will be considered by the relevant executive members during October and November, in accordance with the proposals in paragraph 2.8 above.

9.2 It is however fairly clear that the most significant budget pressures requiring sustained management action are those affecting Social Services and that the issues are national as well as local. The main pressures are:

· the continuing impact of care packages introduced as part of the response to winter pressures in 2000/01. The additional specific grant of £1.9m payable in 2001/02 intended to cover the continuing cost of these commitments is unlikely to be adequate and the decisions taken by the Government/NHS about the level and allocation of funding for winter pressures in 2001/02 are critical

· market pressures, particularly in the independent residential care sector, partly the result of Government regulations, which have resulted in above-inflation increases in the rates payable for care packages

· difficulties in achieving the budgeted efficiency savings on children's services from reduced reliance on expensive residential placements for looked after children

· the continued high level of commitments on services to people with learning and physical disabilities.

9.3 The Government announced on 9 October proposals for allocating additional funding to local authorities in 2001/02 and 2002/03, to enable extra beds to be freed up in NHS hospitals. This is linked to a new agreement drawn up between the health care, housing and independent social care agencies designed to promote more effective capacity planning at the local level. Hampshire and the majority of other authorities in the south east are among 50 authorities targeted for extra help to meet local targets for a reduction in delayed transfers of care. Hampshire will receive an extra £2.4m in 2001/02 and at least an equivalent sum in 2002/03. The implications of the new agreement are still being studied, but in principle this is a welcome announcement.

9.4 When the final accounts for 2000/01 were reported, budget pressures for other services were identified arising particularly from the impact of the foot and mouth epidemic and from the longer term effects of last winter's flood and storm damage. Subsequent announcements of additional Government funding in 2001/02 will help to deal with these pressures in two areas:

· an additional supplementary credit approval of £5.1m was allocated to the County Council in August to help in tackling flood damage to highways for use in 2001/02 and 2002/03. This represented 22% of the national total and was therefore a substantial recognition of the exceptional nature of the impact of the floods on Hampshire's roads. Taken in conjunction with the substantial increase in funding for highway maintenance in the 2001/02 local transport settlement, overall resources available for highway structural maintenance in 2001/02 are 68% higher than in 2000/01

· additional emergency planning grant of £52,000 has been received in 2001/02 as a result of a judicial review which concluded that the Home Office had no legal powers to operate the previous system of cash limited specific grants. This is likely to be a one-off increase in grant, as a draft bill has been produced to secure the powers that the Home Office thought they had previously. A consultation paper has also been circulated on the future of emergency planning which proposes that specific grants should cease and that Government support for the local authority role in emergency planning should be provided through the general grant (SSA) system in future. In the meantime, the additional grant in 2001/02 provides some scope for meeting non-recurring spending pressures affecting Policy and Resources services.

9.5 The October budget monitoring report to the Recreation and Heritage executive member has forecast a shortfall of income of £376,000 arising from action taken to avoid the spread of foot and mouth. A further report will be made for consideration at a future Leader's executive decision-making meeting.

10 2002/03 budget outlook

10.1 The Government announced national standard spending assessment (SSA) control totals for 2002/03 and 2003/04 following the July 2000 spending review (SR2000). For the services provided by the County Council SSA control totals were 5.6% higher than in 2001/02 as set out overleaf:

	% increase
Education	6.0
Social Services	5.4
Fire	4.0
Highway maintenance	2.6
EPCS services	4.4
Capital financing	8.3 ----- 5.6 -----

10.2 Despite this information in the Government's spending plans, planning for 2002/03 has been affected by a number of uncertainties:

· whether any changes to the grant distribution system emerging from last year's Green Paper would be introduced in 2002/03, thus affecting the distribution of grant between authorities

· whether function and funding changes planned for 2002/03 would prove to be financially neutral. There are a number of changes relating to Education and Social Services which will result in adjustments either to SSA or to specific grants in 2002/03:

- the full year effect of the introduction of a new care leavers specific grant from 1 October 2001, offset by a reduction in SSA

- transfer of responsibility for funding of post-16 places in schools to the Learning and Skills Council

- creation of a new National Care Standards Commission which would assume responsibility for registration and inspection of Social Services providers

- the ending of the residential allowance and transfer of responsibility for funding preserved rights clients, both of which will add to Social Services costs and which will be reflected initially in increased specific grant

· the usual uncertainties about the allocation of specific grants and the conditions relating to them. This information continues to be announced on a piecemeal basis. No Education standards fund circular has yet been issued, though a number of grant announcements have been made recently relating to the starter home initiative, childcare places and pilot continuing professional development (CPD) for teachers.

10.3 Some progress has been made in resolving some of these uncertainties, particularly in relation to SSA and revenue support grant distribution for 2002/03. Nick Raynsford, the Local Government Minister announced in late July that:

· the proposed reform of the grant system would not be introduced until 2003/04

· the current freeze on formula changes would be extended to a third year to cover 2002/03

· following the introduction of a reformed system in 2003/04, there would be a further moratorium on formula changes in 2004/05 and 2005/06

· a council tax revaluation would take place in 2005, to take effect from 2007 and that, in future, revaluations would take place on a fixed 10 year cycle.

10.4 Though the Government has not formally sought to use its capping powers following the setting of local authority budgets for 2001/02, 15 authorities, including four county councils, were "called in" to explain high council tax or budget increases. No criteria for selection were announced, nor has the Government named the authorities officially. However, it would appear that the Government has examined both tax and spending increases on a cumulative basis since 1998/99 in selecting authorities for call in. (1998/99 was the last year of "crude and universal capping".) Though it seems unlikely that Hampshire would have been called in unless the criteria had been set at a level which would have included about half of all county councils, it will nonetheless be important to review the County Council's position on a cumulative basis against these criteria in coming to decisions on the 2002/03 budget.

10.5 Though no formula changes are now expected in 2002/03, grant distribution will be influenced by data changes as well as the function changes identified in paragraph 4.2 above.

· Area Cost Adjustment (ACA) - ACA data changes have been the most volatile of data changes in recent years. In 2001/02 ACA data changes accounted for a 0.9% increase in the County Council's SSA. Exemplifications for 2002/03 suggest that the County Council will lose about 0.2% of this increase (£1.3m) as a result of this year's updating of earnings data. Given the substantial increase in 2001/02 and the past pattern of fluctuations in earnings data, this is a better outcome than previously forecast

· Population and related client group indicators - the updating of population and related data has in the past usually had a positive impact on the County Council's SSA. This is unlikely in 2002/03, as although the Council's share of the national population in the 0-14 and over-55 age groups has risen, there has been a small reduction (for the first time since 1974) in Hampshire's overall share of England's population

· Road lengths - the Government is contemplating changing the basis of the data relating to road lengths, using data derived from digital maps, rather than data collection from highway authorities. Some corrections to the data are still being made, so the impact (if any) on Hampshire's share of the highway maintenance SSA is still uncertain.

10.6 Consultations have taken place with the Local Government Association (LGA) on the proposals for accommodating function changes in the 2002/03 grant settlement, though final decisions have still to be taken. However, the proposals for dealing with both post-16 and the National Care Standards Commission transfers could adversely affect the County Council.

· Hampshire's share of the post-16 Education SSA is particularly low, because of the small proportion of Hampshire post-16 pupils who attend maintained schools. For this reason, the methodology proposed by the Department for Education and Skills (DfES) for adjusting the Education SSA would have a particularly adverse impact on the County Council (although not on the funding of Hampshire sixth forms). Representations have been made, but if carried through, the DfES's proposals could result in a loss of approximately 0.5% in the distribution of the Education SSA (about £2.5m). Another way of looking at this would be a reduction in the planned national increase in Education SSA from 6% to 5.5% for the County Council

· the proposed reduction in Social Services SSA to take account of the National Care Standards Commission (NCSC) transfer appears to make unrealistic assumptions about the extent to which management and support services costs within local authorities will reduce as a result of the transfer and about the apportionment of inspection fee income. In addition the Government is also arguing that 0.4% of the 5.4% SSA increase for Social Services in 2002/03 agreed in SR2000 was intended to cover the impact upon local authorities of full cost recovery in setting inspection fees, the introduction of which has now been deferred. This means potentially:

- a bigger transfer from SSA than will be matched by reductions in local authority budgets for registration and inspection

- that 0.4% of the planned 5.4% increase in the Social Services SSA will be transferred to the NCSC to supplement the SSA transfer.

10.7 The other major announcement over the summer concerns the Government's plans for extending the introduction of local Public Service Agreements (PSAs) across all unitary and upper tier local authorities over the next two years. The County Council is negotiating with a view to entering into a PSA commencing on 1 April 2002. There is some accompanying pump-priming grant and unsupported credit approval available to support one-off investment required to improve services and criteria have been developed against which to assess potential calls on these resources. However, apart from the scope to make use of these one-off funding sources, it will be important to ensure that any proposals being put forward in the PSA are consistent with the budget strategy.

Budget forecast

10.8 A projected budget for 2002/03 was reported to Policy and Resources Committee in February. This was based on a continuation of 2001/02's budget strategy, and assumed:

· inflation at 3% for pay and 2.5% for price increases

· continued passporting of Education and Social Services SSA cash increases

· allowance for base budget changes, in particular for the impact of new waste management infrastructure, volume and landfill tax increases and for capital financing costs

· no other service developments were allowed for, or any additional costs arising from job evaluation or the 2001 actuarial revaluation of the local government pension fund

· that future function changes would have a neutral impact

· Hampshire's SSA increase would increase in line with the national increase in control totals.

10.9 Based on these assumptions, spending was projected to increase by £2.3m more than the increase in SSA, implying an increase in council tax of around 7%.

10.10 The base budget assumptions underlying the projection will be reviewed during the course of the autumn and the inflation assumptions also need to be reviewed. Firm decisions on the provision for future inflation do not need to be taken until December, but for planning purposes it is recommended that the pay assumptions would need amending on the following lines:

· given the recent pattern of teachers' pay settlements, the Government's objective of increasing the number of teachers and current problems of recruitment and retention, it is proposed that allowance be made above the initial assumption for a national settlement more in line with recent settlements

· to provide scope to improve the retention and recruitment of staff and to introduce a new pay strategy, some additional resources will need to be allocated to narrow the gap between pay levels in the County Council and the relevant benchmark median. It is therefore proposed that provision be made for pay increases slightly above the anticipated national settlements in 2002.

10.11 The effect of changing the pay assumptions will increase costs in 2002/03, but the majority of this increase relates to Education and Social Services, and will be met within the proposed "passported" budget increase for those services.

Conclusions and next steps

10.12 It is now less likely that the County Council's share of SSA will remain unchanged in 2002/03, particularly taking into account the possible impact of function changes. Potentially both Education and Social Services SSA increases may be more constrained than previously assumed. The revised inflation assumptions take the forecast budget increase to £2.8m more than the projected SSA increase. Coincidentally this is equivalent to about 1% on the council tax for 2002/03.

10.13 Decisions on setting budget guidelines for 2002/03 need to await the firming up of the base budget assumptions and clarification of the Government's intentions on various issues, most of which will emerge by the time of the revenue support grant consultation, expected in late November.

10.14 In the meantime, the Cabinet is requested to endorse the planning assumptions in paragraphs 4.8 to 4.10, as the basis for informal discussions between Executive members and chief officers on pressures and options for setting budgets in 2002/03.

10.15 This budget forecast still remains very tight. There remain a number of other issues to address, even apart from other budget pressures or service aspirations. These include:

· the need to make savings or budget for continuing spending of £1.5m currently funded from balances

· a requirement to consider increasing balances further to guard against both the possible impact of recession and current uncertainties since 11 September on public spending plans, as well as possibly adverse distributional impacts on Government grant support in 2003/04 when changes in Education funding and other SSA formula alterations are introduced

· the potential cost of job evaluation requiring transitional protection - based on experience elsewhere an amount of £5m for the County Council would not be unreasonable

· continued Government shortfalls in the funding for the demand pressures on Social Services, exacerbated by the unreasonable asumptions being made on function changes

· a possible increase in the employer's contribution to the local government pension scheme because of falling market values. A 10% increase in employer's contribution would cost over £1m - provisional results will be available in December.

10.16 If additional funding is required to deal with all these issues, the potential council tax increase would be about 9.5%. A more likely current prognosis is a likely council tax increase of between 8 and 9% for the County Council, assuming that the Cabinet does not wish to consider either significant cuts in some services or adding further resources for other new service developments. Other county councils are forecasting even higher council tax increases at this stage - some as high as 13 to 14%.

10.17 The current round of budget meetings between the Leader and Executive members will in any event not only identify

· any changes in the base budget; and

· pressures that have not been absorbed in the base budget and other additional service development pressures

but also

· options for meeting spending pressures within the existing base budget by redeploying resources, by cash-backed efficiency savings or by increasing fees and charges by more than inflation. In addition for Education and Social Services, a passported increase would also provide some scope for growth in spending, albeit largely prescribed by demand pressures and Government prescriptions

· in addition to any cash-backed efficiency savings, efficiency improvements resulting from absorbing cost increases or achieving a better outcome at the same cost, will need to be identified in the budget. The requirement to demonstrate annual efficiency improvements of at least 2% is likely to be a feature of all PSA agreements with the Government, though the approach to measurement is still uncertain.

10.18 It would be fair to say that pressures are more likely to be identified than opportunities for increased income or efficiency savings or reductions in spending.

Budget consultation

10.19 A question on council tax levels relative to the national spending plans and the County Council's budget forecast has been included in the first questionnaire to the Citizens Panel. This will seek responses to spending 1% above or 1% below 8% which is the current assumed level of council tax commensurate with the existing budget strategy. Respondents will then be asked to choose from a list of services which they would prefer the County Council to spend more or less on.

10.20 Wide and extensive budget consultations in support of the County Council's budget strategy are an essential ingredient in demonstrating to Government that the Hampshire community has been listened to in setting budget and council tax levels.

10.21 The response from the Citizens Panel can be considered when setting budget guidelines, together with further meetings with business interests, Hampshire MPs and the voluntary sector. It is suggested that this is followed by a further MORI telephone survey in January 2002 and the usual round of formal budget consultations with: heads, teachers, governors and parents; business; council tax payers and residents' associations; unions; and the voluntary sector as in previous years during February 2002.

Recommendations

1 To approve the proposals for

· formatting the budget (paragraphs 2.2 and 2.3)

· decision-making on the budget (paragraphs 2.4 to 2.6)

· future budget monitoring (paragraph 2.7 and 2.8). .

1 To note the current position in 2001/02 and to review the impact of spending pressures in the current year in conjunction with setting budget guidelines for 2002/03 in December.

2 To endorse the planning assumptions set out in paragraphs 4.8 to 4.10 as the basis of the budget planning strategy for 2002/03.

3 To endorse the proposals for budget consultation (paragraphs 4.19 - 4.21).

4 To receive a further report on 17 December setting out the details of the 2002/03 provisional RSG settlement and budget guidelines following consultation with the Leader.

rjp2538

Section 100 D - Local Government Act 1972 - background papers

The following documents disclose facts or matters on which this report, or an important part of it, is based and has been relied upon to a material extent in the preparation of this report.

NB the list excludes:

3. Published works.

4. Documents which disclose exempt or confidential information as defined in the Act.

TITLE FILE