Contacts: Paul Carey-Kent, Deputy Treasurer, 01962 847525
David Howells, Director of Corporate Services, 023 8064 4000 ext 203

1 Summary

1.1 This report sets out the draft budget for 2003/04.

1.2 All figures are provisional at this stage and may be subject to some revision later in the budget cycle.

1.3 The normal practice is for the Authority to set an indicative budget and to consult on it with the three constituent authorities. A meeting has been arranged on 9 January to facilitate this process.

1.4 The views of the constituent authorities will be reported back to the next meeting of the Finance and General Purposes Committee on 15 January 2003. The Authority will need to determine its budget for 2003/04 at its meeting on 5 February 2003 and set the levies required from the constituent authorities.

1.5 The base budget, which in effect rolls forward the current budget and policies, is £51.2m. This assumes a 4% increase in firefighters' pay from November 2002; and, until definitive information emerges from the current national negotiations, a further 4% from November 2003. This, of course, is unlikely to represent the final settlement figure for the firefighters pay increase, and it is assumed - at this stage - that the Government will fund any increase above the 4% assumed for both years (or it will be offset by savings from `modernisation' though the achievability and timing of any such proposals will need to be examined carefully).

1.6 This base budget figure (i.e. £51.2m) is an increase of £2.3m (4.7%) over the current year. In previous years, this has been used as a starting point for budget preparation and is compared with the increase in the Standard Spending Assessment (SSA) - which, in turn, drives the level of Revenue Support Grant (RSG) expected to be received by the constituent authorities to meet the Authority's levy. This year, however, the Government is both radically reassessing the SSA formula system and is also running later than in previous years in its notification of proposals (now expected on December 5 at the earliest). Consequently, the usual comparisons are difficult to make. It is known, though, that all three constituent authorities face potentially severe grant reductions as part of the new proposals. While it is entirely the decision of this Authority to set its budget and levies, members will still wish to be mindful of the impact on the constituent authorities in fixing the final amount.

1.7 The base budget increase results from the assumptions made regarding firefighters' pay, the increase in national insurance costs, and the full year effect of the growth agreed last year. Any settlement of pay in excess of the assumptions made brings with it the potential to significantly increase the base budget. The position is helped by pension costs which, in real terms, are predicted to be £558,000 lower than in 2002/03.

1.8 The first priority beyond this base budget level is to review existing practices and approaches to see whether more efficient means of delivering service can be achieved. Members considered a paper at the Authority's meeting on 25 September 2002 which considered the scope for such efficiency measures, but concluded that the potential was limited.

1.9 Given the uncertain position regarding the firefighters' pay award and the pressures this could cause, the Authority accepted at its September meeting that the opportunity for growth would be limited. A realistic minimum is considered to be an additional £500,000 (about 1%) on the base budget. This figure provides the basis for the consideration of a number of funding pressures - many of which have been previously presented to the Authority. With this level of growth, the total budget increase would be about 5.75%. The Fire total standard spending assessment for fire services in 2003/04 is likely to be worth 4.1% in cash terms, but at the time of preparing this report it is not known how this will translate in terms of final Revenue Support Grant under the revised SSA formula. Any budget set at above the percentage increase in RSG will have a significant impact on the constituent authorities, especially given the Government's assumed level of inflation of 2.5 %.

2 Budget comparisons

2.1 In 1999/00 the budget was 8.2% above SSA compared with an average of 11.7% above SSA for all fire authorities. By 2002/03 this Authority was spending 15% above SSA and all other authorities an average of 13.7% above SSA. Data is not available to compare possible budgets against SSA for 2003/04, due to the Government's review of local government finance. The trends are shown below:

Table 1 - Spending relative to SSA

Table 2 - Budget growth relative to SSA

2.2 Although the Authority had relatively modest increases in budgets in 1999/00 and 2000/01, the increases of 9.8% and 8.0% in the following two years were higher than average.

2.3 Net expenditure per head of the population is also a relevant consideration - especially as it is the Government's primary Best Value Indicator of the cost of delivering services to the public. Hampshire currently spends £27.18 per head of population compared with the median of all the fire authorities of £30.21 and lower quartile of £26.66 (based on 2001/02 estimates). However, the average spend per head of the Family Group 4 of similar-sized fire authorities for 2000/01 is £28.90.

3 Base budget

3.1 The base budget has been prepared in the same way as last year and includes:

· the current year's original budget increased to the November 2002 price base, including increases in insurance costs, assuming a 4% pay award for firefighters from November 2002.

· the net cost of salary increments

· all known and projected pension costs

· an estimate of the costs of inflation from November 2002 to
March 2004: 4% November 2003 for firefighters pay; 3.5% for non-uniformed pay; 1% for additional NI costs; and 2.5% for non-pay costs

· full year effect of previous years' growth items

· increases in the cost of operational leasing and capital financing

Uncertainties at this Stage

· At the time of preparing this report, the firefighters' pay award is not known. The final award is likely to have a significant impact on the budget. Every additional 1% increase in pay - above the 4% increases currently assumed - would cost approximately £250,000 in a full year. There has been no confirmation that additional funding would be provided by way of increases in Revenue Support Grant to constituent authorities to cover an anticipated award in excess of the 4% assumption built into the Government's Spending Review 2002.

· There may be financial impacts if firefighters' strike continues for some time. The Government is directly funding the cost of military support to fire authorities on condition that the pay savings made during industrial action are returned to the ODPM. It is not yet clear whether other associated (local) costs of making local contingency arrangements can be off-set against these savings.

· The government has indicated that combined fire authorities may become precepting authorities, possibly from 2004/05. If so, there would be additional costs (e.g the cost of producing a separate budget/council tax leaflet) towards the end of 2003/04. More significant financial implications would follow from 2004/05 when there would be a need to set up adequate levels of reserves and balances.

3.2 The changes in the base budget are summarised in Appendix 1. It includes £2.2m for pension lump sum payments - a reduction on the 2002/03 budget which reflects the fact that the recruitment peak of 30 years ago has largely worked through. As ever, this provision is subject to fluctuations caused by the timing of actual retirements. The current industrial action - and the size of the eventual award - may well have an impact on the timing of individual retirements. Members will recall that the pensions budget is ring-fenced, and that should actual costs vary from this anticipated figure, it will be possible to deal with this as a year-end adjustment to constituent authorities' contributions.

3.3 The base budget totals £51.2m, an increase of £2.3m (4.7%) over 2002/03 and is set out in more detail in Appendix 2 which also shows the outcome budget for 2004/05 and 2005/06.

4 Building Maintenance

4.1 Members may wish to give particular consideration to provision for building repair and maintenance. Increases were agreed for the current year, and from 2004/05, but it was not possible to provide for any growth in 2003/04 because of other competing pressures on the budget. As a result, the repairs backlog (identified prior to the 2002/03 budget setting process) will be tackled on a phased basis by 2006/07, with most short-term work completed by the end of 2003/04, and most mid-term work completed by the end of 2004/05.

4.2 Arising separately from these requirements, £135,000 has been spent on repairs to Copnor Fire Station in order to keep it viable for the medium-term. A provision for these costs has been funded from a provision made utilising an underspend in 2001/02. At that time, however Members indicated that they wished to review whether to use the underspend specifically for Copnor, or to add this amount to the 2003/04 general building maintenance programme. This will be a relevant factor for Members in deciding what level of growth to propose.

5 Efficiency Improvements and Savings Potential

5.1 In accordance with good management practice when dealing with increased service demands, the first action is to explore the scope for efficiency savings or advantageous reprioritisation within the budget. In line with this approach, Members considered a report at the Authority's meeting on 25 September 2002 setting out the main areas of expenditure, associated Best Value reviews and the potential to achieve savings. The conclusion was that short-term prospects for savings are limited given both the constraints and impact of national expectations and other external funding pressures. Best Value studies have, to date, led to no cash savings.

5.2 Savings of £140,000 per annum (from as early as 2000/01) were originally anticipated from the potential to reduce the provision of catering arrangements at fire stations. The outcome of Best Value Scoping Study - set up to fully and formally review this area of activity - will not be known until the 11 December meeting of the Best Value Committee. The likelihood of achieving this level of saving is still in some doubt, so the impact of failing to achieve the full level of assumed savings would need to be addressed by the Finance and General Purposes Committee at its meeting in January 2003 when it considers the draft budget in more detail.

5.3 It has therefore been assumed, for the purposes of this report, that if any other best value or other savings can be achieved then they are unlikely to have any significant impact on planning next year's budget.

6 Growth

6.1 Members may feel that any growth would be inappropriate given the current uncertainties regarding pay. Nevertheless, there are a number of significant funding pressures (other than pay) and, for the purposes of consultation with constituent authorities, it is proposed that options for growth of £0.5m (about 1%) plus the revenue costs of 2003/04 capital starts (£16,000 in 2003/04 rising to £273,000 by 2005/06) should be developed. It is recommended that this be carried out by a cross-party working group of Members.

7 Costs and levies

7.1 Actual costs can be summarised as follows:

Table 3 : Budget options

* note - the base budget has been shown here as a constant figure across all three years so that changes, eg to the forecast cost of pensions, do not distort the effects of the growth proposals. The growth option shown is for £0.5m plus the revenue costs of the 2003/04 capital programme.

7.1 If set at the base budget, the levies on the constituent authorities would be as follows:

Table 4 : Levies at base budget (increase)

Note: The split between the constituent authorities is based upon the draft Revenue Support Grant (RSG) tax base figures. Final figures will be known before the levy is approved in February..

7.2 The levies based on the base budget with possible growth would be:

Table 5: Impact of possible growth on levies

Levy 2002/03			Possible Levy 2003/04	Increase over 2002/03
£'000			£'000	£'000
38,940	Hampshire	(79.6850%)	41,178	+2,238
4,728	Portsmouth	(9.6749%)	5,000	+272
5,199	Southampton	(10.6401%)	5,498	+299
48,867			51,676	2,809

8 Capital

8.1 The proposed capital programme for the three years 2003/04 to 2005/06 is set out in Appendix 3. This includes all existing commitments revised to reflect the latest estimate of costs. It also incorporates requirement to replace current breathing apparatus (BA) kit together with the proposed vehicle replacement programme. However, several factors complicate the capital position:

· The Authority has previously accepted that it would, in principle, be advantageous to move towards purchasing rather than leasing vehicles. That could be achieved by making revenue contributions to capital, but this is not thought tenable in the current financial climate. A more feasible way of progressing this may be available should the Government introduce as it has promised a prudential capital regime whereby borrowing approvals would not be required provided the Authority could demonstrate overall that it had sensible financing arrangements in place to cover any borrowing.

· The new Basingstoke fire station has at this stage been included for planning purposes at an estimated £3m in a 2005/06 programme. Confirmation of that will require a project appraisal to be approved by the Authority, including the assessment of associated revenue cost.

· The Finance and General Purposes Committee has recently set up an informal working group of members to look at asset management. This includes, for example, assessing the potential for using the Private Finance Initiative (PFI) to fund capital schemes. If this were progressed successfully, it might mean that some priorities could be tackled separately from capital programme provision as set out - and this might include the new Basingstoke fire station. A brief presentation on the advantages and disadvantages of PFI will be made at the meeting.

· The programme as set out shows what could be achieved assuming that the system of credit approvals continues as at present. As the basic credit approval notification for 2003/04 has not yet been received, it makes an estimate of this on the basis that the current year's level is rolled forward.

7.3 Thus, this is very much a preliminary indication of capital priorities. The key point for setting the levy for 2003/04 is, however, that there is no proposal to make revenue contributions to capital, nor are there any proposal for schemes to be completed during 2003/04 which will have revenue budget consequences.

9 Vehicles

9.1 The vehicle programme is as presented to the Finance and General Purposes Committee in October (with costs updated to 2003/04 outturn prices).

10 Basic Credit Approval (BCA)

10.1 The BCA notification for 2003/04 has yet to be received.

10.2 The estimated balance of BCA that will be held by Hampshire County Council at the end of 2002/03 is £1,379,000. Capital payments for 2003/04 financed by BCA are estimated to be £1,153,000 (assuming the Authority approves the capital programme) and therefore the estimated level of BCA to be held at the end of 2003/04 is increased to £1,457,000 if the same level of BCA (£1,231,000) is granted as in 2002/03.

11 Capital Charges

11.1 Capital changes consist of interest and depreciation on the current value of fixed assets. The interest rate level is set nationally and has been reduced from 6% in 2002/03 to 3.5% in 2003/04. Depreciation charges are made for those fixed assets with a finite useful life which for this Authority means all assets other than land.

11.2 In 2003/04 the estimated capital charges amount to £3,441,000 a reduction of £1,283,000. The lower interest rate will reduce the charges by £1,413,000 but other variations, mainly charges for new assets, will increase the charges by £130,000.

11.3 Capital charges are made to services in order to show the full cost of providing services. However, they do not affect the Authority's total expenditure as they are reversed in the asset management accounts and so do not change the overall levy.

12 European Convention on Human Rights and the Human Rights Act 1998

12.1 The proposals within this report are compatible with the provisions of the European Convention on Human Rights and the Human Rights Act 1998.

13 Conclusions

13.1 There are several uncertainties that make it very difficult to reach a definitive position on the draft budget: the outcome of the firefighters' pay settlement; the impact should the Authority become a precepting body; the level of borrowing approvals; and the amount of grant to constituent authorities which the new formula funding system links to fire service responsibilities. The Authority will obviously need to re-examine the draft budget position early in the new year when the level of Government funding becomes clearer. In the meantime, it would seem reasonable in the circumstances to consult with the constituent authorities on the basis of the information on base budget and growth assumptions contained in this report.

Recommendations

That:

1 the base budget be approved;

2 members approve further exploration of growth options of up to £0.5m, in addition to the base budget;

3 that a cross-party working group of members consider and assess the priorities for this level of growth;

4 copies of this report, as amended to reflect the outcomes of consideration of growth options, be sent to the constituent authorities in time for the meeting set up between the Chairman of the Authority and representatives from each of the constituent authorities due to take place on 9 January 2003;

5 the Finance and General Purposes Committee be asked to consider - at its meeting on 15 January 2003 - a further draft of the budget for 2003/04 that takes into account the up to date information regarding the level of Government funding that will be made available and also the views of constituent authorities;

6 the final budget - and required levies - be set by the Authority at its meeting on 5 February 2003.

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

Fire Budget 2003/04 budget - general papers

Fire pensions 2003/04 budget

Appendix 1

Calculation of the base budget

1 Summary of changes in the base budget

	£'000	£'000	%
Original budget 2002/03		48,867
Add full year costs of inflation to November 2002 prices - pay and prices		771	1.58
		49,638
Add growth items allowed in the base budget:
Net cost of increments		20	0.04
Operational leasing		116	0.24
Asset management costs		58	0.12
Full year effect of previous years' growth		426	0.87
Provision for inflation (pay and prices) from November 2002 to outturn 2003/04		1,199	2.45
Cash limited expenditure budget 2003/04		51,457	5.30
Pensions:
Full year cost of inflation to November 2002 prices	141
Reduction in lump sums	-694
Increase in ordinary and ill-health pension payments	96
Other	40
Provision for inflation November 2002 to outturn 2003/04	120	-297	-0.61
Base Budget 2003/04		51,160	4.69

2 Full year cost of inflation to November 2002 prices

2.1 The original budget has been increased by the actual costs of inflation to November 2002. Total inflation is £771,000 for pay and prices and £141,000 for pensions.

3 Increments

3.1 These are the gross cost of increments less savings on turnover. The net cost for firefighters is nil and for support staff is £20,000.

4 Operational leasing and capital financing costs

4.1 The operational leasing budget has been calculated based on indicative quotes from the broker for the vehicles to be leased by 31 March 2004. This increases the operational leasing budget by £116,000 and is for existing commitments only.

4.2 The latest estimate of the cost of making the statutory debt repayments and interest on loans taken out adds £58,000 to the base budget.

5 Previous Year's Growth

5.1 When the growth was approved in February, implementation of several items was either phased in during 2002/03 or delayed until 2003/04. These, together with growth approved in February 2001 which is now to be fully implemented in 2003/04 are added at a cost of £426,000. Effects of previous year's growth from the capital programme have been included in (4) above and pensions in (7) below.

6 Retained pay - number of incidents.

6.1 The budget is currently based on paying for 23,253 incidents. This was calculated using the agreed formula which takes the average of the last five years excluding the highest and lowest years to avoid any distortion of exceptional years.

6.2 The formula was reviewed for 2003/04. The data for 2001/02 therefore replaces 1996/97. 2001/02 was the highest on record and replaces 1996/97 which was previously the highest and is now excluded from the five year period. Therefore no change to the base budget is required.

7 Pensions

7.1 The overall pensions budget for 2003/04 consists of:

	£m
Pensions payroll	7.2
Lump sum payments	2.2
Transfer values paid	0.3
Transfer values received	-0.5
Employee contributions	-2.1
	7.1

7.2 The trends in pensions since 1999/00 are:

	Budget £m	Outturn £m
1999/00	5.3	5.6
2000/01	5.8	5.1
2001/02	7.1	7.0
2002/03	7.5	7.6(estimated)

8 Provision for future inflation

8.1 The provision for inflation from November 2002 to March 2004 has been calculated based on 4% for firefighters, 3.5% for non-uniformed staff, 1.7% for pension payments and 2.5% for all other costs. Inflation for business rates has been calculated taking into account transitional relief on certain properties and adds an overall 10.6% to this budget head.

8.2 The additional 1% employers national insurance has been included together with the increase in local government employers pension contributions from 205% to 215% of employees' contributions.