Contact: Jon Pittam, ext 7400

1. Summary

1.1 The accompanying report sets the scene for decisions on the 2002/03 revenue budget and council tax, based on the budget guidelines approved on 17 December 2001. It also takes account of subsequent developments and proposes additions to the budget guidelines to meet the pressures identified in the development of the budget by the Cabinet.

1.2 The following decisions are sought, based upon the recommendations of the Leader and Cabinet to the County Council for the 2002/03 budget and council tax:

1 That the base budget (table 1 and Appendix 2) be approved

2 That committees' plans to carry forward savings from 2001/02 (table 2 and Appendix 3) be approved

3 That the passported SSA increases of 5.4% for Education and 5.3% for Social Services, together with the other additional allocations agreed in the budget guidelines (table 3) be confirmed

4 That the allocation of central passported SSA amounts for Education and Social Services of £750,000 in 2002/03 and £525,000 continued in the base from 2001/02 be approved

5 That the additional growth proposals from Executive members, met by the redeployment of resources within the budget guidelines (table 3 and Appendix 3), be approved

6 That the contingency of £3.0m for the waste management contract be approved

7 That the cash savings of £1.9m and the costs absorbed of £1.9m from efficiency improvements (table 4 and Appendix 4) be approved

8 That the annual review of charges and maximisation of income across services (table 5 and Appendix 5) be approved

9 That additional expenditure of: £2.6m on services; £2.5m to be held in a central contingency for social care market pressures; £2m for a reserve for pay recruitment and retention pressures and for job evaluation; and £3.6m for balances be approved

10 That the underlying estimated level of minimum balances at 1 April 2003 of £6.1m be approved, together with the additional balances of £3.6m to be used during 2002/03 and 2003/04

11 That the revised budget for 2001/02, summarised in Appendix 12, and set out in detail at Appendix 6, be approved

12 That the budget for 2002/03 as summarised in table 16, set out in detail in Appendix 6 and including the additions in paragraph 1.13 of the report be approved

13 That the treasury management strategy for 2002/03 as set out in Appendix 11, be approved

14 That it be a recommendation to Council that

a. the revenue budget for 2002/03 (as set out in the attached draft budget book) be approved

b. the total budget requirement for the general expenses of the County Council for the year beginning 1 April 2002 be £920.514m

c. the County Council's basic council tax for the year beginning 1 April 2002 be £734.67

d. the County Council's council tax for the year beginning 1 April 2002 for properties in each tax band be:

	£
Band A	489.78
Band B	571.41
Band C	653.04
Band D	734.67
Band E	897.93
Band F	1,061.19
Band G	1,224.45
Band H	1,469.34

e. precepts be issued totalling £346,456,391.23 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 overleaf:

	£
Basingstoke and Deane Borough Council	57,151,00
East Hampshire District Council	45,030.34
Eastleigh Borough Council	41,579.60
Fareham Borough Council	40,729.00
Gosport Borough Council	24,904.70
Hart District Council	34,923.80
Havant Borough Council	41,951,00
New Forest District Council	68,577.70
Rushmoor Borough Council	28,876.36
Test Valley Borough Council	43,627.00
Winchester City Council	44,230.47

f. an overall borrowing limit of £360m be set for the year ending 31 March 2003

g. a short-term borrowing limit of £240m be set for the year ending 31 March 2003

h. the proportion of interest payable at rates which can be varied by the lender or by external factors be set at 10% of the inerest payable for the year ending 31 March 2003

i. the County Treasurer be authorised to carry out borrowing transactions within the limits set out in recommendations f, g and h above.

2. Reason

2.1 The full County Council must agree the 2002/03 revenue budget and set the council tax for 2002/03 at its meeting on 21 February 2002. The Leader will present his budget speech and recommendations at that meeting. This report provides the background to those budget decisions and presents the recommendation from the Leader and Cabinet to the County Council.

3. Other options considered and rejected

3.1 Other options are not available as far as process and timetable are concerned, but it is expected that the leaders of the opposition parties will wish to present their own recommendations on the budget and council tax to the County Council as amendments to these proposals.

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

4.1 Not applicable.

5. Dispensation granted by the Standards Committee

5.1 Not applicable.

6. Reason for the matter being dealt with if urgent

6.1 Not applicable.

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

.................................. ...............................

Councillor T K Thornber

Contact: Jon Pittam, ext 7400

1. Introduction

1.1 This report sets the scene for decisions on the 2002/03 revenue budget and council tax, based on the budget guidelines approved on 17 December 2001.

Summary of proposed budget

1.2 The current budget proposals are for a further £11.7m increase in the budget, which results in:

· a budget of £920.5m, which is 6.9% more than the 2001/02 budget

· council tax of £734, which is 7.9% more than in 2001/02, or £1 per week per band D council tax payer

· spending which is £57.3m, or 6.6% above Standard Spending Assessment (SSA), compared with 5.0% in 2001/02.

1.3 Provisional information suggests that both the budget and council tax increases could be in the lower quartile for county councils, a good result from the perspective of having the second lowest increase in standard spending assessment of all county councils.

1.4 The emphasis on "passporting", or setting Education and Social Services budgets which have increased by the 5.4% and 5.3% increases in SSA respectively, in line with the Government's spending plans, inevitably results in both spending and council tax increases which are more than the rate of inflation. The Government has increased its general grant support for the Council by 5.1%, slightly below its 5.4% increase in SSA. As grant support is fixed no matter what the Council budgets, any increase above 5.4% all falls on the income provided by council tax.

1.5 It is possible to have a slightly higher budget increase for a lower council tax rise than predicted when the budget guidelines were set in December. The predicted council tax rise was between 8 and 9% depending upon whether £6m or £9m was added to meet additional pressures. A lower council tax rise of 7.9% is now possible because of a further unexpected increase this year in the surpluses on council tax collection accounts notified by the district councils and because the Government abolished the council tax benefit subsidy limitation scheme in its White Paper published later in December.

Original budget guidelines

1.6 Executive members have put forward service budgets constructed in accordance with the budget strategy and budget guidelines agreed in December 2001 which results in:

· a base budget of £896.2m (an increase of 3.9%) which is the continuation of the current financial policies of the County Council

· an inflation provision which allows 4% for the teachers' pay award, 3% for other pay awards and 2.5% on average for other price changes, including contracted and commissioning costs of bought-in services where pay costs are the main component. An extra 1% for pay and recruitment pressures is set aside in a contingency. However, it is now anticipated that 0.5% of this contingency will be needed to meet a national pay award of around 3.5%

· priority increases over the base budget of

£6.9m for Education (5.4% SSA cash increase)
£2.9m for Social Services (5.3% SSA cash increase)
£750,000 for central support for Education and Social Services

· Education will receive an overall 8% cash increase compared with the 2001/02 budget, taking into account additional Government grants from the standards fund and direct grants to schools

· Social Services will in addition receive a further £24m cash increase in specific grants, but this reduces to only £9.5m after the adjustment for function transfers, and to just £2.5m after allowing for new Government priorities

· no cuts in services but an overall efficiency improvement of £3.8m (0.9%) has been identified from cash-backed efficiency improvements (£1.9m), and other costs absorbed (£1.9m)

· an annual review of charges on all services with increases in most charges at least in line with inflation.

1.7 The budget guidelines were set at £908.8m, a 5.6% increase in spending over 2001/02. It was estimated that a council tax increase of just over 6% would result but that was subject to confirmation of the council tax base and collection fund assumptions, final budget details and decisions about the use of balances.

1.8 It was agreed that the Council's priorities and the views of Executive members and services in preparing their budgets within the proposed guidelines, could be taken into account when recommending the budget to the County Council at this meeting. There is no pre-announced capping limit and the Council could still vary its spending and council tax decisions.

1.9 In December the Cabinet also considered adding between £6m and £9m to the guidelines to meet additional pressures which would increase the budget by 6.3% and 6.6% respectively. Council tax rises of between 8 and 9% were predicted if the final budget took account of these pressures.

Final RSG settlement

1.10 Details of the final Revenue Support Grant (RSG) settlement were announced on 28 January 2001. Despite representations about the continued underfunding of Social Services and the unfairness of the Education SSA adjustment for the transfer of funding for school sixth forms, as expected, the Government has made no substantive changes in the final settlement.

Other developments

1.11 The teachers' pay award has been announced with an overall increase of 3.5% but with a total cost of around 4% in 2002/03 (because of the shortening of the main pay scale), broadly in line with the assumption in the budget guidelines.

Additions to budget guidelines

1.12 It is now proposed to add £11.7m (1.3%) above the budget guidelines and set a budget at £920.5m which is a 6.9% increase.

1.13 The changes are:

	£'000	£'000
Education
· additional behavioural intervention centres		380
Environment
· enhancement of the country towns initiative	100
· new community transport initiatives	100
· school crossing patrols	50
· additional landscape and countryside costs after the restructure of Recreation and Heritage	33 -----	283

Policy and Resources
· additional staffing for community strategy	95
· completion of members' IT requirements	65
· increase in number of editions of Hampshire Now from 2 to 3	95
· additional resources for grants to include: pump priming local strategic partnerships; community strategy; golden jubilee events; and bursaries for disadvantaged and talented young sportsmen and women	200
· other pressures	20 -----	475
Recreation and Heritage
· additional provision for rights of way arising from the Countryside and Rights of Way Act	185
· additional provision for the staffing and fitting out of new libraries, for library community use, E-government facilities and to enhance the book fund	230
· one-off support to Gosport museum	10	425
	-----
Social Services
· addition over passported SSA cash increase to meet demand pressures		1,000 -------
Addition to service cash limits		2,563
Social Services
· central contingency for validated price increases arising in the social care market		2,500
Fire
· increase in levy over and above the base budget		1,037
Pay, recruitment, retention and job evaluation reserves
· contribution to a reserve equivalent to 0.5% on pay for recruitment and retention pressures		1,100
· initial contribution to a reserve for the costs of job evaluation		900
Contribution to reserves
· to contribute to £15m of external factors creating potential liabilities arising from remedial works at landfill sites, potential landfill tax claims, storage of fridges, VAT on mileage expenses, increase in pensions costs in 2003/04, and other possible pressures, together with the need to establish a transitional reserve against the potential loss of area cost adjustment with the introduction of a new Government funding system in 2003/04 Total additional spending and contribution to reserves		3,600 -------- 11,700 --------

Balances

1.14 The budget guidelines assumed the minimum prudent level (0.6%) of balances of £6.1m at 31 March 2002. The proposed budget increases balances by £3.6m. A proportion of this may be required during 2002/03 to meet some of the potential events, but most will be required in advance of the changes expected in 2003/04, to avoid not only balances reducing below the prudent minimum level agreed but also service reductions which may otherwise result.

Earmarked reserves

1.15 Schools' reserves were £24.9m (6.2% of the schools' budget) at 31 March 2001. Other earmarked reserves were £38m on 31 March 2001 but, despite the proposed increase in reserves proposed in the 2002/03 budget, are projected to fall to £16.8m by 31 March 2003.

Council tax

1.16 The Government has abolished the council tax benefit subsidy limitation scheme which is equivalent to a 0.5% reduction in council tax. District councils reported surpluses on collection fund accounts of £3.1m in 2001/02 despite a downward trend in surpluses over the previous two years. It had been assumed in setting budget guidelines that there would be a neutral position on the collection fund for 2002/03. However, the surplus now reported is even higher than in 2001/02 and the net taxbase is also slightly higher than forecast.

1.17 Council tax for the average Band D dwelling would be £734.67, or about £1 per week more than in 2001/02.

Budget consultation

1.18 No further rounds of budget consultation have been carried out this year following the telephone survey in January 2001, the MORI surveys and the results of the Citizens Panel in December 2001, which had majority support for a council tax rise of around 8%.

1.19 The second round of consultation meetings with business, council tax payers, the voluntary organisations and the workforce will be held before the Cabinet meeting.

Conclusion

1.20 There are still some uncertainties in the budget. Additional flexibility on balances and contingencies is necessary given potential liabilities not specifically budgeted for at this stage and the change in the grant system in 2003/04.

1.21 A three year financial forecast is very difficult against this background of a possible detrimental change in the funding system. The government's current spending plans also only extend to 2003/04 and it is not possible to project the Council's financial position beyond that year in a meaningful way. For 2003/04, assuming in addition the continued passporting of the Education (within the new Education funding system) and Social Services cash increases, there is a projected gap of about £6m between this budget level (before meeting any budget pressures or changes in the financing system) compared with the likely increase in SSA. So budget decisions for 2002/03 must have regard to the potentially difficult position in 2003/04.

1.22 For 2002/03 final decisions are still awaited on flood protection precepts and the Fire levy. The County Council, Portsmouth and Southampton City Councils have all asked the Hampshire Fire and Rescue Authority not to increase its levy beyond its base budget. This budget assumes that the Authority will confirm its indicative 8% budget increase.

Detailed report and appendices

1.23 The rest of the report presents the analysis and detailed information supporting the summary and recommendations on pages 1 - 4.

2. Background

2.1 The Cabinet on 17 December 2001 agreed its budget strategy and budget guidelines and determined that

· service budgets be prepared in consultation with executive members within budget guidelines as set out in the report for consideration by policy review committees

· executive members approve service budgets within the budget guidelines for submission to the Leader and Cabinet

· the Education executive member reports back on the achievement of the targets for delegation to schools set out by the Secretary of State for Education and on the extent to which additional specific grants support service levels at schools and for the service as a whole

· the Social Care executive member reports back on the extent to which specific grants are used to assist or improve service levels, the impact of changes in function, and the extent to which other pressures and demands can be absorbed within the adjusted 5.3% passported cash increase

· all executive members identify efficiency improvements achieved in absorbing pressures and costs within the budget guidelines

· all executive members report back on their annual review of charges and maximisation of income

· Hampshire Fire and Rescue Authority be asked to reconsider its proposed budget increase of 8% and attempt to bring its increase more in line with the 5.2% cash increase in the standard spending assessment for Fire

· strong concern be expressed that 8% should be the maximum increase in the Fire levy

· the usual round of budget consultation meetings be arranged in February

· further consideration be given by the Leader to the use of a community workshop and/or a representative public telephone survey to consider budget priorities and possible levels of budget and council tax increase.

3. Revenue support grant (RSG) 2002/03

3.1 A letter was sent, signed by all three group leaders, making representations about the provisional revenue support grant settlement. There has been no reply to this letter and no substantive recognition of the issues raised in the final RSG announcement on 28 January 2002.

3.2 The representations made are set out in detail in paragraph 7 of Appendix 1 and in summary were:

· the continued underfunding of Social Services

· the large rise in the proportion of funding that is ring-fenced specific grant

· the adjustment for the transfer of sixth forms in schools to the Learning and Skills Council, and the unfairness of the way the Education SSA has been distributed

· the increase in liabilities flowing from Social Services specific grant

· the size and distribution of these grants

· the inadequacy of the provision in the SSA for environmental, protective and cultural services.

3.3 The County Council's final settlement is virtually unchanged, apart from a small increase in the capital financing SSA. As Education and Social Services form a very high proportion of the overall budget, it is inevitable that the council tax rise will be much more than inflation in order to passport the cash increases in SSA for Education and Social Services. In addition to the Government's spending plans, the Council also needs to pick up the bill for the lack of recognition in the settlement for the underfunding of Social Services. Having made clear representations about this issue, it is unlikely that the Minister would be able to criticise, let alone consider calling-in or capping, the Council for a high council tax rise as a result of the underfunding all falling on the income raised from council tax payers.

3.4 Details of the settlement are set out in Appendix 1. The main points are:

· SSA of £863.2m, a 5.4% increase

· the second lowest increase of all county councils, mainly because of the disadvantageous adjustment for school sixth forms

· council tax now accounts for 33.9% of the County Council's income for standard spending

· the increase in Government grant support from RSG and business rates is 5.1%, just below the increase in SSA

· the Government has abolished the council tax benefit subsidy limitation scheme and this is equivalent to a 0.5% reduction in the council tax.

4. 2002/03 budget guidelines

4.1 Executive members have put forward service budgets constructed in accordance with the budget strategy and budget guidelines as required.

Base budget and inflation

4.2 The base budget for services is £896.2m, an increase of 3.9%. This represents the continuation of the current financial policies of the County Council.

4.3 Details of the construction of the base budget, for services and for other budgets are set out in Appendix 2. The details of significant variations in service spending are contained in Annexes 1 to 5 of Appendix 2.

4.4 Future inflation and contingency assumptions are based on the guidelines and include:

· 4% for teachers' pay, 3% for other pay together with a contingency for recruitment and retention pressures to ensure services continue to be delivered

· 2.5% for non-pay inflation, but recognising that most contracted and commissioned services have pay as the main component. Upward pressure on costs much higher than 2.5% is being experienced across all the Council's services from bus contracts to the social care residential market

· reduction in interest rates

· increase in the employers' contribution to both the teachers and local government pension schemes, which is the result of the falls in the market value of investments and the increase in liabilities from pensioners living longer than previous actuarial assumptions

· reduction in national insurance contributions

· contingency for future commitments from the waste management contract which covers agreed price increases, volume increases, landfill tax rises and increased infrastructure costs.

4.5 Uniquely this year, the teachers' pay award from April has been announced before the end of January. The increase is 3.5% but with an estimated total cost of 4.1% in 2002/03, mainly because of the shortening of the main pay scale. This is broadly in line with the assumption of 4% for teachers' pay. No further action is recommended because the Government has not increased its share of support and there is more than sufficient growth remaining in the passported SSA increase to schools to cover the marginal extra cost.

4.6 However, this settlement, and others in the public sector which are experiencing similar recruitment and retention difficulties, suggest that the 3% pay assumptions for other pay awards is too low. It is recommended that 3.5% should now be assumed for the national pay award, but this reduces the contingency previously set aside to meet recruitment and retention pressures.

4.7 The overall base budget for services would be about £896m, an increase of 3.9%.

Table 1 - 2002/03 base budgets
	Total £m	Increase %
Education	556.8	4.0
Environment	73.5	5.6
Policy and Resources	38.5	2.2
Recreation and Heritage	25.4	3.3
Social Services	202.1	3.3
	-------	-------
Service cash-limited budgets	896.2 -------	3.9 -------
Fire levy	37.9	7.4
Flood protection levies	5.0	11.2
Magistrates' Courts	9.9	8.6
Capital financing charges	26.7	6.5
Revenue contributions to capital	25.4	3.7
Specific grants	-112.4	-
Inflation, central contingency and other budgets	9.5 -------	- -----
	898.2	4.3
	-------	-----

4.8 This is £4.1m more than the provisional base budget mainly because of additional spending on Education and Social Services financed by specific grants. The variations on other budgets are explained in Appendix 2, but there are no underlying changes in policy.

Carry forward of savings from 2001/02

4.9 Education and Environment have identified potential savings in 2001/02 and requested that these be carried forward in full to meet identified pressures in 2002/03, in addition to their budget guidelines.

4.10 The policy is to allow only 50% of unplanned savings to be returned to services. Although these savings are being projected now, they arise from slippage, contingency sums no longer required and other changes. However, it is recommended that they should be carried forward in full to 2002/03 to ease the pressure on resources otherwise required in excess of the budget guidelines. The savings and their proposed use are shown in Appendix 3, and the amounts are summarised below:

Table 2 - Proposed savings from 2001/02 to be carried forward and used to meet additional pressures in 2002/03
	£'000
Education	651
Environment	642
	-------
	1,293 -------

Passported cash increases

4.11 The agreed budget strategy was to passport the SSA increases of 5.4% for Education and 5.3% for Social Services in addition to the base budget. This results in priority increases of:

· £6.9m for Education

· £2.9m for Social Services

· £750,000 for central support for Education and Social Services.

4.12 Central support for Education and Social Services is contained within Policy and Resources cash limit and revenue contributions to capital but has to be allocated within the overall passporting of cash increases to these services. The principal components are for repairs and maintenance of buildings including financing of capital repairs. The cash increases are more than the base budget increase and £750,000 is available for allocation in support of Education and Social Services. It is recommended that it be used to meet:

	£'000
· additional inflation on repairs and maintenance	200
· corporate contribution to the redevelopment of St Bede School	200
· training and support for the Enterprise project (SAP systems) in schools, Education and Social Services	350 -------
	750 -------

4.13 There is a further £500,000 in the base budget for Policy and Resources for the amounts passported in 2001/02 for one-off help for storm damage and the temporary relocation of St Bede school. Use of this amount in 2002/03 for St Bede will provide a corporate revenue contribution of £700,000 which is proposed to be matched by a similar contribution from capital repairs. This leaves the Education capital programme to find a one-third share towards the cost of the flood-proof, refurbished permanent school. It is anticipated that this should be feasible from the extra resources available within the Education capital programme as set out in the accompanying report. Inflation on the 2001/02 amount is worth £25,000 and it is proposed that this be used to meet the additional cost of supporting Education appeals within the Chief Executive's department.

4.14 Other services, with the exception of the contingency for additional waste management costs, were expected to absorb all other pressures.

4.15 The contingency set aside for waste management is £3m, and its components are shown in Table 8 of Appendix 2.

Redeployment of resources

4.16 Executive members have also identified some additional growth proposals by the redeployment of resources and from additional income, within the budget guidelines, as well as the use of planned savings, and these are also set out in Appendix 3.

4.17 Budget guidelines provide for additional spending above the base budget for passported SSA cash increases as follows:

Table 3 - Additional spending proposals in 2002/03
	Budget guidelines
	£'000	%
Education	6,903	1.4
Social Services	2,925 --------	1.8 ----
	9,831 --------	1.3 ----

Efficiency improvements

4.18 No cuts in services have been made but an overall efficiency improvement of £3.8m (0.9%) has been achieved. This results from cash-backed savings (£1.9m) which are available to support additional spending and other costs absorbed (£1.9m), mainly from pay increments, as follows:

Table 4 - Efficiency improvements
	Costs absorbed	Cash-backed savings
	£'000	£'000
Education	57	385
Environment	776	-
Policy and Resources	325	-
Recreation and Heritage	462	-
Social Services	320	1,500
	-------	-------
	1,940	1,885
	-------	-------

4.19 Details are shown in Appendix 4.

Annual review of income

4.20 Fees and charges have been raised at least in line with the non-pay inflation assumption of 2.5% where there is scope to do so. Recreation and Heritage have increased charges further to achieve an extra £43,000 for redeployment. Details of income reviews and charges made are set out in Appendix 5, and in summary below:

Table 5 - Summary of income from fees and charges
	Mandatory charges £'000	Discretionary charges £'000	Total £'000
Education	1,954	8,165	10,119
Environment	103	4,759	4,862
Policy and Resources	550	5,366	5,916
Recreation and Heritage	-	6,237	6,237
Social Services	35,000	8,512	43,512
	--------	--------	--------
	37,607	33,039	70,646
	--------	--------	--------

4.21 The provisional service budget guidelines were set at £914.2m, a 5.1% increase in spending over 2001/02

4.22 The net effect of all these changes produces the following increases in service cash limits within the budget guidelines:

Table 6 - 2002/03 service budget guidelines
	Total £m	Increase %
Education	571.2	5.4
Environment	74.1	5.6
Policy and Resources	38.5	2.2
Recreation and Heritage	25.4	3.3
Social Services	205.0	5.1
	-------	-------
Service cash-limited budgets	914.2	5.1
	-------	-------

4.23 The overall position, adding on other budgets and compared with SSA, can be summarised as follows:

Table 7 - 2002/03 overall budget guidelines
	Total £m	Increase %
Service cash-limited budgets	914.2	5.1
Other budgets	-5.4	9.2
	-------	-------
Budget guidelines	908.8	5.6
SSA	863.2	5.4
	-------	-------
Budget over SSA	45.6	5.3
	-------	-------

5. Budget projections

5.1 When the guidelines were set, it was estimated that a council tax rise of just over 6% would result, but that was subject to the confirmation of the council tax base and collection fund assumptions, final budget details and decisions about the use of balances.

5.2 There is no scope to withdraw resources from balances which are at the underlying minimum level of £6.1m (0.6% of the budget).

5.3 There is no pre-announced capping limit and the Council can still vary its spending and council tax decisions to take account of service pressures or new priorities, balancing budget increases against the resulting council tax rise.

5.4 The Cabinet considered adding between £6m to £9m to the guidelines to meet additional pressures which would increase the budget by 6.3% and 6.6% respectively. Council tax rises of between 8 and 9% were predicted if the final budget took account of these pressures which included:

· additional Fire levy beyond the level of the Fire base budget and Fire SSA increases which were coincidentally 5.1% and 5.2%

· underfunding of Social Services, if no additional Government support was forthcoming

· the impact of the disadvantageous Education SSA adjustment for the transfer of the funding of school sixth form pupils from the Council to the Learning and Skills Council

· pressures on all services

· continued pressures of vacancies and staff turnover on the delivery of services and the need to provide resources for the pay and benefits strategy in addition to the initial contingency included in the inflation assumptions to improve the recruitment and retention of staff

· £4m financing gap in the existing capital programme

· known increases in the employers' contribution rate from the actuarial valuation of the statutory local government pension scheme - these increases are being phased-in over three years to reduce the impact in 2002/03

· potential loss of resources, particularly from the reduction or removal of the area cost adjustment for the additional cost of providing services in the south east, when the new funding system is introduced in 2003/04.

6. Education

6.1 The passported SSA cash increase of 5.4% for Education is £25.8m. Of this amount £18.8m is required for inflation, including the 4% teachers' pay award assumption and £0.2m for other increases in the base budget. Savings of £651,000 carried forward from 2001/02 has left £7.4m for new budget pressures and growth which has been allocated as follows:

Table 8 - Use of real-terms change in Education passported SSA cash increase
	£m
· additional costs on home to school transport, special educational needs, etc	1.7
· new requirements for education otherwise than at school	0.3
· County Council contribution to standards fund	2.7
· Education development plan priorities	1.2
· schools' delegated budgets	1.5 -----
	7.4	(1.6 %)
	-----

6.2 The budget for schools has been increased by 4.8% in overall cash terms.

6.3 The overall cash increase compared with the original 2001/02 budget, including specific grants, can be summarised as follows:

Table 9 - Overall cash increases in schools' and Education budgets
	County Council budget		Government grants		Total
	£m	%	£m	%	£m	%
Schools (including devolved standards fund)	19.2	4.8	7.7	18.9	26.9	6.2
Other budgets	6.6	8.3	9.4	79.3	16.0	17.5
	-------	-----	-------	-----	-------	-----
Total	25.8	5.4	17.1	32.5	42.9	8.1
	-------	-----	-------	-----	-------	-----

6.4 Schools can therefore expect an overall cash increase of 6.2% compared with the starting point of the 2001/02 budget. This follows an equivalent increase of 11.1% in 2001/02 and 8.8% in 2000/01.

6.5 The teachers' pay award is now known at 4.1%, broadly in line with the 4% assumed and can be met by schools within the additional growth available within the passported cash increase.

6.6 The Education executive member was asked to report back on the achievement of the targets for delegation to schools set out by the Secretary of State for Education and on the extent to which additional specific grants support service levels at schools and for the service as a whole.

6.7 The passported cash increase and the delegation from April 2002 of £7.7m to schools for insurance, meals, maternity and the school library service will achieve 87.3% delegation against a target for 2002/03 of 87%. The amount delegated in 2001/02 was 86.3%. Other targets met are:

· £44 per pupil budgeted on central administration compared with the target of £60

· achievement of the 2.5% increase in each age weighted pupil unit.

6.8 This year the Secretary of State wrote late in January urging local education authorities to make sure that the additional provision made available by the Government for the education service in 2002/03 is actually spent on education. This has been achieved. The letter goes on to say that authorities are also expected to continue to protect and develop personal social services to support an integrated approach to tackling disadvantage. Again this is recognised in the overall budget strategy.

6.9 As a further recognition of this integration, it is proposed to add £380,000 to the guidelines to provide for two additional behavioural intervention support teams to pre-empt exclusions from school. It is envisaged that these will be located in the next most relatively deprived school areas and in support of the County Council's local public service agreement to raise standards and performance in educational achievement.

6.10 Additional grant support for schools and Education can be summarised as follows:

Table 10 - Additional specific grant support for Education
	2001/02 £m	2002/03 £m	Increase %
Standards fund	23.3	30.4	31
Direct funds to schools	12.5	15.0	20
Early years and childcare	2.1	5.7	172
Nursery education	5.7	10.2	78
Teachers' pay reform and other grants	9.1	8.5	-6
	-----	-----	-----
	52.7	69.8	32
	-----	-----	-----

6.11 These are significant increases which are for new, albeit prescribed, purposes to meet the Government's spending priorities through its allocation of specific and special grants.

7. Environment

7.1 £892,000 of additional costs and pressures have been met by the carry forward of £642,000 savings to be achieved in 2001/02 and redeployment of the balance within the base budget.

7.2 However, the budget will result in a £400,000 shortfall if all the existing bus subsidy commitments are to be supported. These extra costs arise from very high price rises from bus companies on re-tendering. The position is being monitored. An action plan has been produced as the result of the Best Value review of public transport to include a strategic review and needs assessment of the subsidised bus network, taking account of the impact of recent public transport initiatives on existing services. In part this review should help to address the funding issue, with resources reallocated and a reduction in some services where necessary. Discussions are also taking place with district councils to establish local strategic partnerships, which would include possible funding contributions towards local bus services. It would be prudent not to commit other new initiatives before ensuring that bus subsidies can be contained within the proposed budget.

7.3 There is no provision made for the storage and safe disposal of refrigerators. Government support so far has been limited to the first quarter of 2002. It is not clear how many refrigerators need to be stored and for how long before they can safely be reprocessed and disposed of. Nor is it certain that full Government funding will be made available to deal with this issue.

7.4 The new initiatives achieved within the budget guidelines are set out in Appendix 3. It is now proposed to make further additions to the guidelines as follows:

· another £100,000 for revenue contributions to capital for the Hampshire Country Towns Initiative to match £100,000 set aside within the redeployment proposals and in addition to £100,000 provided in the 2001/02 budget

· £100,000 to match similarly £100,000 provided in the redeployment proposals to fund community transport initiatives

· £50,000 on a one-off basis to carry out a review into school crossing patrols to ensure safe and consistent provision

· £33,000 to reflect the additional landscape and countryside costs falling back on the Planning budget following the management restructure of Recreation and Heritage.

8. Policy and Resources

8.1 There was no scope for additional pressures in the budget guidelines and no redeployment of resources has been made. The use of the additional resources in excess of inflation on its share of the passported cash increase for Education and Social Services has been dealt with in paragraph 4.12.

8.2 It is now proposed to make the following additions to the guidelines:

· £65,000 for continued funding of posts to support the development of the community strategy, originally included in the 2001/02 budget on a one-off basis, together with £30,000 for an additional post to support the workload associated with community strategy initiatives

· £65,000 to complete the roll-out of computer laptops to all members, together with the associated training and support

· £95,000 to increase the frequency of publication of Hampshire Now from two to three editions a year in recognition of its initial success in improving communications about the Council with the public.

8.3 In addition, it is also proposed to add £200,000 to the budget for grants to voluntary organisations, increasing the total budget to £504,000. This will be used to provide resources to:

· pump prime the local strategic partnerships

· develop further the community strategy

· support the Queen's golden jubilee

· provide bursaries for disadvantaged and talented young sportsmen and women.

8.4 Some other pressures remain on Policy and Resources including for example: income shortfalls on County Farms and Hilliers; new statutory responsibilities from the Stop Now Order and from Animal Feedstuffs on trading standards. Although it is planned that these costs should be absorbed, a small contingency of £20,000 is set aside to meet some of these other pressures should it prove necessary, which the Leader can allocate as an executive decision.

9. Recreation and Heritage

9.1 Income from charges have been raised by 5%, compared with the 2.5% price inflation assumption. This will generate an additional £43,000 of income which has been redeployed within the budget guidelines as set out in Appendix 3.

9.2 The Government has raised expectations of additional resources being provided within SSA to support the implementation of the Countryside and Rights of Way (CROW) Act. This cannot be established one way or another and there is certainly no room in the effective 2.6% increase in the EPCS SSA block to meet this within budget guidelines. It is therefore proposed to add £185,000 to enable the more immediate requirements of the CROW Act to be met.

9.3 It is also proposed to enhance the libraries budget by a substantial sum of £230,000. This is intended to provide for all future requirements for

· extra staffing and fitting-out costs arising from new libraries

· staff training

· development of new community and E-Government facilities in libraries

· small enhancement to the book fund.

9.4 Additional support of £10,000 for 2002/03 only is proposed to assist Gosport Museum.

10. Social Services

10.1 The Government has now made a more realistic presentational adjustment for the transfer to the National Care Standards Council (NCSC). The provisional SSA increase was 6.0%. It is now 5.6%. The effective increase is 5.3%, because the Council was spending less than assumed in the transfer to NCSC. The passported SSA cash increase of 5.3% is higher than the national average of 4.9%, because of a faster rate of growth in the elderly population. Most of the cash increase of £8.1m is required for inflation and for the continuation of services where specific grant has ceased.

10.2 The executive member for social care was asked to report back on the extent to which specific grants are used to assist or improve service levels, the impact of changes in functions and the extent to which other pressures and demands can be absorbed within the adjusted 5.3% passported cash increase.

10.3 There is no recognition in the provisional revenue support grant settlement for the continued underfunding of Social Services. The underfunding nationally has developed since the Government's Spending Review 2000 which forms the basis of its grant for 2002/03. These additional pressures cannot be met within the cash increase in the SSA for Social Services because of pay and price pressures and the consequences of the external function changes imposed by the Government.

10.4 The funding position has been made even more difficult by the new guidance issued on charging policies for home care and other non-residential services, without any apparent recognition of the resource implications. Implementation of this guidance is expected to result in a loss of income of around £1m in 2002/03 and £2m in a full year. It is assumed that charges will be increased to compensate for this loss.

10.5 The pressure on resources is not a surprise. Between 1993 and 2004, central Government has, or will have, transferred several functions to local government: community care; preserved rights; residential allowances; and supported housing costs. Each of these has been a transfer from cyclical (non-cash-limited) Government spending to cash-limited local government budgets. In transferring these functions, the Government has taken much of the risk out of its own budgeting and given local authorities the impossible task of funding demand-led costs from cash-limited budgets.

10.6 There remain a number of budget pressures which are in practice unavoidable. These fall into three main categories:

· further inflationary pressures due to market factors. These are care purchases for which Council has some discretion, but cannot realistically avoid increases beyond the corporately assumed inflation level of 2.5% if sufficient care is to be purchased in the market

· known increases in demand, especially where young people with disabilities reach 18; they then require funding in adult placements, whilst the next generation of children require funding in children's services

· costs of implementing new legislative requirements.

10.7 The only funding available to meet these pressures is in efficiency improvements of £1.5m mainly from the application of transitional housing benefit and a reduction in the more expensive placements for looked after children.

10.8 The efficiency improvements and the passported SSA cash increase are just sufficient to allow for these pressures, other than the additional inflationary pressures, but only at the most optimistic estimates of the levels of spend needed.

10.9 After inflation, £4.4m is available within the £8.1m passported cash increase to meet pressures and changes. Details are shown in Appendix 3 but this sum has been used as follows:

Table 11 - Use of real-terms change in Social Services passported SSA cash increase
	£m
· continuation of services provided by using the promoting independence grant, now withdrawn	2.7
· services for children with learning or physical disabilities moving into adulthood	1.2
· other growth proposals	0.5 -----
	4.4 -----

10.10 The position on specific grants can be summarised as follows:

Table 12 - Additional specific grant support for Social Services
	Total	Variation
	£m	£m	%
· promoting independence	3.0	-2.7	-47
· children's services	6.4	2.2	53
· building care capacity	5.2	5.2	100
· mental health	2.4	-	-
· preserved rights	13.5	13.5	100
· other grants	8.5	5.8	215
	-----	-----	-----
	39.0	24.0	159
	-----	-----	-----

10.11 The net increase of £24m in specific grants is substantial compared with £15m received in 2001/02.

10.12 The largest new grant is for preserved rights, that is people in residential care before 1993 when community care began. About 50% of these people are under 65, so the cost of care will continue for a long time and may become increasingly more expensive. It is difficult to predict in advance the exact impact of this transfer which could lead to pressures in future year.

10.13 The building care capacity grant should help relieve the pressure on bed-blocking in hospitals, but does not help with the Council's own demand-led pressures for care of the elderly.

10.14 The increase in grant on children's services will be beneficial (though mostly linked to revised funding arrangements for care leavers) and other grants include new grants for asylum seekers, residential allowance (another transfer of function) and a performance fund. There is also a significant £1.3m increase in grant aid to the Youth Justice Board. Most of these additions are targeted at either transfer of functions or new developments to meet the Government's priorities.

10.15 It is estimated that after function changes the £24m of extra grants reduces to £9.5m, and within that reduced sum only about £2.5m is available for new growth to assist with the Council's own services and pressures.

10.16 Given the pressures still apparent in these areas and the difficulties at this stage of predicting in full the prices which will have to be paid in the social care market (considerably more than 2.5% assumed in inflation terms) and the demand factors, it is recommended that:

· £1m be added over and above the passported SSA increase on the condition that this is applied in the direct provision of social care to meet demand pressures and that the overall budget remains subject to close continuing budgetary control

· £2.5m be held in a central contingency to be allocated during the year against validated price increases in the social care market (in the same way that a contingency is held for the price element component of the waste management contract).

11. Fire

11.1 The Cabinet agreed at its December meeting to ask the Hampshire Fire and Rescue Authority to

· reconsider its proposed budget increase of 8% and attempt to bring its increase more in line with the 5.2% increase in the SSA for Fire

and also to express strong concern that

· 8% should be the maximum increase in the Fire levy with a maximum full year effect of 9%

and as part of its consultation procedures with constituent authorities the Authority be asked to

· provide a three year budget projection and proposals for efficiency measures in line with the principles of Best Value before starting its 2003/04 budget setting process

11.2 It is understood that a budget increase of 8% is still being recommended, which has a full year effect of 9% in 2002/03 and 10% in 2004/05. This means another £1m is required in 2002/03, with a further increase of £0.8m over the next two years before the roll forward of the 2002/03 Fire budget to 2003/04. The full year growth in the Fire budget is therefore some 5% (10% compared with the base budget increase of 5.1%).

11.3 The 8% cash increase in 2002/03 is on top of a substantial 9.8% cash increase in 2001/02. It takes the Fire budget to 15% over SSA compared with just 3.6% in 1997/98 when the new Authority was set up. Its budget had increased by 47% between 1997/98 and 2001/02 compared with a national increase of just 25%.

11.4 Clearly increases at this level are not sustainable compared with other fire authorities. It is also putting further pressure on the room available for this Council's other services and the level of its council tax increases. The extra £1m in 2002/03 all falls on the council tax and represents an increase of 0.3%.

11.5 The Government's recent White Paper suggests that combined fire authorities should become separate precepting authorities, but this is likely to lead to even more of a burden on the council tax payer if only by the creation of additional reserves and balances the Authority would need to carry if it stood alone. On the other hand the Authority would no longer have the power to set its budget without the direct responsibility of determining the impact on the council tax bill.

11.6 The request for the Authority's three year budget projection and its efficiency proposals should however still be pursued.

12. Pay, recruitment, retention and job evaluation

12.1 The County Council has been experiencing difficulties in recruiting and retaining staff at all levels and across most services. Last year a strategy was adopted to reduce the gap that had developed between the Council's pay and national and local pay surveys and to deal with the longer-term implications for pay, recruitment and retention of all staff. Resources were provided in the 2001/02 budget which allowed for a local pay award for Hampshire management grade staff of 1.5% above the national pay award. It was decided to move towards a more general uplift from the 2002/03 budget onwards. The transition would be more affordable over a period of three to four years if it was contained within the passporting of the SSA cash increases for Education and Social Services. This was achieved in the budget guidelines by assuming 3% for non-teaching pay, but also providing for a contingency within the passported amounts for recruitment and retention pressures.

12.2 The teachers' pay award was assumed to cost 4% in the budget guidelines and this was very close to the final outcome and has been passported to schools. Additional recruitment and retention difficulties for teachers are supported by a Government specific grant of £1.9m in 2002/03 compared with £1.6m when first introduced in 2001/02.

12.3 Other public sector pay awards appear to have been settled between 3.6% and 3.9%. It would therefore be prudent to increase the assumption for the national pay award for non-teaching staff from 3 to 3.5%. This leaves about 0.5% in the contingency held within the passported cash increases for Education and Social Services, and elsewhere within the budget guidelines. The intention was to use the contingency when the national pay award was known as part of the pay and benefits strategy to close the gap on pay generally and to target with market supplements particular hotspots of recruitment. These decisions can be made by the Employment in Hampshire Committee within the funding and policy guidance available within both the budget and the pay and benefits strategy.

12.4 However 0.5% will not provide the same flexibility as originally intended and another £1.1m is proposed to supplement the budget guidelines and bring the contingency back to its intended level.

12.5 In addition the County Council as part of its pay and benefits project will be adopting job evaluation and new pay scales. The impact of this is unlikely to be felt until 2003/04, but the cost of job evaluation typically adds 3 to 4% to the pay bill. Each 1% on non-teaching pay costs £2.3m. It would be prudent to begin creating a reserve for the transitional costs of job evaluation now and a sum of £0.9m is suggested.

13. Other external factors

13.1 The underlying level of balances at 31 March 2002 remains at the minimum prudent level of £6.1m, or 0.6% of the budget. There are now a large number of potential liabilities and external pressures accumulating where the final cost and timing are not precise. Some of these pressures were referred to in December when the need for extra contributions to reserves was first raised. It is not appropriate to budget for all of these events specifically but a general addition to balances is necessary.

13.2 The external factors included:

· potential liabilities of around £2m arising from remedial works at landfill sites. The most pressing is Efford where a supplementary credit approval has been sought for a long period without success

· the long-standing dispute with Customs and Hampshire Waste Service over the liability for VAT of inert material used to line landfill sites, with another potential claim of £2m involved

· storage of refrigerators, if Government support is not forthcoming, potentially around £1.8m in 2002/03

· a recent VAT ruling concerned with mileage expenses which may require £250,000

· the known increase in the employers' contribution to the local government pension fund of £1m extra in each of 2003/04 and 2004/05

· the £4m financing gap in the capital programme which the District Auditor has recommended that the Council should plan to eliminate. It is recommended that this gap be bridged by slippage when possible and by further contributions to the Invest to Save reserve from an anticipated saving from the reduction of interest rates in the current financial year. Nevertheless £2.5m still remains to be bridged during 2003/04 as shown in the accompanying report on the capital programme

· potential overcommitments from existing and future bus contract price rises in excess of the assumed inflation rate of 2.5%. It has been assumed that these costs will be offset by the action suggested in paragraph 7.2. A minimum of £0.4m might be required, rising to £0.6m or more later in 2002/03 if, in the event, a balance needs to be struck between a reduction in services and the level of price increases

· Recreation and Heritage has yet to recover all the income lost during the foot and mouth crisis. £0.2m has been provided for centrally in the revised budget and it has been assumed that Recreation and Heritage will recoup the balance of £0.2m by the year end. If this does not occur, up to another £0.2m may need to be written off.

13.3 These potential liabilities are around £10m.

13.4 In addition, and more fundamentally, provision needs to be made for what looks like a very uncertain situation in 2003/04. This arises from

· the proposed change in the Government's funding system

· the forecast of spending in 2003/04 compared with the likely RSG settlement based on the Government's current spending plans for 2003/04.

13.5 The new funding system has still to be revealed in outline, let alone in detail. The aim is for a new and fairer system, purportedly based more on need and less on past spending. There would be some needs or client based funding amount (a basic entitlement), topped up by additional amounts for deprivation and pay costs. SSA would disappear. There will also be a new funding approach for Education with a schools' budget separated from a local education authority budget.

13.6 The concern for the County Council will be to ensure that the value of the minimum entitlement is as high as possible per population. The costs of providing services in the south east must also be fully recognised, in terms of not only the general labour market but also to cover the contracting for and purchasing of services in the private sector. It would be extremely disadvantageous if the new system just recognised specific pay supplements (for example London weightings for teachers).

13.7 There is yet again a very real threat to the area cost adjustment and the Council will need to campaign against this. If there is only a 10% loss in the area cost adjustment the impact on the County Council could be a loss of grant support of around £5m.

13.8 Assuming both that Government increases its funding for the Council in line with its spending plans for 2003/04 and that the Council continues with its current budget strategy, there is a projected budget which is £6m more than the expected (equivalent) SSA increase in 2003/04.

13.9 Budget decisions for 2002/03 must also have regard to the uncertain outlook for 2003/04. Additional external demands of around £10m, plus perhaps up to another £10m from a change in the funding system have been suggested in paragraphs 13.2 and 13.7. The impact of continued underfunding for Social Services and other services in the Government's spending plans for 2003/04 may also continue.

13.10 This level of uncertainty suggests that additional flexibility on balances and contingencies is necessary. An additional contribution to balances of £3.6m is recommended.

13.11 It is estimated that a proportion of the extra balances may be required during 2002/03 to meet some of the potential events, but most will be required in advance of the changes expected in 2003/04. The alternative is not only balances reducing below the prudent minimum level agreed but also service reductions and even greater rises in council tax in 2003/04 that would otherwise result.

14. Additions to budget guidelines

14.1 It is now proposed to increase spending and to increase reserves and balances by a further £11.7m (1.3%) above the budget guidelines. A budget of £920.5m - a 6.9% increase - would result.

14.2 The increases in spending have been referred to in the previous paragraphs and have been summarised individually in paragraph 1.13.

14.3 The total additions for each budget can be summarised as follows:

Table 13 - Additions to budget guidelines
	£'000
Education	380
Environment	283
Policy and Resources	475
Recreation and Heritage	425
Social Services	1,000 --------
Addition to service cash limits	2,563
Central contingency for Social Services - social care market	2,500
Fire levy	1,037
Pay recruitment and retention reserve	1,100
Job evaluation reserve	900
Balances	3,600 --------
Total additional spending and contribution to reserves and balances	11,700 --------

15. Proposed 2002/03 budget

15.1 Adding the additional growth to the budget guidelines results in proposed cash limits for each service in 2002/03 as follows:

Table 14 - Service budgets
	Total
	£'000
Education	571,621
Environment	74,339
Policy and Resources	39,182
Recreation and Heritage	25,810
Social Services	206,034
	----------
Service cash-limited budgets	916,986
	----------

15.2 Other budgets can be summarised as follows:

Table 15 - Other budgets
	Total
	£'000
Fire levy	38,940
Mandatory student awards	422
Flood protection levies	4,987
Magistrates' Courts	9,945
Capital financing charges	26,749
Revenue contributions to capital	26,526
Specific grants	-119,292
	----------
	-11,723
Inflation and central contingencies
· pay, recruitment and retention	2,240
· interest rates	1,200
· waste management	2,985
· repair and maintenance	1,000
· social care contracts	2,500
· other contingencies	1,043
	--------
	-755
	--------

15.3 Bringing all the budgets together, results in an overall budget requirement as follows:

Table 16 - Budget requirement
	Total
	£'000
Service cash-limited budgets	916,986
Other budgets	-755
	--------
	916,231
Use of reserves and balances
Service underspending	-1,293
Other earmarked reserves	2,104
Balances	3,472
	----------
	920,514
	----------

15.4 The 2002/03 budget requirement is £59.7m or 6.9% higher than 2001/02's budget which can be summarised as follows:

Table 17 - Increase in budget requirement
	Increase
	£m	%
Services
Education	26.2	5.5
Environment	4.2	5.9
Policy and Resources	1.5	4.0
Recreation and Heritage	1.3	5.0
Social Services	11.6	7.3
	------	------
	44.8	5.8
Fire levy	3.7	10.4
Flood protection levies	0.6	11.2
Magistrates' Courts	0.1	8.6
Capital financing charges	1.7	6.5
Revenue contributions to capital	1.5	5.9
Inflation, and balances contingencies, reserves	7.3	-
	------	------
	59.7	6.9
	------	------

15.5 The budget requirement will be met as follows:

Table 18 - Precept
	Total	Increase
	£'000	£'000	%
Revenue support grant	237,616	-2,375	-1.0
National non-domestic rates	332,682	30,259	10.0
Net surplus on collection funds	3,760	653	21.0
Precept	346,456	31,174	9.9
	----------	--------	-----
	920,514	59,711	6.9
	----------	--------	-----

15.6 Based on a taxbase of 471,581 Band D equivalent dwellings this would result in a council tax of £734.67, 7.9% more than 2001/02.

15.7 The overall budget can be compared with SSA blocks as follows, accepting the usual warnings about the dangers of such comparisons, and the approximate allocation of central support services and revenue contributions to capital and contributions to reserves and balances, which have still to be finalised:

Table 19 - 2002/03 budget comparison with SSA
	SSA	Budget	Variation
	£m	£m	£m	%
Education	519.8	526.9	7.1	1.4
Social Services	167.2	178.2	11.0	6.6
Fire	33.8	39.2	5.4	16.0
Highway maintenance	46.3	44.6	-1.7	-3.7
Environmental, protective and cultural services	59.0	103.1	44.1	74.7
Capital financing	37.1	28.5	-8.6	-23.2
	-------	-------	------	-----
Total	863.2	920.5	57.3	6.6
	-------	-------	------	-----

16. Balances

16.1 The 2001/02 budget assumed balances of £6.5m at 31 March 2002. The current projection assumes balances of £6.1m at 1 April 2002, if savings are not made to cover the agreed corporate maximum contribution to the foot and mouth crisis.

16.2 The forecast use of balances from 2001/02 to 2003/04 is as follows:

Table 20 - Forecast use of balances
	£'000
Revenue account balance at 1 April 2001	8,481
Budgeted withdrawal in 2001/02	-2,077
Adjustments with closure of 2000/01 accounts	-328
Addition to balances in 2001/02 revised budgets	128
	--------
	6,204
Use of balances for Dibden Bay inquiry costs in 2002/03	-128
Projected balances at 31 March 2003	6,076
Addition to balances	3,600
Withdrawal from balances in 2002/03 and 2003/04	-3,600
	-------
Balances at 31 March 2004	6,076
	--------

17. Earmarked reserves

17.1 School reserves were £24.9m on 31 March 2001. Other earmarked reserves were £38m at that date, mainly the capital reserve (£19.5m), invest to save, on-street parking and insurance reserves (all around £4m each) and the fire reserve (£2m). These are expected to fall to £34m by 31 March 2002 because of the use of the invest to save and fire reserves. Reserves are projected to fall further during 2002/03 to £16.8m, despite the addition to reserves proposed in the budget.

18. Council tax

18.1 The Government has abolished the council tax benefit subsidy limitation scheme which is equivalent to a 0.5% reduction in council tax. District councils reported surpluses on collection fund accounts of £3.1m in 2001/02 despite a downward trend in surpluses over the previous two years. It had been assumed in setting budget guidelines that there would be a neutral position on the collection fund for 2002/03. However, the surplus now reported is even higher than in 2001/02 and the net taxbase is also slightly higher than forecast.

18.2 The trends in SSA budgets and council tax are as follows:

Table 21 - Trends in council tax
	SSA increase	Budget increase	Council tax increase
	%	%	£
1998/99	2.7	3.9	10.6
1999/00	3.9	5.2	9.4
2000/01	5.2	5.3	5.8
2001/02	5.8	5.9	5.6
2002/03	5.4	6.9	7.9
2003/04 forecast	6.1	6.3	7.0

18.3 Provisional information suggests that for county councils:

· budget increases might range between 6% and 9%, with this Council's increase possibly within the lower quartile and below the average of around 7.5%. Larger increases elsewhere appear to be mainly as the result of overspending in the current year on Social Services and to pick up the cost of Social Services into 2002/03, together with the costs of job evaluation and increased pay costs following the single status agreement

· council tax increases may all exceed 5%, with the majority between 8 and 10%, and with four councils anticipating rises even higher, up to a maximum of 17%. The average increase appears to be around 9%, and Hampshire should therefore be in the lower quartile. This is despite having the second lowest SSA increase of all county councils which might otherwise have been expected to result in one of the highest council tax increases

· county budgets on average appear to be about 7.25% more than SSA, so again Hampshire looks like being below average

· finally the final level of council tax of £734.67 is around the lower quartile.

18.4 Given that council tax bears all the cost of any increase in spending over the cash increase in SSA (and a 33.9% share up to that point), the 7.9% increase in council tax can be explained as follows:

Table 22 - Explanation of council tax increase
	£m	Council tax increase %
Spending in line with cash increase in SSA	14.4	*3.8
Spending above SSA:
Fire levy	2.0	0.6
Underfunding of Social Services	3.5	1.1
Additional costs and growth on other services	4.6	1.4
Contribution to reserves and balances	5.6	1.8
Abolition of council tax benefit subsidy limitation scheme	-1.5	-0.5
Increase in net taxbase and collection fund surplus	-0.7	-0.3
	--------	--------
	27.9	7.9
	--------	--------
* equivalent to 4.5% on council tax at standard spending

19. Forward financial forecast

19.1 It is not possible this year to produce the three year financial forecast which has been introduced in line with the Government's three year spending plans. Forecasts for 2004/05 and 2005/06 are not meaningful until after the Government's next spending plans are produced with the publication of SR2002 in the summer. A further report will be made at that stage.

19.2 It is possible to forecast for 2003/04 using the last year of the current spending plans (which will also become the first year of the SR2002 plan). However, 2003/04 will also be the year in which the Government proposes to change the funding system so the forecast at this stage has to assume the continuation of the existing system.

19.3 The 2003/04 forecast is based on:

· the same inflation assumptions as in 2002/03

· allowance for base budget changes, in particular for the anticipated impact of new waste infrastructure, volumes and landfill tax increases

· continued passporting of the Education and Social Services SSA increases

· possible future function changes have been ignored in both the SSA and budget projection

· no other service developments have been allowed for, or any additional costs

· neutral assumption that Hampshire's SSA increase will match the national increases in both years

· spending is shown net of specific grants because information for future years is incomplete.

19.4 The main changes in spending are summarised in Appendix 8. Spending in 2002/03 is projected to increase by £6m more than SSA. On the basis of an increase in council tax of around 5% for spending in line with SSA, this would imply increases of around 7% for spending at this level. This is before the impact of the potential liabilities identified in this report, or the change in the funding system. However, the position will improve to the extent that it is not necessary to continue to budget for an increase in balances in 2003/04.

19.5 The financial forecast can be summarised as follows:

20. Budget consultation

20.1 No further rounds of budget consultation have been carried out this year following the telephone survey in January 2001, the MORI surveys and the results of the Citizens Panel in December 2001, which had majority support for a council tax rise of around 8%.

20.2 The second round of consultation meetings with business, council tax payers, the voluntary organisations and the workforce will be held before the Cabinet meeting.

21. Treasury management strategy

21.1 The County Council is required to adopt a treasury management strategy for 2002/03 and this is set out in Appendix 11 for approval.

22. Public services agreement

22.1 The pump priming grant of around £2m will be allocated to specific budget heads set out in the local public services agreement. The figures are not currently included but will not affect the overall budget requirement.

23. Revised estimates 2001/02

23.1 There is no formal revised estimate review as budgets are now monitored during the year and changes reported as they occur.

23.2 All services are controlling budgets to their cash limits for 2001/02. Potential savings on Education and Environment have been identified and carried forward to meet pressures in 2002/03. Recreation and Heritage still need to recover the loss of income from the foot and mouth crisis. Social Services has identified a £0.9m budget pressure but expects to control its overall budget within its cash limit.

23.3 On other budgets, after allowing for the carry forward to 2002/03 of the contingency sum for the Dibden Bay inquiry not required in 2001/02 (£0.1m), a saving is projected as a result of the reduction in interest rates. It is proposed to transfer this to the Invest to Save reserve as recommended by the District Auditor, towards the £4m financing gap in the capital programme. This reduces the potential gap to £2.5m in 2003/04 which will allow time to complete the capital financing requirement.

23.4 Variations of spending in 2001/02 are summarised in Appendix 12.

24. Conclusion

24.1 There are still some uncertainties in the budget. Additional flexibility on balances and contingencies is necessary given potential liabilities not specifically budgeted for at this stage and the change in the grant system in 2003/04.

24.2 For 2002/03 final decisions are still awaited on flood protection precepts and the Fire levy. The County Council, Portsmouth and Southampton City Councils have all asked the Hampshire Fire and Rescue Authority not to increase its levy beyond its base budget. Despite this, change looks unlikely and this budget assumes that the Authority will confirm its indicative 8% budget increase.

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:

Published works.

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

TITLE FILE

None

Appendix 2

2002/03 Budget

Construction of base budget

25. Service base budgets (£896.2m)

25.1 At the last meeting of the Cabinet, preliminary service base budget were reported, totalling £892.1m. The final calculation of the base budget totals £896.2m, an increase of £4.1m. The major reason for the increase is additional expenditure on Education (£1.1m) and Social Services (£3.4m) financed by specific and special grants, offset by an increase of £0.2m in the reduction made in the Education budget to reflect the income receivable from the Learning and Skills Council for sixth form pupils in 2002/03.

Inflation to November 2001 prices

25.2 In constructing the base budget at November 2001 prices, services have been restricted to the allocations made in 2001/02, adjusted for the full year effect of pay awards at 3.5%, and of inflation on the waste management contract. In total allowance of £26.7m has been made for inflation between November 2000 and November 2001 made up as follows:

Table 1	£m	£m
Allocations included in 2001/02 original service budgets		23.7
Further allocations made in 2001/02 from central contingency for waste management, pay and recruitment costs and business rates	2.4
Full year effect of 2001/02 pay awards and waste management contract	0.6	3.0
		26.7

25.3 Actual inflation is estimated at £28.7m, or £5.0m more than allowed for in the original 2001/02 budget. After allowing for the additional allocations of £3.0m in the base budget, the excess cost of £2m has been absorbed in the base budget

25.4 A summary of the main factors which account for the actual cost of inflation amounting to £5.0m (0.6%) more than included in 2001/02 original service budgets is as follows:

Pay awards

The original 2001/02 service budgets allowed for the cost of the Teachers' pay award at 3.7% and for other pay awards at 3%. However a contingency sum was included within the budget to allow for pay increases to average 3.5% and for the cost of the Hampshire Management grade award at 5% The value of this contingency sum adjusted for the full year effect of the relevant pay awards was £1.3m and actual pay increases were agreed at very close to the levels assumed, totalling £1.4m above the original 3% built into the budget, or £0.1m above the contingency provision.

Price increases/income

25.5 The general allowance made for non pay inflation in the 2001/02 budget was 2.5% in line with the Government's inflation target, together with specific assumptions for the waste management contract and business rates incorporated in the base budget at a cost of £1.7m. Actual non-pay inflation was approximately £1.9m (0.7%) higher than assumed. The more significant variations from the 2.5% assumption are set out below:

Table 2		Cost in 2002/03
		%	£000
Electricity		-3.0	-86
Gas		30.8	611
Fuel oil		-18.1	-241
Maintenance of grounds		0.4	18
Car allowances		8.6	456
Home to school transport		3.4	486
Cleaning contracts		1.5	77
School catering contracts		5.1	572
Educational supplies		-0.7	-166
Routine highway maintenance		0.8	79
Street lighting		0.9	15
Bus subsidy		7.7	325
Abandoned vehicles		40.8	61
Repair and maintenance of buildings		2.2	200
Independent sector purchasing of care services		1.6	1,251
Fees and charges
	Education	-1.1	-421
	Social Services	-3.5	-1,628

Other variations

25.6 Variations other than inflation add £29.7m to the base budget and can be categorised as follows:

Table 3
		£m
Reductions in Education and Social Services Committees' budgets to reflect changes in function and funding arrangements, relating to sixth form education (-£8.0m), care leavers (-£1.6m), early years (-£0.5m) and Social Services inspection (-£0.5m)		-10.6
Increased spending financed by Government specific grants mainly on Education (£19.2m) and Social Services (£24.0m) - the majority of these grants are either the continuation of grants received in 2001/02 after the budget was set or the result of the transfer of funding responsibility from the Department of Works and Pensions for preserved rights cases and the ending of the residential allowance (£12.9m)		43.5
Expenditure in 2001/02 financed by planned underspendings or the use of balances and earmarked reserves		-1.8
Transfer from Education (-£6.7m) to Policy and Resources (£6.7m) of budgets delegated to schools but determined each year by Policy and Resources		-
Provision for additional waste volumes for which contingency provision made in 2001/02		0.8
Absorption of excess cost of inflation in 2001/02		-2.0
Adjustment for virement between capital and revenue		-0.1
Allowable variations in the base budget:
	Pupil numbers	-0.7
	Changes in number of school days in the financial year	0.7
	Reduction in number of pupils eligible for free school meals	-0.1
	Revenue effect of implementation of the capital programme	0.3
	Increased share of cost arising from tapering arrangements with health authorities	0.2
	Deletion of provision for 2001 County Council elections	-0.5
		29.7

25.7 Details for each service of the most significant variations compared with the repriced budget for 2001/02 are set out in the annex to this appendix.

Allocation for future inflation

25.8 Included within service base budgets is a provision for future inflation, so that the budget is presented on an outturn price basis, based on the following assumptions agreed by the Cabinet in December.

Table 4
	£m
Pay awards at 4% for teachers, 3% for other pay groups	19.6
Non-pay at 2.5%	10.6
Allowance for income to increase in line with the average % increase in expenditure	-7.1
An increase in the employers' contribution to the teachers' pension scheme from 7.4% to 8.35% and to the local government pension scheme from 11.7% to 12.3%, from 1 April 2002	3.6
A reduction in national insurance contributions, as a result of the increase in the rebate for contracted-out employees from 3% to 3.5%	-1.5
A saving of 0.1% in the main rate of national insurance to compensate for the introduction of the aggregates levy from 1 April 2002, with an equivalent increase in revenue contributions to capital	-0.3
	24.9

25.9 Provision has been retained centrally for increases in business rates, for higher costs arising from the waste management contract and for a recruitment and retention contingency equivalent to 1% of non-teachers pay.

26. Summary of service budgets

26.1 A summary of service budgets is set out below:

26.2 Staffing numbers in the base budget are forecast to be 1 higher than in the 2001/02 budget. More details on staff changes are set out in Appendix 7, including details of 84 posts supported by the growth proposals set out in Appendix 3.

27. Hampshire Fire and Rescue Authority (HFRA) levy (£37.9m)

27.1 The HFRA meet on 6 February to approve a budget for 2002/03. The constituent authorities in responding to the consultation on the authority's draft budget, indicated that they would prefer to see the HFRA's budget contained within the base budget, representing an increase of 5.1% in the levy, to £37.9m for the County Council. In the event that the authority considered some growth in spending unavoidable, it was urged to limit the increase in the levy to 8%, allowing growth of £1.3m above the base budget.

27.2 The base budget includes provision of £1.7m (3.8%) for inflation. This allows for the full-year effect of the November 2001 firefighters award which was settled at 3.9%, higher than the 3% allowed for in the 2001/02 budget. Allowance has been made for future inflation on the basis of assuming a 4% increase in firefighters pay in 2002, 3% for other pay groups and 2.5% for prices. In addition to inflation, the base budget allows for growth of £0.6m, which mainly comprises the full-year effect of 2001/02's growth proposals (£0.2m) and increased operational leasing and capital financing costs (£0.3m). Staff members are planned to increase by 19 in the base budget, and should the additional growth of £1.3m be approved this will result in a further increase of 23 full-time equivalent staff.

28. Other expenditure outside committee cash limits

28.1 It is the County Council's policy to exclude a number of headings from service budgetary control limits. These are items which are outside the direct control of services and the magnitude of which means that variations could unreasonably jeopardise service plans if substantial variations took place during the year. They do, of course remain a prior charge on the Council's expenditure.

Education mandatory awards to students (£0.4m)

28.2 Spending on mandatory awards to students in 2002/03 is forecast to be £1.2m lower than originally budgeted in 2001/02. This represents the final stage in the transition to a loan-based system of student support, with the County Council having no responsibility for paying mandatory awards to new students starting courses from September 1999 onwards. As mandatory awards are 100% grant-aided, this reduction has no impact upon the County Council's overall financial position.

Flood Protection levies (£5.0m)

28.3 The Environment Agency has the statutory responsibility for flood defence and the cost of local Flood Defence Committees are levied on County Councils and unitary authorities pro-rata to Council tax base. The County Council receives levies from the Southern, Thames and South-Western regions. Provision has been made for levies in 2002/03 at 2001/02 levels. Actual levies for 2002/03 will be set shortly, but as indicated in paragraph 8.1, a significant increase in levies in 2002/03 is anticipated particularly in the Southern and South-Western regions, for which central provision has been made in the inflation contingency.

Magistrates' Courts (£9.9m)

28.4 Magistrates' Courts Committee receive 80% government grant, subject to a cash limit set by the Lord Chancellor's Department. Initial cash limits have been set for 2002/03 but are subject to further consideration in the light of bids submitted by Committees. Subject to the Hampshire and Isle of Wight Committee's submission being successful, the County Council's contribution net of specific grant will be 8.6% higher than in 2001/02.

29. Capital financing charges (£26.7m)

29.1 The system of accounting for capital assets means that capital financing charges do not feature in service budgets but are charged to a central asset management revenue account. The level of financing charges made to the central account is however a key factor in setting the Council's budget. The charges comprise loan repayments and interest of £28.5m offset by interest on balances of £1.8m. The base budget has been prepared on the basis of current short-term interest rates linked to a base rate of 4%.

29.2 The estimate assumes a continuation of the policy of repaying debt at the minimum statutory level and of making no voluntary set aside of capital receipts, now that there is no longer requirement for 50% of most capital receipts to be used to repay debt. The estimate is £0.3m higher than the original estimate for the current year for the following main reasons:

· debt outstanding at the end of 2001/02 is expected to be about £28.0m higher than the level assumed at 1 April 2001 in setting the 2001/02 budget. Additional repayments of principal and interest on this increased borrowing in 2002/03 are estimated at £2.6m

· short term rates have fallen from 5.75% to 4% since the 2001/02 budget was prepared, reducing interest costs by £2.4m. Allowance has been made in the central inflation contingency for the likelihood of a reversal of this trend during 2002/03

· capital financing costs are partially offset by capital charges made to internal business units. They are expected to fall by £0.1m in 2002/03, mainly as a result of the effect of the policy of operational leasing of new vehicles managed by Hampshire Transport Management (HTM), though there is a compensating reduction in revenue contributions to capital.

30. Revenue contributions to capital (£25.4m)

30.1 These contributions supplement Government borrowing approvals and grants and the use of capital receipts in financing the capital programme.

30.2 The base budget of £25.4m is £1.5m higher than the 2001/02 budget as a result of the following variations:

Table 6
	£m
Restoration of one-off reduction made in the 2001/02 budget	0.5
Committee proposals to transfer resources between capital and revenue and allowance for an anticipated repayment to the invest to save reserve from the generation of capital receipts	0.3
Net reduction in business unit depreciation used to support revenue contributions to capital	-0.1
2.5% uplift for inflation to reflect non-pay assumption in the revenue budget and allowance for the impact of the aggregates levy	0.9
Reduction to reflect transfer to capital reserve arising from anticipated transfer of credit approval by he HFRA	-0.1
	1.5

31. Specific grants (-£112.3m)

31.1 Specific grants are £42.9m higher than in the original 2001/02 budget and comprise:

Table 7
		£m
Education
	Standards fund - 53% or 100%	27.8
	Direct grants to schools	15.0
	Nursery Education (3 year olds) - 100%	5.9
	Childcare strategy - 100%	5.6
	Teachers pay reform - 100%	8.4
	Mandatory student awards - 100%	0.4
	European social fund - (subsidy per litre of milk)	0.1
	Rural bus services - 100%	1.3
	Magistrates' Courts - mainly 80%	8.5
	Emergency planning - 100%	0.2
	Social Services special and specific grants (various conditions)	39.1
		112.3

32. Provision for future inflation and contingencies (£8.9m)

32.1 Service budgets incorporate an allocation for general pay and price inflation based on a provision of 4% for teachers pay, 3% for other pay awards and 2.5% for price increases. The contingency provision of £8.9m in the base budget covers other items for which resources need to be earmarked in the budget, but where it would be premature to allocate the resources to services or where allocation decisions have still to be made. The provision is made up as follows:

Table 8
			£m
5	A sum has been set aside for recruitment and retention measures equivalent to 1% of non-teachers pay		2.3
6	A central contingency of £3.0m has been included in the base budget for higher waste management contract costs. This is to cover:		3.0
	-	a further increase of £1 per tonne in the landfill tax from 1 April 2002 (£0.5m)
	-	price increases due from 1 January 2002 and 1 January 2003 under the terms of the contract (estimated cost of £0.5m)
	-	the impact of new infrastructure likely to become operational in 2002/03 and the potential impact of higher waste volumes (£1.9m)
	-	an amount equivalent to the increase in the County Council's SSA for 2002/03, to reflect the anticipated cost of the new regulations relating to the disposal of domestic fridges from 1 January to 31 March 2002 (£0.1m)
7	changes in business rates are budgeted for centrally, with services being allowed to adjust their cash limits to reflect actual costs. This treatment reflects the uncertainty associated with valuation appeals and the effect of transitional arrangements following revaluations. The operation of the transitional arrangements still in place following the 2000 revaluation, are expected to be broadly neutral for the County Council in 2002/03. A sum of £0.2m has been included in the contingency for the effect of the 1.6% increase in the national poundage		0.2
8	Flood protection levies for 2002/03 will be set in mid-February. Substantial increases are anticipated in the levies for the Southern and South-Western regions and an overall sum of £0.6m (11%) has been set aside		0.6
9	a continuation of the contingency sum for repair and maintenance of buildings, first included in the 2000/01 budget, to provide some flexibility in making decisions about the relative priorities between revenue and capital repairs, particularly in view of cost pressures affecting term maintenance contracts		1.0
10	short term interest rates are expected to increase from their current low level during 2002 and provision has been made for rates to increase to an average of 5% in 2002/03		1.2
11	in passporting the Education SSA increase in 2001/02 £0.5m was earmarked for non-recurring Flood Damage proposals and this sum has also been retained within the base budget pending a decision on its use to support Education spending in 2002/03		0.5
12	the balance of £0.1m of the contingency sum of £0.3m for costs associated with the Dibden Bay inquiry has been carried forward from the 2001/02 budget		0.1
			8.9

33. Summary

33.1 In summary therefore the base budget for 2002/03 is £898.2m, made up as follows:

Table 9
	£000
Service cash-limited expenditure	896,254
HFRA levy	37,903
Mandatory student awards	422
Flood protection levies	4,987
Magistrates' Courts	9,945
Capital financing charges	26,749
Revenue contributions to capital	25,376
Specific grants	-112,372
Inflation and central contingencies	8,993
	898,257
Use of reserves and balances:
Transfers to and from Magistrates' Courts, Supplies, Invest to Save and job evaluation reserves to support spending in the base budget	12
Transfer to capital reserve to reflect HFRA's proposed transfer of credit approvals in 2002/03	92
Financing of Dibden Bay inquiry costs from carry forward of underspending in 2001/02	-128
	898,233

Annex 1

Education

Base Budget 2002/03

Significant Variations

Major variations between the repriced budget 2001/02 and the base budget for 2002/03 at November 2001 prices contributing towards the increase of £2,299,000 (0.4%) are set out below:

Annex 2

Environment

Base Budget 2002/03

Significant variations

Major variations between the repriced budget 2001/02 and the base budget for 2002/03 at November 2001 prices contributing towards the increase of £419,000 (0.6%) are set out below:

Annex 3

Policy and Resources

Base Budget 2002/03

Significant variations

Major variations between the repriced budget 2001/02 and the base budget for 2002/03 at November 2001 outturn prices contributing to the increase of £5.618m (17.6%) are set out below:

Annex 4

Recreation and Heritage

Base Budget 2002/03

Significant variations

Major variations between the repriced budget 2001/02 and the base budget for 2002/03 at November 2001 prices contributing to the increase of £23,000 (0.1%) are set out below:

Annex 5

Social Services

Base Budget 2002/03

Significant variations

Appendix 3A

Education

Revenue Budget 2002/03

Proposals for New Growth and Redeployment of Resources

Appendix 3B

Environment

Revenue Budget 2002/03

Proposals for new growth and redeployment of resources

Appendix 3D

Recreation and Heritage

Revenue Budget 2002/03

Proposals for new growth and redeployment of resources

Appendix 3E

Social Services

Revenue Budget 2002/03

Proposals for new growth and redeployment of resources

Appendix 4

Proposals for efficiency improvements in 2002/03

Appendix 5A

Education

Revenue Budget 2002/03

Review of Income

Appendix 5B

Environment

Revenue Budget 2002/03

Review of income