Contact: Paul Carey-Kent, Deputy Treasurer, 01962 847525

David Howells, Director of Corporate Services 023 8064 4000 ext 203

1 Introduction

1.1 The following steps have occurred to date in the process for setting the Authority's budget for 2004/05:

· the Authority at its meeting on 10 December 2003 approved the base budget totalling £56.1m

· the statutory consultation took place with the trade unions and business and council tax payer groups on 8 January. All three groups showed appreciation of the budget pressures put forward by the Chief Fire Officer.

· The Finance and General Purposes Committee met on 14 January and recommended that a budget of £59.7m be set.

1.2 Since then, further details of the final settlement have emerged, as set out in paragraph 2.5. These have marginal impacts.

1.3 In addition, the Office of the Deputy Prime Minister has written to all Fire Authorities setting out the Government's view on the level at which capping might be applied to Fire Authorities. This is discussed further below, and the letter and accompanying circular are attached as Appendices 1 and 2.

2 Finance and General Purposes Committee

2.1 The Committee considered two reports in connection with the budget:

· draft budget report - attached as appendix 9 (but with appendices removed as they have been updated as attached in the separate Appendices 5-8 in order to reflect the Committee's recommendations)

· Treasury Management and Prudential Code for Capital Finance - attached as Appendix 10 (but with the Appendix 3 removed as it has been updated as attached in the separate Appendix 11 in order to reflect the Committee's recommendations).

2.2 At the meeting the Committee resolved:

· In relation to the draft budget report: that it be a recommendation to the Authority that the preferred level of budget for 2004/05 be £59.7m representing a 16.4% budget increase, comprising the base budget plus unavoidable costs plus priority 1 proposals and priority 2 proposals but excluding the option for funding vehicle purchase through borrowing rather than from revenue.

· In relation to the Treasury Management report: that it be a recommendation to the Authority:

i) to approve the Treasury Management Policy Statement as set out in Appendix 1 to the report

ii) to approve the policies set out in paragraph 10 of the report as a basis of the Authority's prudential framework for capital finance

iii) to approve the financial indicators set out in Appendix 3 to the report.

2.3 The calculation of the base budget is set out in Appendix 5, the proposed detailed revenue budget in Appendix 6, the proposed growth in Appendix 7 and the proposed capital programme in Appendix 8 and the Prudential Indicators in Appendix 11.

2.4 If approved by the Authority the recommendation would lead to a budget requirement of £59.7m (+16.6%). This equates to a band D council tax of £52.38, a 24.1% increase over the notional equivalent which would have applied in 2003/04.

2.5 The following finalisations have occurred since the Finance & General Purposes meeting:

· Final figures have now been received for Revenue Support Grant (RSG) and National Non-Domestic Rate (NNDR). Overall there is no change from the provisional figures.

· The tax base figures have also been finalised and are slightly higher than assumed. This has the effect of marginally reducing the council tax.

· The effect of the second homes discount has also been notified from the billing authorities. The result of this is to add £88,000 to the budget requirement in order to set up a specific reserve for use/consideration during the year.

· The definition of notional council tax is still under consideration by the government. Their assumption is £42.22 compared with our calculations of £42.17. This marginally reduces the notional increase in whatever council tax is set.

· The Transitional Grant for the Authority has been assumed to be £787,000. Final confirmation is still awaited.

2.6 The final council tax figure has to be divisible by nine to enable a tax to be set in all eight bands to an exact penny (a billing authority cannot raise a tax based on fractions of 1p). The effect of this will be slightly different on different levels of council tax due to the roundings required. This will only be an issue for 2004/05 as from 2005/06 these roundings can be offset against the surpluses declared by the billing authorities on their collection funds. This is the practice followed by both the County Council and Police Authority.

2.7 Most of the discussion at the Finance and General Purposes Committee meeting was focused on vehicle replacement. The possibility of purchasing vehicles from revenue was the only growth item not included in the final recommendation.

2.8 The Authority has agreed to cease the operational leasing of vehicles and the fall out of these rentals will start to come through from 2006/07. Instead, vehicles will be bought outright. The choice was then whether to do this from revenue or by borrowing in 2004/05. In recommending the use of borrowing for 2004/05, the Finance and General Purposes Committee took account of the following:

· whilst purchase from revenue is the most economic option in the long-term, the difference is marginal and the main savings come from moving from leasing to purchase

· there is sufficient supported borrowing approval to finance the proposed vehicle programme for 2004/05

· the £1.4m contribution to balances is a one off need in 2004/05 and therefore all other things being equal there would be a £1.4m reduction in the budget requirement for 2005/06. If that reduction were not made, that £1.4m could then be used to cope with either the repayment of £787,000 transitional funding for modernisation (should other savings not be made in time) and/or to introduce the purchase of vehicles from revenue (either in 2005/06 or in future years in a phased manner).

2.9 Another issue discussed at some length at the Finance and General Purposes Committee meeting was the possibility of capping. Since then, the ODPM has sent letters to all Fire Authorities warning that they may be capped if they raise their notional council tax by more than 5%. The Authority will appreciate from previous budget papers that this is a patently unrealistic expectation: the reasons why that is so are also set out in the letter sent to Nick Raynsford and to local MPs attached as Appendices 3 and 4.

2.10 Nonetheless, the Authority should consider in the light of the letter whether any reduction in budget is possible.

2.11 The main potential for reduction would be by reconsidering the level of reserves required. The Government emphasises several factors which it believes might reduce the need to set aside money for reserves in 2004/05. However, none of these have a significant impact on the risk assessment on the basis of which members decided the level of reserves. The Government cites:

· Additional transitional funding - no impact as used in full to reduce the Council Tax.

· Making CFAs eligible for support under the `Bellwin scheme' in case of emergencies - applied only in case of emergencies costing more than £100,000 in new costs and is difficult to access successfully. This could have an impact, but there has historically been no occasion on which the Authority would have been eligible.

· Front loading of Revenue Support Grant - it is true that cash flows are favourable, but that does not reduce the risks associated with the amount, rather than the timing, of any spend.

· Phasing in of reserves - this should be done only if risk assessment shows it to be acceptable: the risks will not be phased in.

· CFAs to discuss with their constituent authorities how they might cover risks. Agreement has already been reached locally on an appropriate level of reserve transfer. The legality, never mind likelihood, of constituent authorities underwriting any CFA overspends is doubtful. If the Government believes this is necessary, then the current levying arrangements might more logically have been left in place.

2.12 However, it would be possible for members to revisit or phase in the contributions to reserves, as the risk assessment previously reported recommended minimum provision of £1.4m in 2004/05, rising to £1.6m in 2005/06. This recognised that the level of the firefighters' pay increase is a known factor, not a risk, in 2004/05. Members made the judgement that £2m would represent a sounder position. That is of course true, but the balance between the desirable level of reserves and the council tax impact could be revisited.

2.13 In addition, following exploration of the contractual issues involved, it is now believed that most of the 2003/04 vehicle replacement programme can be purchased through loan in 2004/05, rather than leased. That, together with identification of some additional income since the budget proposals were produced will save some £50,000. This could be used either to increase in-year flexibility or to reduce the council tax.

2.14 Those factors would justify a reduction of up to £650,000 in the budget requirement for 2004/05. Council tax would then fall by £1.09 to £51.34, which would then represent a 22% increase over the Government's notional 2003/04 council tax for Hampshire of £42.22. Evidently this would remain well adrift of the 5% target for council tax increase, but would represent some movement towards that figure

3 Local Government Act 2003-S.25

3.1 There is a new requirement, under S.25 of the Local Government Act 2003, for the Chief Financial Officer to report to the Authority when setting its council tax on two issues:

· The robustness of the estimates included in the budget

· The adequacy of the financial reserves in the budget

Members of the Authority are required to have regard to this in approving the budget and council tax.

3.2 Robustness of estimates

The estimates have been prepared on an incremental basis based on existing commitments adjusted for inflation and any approved savings or service developments taking into account factors such as past trends in operational incidents, staff increments and revenue effects of the capital programme. With the effective budgetary and management control arrangements that are in place, the majority of the budget can be regarded as robust. However, a few budgets such as pensions and retained firefighter's pay are higher risk because spending is heavily influenced by activity levels which are more difficult to predict. The calculation of the level of reserves recommended took these factors into account.

3.3 Adequacy of reserves

This is an area which has been thoroughly scrutinized during the last few months. The Precepting Working Group, on the advice of the Treasurer, recommended to the Finance and General Purposes Committee that reserves of £1.4m be set up in 2004/05, rising to £1.6m in 2005/06. The Committee took the decision to recommend to the Authority that the level of balances should be £2m without any phased introduction. Given the assessment of risk associated with the Authority's budget, this (or any amount over £1.4m) represents an adequate level of reserves.

4 European convention on Human Rights and the Human Rights Act 1998

4.1 The proposals within this report are compatible with the Provisions of the European Convention on Human Rights and the Human Rights Act 1998 and considered in the light of the Race Relations (amendment) Act 2000.

Recommendations:

1 It is recommended the Authority consider the recommendations of the Finance and General Purposes Committee below in the light of the finalised figures set out in this report and the letter and circular subsequently received from the Government on the possibility of capping.

The Finance and General Purposes Committee recommended to the Authority that:

i) That the capital programme for 2004/05 for 2006/07 as set out in Appendix 4 be approved.

ii) That the revenue budget for 2004/05 as set out in Appendix 2 be approved.

iii) That the total budget requirement for the general expenses of the Authority for the year beginning 1 April 2004 be £59,805,016.57.

iv) That the Authority's basic council tax for the year beginning 1 April 2004 be £52.38.

v) That the Authority's council tax for the year beginning 1 April 2004 for properties in each tax band be:

Band A	£34.92
Band B	£40.74
Band C	£46.56
Band D	£52.38
Band E	£64.02
Band F	£75.66
Band G	£87.30
Band H	£104.76

(vi) That precepts be issued totalling £31.529.966.57 on the billing authorities in Hampshire, requiring the payment, in such instalments and on such dates set by them and previously notified to the Authority, in proportion to the tax base of each billing authority's area as determined by them which are set out below:

Basingstoke and Deane Borough Council 58,048.10
East Hampshire District Council 45,830.43
Eastleigh Borough Council 41,762.61
Fareham Borough Council 41,241.00
Gosport Borough Council 25,766.30
Hart District Council 35,678.00
Havant Borough Council 41,997.00
New Forest District Council 70,293.80
Portsmouth City Council 58,240.80
Rushmoor Borough Council 29,127.09
Southampton City Council 64,674.80
Test Valley Borough Council 44,349.00
Winchester City Council. 44,937.74

(vii) That the Treasury Management policy statement set out in Appendix 10 be approved.

(viii) That the policies set out in Appendix 11 form the basis of the Authority's prudential framework for capital finance be approved.

(ix) That the financial indicators in Appendix 6 be approved.

2 That the Authority confirms the level of general reserves included in the budget requirement.

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

Fire - Budget 2004/05 - General Papers

List of appendices:

Appendix 1 Letter from The Rt Hon Nick Raynsford MP

Appendix 2 Fire Service Circular 2/2004 - Council Tax

Appendix 3 Reply to The Rt Hon Nick Raynsford MP

Appendix 4 Letter sent to all Hampshire MPs

Appendix 5 Calculation of the base budget

Appendix 6 Proposed revenue budget 2004/05 (green)

Appendix 7 Proposed growth 2004/05

Appendix 8 Proposed capital programme 200405 to 2005/06 (yellow)

Appendix 9 Finance and General Purposes report (excluding appendices)

Appendix 10 Finance and General Purposes - Treasury Management and Prudential Code for Capital Finance (pink)

Appendix 11 Prudential indicators 2004/05